The End of Cross-Subsidised Energy — How New AER Pricing Rules Reshape the Retail Market

The retail energy market is about to become fairer — and less volatile at the extremes. New rules from the Australian Energy Regulator are reshaping the pricing landscape in ways that will affect every household, whether you switch plans every six months or haven't looked at your energy bill in years. Here's what's changing, why it matters, and what Bill Hero's 10 years of price data tells us about where the market is heading.

The new rules

Two key changes are reshaping how retailers can price their electricity plans:

1. No more charging above the Default Market Offer (DMO). Retailers can no longer keep customers on rates that exceed the regulated safety-net price. This closes a long-standing loophole that saw disengaged customers paying more than the default price.
2. One price increase per year, maximum. Retailers are now limited to a single annual price change per plan. No more mid-year hikes, no more "we're adjusting your rates" letters arriving twice in six months.

These rules fundamentally change the economics of retail energy. To understand why, you need to understand the three very different segments that make up the retail electricity market.

The three energy markets

Most commentary on electricity prices treats "the retail electricity market" as if it were a single entity. It isn't. There are three distinct segments, each operating on completely different dynamics.

1. Default offer prices — the headline number

The Default Market Offer (DMO) and Victorian Default Offer (VDO) are the prices you hear about on the evening news in June every year, and which come into effect from 1 July. Every year, the regulator announces the new default offer rates, and each year it becomes the simplest, clearest price signal in the market.

But here's what most people don't realise: fewer than 10% of households are actually on a default offer. The DMO functions as a safety net — a maximum price — not a common plan. Its annual announcement cycle makes it highly visible, but it's not where most of the action happens.

2. Acquisition offers — the switcher's market

This is the market that platforms like Energy Made Easy, Victoria Energy Compare, and Bill Hero expose. These are the plans retailers put forward to win new customers — and they change daily. A retailer can drop a new discount, launch a sign-up credit, or introduce a limited-time incentive at any moment to hit their customer acquisition targets.

These prices are aggressive, dynamic, and designed entirely for the minority of consumers who actively compare and switch. If you're a Bill Hero subscriber, this is your market. You're seeing the sharpest end of competition.

The paradox at the heart of the retail energy market is that the best deals are available to anyone willing to spend five minutes comparing, but most people never do

How many people actually switch? The AER's latest retail performance data , January to March 2026, tracks switching across all NEM states. In the most recent quarter, residential electricity switching rates ranged from 3.6% in the ACT to 6.0% in Victoria — meaning roughly 1.2% to 2.0% of electricity customers switch each month. NSW recorded 5.3%, South Australia 5.4%, and Queensland 4.3%. Across the 7.06 million residential electricity customers in the NEM, that represents around 300,000–420,000 households changing retailer every quarter.

Interestingly, the directional data reveals a counterintuitive trend: in Q3 2025–26, more customers moved from market contracts to standard contracts (26,015) than from standard to market (16,725). Approximately 19.2% of residential customers remain on standard contracts — the legacy standing offers that the DMO was designed to replace — and a net ~9,300 customers drifted back onto them during the quarter. This suggests that for some customers, the regulated safety-net price is becoming more attractive relative to what their market offer has become after years of accumulated price increases.

The gap between what switchers capture and what everyone else pays is substantial. The AER finds that customers on the median market offer can save between $260 and $466 per year (12% to 23%) by switching to the cheapest available plan. For those still on a default offer, the savings are even larger — $431 to $624 by moving to the most competitive market offer. Yet with 80.2% of customers on market contracts and most of those not actively comparing, the majority of households leave these savings on the table, year after year.

This is the paradox at the heart of the retail energy market: the best deals are available to anyone willing to spend five minutes comparing, but most people never do. The new AER pricing rules change the consequences of that inaction — for better and for worse.

3. Back-book plans — where most Australians actually sit

The vast majority of households haven't switched plans in years. They're on what the industry calls "back-book" plans — legacy rates that may have started as competitive offers years ago but have since drifted upward through accumulated price increases.

The ACCC has previously reported that many of these customers are paying rates higher than the Default Market Offer — the safety-net price. Think about that. Disengaged customers, who are often the least able to afford it, have been paying more than the regulated maximum. This is the cross-subsidy that has defined the retail energy market for a decade.

The cross-subsidy era is over

In any market with engaged and disengaged consumers, the disengaged subsidise the engaged. Airlines charge business travellers more than leisure travellers. Banks offer honeymoon rates to new customers while long-term savers earn next to nothing. Energy retailing has worked the same way.

This dynamic is well understood in academic literature. A landmark study by Esplin, Davis, Rai and Nelson (2020), published in Energy Policy, built a partial-equilibrium model of Australia's retail electricity market showing that price dispersion — the gap between the cheapest and most expensive offers — is the mechanism of cross-subsidy. The researchers, from Griffith University's Centre for Applied Energy Economics & Policy Research, demonstrated that retailers use second- and third-degree price discrimination to segment customers: "strong" customers (high elasticity — switchers, bargain hunters, Bill Hero subscribers) capture low acquisition prices, while "weak" customers (low elasticity — disengaged, back-book) pay higher margins. As the ACCC itself noted, "the gap between the best and worst offers in the market has been widening, effectively acting as a tax on disengaged customers."

Importantly, Esplin and his co-authors warned that imposing a price cap would lead to "retailers withdrawing their lowest priced offers from the market, in effect reducing the benefits available to customers that 'shop around'." Their research, now vindicated by the new rules, argued that price caps are a "blunt tool" — they help disengaged consumers but harm engaged ones, including vulnerable households who actively seek better deals. Their recommended alternative was a targeted auction for the right to serve vulnerable, disengaged consumers rather than blanket price regulation.

The new AER rules change the game. By capping all plans at the DMO and limiting price increases to once per year, the regulator has clamped down on the mechanism that enabled cross-subsidisation.

What this means: retailers can no longer let back-book prices drift above the safety net and can't use frequent price increases to quietly extract margin from inattentive customers.

Why network costs drive July 1 pricing

There's a reason the annual energy price conversation always peaks around late May and June: the regulated network charges that make up the single largest component of your bill reset on 1 July each year.

According to the Australian Energy Council — the peak body for electricity retailers — network charges (transmission and distribution) typically represent roughly one-third to just under half of a residential customer's bill. Combined with wholesale electricity costs, these two components make up the vast majority of what you pay. Retail operating costs and margins are comparatively small.

When the Australian Energy Regulator approves new network prices each April — covering the poles, wires, transformers and substations that deliver electricity to your home — retailers must immediately factor these changes into their own pricing. Network charges are a regulated monopoly cost: retailers have no control over them, no ability to negotiate them down, and no choice but to pass them through.

This year, the picture is clear: network costs are rising across most of the country. The AER's 2026–27 pricing determinations, published 20 May 2026, show residential network charges increasing in most distribution zones, with only Victoria bucking the trend in several areas.

Source: AER 2026–27 Consolidated Stakeholder Report, 20 May 2026. Residential flat/single rate tariffs, exclusive of GST.

The drivers vary by zone, but common themes emerge: higher transmission costs, inflation, energy transition infrastructure investment, bushfire mitigation spending, and recovery of previously under-recovered revenue. Networks are upgrading ageing infrastructure, adapting local grids for rooftop solar and batteries, and building the transmission backbone needed for a renewable-powered grid — and these costs flow into the network charges that feed into your bill.

The key takeaway: when you see your retailer announce a price change from 1 July, the biggest single factor behind it is almost certainly the network component. At roughly 40–50% of a typical bill, it dwarfs everything else.

The guaranteed return: why network costs keep rising

There's a deeper question behind all of this: who decides what the networks can charge, and on what basis?

The answer is the Australian Energy Regulator's Rate of Return Instrument — a decision made every four years that determines the "interest rate" consumers must pay to network monopolies for the capital they've invested in poles, wires, transformers and substations. The rate of return accounts for 40% to 60% of total network costs, which themselves represent 39–45% of a typical residential bill, according to the ACCC. This single regulatory parameter is, as Energy Consumers Australia puts it, "likely the single largest driver of household energy bills."

How the rate of return works

The logic is straightforward: a network business invests billions in infrastructure, and the regulator guarantees it a return on that investment — the same way a bank earns interest on a loan. Set the rate too low, and networks won't invest, risking network reliability. Set it too high, and consumers pay more than necessary for decades.

The problem, according to consumer advocates and independent analysis, is that the rate has been set too high. The AER currently uses an equity beta of 0.6 — a measure of investment risk — to calculate the return. The process for setting that beta value involves surveying and averaging the financial performance of international peer electricity distribution network businesses.

Australian regulated energy networks are monopoly service providers with stable, government-guaranteed revenue streams. Not all international peers enjoy this kind of guarantee.

Analysis commissioned by Energy Consumers Australia from Electricity Market Advisory Services found that if the AER were to exclude firms that aren't predominantly regulated monopolies from its benchmarking, the equity beta would fall closer to 0.4.

The AER's own draft decision for 2026 has proposed lowering it to 0.55 — a step in the right direction, but consumer groups argue it still overcompensates networks for risks they don't actually face.

The over-investment incentive

This isn't a theoretical concern. When a regulated monopoly is guaranteed a return on every dollar it spends, it has an obvious structural incentive to simply spend more — an economic distortion known as the Averch-Johnson effect. More capital spending means more dollars earning the guaranteed return.

The data bears this out. The AER's own assessment found "no evidence that the rate of return has deterred investment." Of 27 regulated networks, 9 overspent their capex forecasts and 11 underspent by less than 10% — a wide dispersion with no pattern of systematic underinvestment that would indicate the rate is too low.

Meanwhile, network capital expenditure is forecast to rise dramatically. AusNet Services expects Victorian transmission revenues to nearly triple over the next decade. Energex and Ergon Energy's approved capex allowances for their current regulatory period were 30% and 62% higher than the previous period. Every dollar of that investment attracts the guaranteed rate of return — and flows through to your bill.

What this costs consumers

The AER estimates that its proposed changes — lowering the equity beta to 0.55 and adjusting the market risk premium — will save consumers around $1.1 billion over the coming years. Energy Consumers Australia argues there's scope to go further, delivering hundreds of millions more in savings by setting the equity beta closer to 0.4.

The implications for retail prices are direct: all energy generation and distribution costs are ultimately borne by energy consumers, and a higher guaranteed return for networks means higher network charges, which in turn mean higher retail prices. The AER has acknowledged that increased rates of return have been a primary driver of rising revenue forecasts for Ausgrid, Endeavour Energy, Essential Energy and TasNetworks — precisely the distribution zones where residential bills are rising fastest.

The bottom line: when you see your bill go up on 1 July, a significant portion of that increase is flowing to monopoly network businesses earning a regulator-guaranteed return that independent analysis suggests is higher than the actual risk they bear. It's the least visible but most powerful cost driver in your energy bill.

A narrower spread, a fairer market

When you remove the ability to charge above the DMO, you compress the spread between the cheapest and most expensive plans in the market. The very competitive end of the market — the plans that Bill Hero subscribers snap up — won't be as cheap as they've been in recent years. Not because retailers don't want to compete, but because they can no longer fund aggressive acquisition pricing through the extra margin they cream off from disengaged consumers in the back book.

We expect to see:

• A narrower range between the cheapest and most expensive market offers
• Fewer "too good to be true" discounts that rely on cross-subsidisation
• More sustainable pricing that more accurately reflects the actual cost of supplying energy

This is a healthier market structure. But it does mean the era of extreme bargain-hunting may be fading.

Why one price increase per year matters — and why hedging is harder than it used to be

The single-annual-increase rule might sound like a good consumer protection — and it is. But it has a deeper implication for how retailers manage risk.

When a retailer can only adjust prices once a year, they carry significantly more pricing risk. Retailers must manage the pricing risk associated with the electricity spot price, which is wildly volatile. Wholesale electricity costs can spike at any time — a heatwave, a generator outage, a gas supply crunch. Retailers are now required to fix their prices for 12 months, so they cannot adjust pricing even though they remain fully exposed to every one of those price risk events. The rational response? More hedging, further into the future.

But there's a problem that gets almost no public attention: the market where retailers buy that protection is itself under strain.

The forgotten market: electricity futures

Electricity retailers don't just buy their power on the spot market each day and hope for the best. They lock in prices months or years ahead through the ASX electricity futures market — buying contracts that guarantee a fixed wholesale price for delivery in the future. This is hedging, and every retailer has to do it. Without it, a single week of $15,000/MWh spot prices (the market cap) would bankrupt most retailers within days.

In October 2022, at the peak of the energy crisis, Macquarie Bank withdrew from providing clearing services for electricity futures, citing excessive exposure to price swings. Bell Potter followed within days. These two firms were among the largest intermediaries in the market — the institutions that sit between buyers and sellers, guaranteeing that trades settle. Their exit was described by Energy Locals CEO Adrian Merrick as "a sign of a market that is, frankly, bust."

The impact has been structural. ASX Energy trading volumes have fallen 20% between 2022 and 2024, according to analysis by ERM Energetics. A Griffith University survey of 21 market participants found "concern from participants about future ability to hedge portfolios as liquidity in the derivative market shrinks." When a smaller retailer can't access futures contracts, their fallback is the over-the-counter market — bilateral deals struck directly with counterparties — which one former trader described as "invariably much more expensive and clunky."

Why this tilts the playing field

The hedging squeeze doesn't hit all retailers equally. The Big 3 gentailers — Origin, AGL, and EnergyAustralia — own generation assets as well as retail books. When Origin sells electricity to an Origin retail customer, the hedge is internal. They don't need to access the external futures market to the same degree. This is vertical integration functioning as a structural moat.

Independent retailers — the companies that have driven so much of the competitive pressure in the market over the past decade — don't have that option. They must buy hedging externally. And they're buying it in a market with fewer intermediaries, declining liquidity, and products that were designed for a coal-dominated grid that no longer exists.

South Australia is the warning

The AER's own deep-dive analysis of the South Australian contract market found "very limited trading," with large participants "mostly internally hedged" and smaller retailers struggling with "low levels of contract trading, limited product options and an increasingly volatile spot market." SA is further along the renewables transition than other states — and its hedging market is barely functioning.

The rest of the NEM is not there yet. But the direction of travel is clear. As coal plants retire and renewable generation grows, traditional baseload hedging products become less suitable — a 24-hour flat swap contract is an expensive way to hedge when midday prices are routinely near zero due to solar generation. ASX has launched new morning and evening peak products, but the rollout has been slow, arriving four years after the study that recommended them.

The hedging premium

The net effect is a hedging market that is harder to access and more expensive to use. The AER reports that swaptions — options to enter a swap contract, giving retailers the right but not the obligation to hedge — are now the most widely traded instrument, with higher premiums than before 2022. Swaptions are attractive precisely because the market is risky: retailers want the insurance of being able to walk away if conditions improve, and sellers demand higher prices for carrying that risk.

When you add the single-annual-increase rule to this picture, the pressure compounds. Retailers must hedge more volume, further into the future, in a market with fewer intermediaries, declining liquidity, and products that don't fit the generation mix they're hedging against. Those costs flow through to the prices you see.

The trade-off: price certainty for consumers — no surprise mid-year hikes — but at the cost of higher structural hedging costs embedded in every plan.

The 10-year view: cheapest plans have actually gotten cheaper

Now for the perspective that gets lost in the quarterly noise. Bill Hero has been tracking energy plan prices for over a decade. Our data covers the full history of the most competitive end of the market — the acquisition offers that active switchers capture.

When you look at that data in real terms — adjusted for inflation — the most competitive electricity plans have actually declined in price over the past 10 years.

Let that sink in. Despite rising network charges, despite the gas price crisis, despite everything you've heard about energy becoming unaffordable — the cheapest plans available to an engaged consumer are cheaper today in real terms than they were a decade ago.

This is what competition delivers. It's why switching works. And it's why the ACCC, the AER, and every energy consumer advocate keep saying the same thing: if you haven't compared your plan in the last 12 months, you're paying too much.

The new rules don't change this fundamental truth. They make the market fairer for the disengaged while preserving the benefits of competition for the engaged. That's good policy.

What this means for your bill

The new AER pricing rules are a structural improvement — they close the cross-subsidy loophole that penalised inattentive consumers and they bring greater price certainty. The trade-off is a narrower spread between plans and fewer extreme bargains at the competitive end.

But the core advice doesn't change: compare and switch regularly. The gap between what you're paying and what you could be paying is still hundreds of dollars a year. The AER's own data confirms that switching from the median market offer to the cheapest available plan saves $260 to $466 per year.

The rules have changed, but the strategy hasn't.

Check if you're overpaying →

Data sources: AER 2026–27 Consolidated Stakeholder Report (20 May 2026); AER 2026 Draft Rate of Return Instrument; AER Wholesale Electricity Market Performance Report (December 2024); AER Retail Performance Reporting Procedures and Guidelines (effective 1 July 2025); ACCC Inquiry into the National Electricity Market (December 2024); Energy Consumers Australia, 'One of the highest impact decisions for home energy bills is about to be made' (26 June 2026); Electricity Market Advisory Services, 'Report for Energy Consumers Australia' (December 2025); Esplin, R., Davis, B., Rai, A. & Nelson, T. (2020), 'The impacts of price regulation on price dispersion in Australia's retail electricity markets', Energy Policy, Vol. 47; Flottmann, J., Wild, P. & Todorova, N. (2023), 'Derivatives and Hedging Practices in the Australian National Electricity Market', Griffith University CAEEPR Working Paper; ERM Energetics, 'Paying the price for volatility and illiquidity' (July 2025); Australian Energy Council, 'Understanding Electricity Price Changes' (June 2026); AFR, 'Energy retailers struggle for hedges as Bell Potter withdraws' (14 October 2022); ABC News, 'A key part of Australia's electricity market is in meltdown' (28 October 2022); Bill Hero proprietary plan price history (2016–2026).