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Looming gas, coal price caps crunch energy producers
In an effort to curb soaring energy bills, the federal government plans to temporarily cap the price of gas and coal despite producers warning it will only exacerbate the issue.
Introduced December 9, the proposed legislation limits the price of coal to $125 per tonne for 12 months, with the price of gas capped at $12 per gigajoule over the same time frame. The price caps would apply only to uncontracted supply.
The bill also includes $3 billion in support for households and businesses.
Since the intervention was announced, shares in Origin Energy have fallen 7.26 per cent, while AGL is down 2.96 per cent.
Importantly, the price caps would not affect export contracts, enabling producers to continue benefitting from high international prices outside Australia.
“Any investment that was a good idea before the war in Ukraine will be a good idea after the war in Ukraine,” Treasurer Jim Chalmers said on Monday.
“We don’t want these high prices to hollow out local industries and put extra pressure on families if we can avoid it.”
The Australian Energy Market Operator reported that average east coast wholesale gas prices increased between 137 and 145 per cent over the past year. In Sydney, for example, wholesale gas cost on average $27.06 per gigajoule in the third quarter of 2022 compared with $11.16 last year.
Treasury forecasts the caps will leave households $230 better off. Gas prices, which the October budget forecast to jump 20 per cent both this financial year and next, would now increase by just 18 per cent and 4 per cent, respectively, it says. As a result, the increase in retail power prices would fall from 36 per cent to 23 per cent next financial year.
Woodside Energy chief executive Meg O’Neill said the proposed price caps would disincentivise new supply and undermine investor confidence.
“The policy will not address falling domestic gas supply and the increasingly critical role of gas in providing dispatchable power,” O’Neill said in a December 13 statement opposing the price caps.
“We must develop a comprehensive, longer-term solution that addresses gas supply and reliability …without undermining the market-based economy,” she added. “These are the primary factors that are driving higher energy prices in the east coast gas market, rather than solely the impact of the tragic war in Ukraine.”
Liquefied natural gas (LNG) netback prices – a measure of the export price a gas producer could expect to receive in the international market – historically stayed below $10 per gigajoule and only began to increase towards the end of 2021.
‘Heavy-handed’ government
Prime Minister Anthony Albanese has called back Parliament for a special one-day sitting on Thursday to pass the bill, leaving little time for negotiations. The energy industry has been given just two working days to evaluate and submit consultation responses.
The most contentious part of the legislation regards a mandatory code of conduct to sell gas at “reasonable prices”. It would give the government the power to dictate what prices and subsequent returns producers receive on an indefinite basis.
The Australian Petroleum Production and Exploration Association said the changes would replace an open and competitive market with “heavy-handed” government regulation.
“The government said it was introducing a temporary price cap – but now we learn those caps can be extended and its mandatory code of conduct will have the ongoing power to regulate prices permanently,” APPEA chief executive Samantha McCulloch (pictured) said.
“The powers provided through the bill are extraordinary, providing for the government to control the entirety of the market and intervene in an essentially unlimited way.”
Grattan Institute’s head of energy Tony Wood said the prices would apply only to a small proportion of gas and coal given most supply is already secured on long-term contracts that are unlikely to be higher than the caps.
“The government had no choice but to intervene, and none of the possible interventions was without big consequences,” Wood said. “In the case of both coal and gas, the proposed price caps are at levels consistent with market prices that should deliver acceptable profits to the producers and not impede future investment.”
However, he pushed back on the need for price controls. The government has indicated the “reasonable price” would be set using the cost of production plus a margin on top. “Even if used for ongoing price caps or for new sources of gas, such a level of cost-based price control seems unnecessary,” Wood concluded.
