A lack of coal-fired power generation and the high price of gas have led to the new federal government having to make very difficult choices. Consumers are suffering with worse pain to come. There is no easy way out, government leverage is limited, and none of the options is without serious side effects.

Maybe the threat of a least-bad market intervention is where they should land. This could mean revisiting the idea of a windfall profit tax.

In short, if gas producers are making a windfall profit selling Australian gas overseas while Australians can’t afford to heat their homes, they should share the windfall so that those Australians don’t freeze this winter.

Two-thirds of east coast gas consumption (2000 petajoules per year) is exported from Gladstone, the majority under contracts with Asian buyers. There is some, but limited, physical capacity for the producers to ramp up production to take advantage of the very high overseas prices for on-demand cargoes. This is the gas that the Europeans are seeking from Qatar, the US, and Australia to help their position with Russia. They are paying more than four and up to 10 times the contract prices. This is a huge windfall profit for producers who can take advantage.

Most of the domestic consumption is also sold under contract, to power generators, manufacturers, or gas retailers. About 10 per cent is traded on the spot, or on-demand, market. Last week the market operator imposed an administered price cap of $40 per gigajoule when the spot price looked like being more than $800 per gigajoule.

Although there were concerns a few years ago that producers were selling gas overseas at lower prices than domestically, this concern had abated with the Turnbull government’s Australian Domestic Gas Security Mechanism and the ACCC’s tracking of export parity pricing.

Under the mechanism, the government can address a potential domestic gas shortfall by directing the producers to supply the domestic market, and the threat of that action has avoided shortages. The export parity price provides buyers and sellers with a transparent indication of fair price levels. That price has generally been in the range of $8-$10 per gigajoule.

Two things have come to a head. First, the export parity price reached $40 per gigajoule, mainly due to the Ukraine issue. Second, issues on the supply side of electricity, most significantly extended outages of coal plants (up to a third of capacity) and a cold snap, rapidly increased demand for gas, particularly in Victoria which has a much heavier reliance on gas.

The high export parity price has not generally flowed through to gas customers on contracts. But it has become a painful problem for customers who decided to take on-demand market risk, those coming out of contract, or power generators without enough contracted gas to meet the new load.

The government is under pressure to impose a form of gas reservation policy, trigger the gas security mechanism, introduce direct price controls, or impose a windfall profit tax. The new minister, Chris Bowen, is sensibly taking the best possible advice from the experts.

The priority is to get the coal power plants back online to relieve pressure on the electricity and gas markets. It is possible that this could happen in the next few weeks. The government needs clear and credible information from the plant owners.

In Western Australia, 15 per cent of gas is reserved for domestic use, and the level of supply is claimed to be enough to deliver low gas prices for domestic consumers. The producers have learned to work within this constraint.

In Queensland, a form of reservation has been applied to new gas developments for several years. Companies bidding to develop new fields know that part or all the gas must flow to the domestic market. The difficulty is how to impose a retrospective volume restriction on current producers in a way that would drive lower domestic prices. Look out for cries of sovereign risk.

Imposing the domestic gas security mechanism is too slow, and it doesn’t have a price lever. It was designed for a different world. Export parity at present is little help.

The government might do better to sit down with the coal and gas producers and make it clear that enough volume at a fair price must be put in place – and that if it is not, then the government will implement a windfall profit tax, or something worse, on coal and gas producers. If they refuse the extra tax raised could provide targeted support for those who can’t pay their bills, address national debt or aid the transition to low-emission technology.

It should be in the producers’ interests to find a solution, since destroying the domestic market with high prices would not be in their interest when things stabilise, as they will.

The Albanese government has struck the right note so far. No one should expect a nice solution. But one that is pragmatically appropriate for an unprecedented perfect storm may be the least-bad outcome.

Tony Wood

Energy and Climate Change Program Director
Tony has been Director of the Energy Program since 2011 after 14 years working at Origin Energy in senior executive roles. From 2009 to 2014 he was also Program Director of Clean Energy Projects at the Clinton Foundation, advising governments in the Asia-Pacific region on effective deployment of large-scale, low-emission energy technologies.

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