How are electricity prices determined in Australia?

In the last decade, Australians have paid some of the world’s highest electricity prices. Even though pricing pressures have eased slightly, most of us spend a significant amount on electricity. Knowing how the prices are determined and what you are being charged for can help you find the right electricity provider and plan to suit your needs.

The role of the electricity providers

Like any retail business, electricity providers buy electricity from the wholesale market and sell it on to consumers. In every state except Western Australia, the electricity providers buy electricity from the National Electricity Market (NEM). Western Australia has its own electricity wholesale market called the Wholesale Electricity Market (WEM).

How is your electricity bill calculated?

Most Australian electricity bills reflect a summation of usage charges, supply charges, taxes, or other government charges. Although these terms seem confusing at first, understanding them can help you compare different electricity providers and plans empowering you to choose the right one.

What are supply charges?

Electricity providers need to ensure that the consumers have a reliable connection to the electricity network. This involves establishing physical connections to new areas and maintaining the network in existing areas. To pay for these costs and ensure that the infrastructure yields an appropriate return on investment for the electricity provider, the consumer is charged for each day they are connected to the network. This means that even if you are on holiday and haven’t used any electricity at all, you are still charged for each day that your house remains connected to the network.

What are usage charges?

After an electricity provider purchases electricity from the wholesale market, it resells it to consumers along with a profit margin, which is usually between three and 10 per cent. The consumers are charged the ‘usage charge’ based on how much electricity they use and the price of the electricity at that time.

The price of electricity in the wholesale market is set every five minutes and is based on supply and demand. However, depending on the particular electricity provider and the plan chosen by the consumer, it may be sold at a flat rate or broken down into different rates such as ‘peak’ and ‘off-peak’ rates.

Western Australia, Tasmania, Australian Capital Territory and Northern Territory have regulatory bodies which review and approve the additional charges by the electricity provider before the provider is allowed to charge the consumers. New South Wales, Victoria, Queensland, South Australia have deregulated energy markets, meaning that such regulation of the additional charges doesn’t exist.

So how does it all come together?

In order to ensure that you have chosen the right electricity supplier and plan for your needs, it is best to go through your electricity bill and understand how you have been charged. A typical electricity bill in Australia would include the following items:

1. Supply charges: The daily rate according to your supplier and plan, multiplied by the number of days of the service.
2. Usage charges: The electricity consumed, usually measured in kilowatt hour (kWh) multiplied by the price per kWh.
3. Applicable government charges for different schemes, for example, for increasing electricity generation from renewable sources.
4. And finally, the Goods and Services Tax (GST), usually 10 per cent.

So, next time you receive your monthly or quarterly electricity bill, you can look at the individual charges and know which ones are fixed and which ones are within your control.