Retail electricity: what is the Default Market Offer?

The Default Market Offer (DMO) is a mechanism, designed to reduce prices for a range of retail electricity customers which came into effect on 1 July 2019. Here we explain:

• How the Default Market Offer reduces your electricity prices;
• How it provides a useful benchmark for comparing electricity prices;
• Who it doesn’t apply to;
• Whether it is working; and
• How it is changing in 2020.

What is the Default Market Offer?

The DMO is a rule about electricity prices that limits the amount that some customers can be charged for their electricity.  It applies to all customers whose pay ‘standing offer prices’ or the equivalent, for their electricity usage (more on the ‘equivalent’, below). This covers two groups of people:

• Those who have actively chosen to be on a ‘standard retail contract’. This is a retail contract that contains a range of extra protections for customers, but the ‘standing offer prices’ on that contract are usually higher than the prices offered on more popular ‘market retail contracts’;
• Those who have been automatically placed on the same conditions as a ‘standard retail contract’, by default. This can occur in two cases. Firstly, when a customer moves into new premises and begins consuming electricity, without signing a new electricity contract. Secondly, where their existing market retail contract has expired and they have failed to sign up to a new one.

The DMO prices are set anew every year. For their first year of operation, 1 July 2019-30 June 2020, they were set by looking at each area of electricity distribution (distribution zone) and setting the price at the halfway point between the median market offer and the median standing offer in that area.

How does the DMO help in price comparison?

The DMO is not just helpful for those who are on standard retail contracts or their equivalents. It is helpful to everyone as it makes discounts offered by retailers more transparent.

The DMO prices are also now the ‘reference prices’ that any retailer advertising a discount has to use as the ‘base rate’ for their discount. This means that when one retailer in an area says their discount is 20 per cent of,  it means the same thing as when another retailer says that.

These rules for discounts are set out in clauses 12-14 of the Competition and Consumer (Industry Code—Electricity Retail) Regulations 2019.

Who doesn’t the DMO apply to?

There are different types of electricity pricing structures or ‘tariffs’ that retailers apply in Australia.  Some customers are on tariffs that charge them a different amount, depending on when they use the electricity. The DMO does not limit prices for these ‘time of use’ tariffs. It only limits prices for:

• Residential customers on flat rate tariffs;
• Residential customers on flat rate usage tariffs with a controlled load (e.g., appliances whose energy usage can be controlled), and;
• Small business customers (less than 100 MWh) on a flat rate usage tariff.

It does not apply across Australia. It only applies in South East Queensland, New South Wales, and South Australia. Victoria has its own distinct version of a default offer called the ‘Victorian Default Offer’ or ‘VDO’. It does not apply anywhere else, as in those other states, territories and regions electricity prices are already regulated in some way.

The DMO currently only applies to retail electricity prices, it does not affect gas prices.

Finally, the DMO does not apply to customers who are located in ‘embedded networks’. These are private electricity networks, common in apartment buildings, shopping malls and retirement villages where the electricity infrastructure is owned independently (e.g., by the property developer or owner).

Is the DMO working?

In the Australian Energy Regulator’s (AER’s) view, it is. They report that when it came into effect on 1 July 2019, the DMO reduced residential standing offer prices from $118 to $181 per year, depending on the distribution zone. For small business consumers, they suggest that it reduced standing offer prices by up to $896 per year.

While the DMO did not directly apply to the ‘market office prices’ offered on market retail contracts, these prices have gone down as well (though in that case, it is more difficult to pinpoint the reason why)

How is the DMO changing?

The AER recently finalised the is currently preparing a new DMO for the 2020-2021 year. It will apply from 1 July this year. A different methodology is proposed from last year, with the new methodology taking into account changes in wholesale electricity prices over the last year.

The effect of this, for residential customers, will be a relatively unchanged a slight increase ($9-16) in the DMO in NSW ($3 increase to $35 reduction), and a decrease in South East Queensland ($62 to $115) and South Australia (around $109 to $176).

The AER is still considering how it will take into account the impact of COVID-19 in the setting of the DMO.