After a surge in global energy prices due to Russia’s invasion of Ukraine last year,the Albanese government introduced emergency laws in December to cap the domestic gas price at $12 a gigajoule for 12 months to shield homes and businesses from the biggest possible future bill hikes.
Gas producers face the extension of a $12-a-gigajoule price cap for at least another two years,but some companies will be exempt.Bloomberg
The government on Wednesday released the details of a new plan for consultation that would keep the $12 price limit in place for longer to act as a “price anchor” before being reviewed in July 2025.
Under the proposal,smaller gas producers that supply the domestic market only and do not ship the fuel overseas as liquefied natural gas (LNG) will be exempt from the price cap.
LNG companies will be eligible for exemptions if they make a “satisfactory”,court-enforceable commitment to boost supplies into the domestic market,the government said.
In a sign of compromise after weeks of drawn-out talks between the government and the gas industry,the draft code no longer contains a “reasonable” pricing mechanism – a proposal that would have required gas contracts to be struck at prices that reflect production costs plus a margin allowing for a specified rate of return.
The industry had argued a reasonable-pricing mechanism would have ignored the unique risks involved in oil and gas projects,such as unsuccessful exploration activity,development costs and decommissioning requirements,and warned it would have deterred investment in new sources of supply needed to ease the threat of east coast shortfalls and keep a lid on prices in years ahead.
In a joint statement on Wednesday,Treasurer Jim Chalmers,Energy Minister Chris Bowen,Resources Minister Madeleine King and Industry Minister Ed Husic said the government would consult industry on updates to the proposed mandatory code of conduct until May 12.
“The gas code will ensure sufficient supply of Australian gas for Australian users at reasonable prices,give producers the certainty they need to invest in supply,and ensure Australia remains a reliable trading partner by allowing LNG producers to meet their export commitments,” they said.
Since their introduction in December,the government’s price caps of $12 a gigajoule for natural gas and $125 a tonne for coal have driven down wholesale electricity prices from last year’s record highs by reducing the cost of fuelling Australia’s largest power stations.
LNG companies will be eligible for exemptions if they make a “satisfactory”,court-enforceable commitment to boost supplies into the domestic market,the government said.Getty
“In response to unprecedented power price rises as a result of Russia’s illegal invasion of Ukraine and a decade of energy policy chaos under the Liberals and Nationals,the Albanese government took immediate action to shield Australian gas users by temporarily capping the price of gas in December 2022,” the ministers said.
“Coupled with action to cap coal costs for power generators,gas price caps under the government’s energy price relief plan nearly halved wholesale energy prices.”
Major domestic gas users,such as manufacturers that use gas for energy or as a raw material in their factories’ processes,have strongly supported the government’s efforts to bring down what they say are “unreasonably and unsustainably” high prices that have risen disproportionately to exploration and production expenses.
“The draft mandatory gas code of conduct is a step in the right direction,” said Andrew Richards of the Energy Users Association of Australia,whose members include manufacturing giants Brickworks,Incitec Pivot and Qenos.
“We welcome the draft code that aims to establish a clear domestic price anchor,incentivise producers to commit more gas to the domestic market and supports good faith negotiations so gas users can secure gas supply contracts at reasonable prices.”
Richards said gas-dependent manufacturing firms had struggled to access gas supply contracts from producers this year since the price cap came into force as gas producers suspended sales processes to assess compliance with the new rules.
“With the draft mandatory code now moving forward,the Energy Users Association of Australia’s expectation is that this situation will rectify itself soon now that gas producers have more confidence and clarity in the likely ‘rules of engagement’,” he said.
The Australian Petroleum Production and Exploration Association (APPEA),representing oil and gas companies,on Wednesday welcomed the government’s move to exempt smaller domestic producers from the price caps,and its recognition of the need to drive investment into new sources of supply to avert east-coast shortfalls and put downward pressure on prices.
But it warned the proposal may still fail to address investor uncertainty.
“The draft code moves away from a ‘cost plus’ model and binding arbitration,but the revised approach still adds significant complexity and ministerial discretion to the operation of the gas market and is unlikely to address the concerns from investors,” APPEA chief Samantha McCulloch said.
“While we are still working through the full implications of this latest intervention,initial reviews suggest further clarity and refinement will be needed across a number of areas to ensure the domestic gas market is able to function effectively.”
Analysts on Wednesday said the changes were causing ongoing uncertainty among Queensland gas producers,which export LNG as well as supply the east coast market.
“The entire health of the east coast gas market now comes down to a case-by-case discretion by the government to award exemptions or not,” Credit Suisse energy analyst Saul Kavonic said.
“Smaller producers being exempt is welcome,but isn’t going to move the dial for supply,which is almost all in the larger producers’ hands.”
Kavonic said it appeared that Labor had given up trying to formulate an overarching detailed price regulation regime after “realising the logistical and legal complexity involved”.
“Policy uncertainty and risks to exports remain as large as ever – at least until further guidelines on the basis for exemptions are developed,” he said.
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