20
Oct
2014

Why governments should leave the gas market alone

by Tony Wood


Published by The Australian Financial Review, Monday 20 October

A food processing business in regional Victoria has spent tens of millions of dollars on gas-fired boilers to heat and process its product. But in the past year the company’s gas supplier has said that when its contract runs out in two years, the price will increase by 30 per cent, and the same again the year after. Alternative suppliers confirm the outlook.

Unsurprisingly, our food processing business is angry and demanding government action.

It is not alone. Electricity and gas prices for Australian households have increased by 61 per cent and 36 per cent respectively, in real terms, over the past five years.

Just when they might think the worst is over, gas bills on the east coast are set to rise again, and even more steeply. Annual increases for typical households could range from about $50 in Brisbane to $100 in Sydney and Adelaide.

In Melbourne, where many households use gas to heat their homes, the increase could be more than $300 a year.

The main cause is the rise of an export LNG industry in Queensland. Together with Western Australia, it is projected to be worth more than $60 billion a year by 2017-18. As a result, gas suppliers will be able to charge domestic customers the higher price Asian customers are prepared to pay for gas. The producers’ bottom line will look great, but Australian homes and businesses will pay. How should governments respond?

FAILED TO RESPOND

Grattan Institute’s new report, Gas at the crossroads: Australia’s hard choice, examines the impact of Australia’s gas revolution, its consequences for households and businesses, and why governments should take some action, but essentially leave the market to respond.

Both businesses and homes will find it expensive to switch to electricity because of the high cost of new machines and appliances. Whether the switch is warranted is far from clear, as future energy prices are uncertain and reliable sources of information limited.

Sadly, several years of inaction and misinformation have created a mess. Coal seam gas producers have failed to respond to the legitimate concerns of landowners, local communities and environmentalists.

LNG exporters have failed to address concerns their exports could trigger gas shortages on the east coast. Gas retailers have failed to explain the imminent changes to customers. Governments have failed to address concerns over the lack of transparency and liquidity in the wholesale gas market and associated gas pipeline access regime.

State governments have failed to respond quickly and clearly to the mix of legitimate and overblown concerns in the community. The NSW and Victorian moratoriums on development are a poor substitute for action. Victoria’s decision to extend its moratorium on fracking for coal seam gas to conventional gas exploration is bizarre.

Yet while rising gas prices will hurt some manufacturing sectors, such as food processing, packaging and fertilisers, the emergence on the east coast of a national export gas industry will give a great boost to economic growth. Proposed interventions such as domestic reservation, imposing a national interest test or subsidising domestic gas users will almost certainly add more costs than benefits and fail to create more supply.

TARIFF REFORM

Some measures should be taken, nevertheless. The gas supply market is already responding to high Asian prices: North American and African competitors are emerging to supply the Asian market and put downward pressure on prices. Some deals have been done to bring more supply to the domestic market.

But more must be done to remove barriers to a well-functioning market. The next Victorian government should immediately lift the moratorium on conventional gas development, while the COAG energy council should focus on creating a nationally consistent and clear regime for coal seam gas development.

Governments and the gas industry must provide better information to consumers so they can make informed decisions.

This will be even more important if and when the equally important task of network tariff reform is addressed, since it will make consumer choices more complex. Programs to subsidise the extension of gas to new areas such as the one recently completed by the Victorian government, are a poor use of public money and should not be repeated.

Finally, the nature and size of the gas price increases provide a case for two other actions. First, the Australian Competition and Consumer Commission or the Productivity Commission should be given the task of reviewing the operation of the gas market to identify any barriers to competition. Second, the current resource tax regime should be revisited and reviewed. A massive export gas industry is rising on our northern shores.

All Australians have the right to share in its bounty.