How are electricity prices set?

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Knowing about these expenses can help you make better informed decisions about which provider you choose to supply your power.

The majority of the electricity bill you receive every month or quarter is broken down into separate charges, with each priced through different methodology. These figures can seem mysterious, but they don’t have to be. With a proper understanding of how your retailer arrived at the final figure for your bill, you could be left more empowered to choose a better retailer.

How does an electricity provider determine its rates?

There are two main rates that an electricity provider will charge customers on their power bill, these are known as the usage charges and supply charges. The usage charge accounts for the energy that has been used by the household, whether that be through lighting, heating or running the dishwasher. A supply charge however, is the cost paid for having electricity supplied to the home from the grid. This is typically paid at a daily rate and can fluctuate depending on the distribution network a household is placed within.

Usage charges are arguably the easier of the two to take control of and are more transparent when it comes time to pay your bill. Usage charges are usually measured by kilowatt hour (kWh), with some tariffs even charging higher or lower amounts for this rate depending on the time of day the energy was used.

How are usage charges set?

In order to set a usage charge, an electricity retailer must first purchase electricity from the National Energy Market (NEM) to then resell to its customers. The NEM is the wholesale market from which electricity is purchased by retailers (except in Western Australia and the Northern Territory). The wholesale rates are largely determined by supply and demand, but are regulated by government and industry regulators.

The wholesale rate of electricity is set every five minutes, meaning prices will shift as demand increases (i.e., during peak evening periods). There are several steps after purchasing a wholesale rate however, that a power provider must do before arriving at the price for electricity usage shown on a bill.

1. The retailer purchases electricity from the NEM then adds on its own charges, including a margin of profit usually ranging from three to 10 per cent.
2. Additional charges are then reviewed by the state regulator (in regulated markets) before the tariff is offered to the public. This is the main difference between regulated and deregulated energy.
3. A Goods and Services Tax (GST – 10 per cent) is then added, as well as any state-based government expenses.

The combination of these costs then makes up the final usage rate charged by the retailer on a bill.

It’s important to keep in mind however, that energy retailers need to negotiate and bid on wholesale supply rates in order to secure rates for their customers. As such, if the market experiences unforeseen circumstances that contribute to higher pricing (e.g. increased demand or blackouts) it may dramatically affect the rates a customer receives on their final bill, particularly if a retailer isn’t in a position to accommodate the elevated price.

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How are supply charges set?

Supply charges are generally based on the applicable network charges for a distribution network. Different areas are managed by different distributors, which means network charges can vary considerably depending on location. A supply charge essentially covers the operational and maintenance costs networks have to pay to keep the grid in tip top shape. They also serve as a small return on capital for the distributor.

According to the Australian Competition and Consumer Commission (ACCC), a typical electricity bill for an average residential customer in 2020-2021 was comprised of five main components: network costs (45%), wholesale costs (32%), environmental costs (10%), retail costs (10%) and retail margins (3%). This breakdown will of course vary depending on retailer and market structure in a state. For a regulated market though, the retail services portion of a bill tend to be around 10 per cent.

Source: The Australian Competition and Consumer Commission’s Inquiry into the National Electricity Market – November 2021 report.

Competition in the electricity sector means energy retailers are competing to get the cheapest wholesale rates, while trying to minimise the company’s retail expenses. Recent rate rises in some areas have been largely attributed to increased infrastructure spending by networks, forcing up supply charges.

Can my energy retailer change my rates at any time?

If you are on a variable rate electricity plan, then yes, your retailer may change your rates at any time. However, your retailer must provide you with a written notice of the rate change at least five business days before the new rate comes into effect.

With a fixed rate electricity plan though, usage and supply charges are locked-in for an extended benefit period – typically 12 to 24 months – and cannot be changed during this period.

Most retailers will only change their prices one to two times a year, depending on the market. All retailers however, are required to adjust their standing or default electricity pricing on July 1 in line with the new reference price. This is the maximum or capped price a retailer can charge customers for power annually. In NSW, QLD and SA, this is known as the Default Market Offer (DMO), while in Victoria, it is referred to as the Victorian Default Offer (VDO).

Some retailers do change rates more often than others, but it is important to note that these changes will typically only impact new customers looking to sign up to the retailer, not existing customers.

Can I buy wholesale electricity rates instead?

While you generally can’t buy wholesale electricity rates outright, there are some retailers that offer bill-payers access to wholesale rates in exchange for a membership fee or additional cost component. Some of the providers that allow customers to ‘buy’ wholesale electricity rates include Energy Locals, Powerclub and Amber Electric. For more information around wholesale rates, it is best to visit our wholesale electricity pricing guide.

How can I ensure I am on a good rate for power?

A ‘good’ rate for power will differ from household to household, depending on size, location and annual energy usage. But, by regularly comparing the rates available from different providers in market, you’ll be able to make a more informed decision for your power bill. It’s especially important to have a look at your options if you receive a notice from your provider of an upcoming price change, just to make sure you are still paying a competitive rate.

If you are keen to see what’s on offer in your area, then be sure to head to our free comparison tool through the link below. From there, just type in your postcode to see a variety of plans from retailers in your neighbourhood.

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