Electricity prices that are “double” higher than reference prices are a call for a thorough reconstruction of energy consumer protection

Some households are paying more than twice the regulated benchmark price for electricity, fuelling claims that Australia’s energy consumer protections are inadequate and need a major overhaul.

Even though energy regulators have cut default market offers (DMOs) in most jurisdictions this year, many electricity users have reported bill increases of several percent in recent weeks.

Among them is a South Australian customer whose new costs are “estimated” to be 103 per cent higher than the default offer, also known as the reference price set by the government.

Others have faced significant increases in bills, exceeding an estimated $1,000 per year.

Retailers reject any suggestion they are overcharging customers, pointing out that profit margins in the industry are slim.

They also noted that long-term, underlying electricity bill costs have been rising despite a large decline in wholesale electricity generation costs over the past two years.

Vendors argued that the structural price increases were due to the huge sums of money being invested in next-generation assets needed to replace existing coal-fired power plants.

As they say, to make matters worse, there has been a significant expansion of the network of poles and wires throughout the country.

Joel Gibson, director of consumer group One Big Switch, said it was hard to believe some bills had risen so dramatically at a time when wholesale electricity prices were falling.

“We were told energy prices were going to come down this year,” Mr Gibson said.

Is the price limit more nominal?

In line with energy regulators’ decisions made in May, benchmark prices in New South Wales, Victoria and South Australia fell by 7 per cent compared with July.

There was a slight increase in Queensland.

At the time, the Australian Energy Regulator (AER) highlighted a significant decline in wholesale energy prices since the peak of the energy crisis in 2022, when coal and gas prices soared.

The regulator said the default arrangement protected consumers by setting a “cap” on the price retailers could charge customers who signed up for a subscription.

However, Mr Gibson noted that fewer than one in 10 residential customers used the default offer, meaning most were exposed to the free market.

And that’s where he said too many consumers were being let down, leading him to wonder if there might be a need for security changes in the market.

“Five years ago, the government completely overhauled the retail energy market, ostensibly to protect the country’s most vulnerable households from price gouging,” he said.

“Five years and millions of dollars have passed, and I don’t think we’re in a better position.

“Some households, because they haven’t actively engaged with the market, are now paying — based on the evidence we’ve seen — twice the government’s benchmark price, or $1,000 more than they need to.

Questions about the adequacy of reference prices have become more common since a consumer protection organisation published a report last year that found many electricity users were paying higher rates.

The default offer is a safety net: AER

The Australian Competition and Consumer Commission found that in 2023, almost half of customers paid a price at or above the default rate in the national electricity market covering the east coast.

The figure was particularly high in South Australia, where 61% of consumers had subscriptions at or above the reference price.

In response to questions, the AER stood by the design of the default market offer (DMO), saying it was intended to provide a “safety net” for customers who were reluctant or unable to engage with the market.

A spokeswoman for the regulator said about 9% of households and 18% of small businesses took up the no-deal offer.

However, the spokeswoman added that all retailers are required to provide a permanent offer.

“The DMO also serves as a reference price for comparing energy offers,” the spokeswoman said.

“This will make it easier for customers to compare prices of different offers.

“Customers can approach their current retailer to ask to be included in the permanent offer if they wish, and the retailer must do so.

“A DMO protects consumers from unjustifiably high prices while allowing retailers to recover their costs.”

A spokesman for French retailer Engie, whose customers pay an estimated 103 percent more than the reference price, said a number of factors contributed to the price discrepancy.

Retailers defend ‘small’ profits

The spokesman said the specific customer affected had received a 15 per cent price increase since August, suggesting other reasons such as changes in usage, rebates or solar production may have also played a role.

“Like all electricity retailers, we notify customers of the differences between market rates and outstanding rates so they can make an informed choice about the deal that suits them best,” the spokesman said.

“While this is just an estimate, it seems like the client would benefit significantly more from a DMO model and could use it at any time if they wanted.

“We are also concerned that the South Australian DMO does not accurately reflect the true costs or risks of retailing in that state.”

Similar comments were made by small retailer Globird, which overcharged one customer by more than $700 per year.

Chief executive John McCluskey said the affected customer was likely to have benefited from a discounted market offer that has now expired.

Mr McCluskey said the offers retailers made to attract new customers were often based on “tiny margins” – or were even made below cost – and it would be unfair to compare them with standard offers.

“I know it’s easy to assume the retailer is bad or greedy, but we operate on very thin margins and never raise our rates unless absolutely necessary,” Mr McCluskey said.

“We believe that as long as the retailer only charges a small margin, the rates are reasonable.”

Too many system failures

Ross Womersley, chief executive of the South Australian Council of Social Service, said it seemed clear that the default pricing system was failing consumers, particularly poorer and more vulnerable ones.

Mr Womersley asked why customers could not be automatically redirected to the “lowest available price” from a retailer when their contract expired.

He added that in the absence of such reforms, too many people will continue to pay too high prices for electricity – an essential service.

“It is clear that the DMO has limited effectiveness as a price cap and reference price,” Mr Womersley said.

“South Australians – particularly those on low incomes or in vulnerable situations – need additional price and contractual safeguards in the energy market.

Mr Gibson, of One Big Switch, said reforms were needed, arguing that the default market offer did not adequately protect enough consumers.

He said it was unacceptable for a retailer to be able to “move you to a price higher than the Government’s benchmark price if they first notify you in writing (when) you take up the market offer”.

“The truth is that DMOs currently only cover 10 per cent of households,” Mr Gibson said.

“The rest of us rely on market offers and as we have seen, there is a loophole in this legislation through which a fire engine can drive.

“Some retailers are doing this, and some homeowners are paying the price.

“So there’s a real problem here that we need to address.”