AGL Energy (ASX:AGL), and Origin Energy (ASX:ORG) are expected to reduce customer discounts to offset cost pressures arising from the Australian Energy Regulator's recently released draft pricing for the default market offer, according to a Friday Jefferies note.

Although these are draft decisions, wholesale energy cost pressures are higher than expected, and retail margins for small businesses are being compressed, the note added.

Jefferies said that lower retail cost allowance represents an additional headwind for energy retailers, and the Solar Share Scheme is also expected to create further pressure.

In response, energy retailers are expected to reduce customer discounts, which may help to ease earnings pressure in fiscal year 2027, the note said.

Jefferies kept a buy rating on AGL Energy and Origin Energy with price targets of AU$12.76 and AU$13.03, respectively.