16 Dec 2022

Op-ed: Reckless reforms will boost gas prices but not supply

This article originally appeared in The Australian on 16 December 2022.

‘Reckless reforms will boost gas prices but not supply’ by Samantha McCulloch, APPEA Chief Executive

Two decades of policy reforms that enabled Australia’s standing as a global energy powerhouse were unwound on Thursday, ignoring warnings this will lead to gas shortages and ultimately higher prices for Australian households and businesses.

The impact of this far-reaching and unprecedented intervention in Australia’s gas market is already evident. Previously agreed financing for new gas supply is being withdrawn and contract negotiations have stalled.

The uncertainty created by these reforms and measures to introduce a permanent, regulated rate of return severely undermines the case for investment in what is a high-risk, capital-intensive industry.

Some of the most credible and experienced global sources repeatedly have warned how this reckless decision to take a sledgehammer to Australia’s gas industry will reduce supply and increase demand.

As MST Marquee energy analyst Mark Samter said: “This is the single worst piece of energy policy I have seen anywhere in the world in almost 20 years of looking at global energy markets, despite staunch competition from many other dreadful policies around the world.”

David Maxwell, a member of the Australian Petroleum Production & Exploration Association board and chief executive of Cooper Energy, said: “In my 30-plus years in management roles in the gas industry I have never seen such destructive legislation.”

The industry wants to see downward pressure on energy prices and targeted relief for households and businesses; however, price caps and ongoing price regulation will have the opposite effect to that intended.

New independent modelling from economic advisory firm ACIL Allen to be released on Friday finds the impact of this market interference could see wholesale gas prices up to 40 per cent higher than if the market had been left to do its job.

In the long term, households could pay up to an extra $175 a year on gas bills while businesses cop a 40 per cent increase relative to a scenario with no price caps and in which planned investment is able to proceed.

The report also cautions that price caps will encourage additional consumption in the short term that could put significant strain on gas supplies. It warns of the potential for blackouts in Victoria as meeting peak day demand becomes more difficult due to delays in new supply coming online.

According to the report, these higher prices and energy security concerns are a trade-off for short-term benefits that “may be nil or very minimal in the first instance”. It is this near-sighted, populist stance of the government that is at the heart of the industry’s concern.

For the sake of a potential, if any, short-term fix, the government has dismantled a market that was working to deliver essential energy and that will play a critical role in transforming Australia’s energy systems towards net zero.

It has undermined the confidence to invest in an industry central to building Australia’s story of economic success – one that has been looked on with worldwide envy.

The gas industry has invested hundreds of billions of dollars that today support 165,000 jobs along the supply chain, powers millions of homes and businesses, supports economic growth and delivers cleaner energy to our Asian neighbours.

Between 2010 and 2020 alone, the gas industry invested an estimated $473bn in Australia, an economy traditionally viewed globally as a safe and stable place to invest.

But the government’s actions this week have severely threatened investment confidence.

The permanent regulation of gas prices through a mandatory code of conduct was done without consultation and was rammed through parliament in a matter of hours. This should alarm Australia’s business community, which expects to operate in an open, market-based economy.

As EnergyQuest found earlier this month, price regulation rocks investment confidence, reduces exploration, development and new supply, disrupts gas storage economics and makes liquefied natural gas imports to the east coast unviable.

Since coming to office, the government has consistently recognised natural gas as a key part of Australia’s cleaner energy future, backing up renewables in electricity, supporting manufacturing and providing a pathway to a hydrogen industry.

We saw this important role in the recent winter when coal and renewable generation faltered and there was unprecedented demand for gas in the electricity market – with demand increasing 55 per cent relative to the year before. The gas industry stepped up to ensure additional supply and keep the lights on and homes warm along the east coast.

The package of gas market reforms passed on Thursday will only add to energy system pressures and limit the ability of the industry to respond to future calls to boost supply.

The government now has unprecedented control over the Australian gas market, and with this must come accountability and responsibility. When investments in needed new supply are shelved and prices are higher, the government will have to explain why it ignored the warnings.

Samantha McCulloch is chief executive of the Australian Petroleum Production & Exploration Association.