Legal Insights

Essential services – Energy

By Peter Limbers, Alena Stirton, & Meaghan Little

• 07 February 2024 • 8 min read

Last year saw rising retail electricity prices, primarily driven by rising wholesale electricity costs. During the year, gas prices fell from record highs, reflecting the downward trend in international liquefied natural gas (LNG) prices and the impact of the Federal Government’s emergency price cap measure, implemented at the end of 2022. Australia’s energy market continues to face challenges as it experiences significant change with the increased uptake of renewable generation and the phasing out of coal-fired generation. These challenges led the ACCC to issue a further authorisation to the AEMO in November to allow collective conduct in the electricity sector. This is consistent with the ACCC’s approach in previous years (2020-2022) with the same authorisation being granted to promote reliability in the electricity sector in response to COVID-19 and general sector volatility.

2023 enforcement priorities

Rising retail electricity prices

In the December 2023 electricity market inquiry report, the ACCC found retail electricity cost for residential customers had increased significantly throughout the year. In August 2023 the ACCC observed that “79 per cent of residential customers were paying estimated prices equal to or higher than the median offer available on Energy Made Easy or Victorian Energy Compare”. Whilst prices for new customers remain competitive, the ACCC has raised concern that the market is not providing the same competitive pricing for ongoing customers unless specifically enquiring their retailer about pricing

A number of retailers announced increases to their market offer prices or notified customers of significant price increases. The ACCC is closely monitoring these price changes, as part of its enforcement of the Electricity Retail Code (Code). The Code requires retailers to communicate price changes in a way that allows consumers to compare different plans on the market (e.g. by notifying customers of the percentage difference of the new price when compared to the comparison price). The ACCC’s monitoring activity led to retailers CovaU Pty Ltd and ReAmped Energy Pty Ltd being ordered to pay $33,300 in penalties for allegedly sending communications to customers in New South Wales, South Australia and South East Queensland without certain information required under the Code. Following this, CovaU Pty Ltd provided the ACCC with a court-enforceable undertaking to inform impacted consumers and to improve compliance in the future.

"The ACCC will continue to monitor retailer communications to ensure retailers are meeting their obligations. But more than ever, in the current environment of rising energy prices and cost of living pressures, it’s important for people to see if they can reduce their electricity bills by switching to a better plan…Any retailer that breaches the electricity code or seeks to mislead consumers about the reasons for electricity prices increasing can expect our attention."

ACCC Commissioner, Anna Brakey

Energy transition to renewables – changes to financial hedge product availability

The mix of Australia’s electricity generation assets continues to move towards a greater reliance on renewable generation, particularly as the government is targeting Australia being powered by 82% renewable energy by 2030. As more renewable generation enters the market, price volatility will be exacerbated by the intermittent nature of weather patterns which form the basis of renewable generation and are inherently difficult to predict.

In 2023, the ACCC observed that smaller retailers are finding it difficult to obtain hedging contracts to manage the resultant financial risk. As coal plants are retired, the ACCC predicts that the availability of hedging products currently used by retailers will decline. New types of financial products are needed to support retailers, particularly those retailers without their own generation assets. The ACCC’s latest electricity market inquiry report warns that these new products may not be available in time for when they are needed and flags that Government intervention may be required.

"We’re concerned that smaller retailers and new entrants may find it increasingly difficult to manage short-term price risk, and we think government measures may be needed to ensure these retailers can access hedging contracts while the contract market adapts."

ACCC Commissioner, Anna Brakey

Falling gas prices

In contrast to electricity, gas prices fell over the course of 2023, influenced by the combination of lower LNG prices and the Government’s emergency price cap mechanism which was introduced in December 2022.

In December 2023 the ACCC released its gas inquiry report, stating gas prices offered by producers for the 2024 supply fell by 45%, between February and August 2023, to $14.60 per GJ. This is down from $49 per GJ during the peak of the global energy crisis in August 2022. Retail gas prices reflected this trend over the same period, with prices falling by 21% to $19.50 per GJ.

The ACCC also observed increased contracting activity throughout the year after a stagnant period between late 2022 and early 2023. The ACCC closely monitored sales for compliance with the emergency price cap that took effect in December 2022, finding good compliance to date and noting that circumstances of sales in excess of the cap are carefully reviewed.

In terms of gas supply a shortfall of 30 PJ was predicted in January 2023, however by March, sufficient volumes were forecast after LNG producers committed additional sales to the domestic market. The gas inquiry report forecasts balanced supply in 2024, or a 71 PJ surplus if LNG producers only export their currently anticipated spot sales.

Introduction of the Gas Market Code

In July 2023, the emergency price cap was codified by the introduction of the Gas Market Code (GMC), which prescribes a $12 per GJ cap on gas producers for the sale of their gas, as well as minimum conduct, process and transparency obligations to facilitate negotiation of supply contracts on reasonable terms. In summary the GMC:

applies to the East Coast and Northern Territory gas producers (including affiliates of those producers who sell gas to wholesale customers). It is intended to facilitate the adequate supply of wholesale gas to the domestic market on reasonable terms and at a reasonable prices.
includes a framework for exemptions from the application of certain elements of the GMC, including conditional exemptions that are intended to incentivise producers to commit to offering more gas to the east coast market (in return for an exemption from the price cap and/or other provisions of the GMC).

The ACCC notes that non-compliance with the GMC will attract severe penalties, the maximum being $50m or three times the value of the benefit obtained (or if that cannot be determined, 30% of the company’s turnover during the period it engaged in the conduct). The ACCC has also published compliance and enforcement guidelines, that outline key requirements and their consequences under the GMC.

Major developments and activities

Proposed acquisition of Origin Energy by Brookfield and MidOcean

In October 2023, the ACCC granted authorisation with conditions for the proposed acquisition of Origin Energy by Brookfield and MidOcean. The proposed acquisition contemplated two interdependent transactions, with a consortium led by Brookfield Global Transition Fund to acquire Origin’s energy markets business (including energy generation and electricity and gas retail businesses) and MidOcean acquiring Orgin’s upstream gas assets. The ACCC carefully weighed the competition concerns against the public benefits of the proposed acquisition and gave significant weight to the likely benefit that the acquisition would accelerate the roll-out of renewable energy generation. However, despite the ACCC’s authorisation, the proposed acquisition was ultimately voted down by shareholders in December 2023.

"We found that the public benefits and public detriments in this matter were finely balanced. Likely detriments, particularly anti-competitive effects from vertical integration, had to be weighed against likely benefits to Australia’s renewable energy transition. We considered undertakings offered by Brookfield, AusNet and MidOcean in this weighing process."

ACCC Chair, Gina Cass-Gottlieb

Viva Energy’s acquisition of the OTR Group

In December 2023, the ACCC agreed not to oppose Viva Energy’s proposed acquisition of OTR Group, a fuel and convenience retailer operating predominantly in South Australia, after accepting a court-enforceable undertaking that commits Viva Energy to divest 25 Coles Express sites in South Australia. The ACCC had cited concerns that without divestiture, the proposed acquisition would combine the largest retail fuel network in South Australia with Viva Energy’s retail network, making Viva Energy significantly larger than competitors.

Looking ahead

We anticipate that retail electricity prices are likely to continue rising until wholesale costs substantially ease. The ACCC will continue to scrutinise retailer conduct in relation to price changes to protect consumers, including by monitoring ongoing retailer compliance with the Code. The transition to renewable energy generation will continue to present challenges for retailers in managing financial risk, as hedging products currently available are not well suited to the changing market conditions. The ACCC has flagged potential Government intervention in this space, which suggests we may see developments in this area. In gas markets, over the longer-term, the East Coast gas market is expected to have sufficient supply until 2028, but southern states will likely face local shortages from 2027, meaning that transporting gas from Queensland will be increasingly important to fill supply gaps. The effects of the GMC are still to be measured, however it may place downward pressure on gas prices (the same as the emergency price cap). It may also improve domestic supply if producers commit to greater domestic supply volumes in return for an exemption from the GMC.