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ADELAIDE, Dec 18 AAP

December 18 2012, 6:42PM

About 200,000 South Australian households will get an electricity price cut from January, with the state government indicating more will follow in a looming discounting war.

The government has negotiated a 9.1 per cent price cut for about 20 per cent of the state's electricity consumers in return for locking in the new prices for two years.

Small businesses will get a 4.5 per cent price cut under the same deal.

The Essential Services Commission of South Australia (ESCOSA) will also lose its price-setting powers from February when the state's electricity market becomes fully deregulated.

The government says the new deal will benefit all consumers, including those on cheaper market contracts, as increased competition among existing and new retailers prompts a "race to the bottom".

"With the deregulation of the electricity retail market here in South Australia, we will see a price war that will put further downward pressure on electricity prices," Premier Jay Weatherill told reporters on Tuesday.

"This is a fantastic present for South Australian energy consumers."

Mr Weatherill said ESCOSA would remain in place to monitor prices and the government would reintroduce regulation at the first sign of collusion or other anti-competitive behaviour involving energy retailers.

Acting Prime Minister Wayne Swan said South Australia was the first state to act on the Council of Australian Governments (COAG) agreement earlier this year on energy market reform.

"This decision is a great result for people of SA and will mean greater competition, more choice and lower prices," Mr Swan said in a statement.

The South Australian Council of Social Services also welcomed the price cut, which it said would save the average household $180 a year.

The Energy Retailers Association of Australia and the Energy Supply Association of Australia both welcomed the changes and said the deregulation would offer consumers more choice and better services.

By Tim Dornin