Chris Bowen’s default market offer crackdown will crush small energy retailers

Labor’s pledge to adjust the default market offer is politically popular, but risks backfiring by putting unsustainable pressure on energy retailers already operating on razor-thin margins.

Cold weather strikes Melbourne, increasing demand for electricity. Picture: Luis Enrique Ascui

The Albanese government’s planned overhaul of household electricity price caps could put small energy retailers surviving on razor-thin profit margins out of business.

The electricity industry was reeling at the policy proposal on Wednesday as intermittent coal outages in Victoria this winter stoke wholesale prices, a force that will inevitably be passed through to energy customers.

Federal Energy Minister Chris Bowen confirmed the government would review the Default Market Offer (DMO) – the benchmark power price in NSW, Queensland and South Australia – with a view to stripping out allowances that protect retailer margins.

The idea is to bring the national standard into closer alignment with Victoria’s more tightly regulated counterpart, the Victorian Default Offer (VDO), which will rise by less than 1 per cent in 2024–25.

While the move is politically popular amid persistent cost-of-living pressures, it represents a gamble by the re-elected Labor government that could backfire by reducing utility competition as small retailers capitulate under further pressure.

“This is classic Trump-style politics – a distraction tactic,” one senior industry executive said speaking on the condition of anonymity. “Labor is blaming retailers when even the ACCC acknowledges margins are at historic lows. All this will do is squeeze out smaller operators and reduce competition, with no discernible impact on prices.”

The government’s intent to unwind some components of the DMO – including retailer cost allowances – has reignited discussion over the true drivers of rising energy bills. Retailers argue the biggest pressure point is not retail margins, but network charges, which account for about 40 per cent of the DMO and are rising as transmission infrastructure is upgraded to support the transition to renewables.

Network costs are approved by the government and are the fastest growing component of the DMO.

Australian Energy Council chief executive Louisa Kinnear, which represents the country’s retailers, said while a review of the DMO was welcome, it must be comprehensive in its scope as far as cost components go.

“Retail competition allowances have already been stripped out of the DMO in the name of affordability. Yet bills are still climbing, and it’s not because of retail margins,” Ms Kinnear said. “Retailers are also required to support customers facing hardship, which often means carrying bad debts. If we want prices that reflect actual costs, all elements of the DMO need to be under scrutiny.”

AGL echoed that sentiment, insisting the review should not lose sight of the role of network costs.

“To reduce energy bills, we need to look at the whole picture. The government and industry are actively working on measures to reduce wholesale electricity costs. At 40 per cent of an average bill, network costs are a big component of bills and are continuing to grow quickly.

“A focus on improving network productivity is essential to keep these costs in check. Retail costs only represent around 10 per cent of an average bill and we need to carefully consider any moves that could lessen competition in the retail market, particularly if smaller retailers were no longer able to operate,” a spokesman for AGL said.

Victoria, meanwhile, is facing a renewed test of its grid reliability as colder temperatures return and EnergyAustralia’s Yallourn coal power station operates at just 25 per cent of its capacity.

Yallourn, the state’s second largest coal-powered generator, has been crippled by equipment failures, including a collapsed air duct, though the company has not disclosed the cause of outages at two of its four generating units.

The outages and cold weather again leave Victoria with little wriggle room. The country’s energy market operators expect sufficient capacity to minimise concerns about blackouts, but prices are forecast to surge.

Households and businesses, however, do not pay wholesale electricity prices.

The disruption is material for EnergyAustralia, which typically uses Yallourn to supply its retail customers and hedge against volatility in wholesale markets. With the coal plant hobbled, the utility is instead relying on more expensive gas peaking plants to meet demand – a margin-eroding outcome that it can only partially mitigate due to benign conditions in the gas market.

Gas prices remain elevated but manageable, buoyed by near-record storage levels. However, continued outages at Yallourn could test those assumptions if winter demand intensifies.

Originally published as Chris Bowen’s default market offer crackdown will crush small energy retailers