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      Gas, Policy & Regulation — 6 mins read

      Has the gas price cap been effective at regulating prices?

      The federal government’s cap on wholesale gas prices under the Mandatory Gas Code of Conduct is now in place until July 2025. 

      Implemented in a bid to protect consumers and businesses from the “worst impacts” of gas price hikes sparked by the war in Ukraine, and exacerbated by low supply, the $12 per gigajoule cap has drawn a mixed reaction. 

      Has it been effective, and are there better alternatives?

      The challenges of the price cap mechanism

      One of the main problems with the cap, which applies to contracts by east coast producers, is that it reduces revenue for gas companies. This can lead to capital investment being deferred, which in turn puts pressure on supply. 

      Head of Gas at ICAP, Alan Mitchell, points out that price signals help companies make investment decisions when developing new supply, or turning down supply.

      “From a market’s perspective, price capping dulls the market signals required for future investment and development of the gas industry and markets,” he says.

      Jim Snow, Adjunct Professor, Energy Initiative at University of Queensland, and Executive Director of Oakley Greenwood, thinks the price cap mechanism was implemented with the right intentions. 

      But he says it was always going to be problematic because there was a lack of consultation upfront, and the process was rushed. 

      Both Mitchell and Snow feel a price cap also slows down clean alternatives to gas entering the market, with Mitchell pointing out the gas industry needs to support the transition to a low carbon future. 

      “Without gas firming up renewables through the transition to maintain reliability, as coal fired generators retire, we may well see an increased risk of blackouts due to shortfalls,” Mitchell says.

      Snow considers a price range of $12-$15 to be about the right number for alternatives (such as biogas) to come onto the market.

      “But under $12 it becomes extremely difficult,” he adds. 

      He says it makes more sense to allow the market to trade and the price to settle, which will make room for clean alternatives. 

      Are there too many exemptions from the price cap?

      Enforced by the ACCC, the Gas Code allows some participants an exemption from the price cap, based on certain conditions. This includes small domestic suppliers, retailers and trading exchanges. 

      There is some commentary in the industry that the high numbers of exemptions render the Gas Code largely ineffective. 

      Snow certainly takes this view. He said while some exemptions were certainly necessary, they have become wide-ranging.

      “There have been so many exemptions, we were wondering to ourselves who isn’t exempt!” he says.

      According to Snow, the current short-term gas markets indicate that the $12 has become more of a floor price than a cap. 

      “Having granted huge exemptions, why would you sell gas for less than $12?” he asks.

      However, he says if the cap was set at $12 without exemptions, we would have been “headed for catastrophe”, with reduced investor confidence resulting in lower supplies and higher prices.

      Mitchell, on the other hand, doesn’t believe there have been too many exemptions.

      “The limitations under the original legislation hamstrung the market and made it very difficult for participants to optimise portfolios,” he says.

      “With the recent exemptions, the market is allowed to find some form of ability to optimise again. It also allows producers to regain some focus on future investment in projects.”

      Has the price cap reduced prices for consumers?

      Snow doesn’t think so, due to the cap putting pressure on supply. 

      Mitchell says he has seen some softening of pricing, but this may not be due to the cap. 

      “Much of the supply demand balancing this year has contributed to pricing softening. With LNG outages at Gladstone reducing demand and increasing supply back to the market, as well as a mild winter and low electricity demand, we have seen prices settle around the $10-12/GJ space,” he says.

      “It’s hard to say whether that price capping has contributed to this price relief other than providing a bit of a proxy level for all buyers. No additional supply came to market based on the cap.”

      APPEA Chief Executive Samantha McCulloch says the test for the Code will be if it can support the investment that is urgently needed to bring on new supply.

      “After more than six months of uncertainty as the Code was developed, investment in new gas supply is now urgently needed to avoid shortages that will add to energy security concerns and cost of living pressures for Australian households and business,” she says.

      What are the alternatives to a price cap? 

      Snow believes other options should have been explored, such as a super profits tax, using the revenue from this to compensate the people most impacted. 
      Mitchell concurs. 

      “Taxing excess profits to subsidise some of the price rises seen in the short to medium-term market may have been a better option rather than capping the price,” he says.

      “This way, the end user receives some relief while not impacting the investment in future projects, or Australia’s international trade relations. We are likely going to see significant impacts here over the next decade.” 

      However, Snow says Treasury was reluctant to consider the profits tax option, due to concerns it might add to inflation.

      What’s next?

      Snow questions the need to heavily regulate the gas industry, especially as gas will be phased out in the future. 

      He notes that energy policy between gas and electricity is very different for no apparent reason. 
      “It would be better for gas to mimic what happens in the electricity sector,” he says.

      McCulloch says that AEMO and the ACCC have warned of gas shortfall risks during peak winter periods from this year, and structurally from 2026-27. This carries severe risks to the economy.

      “It is critical that the upcoming Future Gas Strategy delivers the long-term economic, energy security and emissions reduction opportunities associated with Australia’s natural gas resources, while ensuring sufficient gas supply in the near to medium-term,” she says.

      Tess Oliver, Article Writers Australia

      Energy Monthly

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      September 3, 2024 | Aerial UTS Function Centre | Sydney

      Industrial Net Zero Conference 2024

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