The treasurer, Jim Chalmers, has described Australia’s energy markets as a “perfect storm” that is threatening to hit consumers, business and the wider economy hard.
“We’ve got spiking gas prices, spiking electricity prices, and spiking prices for petrol,” he said on Thursday. “There’s no use beating around the bush: these challenges in the energy market are part of this cost of living crisis that we’ve inherited.”
So how bad is this crisis, and what can the Albanese government or others do about it?
Losing our ‘exceptionalism’
Russia’s invasion of Ukraine in February, and the resulting sanctions, sent global energy prices soaring. Commodity prices were already on the climb as economies juiced up by spendthrift governments rebounded rapidly. Oil prices jumped significantly in the two months before the war.
The Reserve Bank of Australia governor, Philip Lowe, repeatedly cited Australia’s smaller energy price rises, because of our energy abundance, as a reason inflation was less of a threat than in the US or Europe, and hence why there was less need to hike interest rates.
But that exceptionalism is fading fast. Motorists were the first to feel the pain, as fuel prices follow global trends with only short lags. Gas is similarly tied to international markets, and when its price doubled or more, the effects inevitably showed up in our energy markets. And, of course, the RBA has joined its overseas peers – albeit a tad late – in resuming interest rate hikes after a decade of cuts.
Renewables are increasing, so why are power prices rising?
During the first quarter of 2022, wind, rooftop solar and large-scale solar output met a record 27.3% of the grid serving eastern Australia, up by almost one-fifth on a year earlier. Add in hydro, and clean energy made up 33.7%, also a record, the Australian Energy Market Operator said in its March quarterly report.
New South Wales and Queensland power plants using black coal that is partly exposed to global markets had their lowest first-quarter share on record. Add in brown coal, and their total share of generation was a touch over 60%.
However, the so-called merit order in the national electricity market means all suppliers get paid the final, most expensive offer to meet demand. If there’s lots of wind and sunshine, prices can be zero or even negative, but if it’s coal or higher-cost gas clinching the final deal, the price goes up.
In the March quarter, wholesale prices averaged $87 per megawatt hour, or 141% higher than a year earlier.
Western Australia, which operates a separate grid, averaged $61/MWh, up 14% from the previous quarter mostly because demand picked up during a hot summer.
What went on this week?
On Wednesday evening, wholesale prices across eastern Australia were nudging $1,000/MWh, only hours after Chalmers warned of that “perfect storm”.
The first big cold snap of the season, neatly coinciding with Wednesday’s calendar start to winter, was one immediate factor driving up gas and electricity demand.
However, earlier in the week, Aemo had intervened to cap wholesale gas prices in Victoria and NSW at $40/gj after a retailer, Weston Energy, pulled out of the market a week earlier. It was caught out by rising wholesale prices that it couldn’t pass on to customers, a price vice that is squeezing a raft of other retailers.
A relatively calm day in southern states also saw wind generation fall away, particularly in South Australia, which responded by burning a lot more gas to generate electricity. Unusually, diesel generators were called on to meet about 10% of the state’s demand at times too. Gas-fired power plants in other states were also turned on.
What did regulators do?
Aemo declared a “Threat to System Security” notice at 11.13am on Wednesday for the Victorian market, to muster supplies and ensure forecast demand would be met.
It also activated its gas supply guarantee mechanism for the first time since its introduction in 2017 to ensure market participants were nudged to respond.
Some of the gas came down the south-west Queensland pipeline that is typically pumping south at this time of year, given Victoria’s relatively high dependence on heating. At 98% capacity on Thursday, or 397 terajoules, it was near its limit.
Lily D’Ambrosio, Victoria’s energy minister, said Aemo was “comfortable when it comes to us having sufficient gas supplies in Victoria [on Thursday] and that the outlook improves over the next seven days”.
While such confidence is encouraging, her state will dive back into wintry weather by early next week, with daytime temperatures barely reaching double digits.
The next two cold fronts destined for south east Australia. The first will slide away over TAS, but the second is expected to have more of an impact when it arrives on Sunday. pic.twitter.com/MCqRI46daw
— Andrew Miskelly (@andrewmiskelly) June 2, 2022
What other measures can governments take?
Media interest briefly focused on the Australian Domestic Gas Security Mechanism, a trigger set up by the Turnbull government in 2017 supposedly to keep gas exporters from gouging Australia.
However, as noted by Tennant Reed, an energy policy export at the AiGroup, the mechanism was mainly intended to ensure local gas prices were not higher than global ones, which is not our problem right now.
It also can’t be changed before next January without the new resources minister, Madeleine King, rewriting the rules, which would probably be resisted by the gas industry. Intervening to retain gas for domestic users – the bulk of it is now exported – would carry both diplomatic and investor confidence risks, Reed says.
The new climate and energy minister, Chris Bowen, conceded as much in his first media conference after being sworn in. “It’s not an easy trigger to pull, it’s complicated, and if it was pulled today it would have absolutely no impact until the first of January anyway,” he said. “It was not really designed to see existing contracts undermined.”
Any effort to mimic Western Australia’s 15% reservation of gas production for domestic use in eastern states would also face fierce opposition from the gas industry. Industry group Appea has argued each of the states has its own policies, making a common approach difficult.
“We are doing everything we can and we are at close to record production levels for local customers,” Damian Dwyer, Appea’s acting chief executive, said.
“We’re investing in more gas despite years of moratoriums, bans and delays, but we need investment certainty. The industry has invested over $20bn on supply in the past 18 months,” he said. “More can be invested under the right investment settings.”
Will anyone make money out of this?
Big gas producers such as Woodside certainly stand to make extra profit from the leap in energy prices. Still, as Graeme Bethune, chief executive of consultants EnergyQuest, notes most of Australian export are on long-term contracts with only marginal spot trading.
Shipments from the giant LNG trains in Gladstone were down in May from April, he says. April’s gas shipments were also lower than March’s, at 6.38m tonnes, so there is little sign of extra production.
Higher electricity prices would seem to favour the big three – AGL, EnergyAustralia and Origin Energy – which provide generation and own the biggest retailing outlets.
The Queensland government owns many businesses in the chain, and it has lately lifted its energy rebate to $175 from $50 per household to share the windfall.
However, Paul McArdle of energy consultancy Global-Roam says this week’s profit downgrade by Origin shows the spoils might be diffuse. In Origin’s case, problems with coal deliveries to its Eraring power station – Australia’s largest – meant it had to secure the fuel shortfall at elevated spot prices that it couldn’t pass on to customers.
Origin cut its profit goal for this year and scrapped its guidance for next year, copping a $2bn slashing of its stock market value from investors.
AGL, too, has struggled with coal plant outages so it could not supply all the power it wanted. Across the industry as much as 30% of coal plant capacity has been offline, although the present level has improved to about 20%, Dylan McConnell, an energy expert at the University of Melbourne, says.
What next?
The larger retailers will probably expand their market shares as smaller rivals bow out in droves as their hedges against high wholesale prices run out and they can’t avoid steep rises for customers.
ReAmped Energy, with about 70,000 customers, earlier this week was encouraging them to shop around for better details from other. On Thursday, it had started offering $100 vouchers to prod them out.
My energy provider is now offering me money ($100) to leave them
— Dr Liz Allen (@DrDemography) June 2, 2022
AiGroup’s Reed says the government should consider shorter term measures, such as targeted payments to low-income households or even small businesses that might otherwise go under. Labor’s $20bn rewiring of the nation plan will take years to have an effect.
By Reed’s calculation, supporting the bottom 10% of both groups would cost about $6bn over three years. “Given everything we’ve just been through with Covid, maybe those aren’t big dollars any more,” Reed says. “But it would certainly be a big deal for the government and their budgets to do that.”
The other way the issue might end up with Chalmers is via the Australian Competition and Consumer Commission, which monitors prices, profits and margins in the electricity market.
A spokesperson said the ACCC is on the lookout for any anticompetitive conduct that could harm consumers, and is due to report to the treasurer every six months.
