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ELECTRICITY MARKET AUSTRALIA 1

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1 HOW ARE ELECTRICITY PRICES SET IN AUSTRALIA? Electricity prices faced by Australian households and small businesses are highly regulated. In states connected to the National Electricity Market (NEM) – New South Wales, Victoria, Queensland, South Australia and Tasmania – this is achieved through a combination of state and federal regulation. Western Australia is not part of the NEM and has its own system of regulation. This note outlines the processes by which end-user prices are set in the NEM states. Forthcoming notes will discuss recent developments in utilities prices (Brown and Rosewall, 2010) and the drivers of recent price movements (Davis, 2010). The appendix contains an overview of how the electricity market actually works, in terms of electricity flows and the various payments involved. Retail price regulation Electricity retailers are those businesses that sell electricity directly to the general public. The prices they can charge households and small businesses are limited by price controls imposed by state regulators (except in Victoria, which removed its retail price controls in 2009). The prices are set so that electricity retailers can recover what the state regulator deems to be the costs an ‘efficient’ retailer would expect to incur in the period for which the cap applies. Each electricity retailer must submit an application to the state regulator outlining its expected costs for the period ahead. The regulator has the discretion to amend the propos ...
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