Electricity and natural gas services in Australia were originally constructed by state and territory government authorities. One of the historical reasons for this involves the high cost of building infrastructure for a relatively small population, making the business model for energy supply less than lucrative for private enterprise. Governments have always had an interest in promoting commercial development, but also an obligation to fund services which may initially not turn a profit.
Early electricity supply systems were generally regional, with no way to deliver electricity generated in one state to customers elsewhere. This meant each market operated in isolation, and with no practical way of competing with each other, prices were fixed by the government bodies responsible for electricity generation.
Deregulation is the process of removing the retail price regulation from the government, replacing it with pricing set by private energy companies. This allows you to choose which company and contract suit you best, and stimulates competition between energy companies. Energy contracts are lucrative, so providers are willing to vie for your custom, which can drive more competitive pricing and better service. Essentially, you have the opportunity to shop around for energy, getting the best deal for your circumstances.
In the late 1990s, a national electricity grid began operation, linking the southeastern states of Australia. Tasmania was the last state to join the grid in 2006 when the Basslink submarine cable was completed, connecting generators in the island state to customers on the mainland for the first time. Western Australia and the Northern Territory have their self-contained electricity grids and are not part of the National Electricity Market (NEM). The NEM operates by buying electricity from generators and delivering it to customers based on demand. It’s a complicated process that consumers don’t see, which is part of the reason retailers are paid to manage the supply side.
The grid itself is a combination of privately owned and government infrastructure which delivers electricity to over 19 million customers each year. The national grid also allowed a new level of deregulation in the electricity industry, with companies able to operate nationally as they purchase energy from generators and re-sell to customers all over Australia. Under the deregulated system electricity distributors can sell to customers from Queensland down the east coast and into South Australia, whereas in the regulated system energy was managed at a state level by government bodies.
In some states, electricity prices are set purely by the market, while in others government agencies set prices. Even if governments do set pricing, energy suppliers are allowed to offer discounts on the official pricing. Where governments have an influence on pricing, there can be some issues where prices are restricted for political reasons, such as in the lead up to state elections. Such restrictions make electricity buyers happy, but make it difficult for generators and suppliers to maintain their existing networks and invest in necessary infrastructure expansion.
In Victoria and New South Wales, prices are still standardised regardless of where electricity is being supplied. In other words, no matter where somebody lives, they pay the same price per kilowatt hour for their electricity. Even though the amount of infrastructure required to supply a remote rural location is much higher than to a high-density urban customer such as someone in a block of units, the price of their electricity is similar.
A potential drawback of having fixed pricing in the electricity market is that alternative electricity generation methods are less attractive to individuals. If a cheaper, novel form of electricity generation became available, such as non-polluting geothermal power, it would be unable to effectively compete against non-renewable generators such as coal-fired power stations.
There are some who are concerned about the removal of government regulation of electricity prices due to the potential adverse effect it could have on low-income earners. Some people have argued that difficulty in understanding details of electricity contracts will lead some people into signing up for deals that give electricity suppliers much greater power to increase prices without notice putting people at risk of falling into debt or having services disconnected.
The major advantage of electricity price deregulation is that it allows you to shop around for the best available price in the marketplace. In a deregulated market there are still government authorities who monitor the electricity trade, most notably the Australian Energy Regulator (AER). This body oversees the wholesale and retail markets for electricity, keeping track of how much generators are charging and how that cost flows down to the retail end of the market.
There are effectively two types of retail contracts available to anyone buying electricity, a “market retail offer” or a “standard retail offer” sometimes referred to as a standing offer.
Market retail offers are set entirely by the electricity retailer, meaning the price is often more competitive. Retailers can offer you further discounts, they can offer fixed prices for different periods of time, and they can include other incentives to get you to sign up and stay with them. They are also subject to change without notice, which is something to look out for when signing up to a market retail offer. It’s also worth looking at the tariff rate offered, which is how much per kWh you end up paying for the electricity you use. This may have a fixed price guarantee but could be higher than other tariffs available from different electricity retailers.
Standard retail offers, or standing offers, are much more like older regulated contracts when state governments controlled electricity markets. Prices are often set by government agencies and may not be competitive with market offers for the tariff rate paid for electricity used. There are also no discounts applicable to standing offers. Some protections exist for customers on standing offers, such as a limit on price increases to once every six months, and a minimum amount of time you have to pay a bill before service can be disconnected, for example. Standing offers are usually found where someone hasn’t moved house for several years, or where they haven’t changed electricity supplier or signed up to a market contract before.
Regardless of the tariff, electricity is only a small part of your bill
While the tariff rate for electricity used is a point of difference between retailers, the amount of electricity used is only a small part of most electricity bills. According to the Australian Energy Market Operator (AEMO) about half of the actual cost of electricity supply is in the distribution network that connects the generators with domestic and commercial users of electricity. All the poles and wires cost more to maintain than generating the electricity itself which is only about 20% of the bill. Retail costs are about the same, around 20%, for running their online services, telephone operators and other activities.
The deregulation of the electricity market in Australia has clear benefits for energy users, including the potential to buy cheaper electricity than was available under the highly regulated government run systems. While close monitoring of generators and supply networks is still necessary to ensure fairness, the system does seem to offer better outcomes for most people.
If state based price regulation is removed in other places, it may also pave the way for cheaper renewable energy sources to become even more competitive in the market, moving the electricity market away from non-renewable polluting sources. If you’re wondering if you can secure a better deal on your energy, compare providers here.