The Albanese government served itself a big pre-Christmas helping of political risk when it intervened in the energy market in late December to cap prices and lower household electricity bills.
Having pledged in the May 2022 election campaign to lower power bills, the government waded into the thorny issue of energy markets, where prices are dominated by factors largely outside government control, such as global demand, heatwaves, cold snaps and fuel supply from privately owned gas and coal companies.
The government’s energy market intervention has shown early promising signs, but longer-term risks loom.Credit:James Davies
But with forecasts of power bill spikes of more than 50 per cent and gas price spikes of 40 per cent over the next two years, as well as gas becoming unaffordable for manufacturing, the government decided it needed to act.
In December, it capped the price for wholesale gas at $12 a gigajoule and wholesale coal at $125 a tonne, spurring protest from the resources sector. Current signs are promising for short-term price reductions but there are political risks in this kind of intervention.
The first risk is that, according to the Australian Energy Market Operator and the Australian Competition and Consumer Commission, the east coast might run short of gas as soon as 2024.
This could force prices to spike, increasing electricity bills, or cause gaps in the energy market leading to blackouts. And companies that are considering future gas supply projects worth billions of dollars, which would put more gas into the market, say the market intervention is forcing them to reconsider their plans.
If a gas shortage pushes power bills even higher, the government’s election promise to cut power bills by $275 by 2025, when the next federal poll is due, could come back to bite it.
The government has sought to calm the resources sector with assurances its intervention was temporary, lasting only for the next 12 months.
But market analysts warn the global energy crunch and its consequent high prices, caused by Russia’s invasion of Ukraine, will stick around for years to come.
It’s possible that this time next year the prospect of high electricity prices will spur calls for another round of price caps, which would again spark outrage from the resources sector.
Mining tax mark two
Perhaps anticipating the potential for longer-run price controls, the federal government is finalising a mandatory code of conduct for gas producers. This would give the government power to ensure “reasonable” gas contract prices beyond the 12-month, $12 a gigajoule price cap.
This move prompted an angry outburst from Santos chief executive Kevin Gallagher who claimed that “this Soviet-style policy is a form of nationalisation”.
Prime Minister Anthony Albanese has rebuffed the sector’s accusations, saying the interventions would not inhibit investment. He argued that 96 per cent of gas contracts in 2021 were priced under the $12 a gigajoule cap.
Nevertheless, coal and gas companies have threatened to mount another multimillion-dollar advertising campaign, similar to their 2010 effort credited with killing off the Rudd government’s resources rent tax.
Annoying the neighbours
Some of Australia’s key trading partners and Pacific allies, Japan and Korea, have already expressed fears that crucial Australian gas supply contracts will be disrupted by the government’s intervention.
Korea and Japan are big customers for Australian gas exports and both nations depend on energy imports because they produce very little of their own supplies. Both countries have been assured by the government their long-term contracts will not be disrupted.
But experts including Graeme Bethune, of Adelaide-based energy consultancy EnergyQuest, have questioned if industry will invest enough in bringing on new supply to replace the looming shortfalls, particularly if market interventions extend beyond the coming 12 months.
If shortfalls hit, the federal government may be forced to use its powers under the so-called “gas trigger” laws to redirect supply from international contracts to keep the lights on at home. This would undoubtedly cause an angry reaction from Japan and Korea, which would be forced to scramble for alternate energy sources.
Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. Subscribers can sign up to our weekly Inside Politics newsletter here.
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