The influence of market intervention on retail electricity prices

On Thursday 13 March 2025, the Australian Energy Regulator (AER) released its draft determination for the 2025-26 Default Market Offer (DMO). The DMO determines the maximum price, or price cap, an electricity retailer in NSW, SE QLD and SA can charge a residential or small business customer on a standing offer, meaning customers who have not entered into a market-based contract with a retailer. This is its primary purpose.

Moreover, the DMO price acts as a reference price to help customers who are engaged in the market compare different retail electricity offers. Retailers are required to provide a comparison of their offer against the DMO price, typically expressed as a percentage discount.

The 2025-26 DMO has received a fair degree of attention given its draft and final determinations straddle the upcoming Federal election with the final determination to be released in late May. Electricity prices are once again featuring heavily in the current political campaigns of the major parties.

The DMO price, along with retail electricity prices, consists of several components that reflect the costs incurred by retailers in supplying electricity to customers. These components include wholesale energy costs, various environmental scheme costs, transportation costs (transmission and distribution), other costs (such as market fees) and a retail margin. The largest component is the Wholesale Energy Cost (WEC), making up approximately 40-45 per cent of the total retail electricity price.

The AER, as part of its DMO determination process, engages ACIL Allen to assist with estimating the WEC. We have been providing this service for the past six years. Additionally, for approximately 10 years, we have supported the Queensland Competition Authority (QCA) in determining regulated electricity prices in regional Queensland.

While our company may not inherently advocate for price regulation, we acknowledge the reasons why governments implement it.

The method to estimate the WEC attempts to emulate, albeit in a simplified way, how retailers procure electricity from the wholesale market and manage price risk. Retailers purchase their electricity needs for their customers in real-time from the often volatile wholesale electricity spot market, often referred to as the National Electricity Market (NEM) or the spot market.

This poses a challenge for retailers since they are purchasing their electricity needs from this very volatile spot market and then on-selling to their residential and small business customers at a (typically) fixed price. Retailers manage this asymmetric price risk through various means, including entering into forward or future wholesale hedges at an agreed price, using their own generation capabilities or entering into financial contracts with generators. This allows them to build up a “hedge book” over time, in advance of the given determination year.

We won’t delve into the intricacies of how the WEC is calculated (you can read about that in our report to the AER[1]). However, generally, there are three factors that influence the WEC:

1. The price level of forward or futures contracts 
2. The profile or shape of the demand of residential and small business customers
3. The level and profile or shape (such as the time-of-day shape) of spot price outcomes.

Focusing on the first factor, futures prices, the charts below show the WECs from the AER’s past 7 determinations tend to follow the trend in the futures prices, as would be expected. Futures prices stepped up between 2021-22 and 2023-24, as did the WECs (and hence retail electricity prices), and have generally remained at those levels.

The charts also show where participants in the futures market (including retailers, generators and brokers) think wholesale electricity prices will settle out to June 2028.

Currently, market participants are of the view that wholesale electricity prices in the NEM will remain at current levels out to June 2028. Setting aside changes in the other drivers, this implies that the WECs may well remain at current levels for the next 3 determinations – that is, for the entire term of the next Federal Government – unless there is a change in sentiment in the market.

In recent times, political parties from all sides have either previously intervened, or signalled their intent to intervene in energy markets in the future, such as introducing coal or gas price caps, introducing a domestic gas reservation policy, or delaying the closure of a given power station. These interventions are designed to either quickly[2] lower the cost base of thermal power stations or increase supply and hence reduce price outcomes in the NEM. However, given retailers tend to build up their hedge book, including futures contracts, well in advance of time, such interventions typically do not have a direct impact on retail electricity bills for at least 12 to 18 months. Further, there does not appear to have been a decrease in futures prices despite recent announcements of potential policies involving our energy markets. This all suggests that any interventions in the market, aside from rebates paid directly to electricity consumers, are unlikely to flow through to consumers’ electricity bills until half way through the next federal government’s term at the earliest.