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Kicking the gas can down the road: why a gas price cap is the worst way to protect energy consumers.


The federal government’s plan to extend the gas price cap is not surprising given the fundamental market issues that remain.

As long as the war in Ukraine continues, Australian gas will attract premium prices abroad. So the “temporary” $12 per gigajoule cap on domestic wholesale prices – intended to protect local energy consumers – will no longer be lifted in December, but will remain for a another 18 months at least.

This is just kicking the pot on the ground, instead of developing a coherent energy policy.

A price cap is the worst of all credible options for achieving market or price stability. It creates perverse incentives to continue inefficient energy use practices in industry and homes. It also slows progress on emissions reduction and the transition to renewable energy.

The optimal regulation of natural gas markets has been well studied and applied internationally, and state and commonwealth governments would do well to learn from such expertise. At a minimum, the government should consult a range of experts and develop different policy options.

These options should a gas reservation policy and a new tax on excess profits in the gas industry that would be distributed to consumers.

At the same time, the government should also initiate a first-principles review of all energy market frameworks, as (among other things) this issue shows that the fundamental assumptions underlying current energy market frameworks are no longer valid.

Read more: Rising energy prices are really going to hurt. What can the government actually do?

Introduction of a code of conduct

The extension of the gas price cap is only part of the obligation proposed by the Albanian government code of conduct (gas code).

It is worth noting the consultation paperreleased on April 26, states that the Gas Code “will ensure that domestic prices are reasonable by establishing a price anchor through:

  • a price cap, initially set at $12/GJ
  • conditional exemptions from the price cap for producers based on satisfactory voluntary enforceable supply commitments or a small producer supplying only the domestic market.

For example, large gas producers can submit an application to exceed the price cap. That could explain the term “price anchor”.

Read more: Yes, the government’s price cap is overly generous to gas producers. But it was necessary

The draft code has already been discussed with gas producers and large industrial users in recent months. Energy and Climate Change Secretary Chris Bowen told the ABC this was about striking “the right balance”.

Major gas producers are asked to comment by May 8 on the supply and price commitments they would be willing to make under the proposed exemption framework.

Submissions for the second and final consultation round close on May 12.

Wholesale electricity prices have fallen since the introduction of price caps for coal and gas. (The wholesale price of electricity is strongly influenced by the price of gas).

But the wholesale gas price for the first quarter of this year is still the highest Q1 price ever recorded. The average price across all Australian Energy Market Operator markets in March was $9.43/GJ, the lowest since January 2022 at $8.81/GJ. The average quarterly price across all AEMO markets was $11.86/GJ compared to $9.93/GJ in Q1 2022.

Retail prices for electricity and gas continue to rise.

A fragile framework that needs to be repaired

The relatively small reduction in gas supply due to sanctions against Russia exposed the delicate balance between supply and demand and the fragility of the global fossil energy system. In the long term, the solution is clear: switching to renewable energy sources that are not subject to short-term supply and demand shocks and are now cheaper than coal and gas.

The switch to renewable energy sources has another important advantage: the decentralization of electricity production from concentrated sources of fossil fuels. This can begin to address some of the major sources of geopolitical instability related to oil and gas in the Middle East, Russia and similar sources.

In the short term, however, the Australian government must curb the worst excesses of the free market for natural gas and retail electricity. We need to provide short-term relief to Australians by decoupling the Australian natural gas market from global markets for a limited period of time.

The price cap is a poor attempt to do this, but the only sure way is a domestic reservation policy. This would reserve some of the gas produced on the East Coast for the domestic market.

Western Australia already has one, which mandates that 15% of gas extracted in the state must remain there. Therefore WA gas prices are cheaper. Now Australia’s east coast needs a strong gas reservation policy.

A double blow

Linking the domestic gas and electricity market to the extremely volatile and tight international market is not in the national interest.

It’s a double whammy because not only are energy prices too high, the resulting profits aren’t taxed properly.

We need to get this right.

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