Power prices to remain high for years, warns ACCC

Power prices will remain high over the short to medium term for Australian households with elevated wholesale costs predicted through to 2024, the competition regulator warns.

Power prices will remain elevated for several years while pressure is growing on smaller retailers, the ACCC said.

Electricity bills will remain high in the short to medium term with the soaring cost of coal and gas expected to keep wholesale prices elevated through to at least 2024, the competition regulator said, while smaller electricity retailers are facing pressure as contract markets tighten.

As energy ministers meet in Brisbane on Thursday to tackle looming intervention in the market, Australia’s rocky energy transition from coal to renewables and the ongoing war in Ukraine is forecast to keep tariffs raised, further piling pressure on the federal government to execute its plan for price relief.

“The current market expectation is that high gas and coal prices may continue to elevate national electricity market wholesale spot market prices in the coming quarters,” the Australian Competition & Consumer Commission said in its latest report on the market.

“Based on market pricing as at 31 October 2022, while commodity prices are expected to come down from recent high levels by the end of 2022, they are forecast to remain above pre-2022 levels, reducing through 2023 and 2024.”

Treasury has warned of a 56 per cent jump in power prices in the next two years, while Labor will intervene in Australia’s domestic gas and coal markets before Christmas to calm soaring prices.

The estimated price of new market offers increased by about $300 per year, or 23 per cent, based on the median annual bill of a typical residential customer, according to the regulator.

The ACCC also found smaller electricity retailers are struggling to juggle their exposure to high and volatile wholesale electricity prices with less competition in the retail market leading to further hikes in energy prices for consumers and businesses.

Most big energy users can manage their exposure to wholesale power price spikes by entering hedge contracts that lock in firm prices or signing up to contracts at a specified rate.

Power prices will remain high over the short to medium term for Australian households with elevated wholesale costs predicted through to 2024, the competition regulator warns. Picture: Lionel Bonaventure/AFP

However, six electricity retailers have quit the market and others have told customers to switch retailers or are no longer taking on new accounts.

Turbulent market conditions and a five-fold jump in wholesale prices has challenged the business models of smaller retailers, with many struggling to pay money to cover their exposure to the price jump.

“A number of retailers have lost access to the Australian Securities Exchange to provide hedging cover in 2022. This has meant they have had to source contracts in the over-the-counter market instead. Prices in the over-the-counter market were notably higher than on the ASX from quarter 2 2022 onwards, putting retailers without ASX access at a disadvantage.”

The increase in hedging costs means default offers need to have the option of being tweaked during the year, the ACCC has recommended. It found higher spot market and hedging contract prices have meant consumers choosing a new energy provider now have a smaller range of more expensive market offers to choose from given many smaller retailers do not have any market offers below the default rates.

“As retailers’ hedging costs have increased significantly this year, the ACCC also believes that regulated retail prices – default offers – need to accurately reflect retailers’ actual operating costs,” the ACCC said.

“To achieve this, the Australian Energy Regulator should have the flexibility to adjust the default offer in the event of unforeseen circumstances outside of the annual price setting decision.”

The default market offer, which puts a price cap on what retailers can charge customers who have not looked for a better deal and remain on standing offers, saw power bills rising by hundreds of dollars after the national regulator announced increases of up to 18 per cent on standing offers from the start of July this year.

While default offers do not directly determine energy costs for most Australians, given only about 10 per cent of households are on standing offers, they set a benchmark and are seen as highly influential as big retailers set their own offers.

Originally published as Power prices to remain high for years, warns ACCC