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Why do energy prices change?

There’s a lot that goes on behind the scenes in the world of electricity. To ensure your lights turn on every day, retailers like us must pay underlying costs that make powering your site possible.

Every year in July a number of the key costs that make up the energy supply chain are reviewed.

While we hope this means we can reduce your prices, sometimes market conditions will result in an increase. The specific effect this has on your bill depends on your usage, network region, and whether you have solar PV.

This year the regulator has increased the flat Default Market offer by 5-18.5% depending on your state and network.

These are the main underlying costs that make up energy prices and can cause power prices to change:

  • Wholesale energy: This is the price of electricity we buy from a generator to supply to you. Australia has an over-reliance on fossil fuels and recently its price has significantly increased due to the war in Ukraine and unplanned power plant outages. As a result, the price of wholesale electricity has more than doubled compared to this time last year and is the main cause behind increased energy prices in FY22/23.
  • Distribution & network: We pay local network service providers to maintain and operate regional power infrastructure, such as poles and wires, that are necessary to supply you with electricity. Costs and charges vary between region and tariff type, and often depend on any upgrades that are required.
  • Solar: The value of power exported from solar PV has a direct relationship with wholesale prices. When wholesale prices increase the value of solar PV normally does the same in most areas (at least with Energy Locals!), and vice versa.
  • Environmental: This is the cost retailers must pay to comply with a variety of federal and State-based government environmental regulations, which are intended to support investment in renewable energy.
  • Metering: To access usage data from meters we’re required to pay the metering provider or the Local Network Service Provider.  For those outside Victoria, metering costs are increasingly sharply year-on-year as more smart meters are rolled out, which is a regulatory requirement in many cases.
  • Energy efficiency: All energy providers need to pay fees to fund the various energy efficiency programs that are run by most State governments.
  • Debt management: New or changed regulatory rules have added to the cost of collecting unpaid bills. When a customer doesn’t pay us, we still need to pay ~85% of that money to the parts of the supply chain listed above.

 

The results of these changes can be seen in the chart below from the Australian Energy Regulator (DMO 3 = FY21/22, DMO 4 = FY22/23):

 

We’ll always give you the lowest prices we can
While annual price changes are an unavoidable part of our industry, we always strive to pass on any costs savings where we can.

Please remember that we don’t profit when you use power, so our interests are aligned with yours in driving down costs.

The longer-term outlook
Based on the data we see in the market, it doesn’t look like the current high wholesale power prices will reduce anytime soon. When we purchase energy for the subsequent financial year, if we can get it cheaper then we will pass on those savings to our customers.

Policy fixes
Speaking very frankly, Australia has meandered along without a coherent national energy policy for too long. Putting one in place would be a really, really good idea. It’s not surprising that coal power stations are breaking down: the owners of them had little incentive to keep upgrading them without long-term policy uncertainty.

Other things that we believe will help include:

  • A domestic gas reservation policy. It’s crazy to see gas exported at high international prices which then mean it’s not economic for gas power stations to operate.
  • A capacity market, meaning power stations are paid to have generation available when required. The introduction of this should be coupled with a reduction in the current maximum price that wholesale power can reach, which is an eye-watering $15.10/kWh (yes, 15 dollars per kWh).
  • An extension of the STC scheme, which is currently available to customers who add solar PV, to also include the installation of battery storage. In conjunction with our partners such as Tesla, Sonnen and Members Energy, we’re responsible for integrating thousands of domestic batteries with the energy market and they will play an increasingly important role in ensuring that big generators can no longer game the market.