Retail reform reset: Why price controls alone won’t power the transition

This article explores the Australian Energy Council’s (AEC’s) response to the Default Market Offer (DMO) Review, drawing on new analysis from Ernst & Young (you can see our submission and the EY report here).

The review being undertaken by the Department of Climate Change, Energy, the Environment and Water (DCCEEW) was announced by the Federal Government in June. It is considering the methodology used by the Australian Energy Regulator (AER) to set the safety net price for the 8-9 per cent of households who are not on competitive market offers.  In particular the review is considering bringing the DMO closer to the approach used to set the separate Victorian Default Offer (VDO).

While the DMO and VDO share similar methodologies, price differences are largely driven by regional variations in wholesale and network costs. These costs make up the bulk of the bill – 76 per cent of the DMO and 67 per cent of the VDO.  Ernst & Young (EY) in a report commissioned by the AEC closely examines the differences between the DMO and VDO and the costs that go into each. That report concludes that while removing the competition allowance is likely to reduce DMO prices, it is not likely to be a significant reduction, given the size of the retail component of the energy bill. According to EY: “In order to make a significant impact on energy bills over the course of the energy transition, broader reforms that address wholesale and network costs, that enable an orderly, timely and cost-effective transition are required.”

Setting the DMO too low or tightening retail price controls too far could also have serious unintended consequences—such as reduced competition, innovation, and investment. Instead, the Australian Energy Council (AEC) urges a focus on productivity-enhancing reforms, smarter regulation, and customer-centred pricing frameworks that reflect the evolving role of energy retailers in a high Consumer Energy Resources (CER), future involving technologies like solar, home batteries and electric vehicles (EVs).

The difference between the DMO and VDO outcomes is due to different wholesale and network costs

Despite methodological similarities, the EY Report finds a significant gap in average residential prices—$647 higher in the DMO for 2025–26— this is attributable mainly to wholesale and network costs being higher across New South Wales, Southeast Queensland, and South Australia than in Victoria.

The message is clear: it’s not the framework but the underlying cost inputs driving the divergence.

The DMO and VDO methodologies are largely similar

One of the most important takeaways from the EY Report is that the DMO and VDO frameworks share broadly similar methodologies—particularly given the DMO does not currently include a competition allowance[i]. This indicates the headline price differences between the two default offers are not about how each offer is calculated but rather what costs are being baked into them.

Both offers aim to protect less engaged customers, but without acknowledging regional cost disparities, a national comparison misses the mark.

The current indicative direction of energy costs is upwards in the medium term, primarily due to rising wholesale and network costs. While the Australian Energy Market Commission’s 10-year outlook assumes costs will decline, work undertaken by EY identifies an important caveat: the projected decrease hinges on the best-case delivery of new renewable generation and the integration of Consumer Energy Resources (CER).

But the reality is less rosy. Transmission delays—like the two-year lag for VNI West—and budget blowouts, including a $1.7 billion cost hike for VNI West and $1.5 billion for EnergyConnect. The Australian Energy Market Operator in its just released network options report^[ii] notes after accounting for inflation transmission cost estimates have markedly increased from equivalent estimates considered as inputs to its 2024 Integrated System Plan (ISP), ranging up to around 100 per cent higher in some cases. This is primarily driven by things like sustained supply chain pressures, project complexity, social licence, scope revision and additional contracting costs. All of this suggests that the AEMC assumptions may be overly optimistic.

Work undertaken by EY and the recent Ai Group analysis warn that without improved energy productivity and more efficient infrastructure rollout, Australians will continue to face upward pressure on bills.

Unintended consequences that could arise from stricter price controls and a framework that results in the DMO being set too low

The United Kingdom offers a cautionary tale. The EY Report notes findings around how strict retail price caps there triggered retailer failures during volatile periods, constrained innovation, and reduced service quality. Ofgem, the UK regulator, now warns of long-term harm from a one-size-fits-all approach.

Similarly, well-intended attempts to curb what is known as the "loyalty penalty"[iii]—by narrowing price gaps between new and existing customers—can backfire. A University of New South Wales study warns such measures risk dismantling the very market structure that delivers low-cost offers to the vast bulk of consumers.

The AEC strongly advises that any changes through the DMO Review be proportionate and mindful of potential knock-on effects, especially given the limited time available for deep evaluation of changes.

Real opportunities to lower retail prices

While the DMO Review looks at adjusting regulatory levers, the AEC believes there are more effective reforms to deliver real, long-term price relief. Chief among them is addressing regulatory inefficiency.

For example, having two energy regulators—the Australian Energy Regulator (AER) which sets the DMO and Victoria’s Eseential Services Commission (ESC) that sets the VDO—creates duplication and complexity. Moving toward a single, streamlined national regulator could cut compliance costs and improve outcomes for consumers.

Additional productivity-boosting reforms include:

• Removing prescriptive elements in the energy rules in favour of principles-based regulation.
• Supporting distribution networks to deliver clearer pricing signals to enable better retailer and customer responses.
• Accelerating CER interoperability to improve service switching and participation.
• Simplifying the National Energy Customer Framework to reduce costs and friction.

These reforms aren’t silver bullets—but collectively, they’re a more targeted, effective way to reduce costs than artificially suppressing retail margins.

Catering to the different needs and values of customers

A blanket approach to price setting no longer works in a dynamic and decentralising energy market. The AEC recommends evolving the DMO framework to better suit distinct customer segments, from those disengaged to highly active participants.

That could mean narrowing the DMO’s scope to focus on customers facing real barriers to market engagement. Alternatively, the DMO could shift to a flat tariff model, where distribution networks revert DMO customers to flat network prices. These options merit exploration—but only through a broader, longer-term review.

Meanwhile, a more adaptive framework is needed for emerging energy products—like subscription pricing, dynamic tariffs, and flexible demand offers—that sit outside traditional volumetric comparisons. For these innovative models to thrive, the DMO and VDO constructs must evolve.

The value of retail market competition

Retail market competition doesn’t just offer consumers better deals—it keeps pressure on retailers to cut costs, enhance services, and invest in innovation. And this pressure has ripple effects that benefit even disengaged customers.

Retailers submit actual cost data to the AER, which feeds into DMO price setting. So, when competition drives down cost to serve or encourages efficient wholesale strategies, all customers gain.

Moreover, competition incentivises retailers to enter hedging contracts and invest in generation—including batteries and small-scale renewables—essential to a more flexible and sustainable grid. These incentives are critical to delivering the outcomes expected in the Wholesale Markets Review.

The risk of setting the DMO too low is real. The EY Report warns that insufficient retail margins may deter new entrants, stifle innovation, and reduce customer choice. That could lead to a stagnant market and a loss of competitive tension—the very force needed to put downward pressure on prices.

Keep it simple: an efficient price framework application should only apply to relevant customer segments

In light of the above, the AEC believes that future price regulation should be laser-focused on protecting those who need it—namely, customers with limited ability or desire to engage in the market.

This could mean defining the DMO as a flat-rate safety net, with network tariff alignment. Or it might mean rethinking the reference price model entirely for segments that are transitioning to dynamic usage and CER-based consumption.

Rather than rush into sweeping changes during a short review window, these structural options should be addressed through a comprehensive reform process, such as the Australian Energy Market Commission’s current Pricing Review—where the AEC continues to provide input.

Price frameworks should support customer choice and engagement on innovative or value-add products and services

As technology changes the way people use, generate, and store energy, regulatory frameworks must keep up. The DMO and VDO, tied to volumetric usage models, are becoming increasingly out of step with emerging offers like subscriptions, EV plans, or dynamic pricing.

The AEC supports the development of a flexible exemption framework that allows these new models to be appropriately regulated, without applying outdated comparison tools or disclosure rules that confuse rather than assist customers.

Alongside this, the sector needs purpose-built tools—such as online calculators that model CER profiles and usage—to enable consumers to make meaningful comparisons and informed choices.

Our DMO submission is informed by our Future Role of Retailer project

Since late 2023, the AEC has been progressing a long-term “Role of Retailer” project to examine what energy consumers will need in a high-CER environment—and what changes retailers may need to better serve them.

AEC members are already testing new technologies and product models, from virtual power plants to bundled EV offerings. The Role of Retailer project brings these insights together, ensuring reform recommendations are grounded in real market innovation.

Our submission to the DMO Review is informed by these findings and highlights the need to match regulatory models to customer behaviours, values, and preferences as they continue to evolve.

We welcome opportunities to work closely and iteratively with DCCEEW

Many of the most successful market reforms in recent years were built on transparent, inclusive processes that allowed ideas to be stress-tested from all sides.

The AEC supports this model and encourages DCCEEW to take a similarly consultative approach to the DMO Review. We look forward to further engagement, especially to share insights from the Role of Retailer project as it continues into 2025.

[i] The competition allowance has not been allowed for the past two DMO determinations.

[ii] 2025 Electricity Network Options Report, page 5. This report informs AEMO’s 2026 Integrated System Plan

[iii] A loyalty penalty stems from the practice of companies incentivising and rewarding new customers with discounted prices or better offers while long-term customers may not receive these for the same product or service.