2022 DMO VDO electricity prices up from July

Last week the Australian Energy Regulator and Victoria’s Essential Services Commission released their pricing for 2022-23. It’s not the stable pricing both predicted last year. It’s just another sign of the big jump in power prices.

The 2022 DMO VDO increase.

Default offers are a safety net for households and small businesses. These prices apply to those on standing offers, capping the price consumers pay for electricity for those who don’t choose a market offer. Around one in ten households (about 550,000 customers) are impacted by the Default Market Offer (DMO) and Victorian Default Offer (VDO). For 2022-23, the DMO and VDO price increases for households:

• Victoria – 1% to 9%
• NSW – 8.5% to 14.1%
• SE QLD – 11.3%
• SA – 7.2%

This jump is well above inflation – which is running around 5%. Unfortunately, there’s a bigger problem. Both the 2022 DMO and VDO are calculated based on assumptions of how retailers buy electricity. I’ll explain why some retailers won’t be able to meet this because they didn’t buy enough forward energy contracts before the market surged. Plus, the reason why the price increase for most households on market offers will be significantly higher.

Bigger hit to market offers

The pain will be worse for those on market offers. Many retailers are scrambling to buy electricity at a cost that looks remotely like what they paid last year. As a result, a lot of retailers will struggle to provide deals that are much better than Default Offer – if they can even do that. We expect to see a decrease in the discount levels offered. We’ll break out why seventeen retailers have already removed their NSW and SE QLD market offers.

Wholesale rates have exploded in NSW and QLD

The increases in the 2022 DMO and VDO look very modest compared to the wholesale spot and future prices. Wholesale prices have increased 100-200% in the last six months. The wholesale rates for baseload contracts for Q3 2022 can be seen in the chart below and are currently around ~25c per kWh. These are one of the contracts retailers use to lock in pricing for the electricity used by their customers. Current spot prices are even higher, averaging 35 cents overnight and 25-30 cents during the day in NSW. Prices for these contracts were under 8c just six months ago. We are now witnessing unprecedented energy costs that retailers face when buying electricity for their customers. Compare these rates with the table below. This shows wholesale rates of 11-15c per kWh that the DMO prices are predicated on:

The DMO is shaking up the market

Based on futures pricing and feedback from retailers, the DMO price doesn’t reflect the actual cost increase that many retailers will see for 2022-23. Especially retailers that had not locked in pricing before April 2022 to cover their customers’ electricity consumption for the next 12 months. So, we can’t see how they will be able to offer customers plans at the Default Market Offer in NSW and QLD without losing money. As a result, small retailers are removing all their market offers. Some are not taking on any new customers, while others have told their existing customers they should shop around.

Around half of all retailers ditch market offers

As of 5th June 2022, over twenty-five electricity retailers have removed their market offers in NSW and QLD, including:

1. 1st Energy
2. Amber – only accepting new customers with solar and battery
3. Bright Spark Power
4. CovaU
5. Diamond Energy – not accepting new customers until new rates published
6. Dodo – removed from QLD only
7. Discover Energy
8. Electricity in a Box
9. Elysian Energy
10. Future X Power
11. GEE Energy
12. Locality Planning Energy
13. Mojo Power
14. Momentum Energy
15. Nectr
16. OVO Energy
17. People Energy
18. Pooled Energy (in administration)
19. Powerdirect
20. Powershop
21. QEnergy
22. Radian Energy
23. ReAmped Energy
24. Simply Energy
25. Smart Energy
26. Tango Energy

In some cases, retailers have advised customers of rate increases up to 150%. The problem is that some small retailers have not hedged sufficiently. They are (understandably) unwilling to purchase future contracts at the current unprecedented rates. In hindsight however, they should have locked in future rates much earlier, not in the last quarter of the financial year to cover their customers usage for 2022-23. We believe that the majority of the retailers listed above will have hedged sufficiently for their existing customers but may not have hedged sufficiently to absorb a large portion of the customers being told by their retailer to go elsewhere. These retailers are also well-aware that all of their customers, new and existing, will face significant price increases in any case and that tends to create unhappy new customers and thus significant churn. Many are saying that they want to relase their new rates before taking on new customers to avoid any surprises for their customers.

Exiting the market.

Last week, Pooled Energy appointed administrators. We expect that more retailers will leave the market in the coming months. While other retailers are sitting out the storm and not seeking new customers.