Rising energy prices will really hurt. What can the government really do?
Imagine this. You’re in government for the first time in over a decade. And within six months, you’re facing a dilemma: skyrocketing energy prices. It doesn’t matter to your voters that the root cause is war in Europe. What they will see is pain—the electricity and gas bills go up.
So what can you do? Federal and State energy Minister met yesterday to address the issue before today’s meeting of the prime minister, state premier and territory leader.
One thing is for sure—politically, governments can’t do nothing, with electricity prices expected to rise by 56 percent this year and next and gas to a lesser extent. That comes amid rising inflation and rising interest rates, which are expected to take a toll on people’s pockets.
So what options does the government really have? Which is the best? And – importantly – which is the most politically viable? Here they are from best to worst.
1. Gas and coal producers choose to lower their domestic selling prices
The pain of your looming energy bill begins in gas-rich places like Queensland, where the big gas companies extract boundary between coal and gasliquefied and sold almost entirely abroad. Similar, coal coal mining companies and sell most abroad.
After the war in Ukraine and sanctions against the Russian fossil fuel giant, fossil energy prices have skyrocketed. That means coal and gas companies can sell their goods at a much higher profit than usual. And that means many of our fossil power plants, both coal and gas, now have to pay a heavy price to secure a portion of their own supplies, resulting in horribly high bills for friend.
Having witnessed Australia’s predicament—and knowing the government has committed to doing something about energy prices—you may wonder why these companies don’t agree to make a deal and provide these relatively small volumes for domestic use at much lower prices, as they are mined or extracted on Australian soil.
This is the simplest, best, and least likely option. The government therefore felt compelled to intervene.
2. Government imposes price ceilings on gas and coal
This is the most talked about option today. It is one of the best options available to the government, in the absence of corporate action.
How will it work? Because prices are often opaque, hidden behind secret long-term contracts between gas and coal producers and their buyers, governments may have to impose price ceilings on the spot market. short-term where these items are sold.
About five years ago, the Turnbull government signed an agreement with our three major LNG producers to ensure we had sufficient domestic supply. The deal doesn’t mention pricing, as it’s mostly related to supply.
The government could build on this deal by introducing a gas price ceiling and offering similar arrangements to coal companies.
Gas and coal producers will have a hard time crying because most of their profits come from exports. Domestic supply is only a small part of their business.
One issue here is the new debate between the federal and state governments about how to impose these limits. Proposal report the federal government are preparing to limit gas prices—but they want states to limit coal prices.
3. Put a temporary tax on unexpected fossil fuel profits and give Australian consumers money
This is a good option, consisting of two steps. First: apply a surprise tax. That’s not too difficult. You can ask the Australian Competition and Consumer Commission to determine an acceptable price for oil and gas 18 months ago and say any of the above is taxed at an unexpected rate—up to 100% . The hard part will be collecting this revenue and redistributing it to energy consumers.
Politically, it could be a challenge, given the Labor in the election saying there was no new tax. But the government will be so popular that they can get away with breaking their promises by arguing that when things change, you have to change with them.
4. Applying gas reserve policy to the east coast market
Many experts successful offers a gas reserve policy for the national market (which, in effect, means most of the east coast of Australia plus South Australia). After all, Western Australia introduced a gas reserve policy after the previous energy crisis and it worked.
Yes, this will lower energy prices. It’s not the best idea. When you put in place policies like this, you force gas producers to spend a percentage of their production for domestic use. This output flooded the market and pushed prices down. That is too complicated. If you want a discount, you can lower it in other ways.
Is the market failing or working exactly as intended?
All of these options have one thing in common: governments intervene in markets in ways that were almost unimaginable a year ago.
Play as the devil’s lawyer for a minute. The market is doing exactly what it intended. There is huge demand for gas and coal commodities, which are still widely used to produce electricity. That means whoever is willing to pay the most will get the goods.
Even before this year’s energy crisis, gas-fired power was the most expensive option in Australia. In our auction-based energy system, the highest bid accepted for a specific time period sets the price for the next period.
When electrification successfully bids to the grid, it will set new high prices for every other electricity provider, from coal to hydro to renewables. All of these things are profitable — and we have to deal with the pain.
Market logic dictates that those who can’t afford it just have to deal with it. Businesses may go bankrupt, consumers may have to cut their energy use radically—but that’s just how markets work.
The question, of course, is whether it will happen on a large scale, as we may see next year. A lot of people will be extremely angry with the government. That’s why we see the government weighing the best way to intervene. They cannot allow it to happen.
I’m not jealous government. If they come up with a clear way to solve the problem, I’d warmly welcome it. But the way it looks at the moment, it can be messy. Especially if companies or consumers start to claim compensation.
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