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What the federal government's coal price cap means for power bills, generators and Queensland's royalties

The federal government has announced a price cap on gas and coal to help ease the cost of energy.

While some of the details still need to be nutted out, Prime Minister Anthony Albanese said parliament will move to place a temporary cap on gas at $12 a gigajoule, and that states will be capping coal at $125 per tonne.

Along with the caps, Mr Albanese said the federal government would provide up to $1.5 billion to support households and small businesses. 

The PM said federal, state and territory governments were "determined to provide some relief" through "extraordinary measures".

How does a price cap lower your power bill, in theory?

Australian energy economist Bruce Mountain, who heads up the Energy Policy Centre, said the price caps may not actually work to bring down energy bills as hoped.

That's because there are a number of elements that make up your energy bill.

Professor Mountain said making the electricity is one part of the cost — as is customer service, shipping, selling, billing and marketing that electricity to the consumer.

"So in principle, decreasing the cost of any one elements of that cost stack will decrease the cost to the end customer … at least, that's the hope," he said.

Professor Mountain said because of the complexity of our energy markets, we can't be sure how capping one element of the chain is going to play out — or whether coal or gas companies will pass on the discount to the consumer.

How will the price cap affect the big coal generators?

First of all, the price caps only affect the local market and won't impact the coal we export.

In the local market, there are only a few generators that look likely to be affected, Professor Mountain said. 

"The vast bulk of the coal that's burned in Australia is contracted forward," he said.

A forward contract is an agreement to buy or sell an asset at a future date at a specified price.

"Those forward contracts — which are the price they're paying now — are at a substantially lower price than what we see in the market now," Professor Mountain explained.

"But we can say at this point it is only a few generators, one or two that we know, are buying coal at prices that are a premium to the $125 cap.

"So they're the ones at the moment to focus on."

Origin Energy's Eraring power station in NSW's Hunter region appears to be paying more than $125 a tonne already.

The station can either accept the price cap or choose to find another market for it overseas, Professor Mountain said. 

"Eraring is our important, big electricity generator in the market," he said.

"It would be a loss of have a generator that's critical to the market right now, so I think the market would find it hard to actually sustain its total loss.

"If we lose all of their production, there would be pretty big price effects because you'd need to pump up a whole lot of gas-fired generation, certainly during winter and the evenings and mornings."

Will Queensland's coal royalties be affected?

This week Queensland's mid-year financial and economic update forecast new coal royalty tiers will deliver $2.95 billion this financial year.

But Queensland Premier Annastacia Palaszczuk said those royalties have "nothing to do with" the price caps.

That's because the vast majority — 90 per cent — of the state's coal is exported internationally.

Queensland's premier was "absolutely confident there will not be any impacts [for the sector]".

Stanwell and Gladstone are two Queensland coal-fired generators that provide energy to the local market.

Stanwell is government owned and Gladstone is privately owned.

Professor Mountain said he doesn't believe these two generators are currently paying a premium, so they may not be impacted by the cap.

As part of its agreement with the federal government, Queensland will not impose any cap through legislation.

Instead it will issue a direction to its government-owned corporations.

Asked whether state-owned generators would be out of pocket, the Premier said "I doubt it, they're in a very good situation".

"We have an abundance of coal … we are the energy powerhouse of the nation."

She also emphasised that the price caps would have a 12-month expiry date. 

"It's good that it's only for one year — it's a temporary measure," she said.

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