Australia weighs energy price caps as policy battle heats up

A POLICY battle is heating up in Australia over surging gas and power prices, with the government weighing price caps sought by hard-pressed manufacturers and households while analysts warn that controls could worsen the gas crunch in the long run.

Treasurer Jim Chalmers said late on Thursday (Nov 3) that the government would decide before Christmas what steps to take but that its preferred option would be regulatory action, in his first public comments on how quickly the government would act.

The goal, he said, is to ensure households are not hit with 20 per cent to 30 per cent increases in power and gas prices over each of the next two years as forecast in the new Labor government’s first budget, released on Oct 25.

The government could also choose actions involving taxes or subsidies, Chalmers said on Australian Broadcasting television, although additional taxes are considered likely to displease foreign investors in Australia’s resources sector while subsidies would stoke inflation.

The government has not yet taken steps to rein in gas prices, beyond securing an agreement from east coast liquefied natural gas (LNG) producers to offer uncontracted gas first to the domestic market before offering it offshore, and to ensure that domestic buyers pay no more for that gas than international customers.

Analysts said price controls could deter producers from investing in new supply just when it is needed, with a shortfall looming in eastern Australia within the next three years.

“It is possible Federal government interventions could now cause, rather than avert, a serious gas and power crunch next year,” Credit Suisse analyst Saul Kavonic said in a note.

Manufacturers dependant on gas for heat or as a raw material have been clamouring for a price cap of A$10 per gigajoule (GJ), but analysts said that was unrealistic with global prices now at much higher levels.

“A$10-A$11 a gigajoule feels like a very bold ask from industry, recognising where global gas prices are and where the Australian dollar is at 65 (US) cents,” said UBS analyst Tom Allen.

If domestic prices are capped, the two LNG exporters on the east coast that have excess supply, led by Shell and ConocoPhillips, would have no incentive to produce above their contracted levels, which could result in less supply for the local market, Kavonic said.

Manufacturers are nevertheless pushing for action to rein in surging prices.

The Energy Users Association of Australia (EUAA), which represents manufacturers, said in the past two weeks some members have had to pay between A$30 and A$35/GJ for new gas contracts, which is around three times the price that gas producers said they fetched on average in the third quarter.

“The gas industry, government, regulators and customers need to sit down together and develop a solution to this mess that works for everyone,” EUAA chief executive officer Andrew Richards said in a statement. REUTERS