VDO, DMO and increased network costs: What will your electricity bills look like from July 1?

Default Market Offer and Victorian Default Offer

Each May, the Australian energy regulatory bodies announce a default market offer which is a reasonable energy price set for residential and small business electricity consumers located within the National Electricity Market (NEM) and implemented July 1 of the new financial year.

The regulated pricing is based on how much it realistically costs to acquire electricity, referencing the cost of electricity in the futures market, alongside approved network costs, retail costs, environmentals and other charges.

The goal is to provide a simple, trusted and reasonably priced electricity option that safeguards consumers unable to engage in the electricity retail market.

As per the Australian Energy Regulator (AER) which oversees the program across New South Wales, South East Queensland and South Australia, the Default Market Offer (DMO) is also the “maximum price that retailers can charge electricity customers on default contracts known as standing offer contracts.”

According to the AER, small businesses on the Default Market Offer (DMO) in these regions are set to benefit from a 2-9% electricity saving, depending on their distribution network.

Similarly in Victoria, the Victorian Default Offer (VDO) which is managed by the Essential Services Commission (ESC), has suggested small businesses on the Victorian Default Offer should expect a 7% saving, depending on their distribution network.

But if we dig a little deeper, what does this actually mean for small business energy bills?

Is the default market offer all ‘hype’?

It’s important to understand the Default Market Offer or Victorian Default Offer is not the most competitive price available, and businesses should undertake their own research to compare energy providers or work with a business like Choice Energy who can do so on your behalf.

In fact, according to both regulatory bodies, less than 20% of small businesses in New South Wales, South East Queensland and South Australia are on the DMO, and less than 20% of Victorian businesses are on the Victorian Default Offer (VDO), which means the majority of businesses are securing far more competitive rates, through competitively-priced plans known as market offers, where the retailers set their own usage and supply rates.

What notable trend did we see across market offer pricing this year?

When setting final pricing, both regulatory bodies expressed that while wholesale markets have stabilised since their extreme peaks of 2022, network costs have increased considerably (the cost to distribute electricity via poles and wires) which has been driven by inflation and interest rate rises.

With network costs accounting for approximately 40% of the total cost of business electricity bills, it’s a significant factor to highlight, that is often not understood by business operators, as this cost is 'bundled' with others into one set charge on business energy bills.

How will the market offers and network cost increases affect your business electricity bills this financial year?

For small businesses on the Default Market Offer or Victorian Default Offer who are not actively participating in the electricity retail market (less than 20% of small businesses in each state), you’ll likely receive a communication from your retailer that you’ll see a small saving on future bills (up to 9% or 7% respectively), or a modest increase of around 1% depending on their region. Network costs have been taken into consideration for their pricing.

For small businesses who are on rates well below the Default Market Offer, you may actually receive a letter from your electricity retailer flagging an increase in your electricity costs, as a result of increased network charges that the retailer may decide to pass along to you.