Why do electricity prices change?

Posted 16 June, 2025 Andrew Rasch

When we turn on the kitchen lights or press start on the microwave, we don’t usually think about why they work. They just do.

But there are complex costs behind our readily available electricity. And like all costs, they’re subject to change. It’s easy to feel confused but read on and we’ll help demystify it for you.

There are key components that make up the cost of transmitting power to our houses and businesses. They include the price of wholesale electricity, labour and material costs, government schemes and maintaining the network’s poles and wires. These costs can change according to economic and market conditions and the changes flow through to your power bill.

Who has the final say?

Each year, energy authorities such as the Australian Energy Regulator (AER) review the costs of electricity generation and transmission across certain states and regions. After the review, the AER updates the Default Market Offer.

What’s the Default Market Offer?

The Default Market Offer (DMO) acts as a safety net price for electricity and protects consumers from excessively high prices on standing offer contracts. The DMO is a reference price against other electricity offers, which makes it easier for consumers to shop around and see if they’re getting a good deal.

Let’s not deny it. Nearly all the components that affect the cost of electricity have increased. This means the AER has increased the DMO from 1 July 2025 to 30 June 2026 (known as DMO 7) in South Australia by between 2.3 per cent and 3.2 per cent for residential customers.

The increase will depend on whether your bill includes a controlled load, which are usually separately metered on large appliances, such as hot water systems, pool pumps and underfloor heating.

The increase for South Australia is lower than other regions across Australia, where costs may differ. For example, in New South Wales, the DMO will increase by nearly 10 per cent from 1 July.

What’s happening in South Australia?

Here are the changes for each component in SA, which shows how the AER calculated the 3.2% increase to the DMO across 2025-26.

Wholesale energy costs (6.6 per cent increase)
Average: 37.5 per cent of your bill
This is based on the price energy retailers pay to buy electricity from generators; the increase is mainly driven by elevated contract prices, which retailers use to manage risks associated with fluctuating market prices.

Network costs (2.7 per cent decrease)
Average: 40.5 per cent of your bill
These costs have been influenced by factors such as higher returns on capital, improved network resilience, the uptake of consumer energy resources (such as rooftop solar, batteries and electric vehicles) and improved exposure to risks including workplace injury and cyber security.

Environmental costs (26.5 per cent decrease)
Average: 3.5 per cent of your bill
These costs have decreased for all customers, mainly due to decreases in government renewable energy target schemes.

Retail costs (23.2 per cent increase)
Average: 13 per cent of your bill
The year-on-year retail cost increase is caused by increased operating costs and bad and doubtful debts, plus added costs from installing smart meters.

Retail margin (3 per cent increase)
Average: 6 per cent of your bill
The increases in wholesale and retail costs has affected the retail margins, which is set at 6.0% of the DMO price for residential customers; this means increases elsewhere have a flow-on effect.

Dig a bit deeper

Of course, we’ve only skimmed the surface of this topic. If you’d like to learn more you can read the AER’s May 2025 final determination on DMO prices here.

Don’t forget, the National Government Energy Rebate will provide $150 rebate for eligible households and small businesses in the coming year. Check here for details.