Overview of final recommendations on how maximum prices should be set

IPART has recommended methodologies for setting maximum price protections for customers being supplied energy services through an embedded network. 

IPART’s maximum price methodologies are based on what on-market customers would pay for these services. In particular: 

  • Maximum prices for electricity and gas would be benchmarked to retail offers being advertised on the Australian Energy Regulator’s (AER) Energy Made Easy website. The benchmark would be set equal to the median of retailers’ lowest fixed and consumption tariffs, and updated annually. 
  • Maximum prices for hot and chilled water are based on the electricity and gas benchmarks. Consistent with the NSW Embedded Network Action Plan, and how hot water is paid for outside of embedded networks, we recommend that hot water be billed in the underlying energy units (rather than in litres of hot water). In our view, this would better facilitate customers protections applying to these services in the future. To ensure that there is a limit to the hot water system inefficiencies borne by customers (which are outside of the control of tenants) we recommend a methodology for setting the maximum amount of fuel that sellers can charge per litre of hot water consumed. For gas hot water systems, sellers must not charge customers for more than 0.4 megajoules of gas per litre of water consumed. 

These recommendations would apply to all small customers in embedded networks except those business customers that are large corporate entities. For large corporate entities that are small energy customers, we recommend that the maximum price is no more than the local area retailer’s business customer standing offer (which is capped by the default market offer for electricity customers). 

Ensuring that customers benefit from being in an embedded network

Embedded networks can be a more cost-effective way of delivering energy compared to traditional supply arrangements – mainly due to the lower distribution network costs for embedded networks. These network costs would remain significantly lower, even under the proposals to increase network prices for embedded networks over a number of years. Our recommendations would help ensure that embedded network customers can share the benefits of these lower costs. 

If sellers charge the maximum prices allowed under our methodology, we estimate that:

  • On average, embedded network customers would typically pay about 5% less than the average electricity and gas prices being paid by an on-market customer (although there would be some variation between years). 
  • Some customers would still be worse off than on-market customers, as they could save around 5% more on average if they were able to access the lowest offers in the market.

However, embedded network sellers could charge less than the maximum prices allowed.

Our recommendations also: 

  • ensure that embedded network sellers can recover their efficient costs of supply
  • allow for the sharing of costs and benefits so that customers benefit from efficient technology, while also providing a financial incentive for developers and investors to install it.

These issues are discussed in detail in the independent advice prepared by Axiom Economics. 

We used historical data sets of Energy Made Easy published offers to analyse the prices that would result from our methodology. These can be found here.