Peter Dutton says his policies would reduce the wholesale price of gas on Australia’s east coast from $14 a gigajoule to $10 a gigajoule by increasing supply. He also argues that lowering the price of gas would lower the price of electricity. Such an apparently simple and appealing proposal deserves serious assessment.
Three key facts need to be considered:
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There is now not enough gas available outside the production of Queensland LNG producers to meet demand on the east coast, and that position is getting worse as long-term production in Gippsland in Victoria declines.
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East coast wholesale gas prices per gigajoule have risen from $8 to $10 in the second half of 2017, to about $14 today.
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Gas is needed to meet electricity demand when the mix of coal, hydro and renewables is not enough to meet demand. When this happens, the high cost of gas tends to push up the wholesale price of electricity.
The current market mechanisms, notably the Australian domestic gas security mechanism, introduced in July 2017 by the then prime minister, Malcom Turnbull, have ensured that the east coast has not run out of gas. If producers do not voluntarily provide sufficient gas to meet any shortfall, the federal minister for resources can limit or prohibit exports. So far this has not been necessary.
The depletion of gas resources on the east coast was always going to lead to higher prices. The war in Ukraine then dramatically lifted global LNG prices, with domestic wholesale prices reaching almost $30 a gigajoule. The Albanese government introduced a $12 price cap in December 2022. The impact has been limited by the way the price cap is managed, with the result that average producer prices in late 2024 were about $14 a gigajoule.
The Coalition’s view is that the price of $14 is unacceptable for Australian consumers, and generates unfair windfall profits for the producers. Recent history provides some support for this argument.
A Coalition government would impose some form of pressure on the LNG producers to meet any projected shortfall on the east coast, as they do now, but at a “fair” price decoupled from the international price.
The central proposal is to force gas into the domestic market such that oversupply drives down the price. This proposal is superficially attractive, but the Coalition has not explained what the process would be or how it would work in practice. Oversupplied markets do not tend to remain that way.
Further, demand and supply in the east coast market are quite dynamic, and the opposition has not explained how what appears to be a static process could respond to such market changes. Without more clarity, it is impossible to assess whether the Coalition’s idea would – or even could – meet what is a sound objective.
That objective for both sides of politics would seem to be for the domestic market to be supplied at a price that is fair to consumers – that is, no windfall profits, and at a price which producers would have been satisfied with before the war in Ukraine. Additional gas could then be sold overseas at whatever price the producers can get.
But it would surely be easier to place an obligation on the LNG producers to meet domestic contracts at such a price. The spot market would need to be maintained to meet unexpected circumstances. This price could then be reviewed and adjusted according to market developments.
The opposition’s announcement includes other mechanisms to free up large sources of gas and get them to market. But there is little detail on what gas, located where, and transported how.
Whichever side wins the May election will need to deal with the looming gas shortfall in Australia’s south-east. But short-term, superficially attractive ideas are not enough. Australians are owed a future gas strategy that looks to the role of gas in a net zero economy.
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