Consumers in the energy market
Consumers in the energy market normally engage with an electricity or gas retailer who in turn arranges for the delivery of electricity or gas and then bills them for the supply.
A customer's electricity bill reflects a number of different costs:
- Wholesale energy costs– electricity generation
- Regulated network costs– transmission and distribution
- Environmental policy costs
- Retail costs - operating costs and margin
Wholesale energy costs – electricity generation
Wholesale energy costs for electricity generation include:
- purchases from the spot market
- financial hedging contracts
- ancillary services
- market fees
- energy losses from transmission and distribution networks.
Retailers purchase wholesale electricity via the spot market and by contracting.
Regulated network costs – transmission and distribution
Regulated network costs from transmission and distribution network include costs associated with building and operating transmission and distribution networks, including a return on capital and metering costs.
These costs are regulated by the Australian Energy Regulator (AER) in the National Electricity Market (NEM), the Economic Regulation Authority (ERA) in Western Australia, and the Utilities Commission in the Northern Territory.
Network tariffs are set annually by the regulator and are passed through to customers by retailers through retail tariffs.
Environmental policy costs
There are a number of environmental policies or programs that directly impact or integrate with the electricity market. These include the Renewable Energy Target (RET) and the various state and territory feed-in tariff and energy efficiency schemes.
Retailers pass through their environmental policy compliance costs to customers.
Retail costs - operating costs and margin
Retail costs arise from retailing electricity and marketing to consumers, as well as any return to the owners of the retailer for investing in the business.
Retailers make offers to small consumers in the retail energy market to provide them with gas or electricity. Retail offers are classified as either market offers or standing offers. The difference is the contractual terms and conditions.
Standing offers are basic electricity contracts with terms and conditions that are regulated by law and retailers cannot change them.
In some, but not all, jurisdictions the standing offer price is also regulated by either jurisdictional regulators or governments.
On 1 July 2019, the Australian Government enacted legislation to introduce the default market offer (DMO) in New South Wales, south east Queensland and South Australia. The legislation requires that retailers must not set their electricity standing offer prices for certain small customers in excess of the AER’s determined annual price (the DMO). The AER sets the DMO on a yearly basis.
The Victorian Government also enacted legislation to introduce the Victorian Default Offer (VDO) which specifies the price retailers may charge for electricity standing offers. The Essential Services Commission (ESC) in Victoria sets the VDO.
Market offers are electricity contracts determined by retailers in the competitive market. They must contain a regulated set of minimum terms and conditions, such as consumer protection obligations.
There are a wide range of market offer tariff types available, including:
- Flat rate
- Single / inclining block rate
- Off-peak (controlled load) hot water
- Seasonal tariff (SA)
- Time of use
- Pay as you go
- Voluntary retailer solar feed-in tariffs
Offers are differentiated by:
- Discounting – using the standing offer as a benchmark
- Non-monetary incentives
- Tariff structure
The introduction of the DMO in New South Wales, south east Queensland and South Australia and the VDO in Victoria, means that retailers in those states must compare their market offers against the price set by the AER or the ESC.
There are two main sources of consumer protections for energy products and services:
- The Australian Consumer Law (ACL) – which is the principal consumer protection and fair trading law in Australia
- The National Energy Customer Framework (NECF) – which regulates the sale and supply of electricity and gas to retail customers, and harmonises most energy consumer protections across participating jurisdictions.
- Energy consumers are protected by the core principles of the ACL for the supply of goods and services, including the supply of energy and energy related products (such as solar panels). The ACL includes prohibitions to protect consumers from certain conducts that harm effective competition, fair trade and commerce.
- In addition to the general protections under the ACL, energy consumers are protected by the energy-specific provisions under the NECF for the sale of energy. For example, while both frameworks limit energy retail practices and market participants' behaviour, the NECF provides targeted protections related to energy supply being an essential service, vulnerable consumers and information requirements that are not covered by the ACL.
The AEMC has made changes to the National Electricity Rules (NER) and National Energy Retail Rules (NERR) to give consumers more choices about energy products and services, more control over energy bills, and stronger protections. These include new rules to:
- require retailers to provide customers with new smart electricity meters within a defined timeframe
- require retailers to notify customers at least five business days prior to their gas or electricity price change
- strengthen protections for customers that have a person requiring life support equipment living in their home
- strengthen protections for customers who are having trouble paying their bills due to hardship
- giving flexibility to AEMO and industry to update their processes so customers can be transferred from one retailer to another retailers in two days – regardless of the type of meter they have.
Further information on these rule changes and others is found in our consumer action plan 2019-2020.
In the AEMC’s 2019 Retail energy competition review final report the Commission mapped the consumer protections that energy consumers in the national electricity market currently receive under the NECF and the Australian Consumer Law (ACL). This was the first step in assessing whether energy consumers are receiving appropriate protections, and barriers to innovation are minimised. The Commission concluded that the NECF generally complemented the ACL in protecting energy consumers from harm. However, the Commission noted the need for further analysis in two areas:
- The combination of the development of a range of new, non-traditional energy related products and services with the specific application of the NECF to the sale of energy, means there is a need to assess if (and what) consumer protections should apply to these new products and services.
- As information related provisions in the NECF are prescriptive, they may limit innovation, particularly in relation to digital technologies. Furthermore, in recent years there have been progressive one-off additions to the information provisions.
The Commission is progressing both of these areas as part of the 2020 Retail energy competition review.