Australia's Energy Reference Price: Victorian Default Offer and Default Market Offer explained

The energy reference price defines the standard cost of energy in Australia. Instituted by the Australian Energy Regulator, it’s also known as the Victorian Default Offer (VDO) in Victoria, or the Default Market Offer (DMO) in other states. It provides residential electricity customers with a common point for comparing a diverse range of electricity plans. 

Understanding this reference price empowers customers to confidently navigate energy market offers, ensuring their chosen plan aligns with their needs. For more detailed insights, get in touch with Compare Energy. We’ll answer your questions and explain the relevance of the reference price to your energy costs. 

 

Australia's Energy Market

Australia began deregulating its energy market in 1998, which allowed for more competition among providers. This was designed to drive down electricity prices with the arrival of new energy retailers offering unique energy plans. However, this also introduced complexity, and residential customers found it challenging to compare plans.

Before deregulation, consumers had limited choice in electricity providers. Incumbent utility companies dominated the market. They controlled the electricity's production, transmission, and distribution. As a result, consumers were at the mercy of these entities. There was no competition to influence or temper prices, and consumers had to comply.

Deregulation was necessary to break up these monopolies. It allowed new providers to enter the market. It fostered competition, in order to drive prices down. While this did dismantle the hold of incumbent providers, it introduced new complexities for consumers.

Post-deregulation, consumers faced a multitude of options from various energy providers. On the surface, this seemed beneficial. Yet it led to widespread confusion. Consumers had to distinguish between different energy offerings. They had to understand different pricing structures. Comparing rates became challenging for many. The array of new choices overshadowed the promise of lower prices.

The Energy Reference Price emerged to help simplify electricity plan comparisons. Setting a standard reference price enabled consumers to make more informed decisions about their energy. It addressed the issue of overwhelming variety by providing a benchmark to assess all plans against.

The energy reference price's introduction has had a significant impact, helping consumers navigate a complex market. It underpins the Australian energy market's commitment to a customer-focused approach, encouraging competitive pricing and greater transparency.

 

Energy Reference Price: A Definition

The Energy Reference Price (ERP) functions as both a price cap for energy retailers and a standard of comparison for consumers examining energy plans. It provides a consistent benchmark from which all energy plans can be compared, giving consumers a clearer understanding of the competitiveness of a deal.

The ERP acts as a safeguard for customers who do not participate actively in the market, defaulting to this set price. The Australian Energy Regulator determines the ERP, based on specific usage and supply charges in different geographical areas. 

This means the reference price varies between states, and in some cases, even within regions in the same state. All energy retailers must offer customers the ERP, which gets updated every July to reflect changes in the cost of supplying energy.

Before the introduction of the ERP, energy retailers had no limit on what they could charge customers in deregulated areas, which led to the creation of the 'lazy tax' concept for customers who did not shop around for better deals. 

The ERP is used in New South Wales, South East Queensland, South Australia, and the Australian Capital Territory. In these areas, it acts as the maximum price for customers who don’t actively shop around for a better deal, with the specifics depending on their location and energy consumption. When promoting their products, energy retailers must clearly illustrate how their prices compare to the ERP.

Even though the ERP is designed to be a 'safety net' price, more competitive deals can be found. Consumers should compare electricity plans from various energy companies to get a better deal. 

However, it's crucial to remember that the ERP's importance extends beyond just price. It also encourages competition among energy retailers, prompting them to improve customer service and offer additional value incentives. In this sense, the ERP has influenced how energy is sold and how consumers decide about energy usage.

 

Victorian Default Offer (VDO)

The Victorian Default Offer, introduced in July 2019, is a protection measure for energy consumers in Victoria who are on costly standing offer contracts with their current energy provider. The initiative was designed in response to an independent review that identified Victorians were paying excessive amounts for their electricity. The VDO offers fairer electricity prices and aids in making the retail market more accessible and affordable for households and small business customers.

The VDO is similar to the reference price in other states, aimed at providing customers who do not actively participate in the energy market with capped and more competitive electricity prices. The VDO not only serves as a safety net for customers but also acts as a reference price when comparing energy plans. 

Energy plans with discounts must base their pricing on the VDO, which aids in a more transparent comparison between the estimated annual cost of the VDO and discounted plans. This is the reason you often see plans marketed at percentages more or less than the VDO.

If you're a residential or small business customer and you've been on a standing offer since before July 2019, you're likely already on the VDO. This safeguards you from being charged more than the default price set by the Victorian Government. 

However, while the VDO provides a fairer electricity plan, cheaper market offers may still be available with lower usage and supply rates. It's always a good idea to review and compare electricity prices periodically.

From September 2021, the two-period time of use VDO was introduced. This default tariff is for customers connected to a time-of-use tariff, providing households with smart meters access to peak and off-peak electricity rates.

To understand if you are on the VDO, simply look at your latest energy bill. Your contract type should be listed there, although it may be found in the fine print and may not be labeled as "standing offer." If you're not currently on the VDO but wish to switch, you can contact your retailer and request to be switched to their Victorian Default Offer.

The VDO is a beneficial tool for those who do not wish to navigate the energy market and prefer a capped, fair price. However, remember that the VDO varies between different distribution zones in Victoria. When energy companies market their plans, they must use the VDO as a 'reference price.' Despite the advantages of the VDO, market offers from electricity retailers may still provide cheaper options, so always consider comparing electricity deals to potentially lower your energy bill.

 

Default Market Offer (DMO)

The Default Market Offer (DMO) has been a significant development in the energy sector, transforming the landscape of electricity prices and contracts. Introduced as a response to climbing electricity prices and an intricate retail market, the DMO is designed to serve as a cap on electricity costs, primarily for contracts known as standing offers. It was implemented as a protective measure for consumers, offering a safety net for those uninvolved in energy market fluctuations.

The DMO is a product of recommendations from the Australian Competition and Consumer Commission’s 2018 inquiry into electricity prices. This regulatory change has been met with mixed responses, with some welcoming the reduced power bills, and others expressing concerns about a perceived move towards price re-regulation that may limit competition.

The Default Market Offer is an electricity tariff set by the Australian Energy Regulator. Upon its introduction, customers previously on standing offers were automatically transferred to this lower default price. Retailers can technically still charge above the DMO on their market offers, but many choose not to due to the DMO's secondary function as a reference price against which all market offers must be compared.

DMO is an assurance for consumers not actively participating in the energy market, safeguarding loyal customers from being exploited by exorbitant standing offers once their initial energy deal expires. Despite this, the DMO is not considered a competitive price for energy and significant savings could be found beyond it.

The cost of the DMO is calculated based on the region's operational efficiency, including a reasonable margin and customer acquisition and retention expenses. As part of this shift, energy retailers must now advertise each plan's clear and straightforward conditions, using the default price as a point of reference.

This change followed the ACCC’s Retail Electricity Price Inquiry report, which found the electricity retail market perplexing and challenging for consumers to find a better deal. The report also identified that loyal customers were subjected to a 'loyalty tax' via undiminished standing offer rates.

As a reference point for power prices, the Default Market Offer protects customers who remain uninvolved in the energy market. Customers previously on a standing offer before 1 July, 2019, were transitioned to the new default reference price. Set by the AER, this reference price is based on specific usage and supply charges in different areas, leading to variations in reference prices across states and distribution networks.

Historically, customers had the option between two types of electricity contracts: standing offers and market offers. Market offers, set by the energy retailers themselves, typically include attractive discounts and incentives. Standing offers were basic electricity deals without discounts and were typically more expensive than market offers. They were intended to be a fallback once a customer’s initial energy deal ended.

One significant difference between the DMO and standing offers is who set the price. While electricity companies determined the standing offer price, the DMO is a government-set price, typically lower than previous standing offers. The DMO also curbs the potential for retailers to exploit loyal customers with inflated prices.

In addition to this, the 'reference price' serves as a standard benchmark, introducing clarity to electricity price comparisons. Retailers must now calculate all conditional discounts on their energy plans in line with the reference price, effectively combating potentially deceptive discounts that might mask inflated electricity rates.

The DMO has affected customers in New South Wales, south-east Queensland and South Australia and is likely to be introduced in Tasmania. Customers in Victoria have a similar default price for power known as the ‘Victorian Default Offer’. The ACT also follows a similar 'reference price' structure in its energy market.

If you’re unsure about your status can determine if you're on a standing offer by evaluating your recent energy behaviour. You're likely on a standing offer if you haven’t relocated for a while or compared energy plans. In fact, the Australian Energy Regulator found that about 10% of the total market in NSW, QLD and SA were still on standing offers as of 2023. This reinforces the need for awareness and understanding of the DMO among electricity customers.

 

VMO vs DMO

Understanding the difference between the Victorian Default Offer and the Default Market Offer is important for consumers seeking to make informed decisions about their energy plans. While both exist to protect consumers from costly standing offers, key differences set them apart.

The DMO, introduced by the Australian Energy Regulator, serves as a price cap on energy rates for standing offers and operates as a reference price for all market offers. Its primary purpose is to shield consumers, especially those unengaged in the energy market, from excessive standing offers post the termination of their original energy deal. It is not considered a competitive energy price, and customers can find more cost-effective alternatives. This cap currently affects consumers in New South Wales, South-East Queensland, and South Australia.

On the other hand, the VDO is a default electricity price for Victorian consumers, introduced by the Essential Services Commission. Unlike the DMO, the VDO is intended to be competitive, providing a fair price for energy rather than just a safety net for those on standing offers. The objective behind the VDO is to ensure that consumers, particularly those not actively seeking out new energy plans, are not disadvantaged.

While both the DMO and the VDO protect customers from high electricity bills, they do so in slightly different ways. The DMO, with its function as a reference price, brings transparency to the electricity market by setting a benchmark against which all market offers must be compared. Conversely, the VDO is a competitive offer in itself, aiming to provide a fair price for all Victorian electricity customers.

 

How to Choose the Right Energy Deal

Choosing the right energy deal might seem daunting, but a thoughtful approach can make it significantly easier. Your energy deal should align with your household size, energy usage patterns, and environmental preferences. Here's how to navigate your way to a suitable energy plan.

  1. Understand your energy usage: Take a look at your previous electricity bills to gauge your typical usage. If you're a large family with high energy consumption, you might benefit from a plan with a lower usage rate. Conversely, smaller households or those with energy-efficient appliances may find plans with a lower daily supply charge more suitable.
  2. Consider renewable options: Some plans offer green energy options, contributing a percentage of your usage towards renewable energy generation. Check on the providers' offers on clean energy options.
  3. Check for discounts and incentives: Many energy plans offer discounts and incentives. However, it's crucial to read the fine print. Some discounts are conditional on behaviours like paying on time or signing up online. Ensure these conditions align with your habits to fully benefit.
  4. Compare energy deals with Compare Energy: We provide a simple way to compare energy rates, conditions, and features across multiple plans, helping you find the best deals for your needs.

While price is a significant factor, it's not the only consideration. An energy plan might have a lower rate but may not be a good fit if it doesn't align with your usage habits or green energy goals. Take the time to understand the details of each plan before making a decision. This approach ensures your chosen energy plan is not just cost-effective, but also tailored to your specific needs and lifestyle.

 

Compare Energy Plans with Compare Energy

When it comes to finding the right energy plan, Compare Energy is your trusted expert in the industry. We understand the stress of navigating through Australia's energy reference prices, and that's why we're here to help. With our simple and user-friendly website, we make it easy to compare a range of providers and plans—saving you time and effort.

At Compare Energy, we provide an impartial and comprehensive electricity and gas comparison service for Australian households. Our goal is to make the entire process simple and stress-free, from searching the website to getting connected to a new plan.

We keep our database updated regularly on the most competitive plans available. We present the details of each plan side by side, allowing you to compare and make an informed decision easily. Whether you're unsure about what you want or simply looking for a better deal, we will guide you in the right direction.

Take the stress out of finding the right energy plan by choosing Compare Energy

 

FAQs

  • Can I switch to a different energy plan if I'm on the Victorian Default Offer or Default Market Offer?

Yes, you can switch to a different energy plan even if you are on the Victorian Default Offer or Default Market Offer. Comparing different plans can help you find a better deal that suits your needs.

  • Are the Victorian Default Offer and Default Market Offer mandatory?

No, they are not mandatory. However, energy retailers must offer at least one plan that complies with the Victorian Default Offer and the Default Market Offer to eligible customers.

  • How do I know if I'm eligible for the Victorian Default Offer or Default Market Offer?

Eligibility for the Victorian Default Offer and Default Market Offer depends on various factors, such as your location and consumption. It's best to check with Compare Energy experts.

  • Are there any penalties for switching from the Victorian Default Offer or Default Market Offer?

No, there are no penalties for switching from the Victorian Default Offer or Default Market Offer to another energy plan. You have the freedom to choose a plan that better suits your needs.

  • Will I save money by switching from the Victorian Default Offer or Default Market Offer?

Switching from the Victorian Default Offer or Default Market Offer to a different energy plan can potentially save you money. It's recommended to compare plans to find the one that offers better rates and benefits.