What price competition?

Hey Reader, welcome to The Energy's weekly data newsletter. This week we explore the Default Market Offer and why reform needs to be carefully orchestrated.

DMO 'not working'

Last week federal Energy Minister Chris Bowen announced a major shakeup of the Default Market Offer (DMO) saying it was not working as intended.

The government is now consulting on reforms that would see the reference price brought more in line with that of Victoria’s, with an emphasis on covering the “efficient costs of supply” as distinct from the “reasonable” costs of a retailer supplying electricity.

Coming into effect on 1 July 2019, the DMO was recommended by competition regulator the ACCC on the back of a 35% increase in electricity bills in the ten years to 2018.

Aside from “improving consumer experiences and outcomes” the ACCC envisaged the DMO would “remove some of the rigidity in the regulatory framework”, leading to a decrease in regulatory costs.

With another wave of reform in the works, retailers are bracing for more red tape. But as with all things related to Australia’s energy market, it’s not that simple.

Fewer customers are on the DMO

The important context here is that the DMO only applies to 8.2% of customers in the 56% of Australia that it covers. And the number of both retail and small business customers on it has been declining fairly consistently since it was implemented.

The government says the DMO is being used by some retailers as a minimum price instead of a benchmark for discounts.

But the other key piece of context here is that the reform came from the competition regulator, and, as the government says in its reform consultation paper:

“At the core of the issue is the question of whether the DMO successfully balances its competing objectives to act as a consumer price protection measure while enabling and incentivising competition and customer engagement in the market.”

What price competition?

DMO arbiter the Australian Energy Regulator says it assesses retail market competition by taking into account the entry and exit of sellers in the market; the exercise of choice by consumers in the market; differentiated products and services; customer switching behaviour; and innovation and consumer energy resources.

But the number of active retailers serving the market has effectively flatlined since the introduction of the DMO.

The market share of tier 1 retailers has also flatlined, despite gains by their smaller competitors. Tier 1 retailers saw their share of the electricity consumer market fall from 69% in 2017-18 to 62% in 2018-19, but in 2023-24 it was still 62.5%.

Residential customers market share by retailer

*Source: AER Annual Retail Market Report 2023-24*

Ultimately, price-led consumer switching moves the dial, but doesn’t drive lasting change or force innovation.

And consumer advocates say the focus on competition as an end in itself has been part of the problem.

Expert view

“The failings of the DMO aren’t the result of inherent issues with ‘regulation’ (as many retailers and some market zealots like to assert), but of a confused and compromised purpose that was never sufficiently focussed on better outcomes for consumers.

The objectives of the DMO were always framed with the assumption that ‘competition’ was an end in itself to be protected and accommodated at the expense of consumers, and that price protection – like the DMO – was only about dulling the sharpest edges of the market’.

As the DMO has been framed the onus, and the risk of competition failing to deliver better outcomes, has been on consumers. Its consumers who have faced intentionally higher DMO prices. Its consumers who have been told to ‘shop around’ to avoid a penalty intentionally inflicted on them by a regulation that was never about properly protecting them.’

This review is a critical opportunity to ensure the DMO sets a fair default-price protection for consumers and, crucially, to see the DMO as a tool to reshape the way competition works for consumers.”

Douglas McCloskey
Program Director - Energy and Water Consumer Advocacy Program, Justice and Equity Centre

What next?

Everyone can agree the next big challenge will be establishing how to navigate pricing in the wake of rapid uptake of consumer energy resources.

This is yet another moment where policymakers and regulators could get it wrong with long-term consequences.

There are fears the power of the market giants will also land heavily here.

Expert view

“On average the retail component of the DMO bills accounts for 15% however network charges account for 38% - the largest component. We also know that the increase in the recent DMO isdue mostly to increases in wholesale prices and network charges, not retail. Yet the reforms being proposed are mostly focused on the retail component.

We need bold reforms that address the power grab by the electricity distribution networks who are regulated monopolies. A repeat of the gold-plating era is a real risk and ministers of today need to do all that is in their powers to ensure that does not happen.

Care must be taken to ensure that consumer energy solutions are not beholden to regulated monopolies. As we have seen with community batteries the value from these is not being passed through to consumers. Consumers need to be protected also from the misuse of market power and funding by these regulated monopolies.”

Stephanie Bashir
Principal, Nexa Advisory

Nothing is set yet on what pricing and market power might look like in a 100% renewable grid.

Back in 2023, energy transition expert Bjorn Sturmberg reminded us that market mechanisms such as evening peak pricing have not changed when families eat – nor should they. Instead, "they sent pensioners to bed at 4pm to shiver under blankets instead of running their heaters".

If we view the grid, as Sturmberg does, as a “common good” then what happens when consumers are in control of market moving assets?

Sturmberg has suggested the lessons from other common resources such as water or telecommunications networks could apply, which is thought-provoking as a big wave of government-incentivised household batteries looms on the horizon.

Expert view

“Rooftop solar systems could be monitored in the way rural fire brigades monitor their community’s water tanks and dams.

These solar systems today have greater combined power capacity than the biggest generator in the country – they are truly, as (Saul) Griffith notes, critical national infrastructure. But there are no processes in place for monitoring their performance or managing their maintenance.

This critical gap would be best filled by local or state governments, network companies or a not-for-profit, not by individuals – we don’t, after all, make individuals responsible for maintaining roads or the NBN.”