Finance Finance News Newly installed federal government faces a tough test on gas prices
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Newly installed federal government faces a tough test on gas prices

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Long-suffering energy consumers who have seen power prices spike recently now face rising gas prices too, with shortages related to the war in Ukraine pushing up wholesale costs for businesses.

The Australian Market Energy Operator (AEMO) has been forced to act, putting in place short-term gas price caps across eastern states that has pegged gas prices to $40 a gigajoule ($40/gj) until June 10.

And while the federal government could also act, experts warn such a move could incur high political costs and might not even influence the market in the short term.

Rather, the spike in prices might be difficult medicine with a longer-term advantage, as it may push Australia to adopt renewables faster, said Bruce Mountain, director of energy policy research at Victoria University.

Were the energy system more reliant on renewables, such spikes in gas prices would have little effect, Professor Mountain said.

“As much as we hate these prices, it is illustrating to us with absolute clarity the value of avoiding coal and gas as our primary energy sources,” he said.

What could the government do?

Prime Minister Anthony Albanese was asked on Tuesday whether he would act on gas prices.

He responded that the new government wasn’t fully in place.

“We’ll give proper consideration with proper advice to any policy moves that are made. But we’ve been very conscious about the issue of cost of living,” Mr Albanese said.

The government could implement a gas security mechanism that forces big gas exporters to divert gas to the local market in times of shortage.

But Grattan Institute energy program director Tony Wood said the effect of such a move would be limited because the price mechanism set in that legislation is set at the export price.

“The export parity price is now $40/gj so it leaves the government in a nasty position,” Mr Wood said.

Even if the mechanism was used, the price would be pegged at four times where it has been in recent times, still putting price pressure on the domestic market.

The same applies to AEMO’s caps in the eastern states. While they protect consumers from fluctuations in price, they are still well above where domestic prices have been until recently.

The spike in what are known as “spot”, or uncontracted, gas prices has been dramatic.

Mr Wood said export parity prices for gas charged in the domestic market were just $10/gj until recently.

Now prices have reached up to $800/gj in Victoria, where the regulator has stepped in to cap prices at $40/gj temporarily.

But as the chart above shows, prices would again spike to at least $150/gj if the regulator took its foot off the brake pedal.

Higher gas prices at the moment are only hitting some commercial users who have not contracted the gas they use at lower prices.

But on July 1 new domestic prices will be set and if the spot price does not fall by then households will be hit.

Wanting it both ways

Although the federal government has the power to act, doing so could be problematic.

“You can intervene and demand both gas and coal are set aside locally,” Professor Mountain said.

“But then, if in the same breath you demand a transition to renewables, it will cost more money from the public purse because you have skewed the market [in favour of gas and coal].”

Professor Mountain says that overseas responses to war price spikes show what could be done for gas consumers.

“If they reserved a certain amount of gas for the local market then they could change the supply balance and prices would have to adjust [fall]” Professor Mountain said.

“It’s effectively what’s happened in wheat and other foodstuffs around the world. Countries have simply closed their export markets and prices have collapsed despite there being scarcity globally,” Professor Mountain said.

“It’s doable.”

If the export restrictions were not too severe then Australia’s international gas customers, and its international reputation, would not be too damaged, Professor Mountain said.

The effect of spiking gas prices takes longer to hit consumers than rising power prices because more gas supply is contracted to big companies, Mr Wood said.