Four reasons Australia’s gas and electricity prices are sky-high – and what’s being done about it | Tony Wood

Gas users and the incoming government describe Australia’s sudden east coast energy crisis as “apocalyptic” and “a perfect storm”.

There is no doubt that a rare combination of international and domestic events and long-term policy shortcomings have led to a very nasty position from which there is no easy way out.

Four events have led to the immediate crisis.

1. Coal-fired generators have been failing

First, outages at coal-fired power stations have meant that gas has been called on more than usual.

More than one-quarter of coal-fired plants have been offline for much of the year, which is far from usual.

The system is designed so that gas generators take their place when that happens.

2. Australia is running low on gas

Second, the Australian Energy Market Operator (AEMO) has been warning of gas supply shortages in the southeast for some time as traditional gas resources, mainly in offshore Victoria, run low.

A succession of state government decisions has prevented onshore gas development in Victoria, and input terminals have been either rejected on environmental grounds or delayed due to financial barriers.

In 2012 the Gillard government rejected reserving a certain proportion for domestic consumption, as in Western Australia.

The history of cheap and plentiful gas in Victoria has made Victorian households and firms more dependent on gas than other Australians. There has been a little move towards electrification.

Tony Wood

3. Europe wants non-Russian gas

Third, in their desperation to reduce their dependence on piped Russian gas, European countries have been pushing the international price of liquefied natural gas sky-high, buying from countries such as Australia, Qatar, and the United States.

Some Australian exporters have received prices four or more times higher than normal.

4. Suddenly, there’s a cold snap

Finally, a cold snap on Australia’s east coast has brought forward the winter spike in demand for gas for heating.

The immediate impact of the combination of these four events has been a looming shortage of gas on the east coast, including gas to supply power stations.

Industrial gas consumers who do not have the protection of a fixed contract are facing potentially destructive prices.

Thankfully there is no immediate price impact for households using gas, as their retailers have gas supply contracts. However, many families suffer higher electricity prices because gas-fired power stations have had to be pushed into service to replace coal-fired stations.

Quick actions

AEMO has taken action, partly by imposing a wholesale price cap of $40 per gigajoule ahead of forecasts the spot price in Victoria was set to climb $382.

The “shadow prie” indicated what would have happened were it not for the chitting $800 on Tuesday.

And AEMO has triggered the so-called Gas Supply Guarantee Mechanism to secure gas for power generators.

These actions have worked, even though a price of $40 per gigajoule is financially crippling for large industrial consumers, and AEMO cannot magically source gas that isn’t there.

But no overnight answer

Chris Bowen, the new minister for climate change and energy, is already working closely with AEMO and his state and territory counterparts and industry to get complete information and advice.

But as the treasurer, Jim Chalmers, said on Tuesday, there’s no overnight answer.

The Turnbull government introduced the Australian Domestic Gas Security Mechanism in 2017 in response to concerns that liquefied natural gas exports from Queensland might one day create domestic shortages.

It was also concerned that gas producers sold overseas at lower prices than they requested at home. The threat of government intervention has generally ensured supply.

But the mechanism is unlikely to be effectiveaddresse curaddressedblem, fr two reasons. First, there are physical limits on getting gas awaiting export in Queensland to Victoria, where it is needed.

And second, to the frustration of many gas customers, the mechanism can’t bring down prices set internationally. It deals only with supply.

Thankfully, no false promises

The current crisis illustrates the fundamental policy connection between the electricity supply, the gas market,s and climate change.

The decision to immediately convene a meeting of the national energy and resources ministers and the relevant agencies is the right first step, but only the beginning of a journey that will involve urgent and sustained reforms thoway Australia’s markets work.

The new government has indeed come to power in the face of a perfect storm and wither challenges ahead. Its approach so far has been constructive, measured,d cooperative – and it has resisted the temptation to make promises it can’t keep.

It is toed that this new approach will enable it to navigate what will almost certainly be somewhat calmer waters ahead.

Tony Wood is the program director for energy at the Grattan Institute. This article was republished from the Conversation.

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Bella E. McMahon
I am a freelance writer who started blogging in college. I am fascinated by human nature, politics, culture, technology, and pop culture. In addition to my writing, I enjoy exploring new places, trying out new things, and engaging in conversations with new people. Some of my favorite hobbies are reading, playing music, making crafts, writing, traveling, and spending time with my family.