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Rising gas prices have been described in various ways as “apocalyptic” and “a perfect storm.”
But Australia’s energy problems did not come out of nowhere. The confluence of economic, geopolitical, political and even short-term and long-term forces have led to rising prices.
The consequences for households and businesses are now inevitable.
Why have prices skyrocketed? And is there anything that can be done?
Credit: Illustration: Jamie Brown
Why have gas prices risen so fast?
Much of the history has been the war in Ukraine.
Energy prices were rising before the Russian invasion as the world economy accelerated to emerge from a pandemic-induced fall. But the conflict sparked a sudden and dramatic global supply shock, as companies and governments around the world turned down Russia’s huge oil and gas supplies.
As the brutal invasion of Russian President Vladimir Putin escalated, millions of barrels of Russian oil per day were withdrawn from world markets and several massive energy infrastructure projects were abandoned.
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The impact has not been different from that of the 1973 oil crisis, when members of the Organization of the Petroleum Exporting Countries imposed an oil embargo on countries that had supported Israel during the Yom Kippur War. The 1973 crisis finally led to a dreaded combination of stagnant economic growth and high inflation. Economists called it “stagflation.”
There have also been domestic forces working. Australia’s aging fleet of coal-fired power plants has been hit by unplanned outages. This has cut off the supply of electricity to the energy grid, adding to the pressure on the gas, which (unlike coal) can be activated in a short time as an alternative source of electricity generation.
About 85 to 90 per cent of Australia’s gas market is covered by long-term contracts between suppliers and companies known as gas supply agreements, according to Damian Dwyer, Acting Executive Director of the Australian Production Association and Oil Exploration. This has limited the impact of the extraordinary rise in prices, for the time being.
Dwyer said the rest of the market is covered by more volatile immediate “spot” prices, subject to the whims of global markets. One way or another, high spot prices tend to generate higher costs as new contracts are negotiated.
“Coal prices have skyrocketed and there have been disruptions at several coal-fired power plants, rising electricity prices and rising gas demand to power gas power generators that were suddenly put on hold. operation, “Dwyer said.
Time has also played an important role. Floods in Queensland and NSW affected the coal supply. And a recent cold season has further fueled the demand for gas to heat homes, making prices even higher.
The situation has not been helped by relatively low electricity generation from renewable sources. According to market analyst EnergyQuest Australia, cloudy weather caused a 27% drop in solar power generation in May compared to April, while wind power fell around 1, 9%.
All this supported an extraordinary increase of 34.6% in the use of gas energy in May, which in turn has brought prices to stratospheric levels.
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New Treasurer Jim Chalmers described it as “a perfect storm,” warning that it was doing enormous damage to households, businesses and the national economy. Australian Industry Group CEO Innes Willox said it was “apocalyptic”.
As Meg O’Neill, chief executive of the country’s largest oil and gas producer, Woodside, put it this week: “There has not been a crisis of this nature since the 1970s.”
One-off electricity prices, which represent the immediate market price, this week have approached $ 1,000 per megawatt-hour, or about 80 times the normal level. The increase prompted the Australian energy market operator to set a maximum price of 40 gigajoules (GJ), which was still well above average.
What can the federal government do about it?
In 2017, the then coalition government introduced an emergency power called the Australian Gas Reserve Mechanism, which allows the government to keep more gas for domestic use in a supply crisis instead of selling it for export. More than 70 per cent of Australia’s domestic gas supply is exported.
But according to current rules, export control could not be used until January 1 at the earliest, to give time to consider whether there will be a deficit, and only if there is a shortage of gas.
This time, the problem is not gas shortages but rising prices. In other words, in the absence of direct subsidies, the government can do little to control prices in the short term.
On Wednesday, Australia’s new Minister of Climate and Energy, Chris Bowen, ruled out using the mechanism in the short term.
“It’s not an easy shot to shoot; “It’s complicated, and if it were to be withdrawn today, it wouldn’t have any impact until Jan. 1,” Bowen said. “It wasn’t really designed to undermine existing contracts.”
The government is also deeply reluctant to activate export controls, fearing that it could jeopardize Australia’s reputation as a reliable international exporter, especially when other countries bear the cost of sanctions imposed on Russia.
How long will this situation last?
This depends on a number of factors, such as the performance of coal generators and the amount of wind and solar energy generated during the winter, said EnergyQuest CEO Graeme Bethune.
In the long run, years of political inaction and false starts in energy and climate policy have exacerbated Australia’s problems. According to experts, these problems include the lack of investment to build the transition and the storage needed to improve the reliability of the network and keep prices low as the absorption of renewable energy increases.
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According to Tony Wood, director of the Grattan Institute’s energy program, uncertainty dates back to Tony Abbott’s decision to eliminate the former Labor government’s carbon tax in 2013, and later to the decision. of Scott Morrison to Remove Malcolm Turnbull’s National Energy Guarantee in 2018.
He said Australia would have been in a much better position to handle the crisis if the federal government had provided the market with more security.
“We wouldn’t have had all the coal-fired power plants closed yet,” Wood said. “But we would have had a much clearer view of how this is developing.”
Driving on Sundays was banned in some European countries during the 1973 oil crisis, which boosted alternative modes of transport. Credit: Getty Images
So what does all this mean for your electricity bill?
You can get an idea of where energy prices could go from a recent ruling by the Australian Energy Regulator, which sets out basic price increases for the “default” energy bill at NSW, Southeast Queensland and South Australia. He said that as of July 1, basic household electricity bills could rise to 8.2% above inflation.
He said that since its last determination a year ago, wholesale electricity costs for retailers, which supply us all with our energy, had risen 41.4% in NSW, 49.5%. % in Queensland and 11.8% in South Australia, due to the shutdown of power plants, rising coal and gas prices and the slowdown in investment in new capacity, among others.
And electricity prices could rise further for customers forced to sign new contracts in the coming months, warned energy market expert Gavin Dufty, who is the policy and research manager at the St. Vincent de Paul Society. in Victoria.
Australia is less dependent on gas and coal for its electricity than before. But as long as prices remain high, the electricity bills faced by consumers and businesses will also remain high.