What am I paying for when I pay my electricity bills? How much profit can my electricity retailer take?

What am I paying for when I pay my electricity bills? How much profit can my electricity retailer take?

In short, the job of the energy retailer is to recoup the full costs along the electricity supply chain, including a margin for themselves.  The amount of your bill which is retailer margin (the residual) is generally only a few percent of your electricity costs.  You can see a breakdown for average bill costs in this Australia Energy Market Commission report on page 13.  St Vincent De Paul also produce great reports on this topic and related matters.

The largest component of electricity bills is usually the network costs.  This is the cost of upkeep and upgrades of poles and wires and the like.  The companies that do this work, called distribution or transmission network service provider (DNSPs or TNSPs) are regulated monopolies.  All their costs and work must be justified to and approved by the Australian Energy Regulator.  These costs are difficult to predict but are likely to increase while we transition to more renewables.  We currently have an Energy Security Board reviewing energy policy for 2025 looking to ensure that electricity costs don't rise too much and the lights stay on.

The next largest component is the actual wholesale cost of the electricity itself.  There is a spot market where generators bid at 5min intervals the minimum price they are willing to sell their electricity.  I won't go into detail on how that works, you'd be able to read all about that on the AEMO website or here.  Retailers can opt to enter into contracts directly with generators to try to 'beat' the spot market.  At the same time, generators are trying to enter into contracts which they believe are more beneficial for them than simply receiving the spot market price.  The average spot price has seen dramatic falls in recent years due to the increasing amount of cheap renewable energy.  This is also the reason why solar feed-in tariffs are decreasing and will continue to fall.

There are a number of other financial markets designed to ensure there are rarely shortfalls in power generation and that the grid is capable of dealing with extreme events.  These are much more difficult to describe in an email but you could look up the frequency control and ancillary services market and the retailer reliability obligation.

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