After nine years of energy policy chaos, Australia’s state and federal energy ministers met last week to discuss the significant increases in energy prices that are impacting the cost of business and living.
The ministers agreed to a range of measures to overcome the gas crisis, including storing gas for emergencies, as well as agreeing on a longer-term national plan to move away from fossil fuels to renewable energy. Although this is promising, there’s a lot of work to be done.
Australia’s wholesale electricity and gas prices are at levels not seen before, and it is having an extraordinary impact on the prices businesses and households now face. Today energy retailers are going out of business. Tomorrow it will inevitably be Australian businesses.
There are three measures that government and the energy industry can take to reduce price rise impacts in the short and long term.
Firstly, price transparency, to allow sunlight onto those energy generators using their market power to set high electricity spot prices.
Secondly, shoring up local gas supply with a domestic gas production reserve. Finally, taxing gas exports and investing that money to support energy security for Australians.
Transparency in energy market power dynamics
The government should strongly consider implementing market price transparency around which electricity generators influence the market price. Frustratingly, the data is already available at the Australian Energy Market Operator (AEMO) but has not been stitched together to easily show in real-time who is pushing prices sky-high.
The energy market bodies currently review market power retrospectively, with the Australian Competition and Consumer Commission (ACCC) and Australian Energy Regulator (AER) providing backward-looking reports.
While this provides some insights, market prices are changing too quickly for rear view analysis. What we need to see is who is the price-setting generator in real-time so that businesses and policymakers can question the responsible generator, and more importantly, their owner.
Additionally, recent regulatory, and industry reports pointed to coal generators rebidding to pushing spot prices up, but little has been done to change this behaviour.
AEMO, Australian Energy Market Commission (AEMC) and the AER talk often about the importance of transparent markets. It is time that AEMO’s data dashboards were updated to provide insight and give the ACCC the real-time tools to see which generators are using their market power to influence and set prices.
Implementing this change quickly can help create transparency and trust in the energy markets by holding generators accountable to the consumers and businesses that ultimately pay their bills.
Reserving gas production for domestic supply
As reported, the energy ministers agreed last week to authorise AEMO to procure gas on the open market and keep it in storage for shortages for emergency situations, but a gas reservation policy was not discussed. Currently, Australia has the highest exports of liquefied natural gas (LNG) gas capacity in the world, 13% higher than Qatar and 22% more than the United States. Origin Energy, Santos, and Shell export three-quarters of Australian east coast gas production.
With numbers like that, it is difficult to argue with the Australian Institute Richie Merzian’s statement, “Australia doesn’t have a gas supply problem; it has a gas export problem”.
To paint the picture, Australia’s east coast contract wholesale gas prices used to be between $4.50-5/GJ; Now the spot price is over $30/GJ — if a supplier is even available; some businesses are unable even to access energy market contracts. With the war in Ukraine leading global legislators to look for non-Russian gas sources, wholesale gas prices will continue to spike further.
Yet Western Australia’s domestic gas spot prices have only risen 160% across two years in comparison to 529% on the east coast. The key difference is the WA gas reservation policy, which requires gas producers to reserve 15% by volume of LNG produced in the state for domestic use. Meaning there is enough gas supply to meet local demand.
The opportunity is to reject an industry-led status quo and to implement policies that benefit the broader Australian economy. By staring down LNG exporter interests, there is a strong chance that local manufacturing and industries won’t shut down because of pricing pressure, and energy price spikes will reduce.
Political will is needed to establish a national gas reserve to stop energy exports from being prioritised and ensure Australians have an adequate supply. While there is commentary saying that the Queensland to NSW gas pipeline is full, the AEMO gas map shows the southern pipeline with spare capacity. We can all argue the numbers, but the reality is there is not enough domestic gas supply now.
Taxing gas exports and investing in energy security for all Australians
Australians are not benefiting from being the largest LNG exporter in the world. Taxing gas exports would make domestic gas customers more attractive to energy suppliers — with the added tax benefit of reducing our budget deficit. If governments have the resolve to review this, this could be implemented and benefit consumers and businesses in the short term.
Gas companies’ profits are going up, which is already impacting some industries. Dan Walton, Australian Workers’ Union National Secretary, reported that some manufacturers had seen a $100,000 per day increase in gas costs forcing businesses to switch off production at specific parts of the day, and they could face prices 100 times higher than they have traditionally paid.
Taxing gas exports might seem like a bold step, but other countries have done it.
A 25% windfall tax on oil and gas producer profits was introduced recently in the UK without consultation. Meaning from 26 May 2022 until 31 December 2025, profit from UK oil and gas producers will support government financial assistance packages that benefit households. If the conservative UK government can put consumers ahead of oil and gas producer profits, Australian governments can too. This approach was ruled out by the new prime minister, Anthony Albanese last month, but now is the time for energy leadership, that the new government has demonstrated elsewhere.
It’s time for Australia to step up, overhaul industry profits, and invest that money in supporting energy security for Australians.
Change needs to challenge incumbents and happen quickly
As energy markets enter a new era of high prices, legislators need to consider alternatives to protect households, businesses, and industry. Without meaningful short and long-term changes, huge numbers of manufacturing businesses will turn off.
Industry and political leaders must hold their nerve in response to lobbying by energy incumbents. And industry regulators, such as the ACCC and AEMO, need to listen to and support feedback from consumers and businesses. Not just be captured by the industry they regulate. Australians need a brighter energy future, and it’s not only government policies that will get us to that point.
Energy companies have been managing energy market changes in the interest of their own profits. Overhauling energy markets by implementing national gas reserves, price transparency, and tax gas exports are needed to put the brakes on the impending energy crisis.