Pressure remains as ‘not much’ gas covered by price cap

Households, cafes and manufacturers might think they’re going to get cheaper gas under a new price cap regime, but unfortunately that’s not how it works.

While the federal government’s mandatory gas code of conduct for producers is now law, it doesn’t affect supplies already under contract which means bills won’t suddenly drop.

An emergency price cap took effect in December after the whopping gas price increases that followed Russia’s invasion of Ukraine when some businesses faced a quadrupling of energy costs.

The competition watchdog advised that a cap of $12 per gigajoule would be reasonable, noting almost all (96 per cent) of domestic wholesale offers made in 2021 were below that level.

The mandatory gas code of conduct extended the $12/GJ price cap until 2025, but that’s a wholesale, not a retail price.

Export contracts aren’t included, short-term supply and smaller producers are also exempt and a new explicit exemption for liquefied natural gas imports has been added.

With most production locked into international contracts, Australia could soon be importing more LNG for domestic use – outside the code.

Energy major Woodside welcomed the release of the mandatory code of conduct for the eastern Australian gas market.

“Woodside remains committed to investigating all available options to maximise supply of gas to the eastern Australian market, including opportunities for LNG imports,” a Woodside spokesperson said.

Rick Wilkinson, CEO of analytics firm EnergyQuest, said with all the exemptions, it’s reasonable to ask how much gas is actually subject to the price cap.

“The answer is not much right now – we estimate it at approximately six per cent of total east coast production (which includes LNG), but a more material 21 per cent of domestic supply,” he said.

Having inserted itself as arbiter of the east coast gas market, the government may be forced to make some difficult decisions in the medium to longer term as artificially low prices do not encourage new supply, Mr Wilkinson said.

He rejects the official view that the war in Ukraine and record international gas prices are the cause of the east coast market disruptions.

“Our analysis shows it is primarily caused by domestic issues and the availability of firm energy supply,” he said.

Energy giant Origin says gas remains critical as a feedstock for heavy industries but acknowledges small users are in decline.

Still, the environment for gas investment in parts of Australia has deteriorated so rapidly that the country is at serious risk of the decline in supply outrunning the decline in demand, according to CEO Frank Calabria.

That could impose avoidable costs and supply risks on Australian households and businesses who are yet to get the support they need to exit gas.

The Australian Energy Market Operator has warned of long-term supply gaps and the risk of gas shortfalls in coming winters, particularly if severe weather hits.

The code is backed by domestic supply commitments of at least 260 petajoules to 2027, which the market operator and the Australian Competition and Consumer Commission have assessed as reducing the risk of shortfalls.

EnergyQuest has forecast the east coast gas market will be short of supply by the end of the decade and possibly much sooner, depending on whether new domestic supply or LNG imports are established and how the exit of coal plants is managed.

Peak demand shortages may come earlier depending on the weather.

“The code doesn’t fix these problems,” Mr Wilkinson said.

Amid calls for windfall war profits to be taxed, the federal government says the gas price controls take into account the key costs for domestic producers and allow a “reasonable” return.

Australian Council of Social Service CEO Cassandra Goldie says while the $12/GJ price cap should help put downward pressure on household gas prices, the government should do more.

The peak body says a 10 per cent royalty on offshore gas production would fund a transition away from gas.

“International gas corporations are making enormous profits from public resources while soaring energy bills are forcing people on lower incomes to choose between heating their homes and eating three meals a day,” Ms Goldie said.

“The energy minister should monitor the exemptions to the cap, which could allow too many companies to exceed the cap and make very large returns.”

The government should also work with energy retailers to provide energy debt relief to people in energy hardship, she said.

Further investment in energy efficiency, electrification and solar retrofits for low-income housing could also ease energy poverty.

According to the coalition, federal Labor’s track record on managing Australia’s gas market has been “hopeless” and their promises hollow.

Resources spokeswoman Susan McDonald said the code risks further discouraging investment.

There is “significant ministerial discretion to make different rules for different companies, creating additional ambiguity”, the senator adds.

“This announcement will only heighten concerns of Australia’s trading partners who want confidence that the government will back the gas industry because their own energy security relies on it,” she said.

Energy Minister Chris Bowen will be travelling to Tokyo in the coming weeks to shore up Australia’s reputation as an energy exporter.