How is the price of electricity and gas calculated in Victoria? (February 2014)

Price regulation

In Victoria, energy prices are not regulated. The Essential Services Commission (ESC) is Victoria’s independent economic regulator of essential services. Its role is to oversee compliance and performance reporting by energy businesses, and issue energy distribution and retail licenses. The ESC also provides information to consumers about the evolving energy markets, and the choices they have.

Retailers provide a standard contract with set terms and conditions, and they set their own prices. Retailers can also offer you a market contract with varying terms and conditions including price. You are free to choose your retailer and market contract. 

The Australian Energy Regulator (AER) has no role in the setting of retail energy prices, however it does regulate network costs. For electricity, this involves setting the revenues and prices that network businesses can earn from transporting electricity to customers. For gas, the AER approves prices for access to pipelines.

EWOV and prices

The setting of prices and tariffs is outside of EWOV’s jurisdiction to investigate. However, EWOV can investigate whether your bill is accurate based on your contract terms and meter read data. 

The supply chain of electricity

In the energy industry, costs flow through a ‘supply chain’. The eastern and southern states of Australia have one of the largest interconnected power systems in the world. Each business in the supply chain (generators, networks and retailers) incurs costs that are passed on to consumers via electricity bills. This supply chain is similar to buying fruit at a supermarket – the costs of the farmer, wholesaler and retailer are ultimately passed on to the consumer in the final price of the fruit.

  1. Generators buy fuels (such as coal, gas or biomass) and generate electricity at power stations.
  2. Networks transmit and distribute electricity via a network of substations, poles and wires. Their costs include the maintenance of poles and wires, replacement of ageing assets and compliance with reliability and safety standards. According to the AER report State of the Energy Market 2013, network costs have been the main driver of rising energy prices over the past five years. Network costs account for between 36% - 57% of a typical residential electricity bill.
  3. Retailers deal directly with customers, including issuing bills, answering questions, arranging new connections and disconnections and handling complaints. Retailer costs account for between 10-15% of a typical residential electricity bill.

Other costs

A number of other factors contribute to the amount you pay for electricity:

  • The wholesale market cost of electricity. This is largely determined through Australia’s National Electricity Market (NEM). The wholesale price (or ‘spot price’) can vary greatly from day-to-day, similar to stocks on the stock market. Wholesale energy costs account for 21 - 27% of a typical residential electricity bill.
  • Government policy. Carbon pricing accounts for between 3 – 12% of a typical residential electricity bill. Other schemes such as the Renewable Energy Target and feed-in tariffs for rooftop solar panels account for between 3 – 8% of residential bills.

The supply chain of domestic gas

  1. Production – gas is extracted from wells in explored fields
  2. Processing – extracted gas is processed to separate methane and remove impurities
  3. Distribution – distribution networks are used to deliver gas to industrial customers, cities and towns. Distribution charges typically make up between 40-60% of a residential gas bill
  4. Transmission – high pressure transmission pipelines are used to transport natural gas over long distances. Their costs include new pipeline construction and infrastructure. Gas transmission costs make up between 3-8% of a typical residential gas bill
  5. Retail – retailers deal directly with customers, including issuing bills, answering questions, arranging new connections and disconnections and handling complaints. Retail costs account for approximately 19% of a typical residential gas bill.

As with electricity, each business in the gas supply chain incurs costs that are ultimately passed on to consumers via gas bills.

More detailed information about Australia’s energy market is available in the AER’s report State of the Energy Market 2013. You can also access a fact sheet about the components of energy bills and pricing from the AER. 

If you need further help, first contact your electricity or gas retailer. A list of contact details is available on EWOV’s website. If you are dissatisfied with the information or assistance provided by your retailer, you can contact EWOV on 1800 500 509 or lodge a complaint online.

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