Origin: VDO could add cost pressures

default offer

The state’s energy regulator says a proposed ‘fairer price for electricity’ known as the Victorian Default Offer (VDO) could save households hundreds of dollars a year, while small businesses could save thousands.

But, Origin Energy CEO Frank Calabria said it could in fact add to cost pressures in the Victorian energy market.

“It is important to note that existing regulation specific to Victoria, including the annual easement land tax paid by the transmission networks and the complete ban on onshore gas development, currently contribute to upward pressure on energy prices in that state,” Mr Calabria said.

“Origin’s concern is that the introduction of the VDO will add to these cost pressures, and we could see both investment and competition decline in response to this additional intervention in the Victorian market.”

The Essential Services Commission has released a proposal which states a typical Victorian household (using 4,000kWh per year) on a standing offer could save between $390 and $520 a year (depending on where they live), while the savings for a small business using 20,000 kWh per year would be between $1830 and $2300 a year.

Commission chair Ron Ben-David says that subject to the passage of legislation currently in Parliament, every Victorian household and small business will be able to access the Victorian Default Offer from July 1 by simply requesting it from their electricity retailer.

“Customers who haven’t shopped around for a while, or who have struggled to meet discount conditions, will find the Victorian Default Offer could save them hundreds of dollars.

“While customers on market offers will need to request the default offer, customers on standard contracts (also known as standing offers) will be automatically transferred from July 1,” he said.

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The Victorian default offer will automatically apply to around 145,000 residential customers, and 45,000 (or 15 per cent) of small business customers.

“Around six per cent of Victorian households have been stuck on standard contracts which have risen in price by over 20 per cent in just the last two years,” said Dr Ben-David.

Under the proposed legislation, the Essential Services Commission will review the price of the Victorian Default Offer each year and retailers will be obliged to comply with its price rulings.

The commission’s draft advice is now available. Anyone interested in making a submission can send it to [email protected] by 5pm, April 4, 2019.

The commission is expecting to make its final recommendation to the government in May.

The Australian Energy Council (AEC) has warned against the decision, saying the regulated price comes at the cost of competition.

The AEC said in a statement, the offer “risks shrinking the market, reducing the number of cheaper deals and forcing smaller retailers out of the market.”

“It also risks product innovation and ultimately future investment in Victoria’s energy market.”

“The energy experts, the Australian Energy Market Commission, advised the COAG Energy Ministers against this kind of price re-regulation last December. This is because, while it might benefit a very small minority of retail customers who have not shopped around and who are on standing offers, it risks damaging competition and with it the cheaper market offers that the majority of households currently enjoy,” AEC chief executive Sarah McNamara said.

“The AEMC found that customers on lower priced market offers are likely to be worse off – in Victoria more than 94 per cent of households are currently on market offers.”

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Based on the draft advice, Origin estimates an annual reduction in revenue for residential and small business standing customers of less than $20 million.

“Origin has competitive offers in the Victorian market. Since 2017 we have provided substantial discounts of 26 per cent to concession card holders and 17 per cent to households on standing offers,” Origin CEO Frank Calabria said.

“Origin is proud of the actions we have taken to deliver price relief to our Victorian customers, and in particular, support our concession holders and those vulnerable members of our community.