What is the Reference Price for Energy?

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If you’ve heard or read about a new ‘reference price’ for energy but don’t understand what it is, how it works, or most importantly, what it means for you, Canstar Blue has you covered. Basically, the energy retail market has been going through a period of significant change, brought about largely because of the actions of some retailers in creating overly confusing (even misleading) plans that left consumers confused and often on bad deals. The industry regulators have taken action to simplify the market and the introduction of the reference price is one of the key changes.

What is the reference price?

Energy Reference Price?

The reference price for energy effectively acts as a price cap for power retailers, in addition to providing a consistent point of reference for consumers to compare plans. The idea is that energy retailers display how their prices compare to the reference price, so consumers know where they stand when it comes to finding a competitive deal. Think of it as a ‘level playing field’ from which all energy plans are compared, so you can have confidence that the retailers promoting the biggest percentage savings compared to the reference price will genuinely be the cheapest.

  • It should be noted that, while the reference price acts as a price cap for customers who do not engage in the market (on standing offers, which we’ll come to), retailers can still charge more than the reference price through market offers. However, it appears this is discouraged by the regulators, even if the retailer may have reasonable claims to charge more than the reference price (i.e. because it offers an additional value-add incentive that makes the product appealing).

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How does the reference price work?

The reference price for energy is a ‘safety net’ price that customers pay for power if they do not engage in the market (i.e. compare offers and shop around). The reference price is set by the Australian Energy Regulator (AER) and is based on specific usage and supply charges in different geographical areas, so the reference price will vary between states, and in the case of New South Wales, it will even vary between different areas of that state. All energy retailers must offer customers the reference price, which will be updated to reflect the costs of supplying energy every July.

That’s the reference price in a nutshell, but to truly understand it, you’ll need to know the context, and how we got to this point. Read on for all the info, or:

Cheaper plans than the reference price

As we mentioned, the reference price is purely a ‘worst case scenario’ power price and you can certainly save a lot more if you shop around. Therefore, the tables below show a comparison of the cheapest deals on our database, with their savings compared to the reference price highlighted.

Cheaper than the reference price NSW

Here are some of the cheapest published deals from the retailers on our database that include a link to the retailer’s website for further details. These are products from referral partners†. These costs are based on the Ausgrid network in Sydney but prices may vary depending on your circumstances. This comparison assumes general energy usage of 3900kWh/year. Please use our comparison tool for a specific comparison in your area. Our database may not cover all deals in your area. As always, check all details of any plan directly with the retailer before making a purchase decision.

Cheaper than the reference price QLD

Here are some of the cheapest published deals from the retailers on our database that include a link to the retailer’s website for further details. These are products from referral partners†. These costs are based on the Energex network in Brisbane but prices may vary depending on your circumstances. This comparison assumes general energy usage of 4600kWh/year. Please use our comparison tool for a specific comparison in your area. Our database may not cover all deals in your area. As always, check all details of any plan directly with the retailer before making a purchase decision.

Cheaper than the reference price SA

Here are some of the cheapest published deals from the retailers on our database that include a link to the retailer’s website for further details. These are products from referral partners†. These costs are based on the SA Power network in Adelaide but prices may vary depending on your circumstances. This comparison assumes general energy usage of 4000kWh/year. Please use our comparison tool for a specific comparison in your area. Our database may not cover all deals in your area. As always, check all details of any plan directly with the retailer before making a purchase decision.

What happened before the reference price?

Before Energy Reference

Before the introduction of the reference price, there was no limit to what energy retailers could charge their customers in areas of the country where prices had been deregulated (i.e. rates were no longer set by state governments or regulators). This created highly competitive markets in these areas, with many new energy retailers forming and competing for business. But while many consumers shopped around, compared prices and found good deals, some did not and instead found themselves on expensive plans known as ‘standing offers’. Standing offers were default contracts that generally came with the highest prices, which led to the term ‘lazy tax’ to describe the fact that customers were effectively punished for not shopping around and switching retailers.

At the same time, because there was no benchmark price from which energy discounts were applied, the market became extremely confusing for consumers to navigate as some big discount plans actually worked out more expensive than some plans with smaller discounts – all because these discounts were not applied to the same base pricing. Energy retailers could (and did in some cases) simply place a large discount onto very high base rates, giving consumers the impression that their plan was going to deliver great savings, when in reality it wouldn’t. The rise of conditional discounts also resulted in higher prices for those who failed to meet the conditions, such as paying on time.

The regulators step in

Regulators try regulating

In light of growing evidence of what the energy retailers were doing, as well as public demand for an easier to understand market, the Australian Competition and Consumer Commission (ACCC) launched an inquiry into the retail market that included a series of recommendations on what needed to change to make it easier for consumers to understand, and ultimately save them money. One recommendation was to replace standing offers with a ‘Default Market Offer’ (aka. the reference price). Consumers on a standing offer contract would then be switched automatically onto their retailer’s Default Market Offer and pay the reference price for power instead of the higher standing offer rates.

  • The exception to this would be if a standing offer was already cheaper that the reference price. In this case, the retailer would be expected to maintain its offer to the consumer. However, it is extremely rate to find such a cheap standing offer in the first place.

Where is the reference price used?

The reference price is used across New South Wales, south-east Queensland and South Australia. In these areas, the reference price is the maximum price that energy customers who don’t engage in the market will pay, depending on their location and specific circumstances (i.e. how much power they use). In Victoria, customers have a similar reference price for power, but this is known as the ‘Victoria Default Offer’. It does not (effectively) act as a price cap in quite the same way as the reference price, but it is similar in that customers on old standing offers are switched onto the cheaper default price.

How will the reference price be used?

The reference price looks set to change the way energy retailers market their products because they will need to reference the reference price! In doing so, they have to publish a percentage clearly showing the difference between the annual cost of their product compared with the reference price. The percentage difference must be compared with the maximum cost of the retailer’s plan, not the lowest potential cost after any discounts. The potential difference after discounts may also be displayed, but less prominently, as the example advert from a fictional retailer (courtesy of the ACCC) shows.

This is why it appears we have seen the end of huge 40% discounts – because truly being 40% cheaper than the reference price is going to be extremely difficult…

Key points about the reference price

The reference price has been introduced to help make the energy market easier to understand, but it does seem a little confusing at times. Here are some key points to keep in mind:

  • The reference price is specific to energy distribution networks in each state, reflecting the costs involved in supplying power to particular geographical areas. Make sure the reference price you use to compare is the price on your network. Don’t know what network you’re on? You can find out here.
  • While the reference price is the maximum that energy customers who do not engage in the market will pay (specific to their network), the reference price does not act as a level playing field from which discounts are applied. Instead, it is a point of reference to compare all plans – discounted or otherwise. All plans need to reflect a percentage compared to the reference price, whether than product is less than or higher than the reference price.
  • When it comes to plans with discounts, you could technically see three different prices quoted: the reference price; the price when conditions of a discount are not met; the price when conditions of a discount are met
  • Failing to meet the conditions of a discount does not necessarily mean you’ll be left to pay the reference price. If the plan is significantly cheaper than the reference price, you could fail to meet the conditions and still pay less than the reference price. However, no plan can result in prices higher than the reference price when discount conditions are not met.

So how much is the reference price?

The reference price is not designed to be the cheapest deal around. It has been introduced to ensure that those energy customers previously paying the highest prices will now pay less. So, how much will they pay? The following table shows single rate tariff and single rate + controlled load prices across the different energy networks in NSW, SE QLD and SA, plus the usage assumptions (kWh) used to calculate them.

State Energy Network Flat Rate Annual Cost Flat Rate + Controlled Load Annual Cost
Sydney Ausgrid $1,467 (3,900kWh/pa) $2,059 (6,800kWh/pa)
Sydney Endeavour $1,720 (4,900kWh/pa) $2,166 (7,400kWh/pa)
Sydney Essential $1,957 (4,600kWh/pa) $2,375 (6,600kWh/pa)
SE Queensland Energex $1,570 (4,600kWh/pa) $1,927 (6,300kWh/pa)
South Australia SA Power $1,941 (4,000kWh/pa) $2,420 (6,000kWh/pa)

Source: AER Default Market Offer Price Determination report.

How does the reference price compare to the cheapest offers?

The reference price is competitive compared to most energy plans and will result in notable savings for those customers who have been switched from an old standing offer onto the new default price. But like before these regulatory changes to the energy market, consumers who shop around and compare their options still stand to save the most. Canstar Blue’s electricity database shows that – based on the same assumptions as detailed in the table above – the cheapest plans in market work out between $200-300 cheaper than the reference price in each area. But this is subject to change.

Is there a downside to the reference price?

Potential Downsides of a Reference Price

Energy retailers have argued that the introduction of a regulated default price will harm competition and innovation in the energy market, especially if the default price is set very low. There is speculation that it could even lead to some smaller retailers going out of business. It’s too early to tell whether or not the introduction of the default price has negatively impacted price competition, but it’s certainly a win for those energy customers who were previously paying the highest prices.

The other potential downside to the reference price is how well, or otherwise, it will be interpreted by the consumers it is designed to assist. In the case of discounted energy plans, consumers may see three different prices referenced, representing the cost of reference price itself, the cost of the product if the discount conditions are not met, plus the cost if the conditions are met. It seems reasonable to suggest that some consumers may find all of this information confusing, at least in the first few months are it is rolled out.

Summary of the reference price

It’s good to be aware of the reference price for energy because it’s designed to help you compare plans and ultimately pick the right one for you. In summary:

  • Customers on old standing offers will be switched onto the new default, reference price
  • The reference price is the most that energy customers who do not sign up to a market offer will pay
  • Some market offers could still be higher than the reference price, though this seems unlikely to be common
  • Reference prices differ between different parts of the country, so make sure you know which price applies in your area
  • Energy retailers will now need to display how their plans compare to the reference price
  • You can still find cheaper deals than the reference price – so continue to shop around

The reference price will certainly put a downward pressure on overall energy prices, but keep in mind that price is only one consideration when it comes to finding the best energy retailer for you. Customer service and other value-add incentives are just two other things to keep in mind when shopping around. Canstar Blue’s electricity comparison tool includes a unique value rank feature that compares plans on which offer the best overall value, not just the cheapest prices. Hit the link below to compare.

Image credits: Peshkova/Shutterstock.com, MPIX/Shutterstock.com, StudioLaMagica/Shutterstock.com, BlurryMe/Shutterstock.com

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