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The Guardian - AU
The Guardian - AU
National
Peter Hannam

Is Labor’s energy price relief plan really a ‘Soviet-style policy’ or an ‘Armageddon’ moment?

Gas extraction costs have barely budged since Russia’s invasion of Ukraine but prices for domestic customers have quadrupled, Anthony Albanese says.
Gas extraction costs have barely budged since Russia’s invasion of Ukraine but prices for domestic customers have quadrupled, Anthony Albanese says. Photograph: Dazman/Getty Images/iStockphoto

The Albanese government succeeded in passing its new energy price relief plan into law on Thursday, sparking claims the legislation resembles a “Soviet-style” policy.

Here’s what you need to keep in mind.

Who’s calling it a USSR-like move?

Kevin Gallagher, the CEO of energy giant Santos, decried the new policy, saying its reach potentially went far beyond the gas sector.

“If [the government] doesn’t like your business, your profits or the prices you charge for your products and services, it will regulate you,” he said. “And it will regulate you if the unions don’t like your business, your profits or the prices you charge.

“This Soviet-style policy is a form of nationalisation,” he said.

Gallagher, who drew the ire of investors earlier this year for receiving a $6m incentive to stay on at Santos and oversee the development of three big new projects, also likened the requirement to companies getting government agreement on new gas supplies to operations in Argentina, Venezuela or Nigeria.

“This policy has been built on a campaign to demonise the gas industry and will pit workers in manufacturing against workers in gas, pit gas producers against gas customers and destroy the longstanding relationships we have built over many years to support Australian industry with reliable, affordable energy – and sometimes subsidised gas,” he said.

Just hyperbole or ‘lippy executives’?

Gallagher’s comments join criticisms of the energy plan that it is like “Armageddon” and “a declaration of war on the gas industry”.

The government returned fire on Friday, with the industry minister, Ed Husic, dismissing “lippy executives” who want to “hold on to every single dollar of their Putin profits”, referring to the Russian leader who declared war on Ukraine and triggered soaring energy prices globally.

Manufacturing employs 900,000 people, Husic said, and capping the energy costs was about getting “the balance right across the economy”.

But the prospect of future intervention is real, with the amended act including market codes that require gas suppliers to offer prices that are “reasonable”.

The year-long price cap of $12/gigajoule was something the industry was getting “comfortable with” ahead of last Friday’s announcement, one official with a major energy supplier said.

The inclusion of an amorphous “reasonable” test, presumably to be administered by the ACCC, does open the door to a permanent intervention in one industry – for now at least.

What’s at stake?

It is true the gas industry is reaping massive windfall profits at the moment. (Similar profits are being made by coalminers but states regulate them.)

The prime minister, Anthony Albanese, said the gas companies “huffed and they puffed and they did nothing” about proposing alternatives that would have contributed to lower prices. (Here’s how the plan is supposed to work.)

Gas extraction costs have barely budged since Russia’s invasion but prices for domestic customers have quadrupled, Albanese said. Those costs “have not increased by any decisions” the government has made this past week.

However, that’s not how the gas industry sees it. For instance, Origin Energy has to invest money each year to maintain its annual gas output of 700 petajoules, much of which comes from coal seam gas wells that have a short life span.

About every second well they drill is a failure. How will imposing a “reasonable” rate of return test affect the next well, an expanded field, or a new field? Origin was still in the dark earlier this week.

Existing gas fields are in decline, particularly in Bass Strait. The Australian Energy Market Operator’s most recent gas opportunities statement said “south-eastern gas production will drop significantly from 2023”.

Gas pipeline capacity is also limited, so pumping the fuel south could be constrained. The AEMO also predicted “a risk of gas shortfalls under extreme weather conditions from winter 2023 in New South Wales, Victoria, Tasmania and the ACT”.

Most of Australia’s gas is exported on long-term contracts that can’t easily be broken. Switching from gas to electricity could help (although add strain to a creaking grid), as could boosting energy efficiency.

Or we could develop more gas fields. The new rules will discourage some of that investment. Such spending, though, is also opposed by the International Energy Agency if we are to meet the Paris climate goal of avoiding 1.5 degrees of warming from pre-industrial levels.

Next steps?

Proof that the gas industry is not yet toxic to investors came on Friday, with billionaire Chris Ellison launching a $403m takeover bid for Norwest, a company that has gas prospects in the Perth basin.

A consortium of Brookfield and MidOcean are also in the midst of due diligence as they decide whether to proceed with their $18.4bn takeover bid for Origin. They “noted” the government’s plans this week, and a bid verdict will probably be seen as a rejection or endorsement of the investment settings.

The gas industry is also reportedly considering a $20m advertising campaign against the government, modelled perhaps on a successful effort by the Minerals Council in 2010 to oppose the mining tax that ended up contributing to the toppling of then PM Kevin Rudd.

This time around, though, there will be widespread support for the government from households and energy users – assuming they accept the policy will lower their energy bills. (Treasury modelling that is yet to be released suggested household electricity prices were on track to rise 36% next fiscal year.)

Political backstory

The gas industry had been in the sights of the Albanese government almost since it took office in May and hit an energy crisis in the eastern states within weeks. Soon after the ACCC was warning of gas shortfalls if companies exported all their uncontracted gas supplies to take advantage of record global gas prices.

Through this period, the treasurer, Jim Chalmers, had been sowing the seeds for a heightened debate over energy. Unlike previous budgets, his October debut as treasurer detailed what was happening to electricity prices – up 20% this fiscal year and another 30% next – and gas – up 20% this year and next.

The shift to price curbs and a trailing future power were also a recognition that voluntary codes of conduct for a powerful industry were not going to be enough, nor a so-called gas trigger, the awkwardly named Australian Domestic Gas Security Mechanism, that could only be pulled once a year. Making the playing field level for domestic energy consumers needed more.

The gas sector concedes in private that they were caught on the hop by the government. Even those taking part in national cabinet last Friday, such as ACT chief minister Andrew Barr, say the longer-term consequences of the plan were not thrashed out. Agreement was, instead, “in principle”.

MPs who were briefed on the government’s plans on Saturday by the PM also say the “reasonable” provisions did not get an airing.

Email inboxes began filling up on Saturday as energy firms scrambled to understand what was going on. By mid-afternoon, analysts such as Mark Samter from MST Marquee were crystallising the anger, describing it as a “welcome to Armageddon” moment.

The policy unveiling was “shrewdly planned and executed”, the energy official said.

“There’s no excuse for the lack of engagement,” this person said. “It was a case of ‘like it or lump it’.”

Resources minister Madeleine King also lost some credibility with the gas firms, while Husic’s pull for his portfolio won the day.

“She’s been sidelined,” the energy official said. “Quite possibly hung out to dry.”

And it was not as though the gas industry didn’t have competition for the ear of ministers. The Energy Users Association of Australia, AiGroup, and other lobbyists for aluminium, chemicals and manufacturing hit the phones and secured meetings with ministers, particularly Husic.

Andrew Richards, the EUAA’s CEO, said his group walked out of roundtable discussions with the gas industry when it was clear they were not serious about contracting gas to his members at affordable prices.

“No one ever gives up market power,” Richards said. “It’s always regulated away from them.”

“We do it in pipelines, we do it in networks. We do it in electricity, retail, we do it in a whole range of other things, telcos, you name it, they’re all regulated,” Richards said. “So if the gas industry is now complaining about that, well, if you’re looking for a scapegoat, look in the mirror.”

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