a glut of greed – on high gas prices and who’s to blame
Crisis? What crisis….?
So Australia’s industry minister Ed Husic has come out with a claim that I’ve heard from renewable energy journalists more than once before in recent times – that the gas industry is pocketing record profits while households suffer from record power costs. So what exactly is happening and how can it be fixed?
Husic’s remarks were blunt enough: ‘This is not a shortage of supply problem; this is a glut of greed problem that has to be basically short circuited and common sense prevail.” As I reported before, gas companies are more interested in exporting their product overseas, at great profit, than selling it domestically. All the major news outlets are reporting much the same thing – the political right, under conservative leader Dutton, is blaming the overly-rapid shift to renewables (he wants to open up more gas fields), and gas companies are playing the victim role.
The ACCC has been complaining for some time that there isn’t an effective mechanism to prevent gas companies from selling to the highest bidder, at the expense of the local market. There are, of course, worldwide gas shortages, causing the value of the commodity to shoot to record highs. The Financial Review reported on the situation back in July:
The ACCC says prices for east coast domestic gas that will be delivered in 2023 have rocketed to an average of $16 per gigajoule from $8 per gigajoule. Exporters have also dramatically widened the spread of prices offered to domestic buyers from between $7 and $8, to between $7 and as much as $25. This is despite the fact that the estimated forward cost of production is steady at just over $5.
The government clearly has little control over gas exporters – ‘gentlemen’s agreements’ aren’t really cutting it, and domestic costs are affecting businesses as well as households, adding to the many woes of local manufacturing. So I’ve turned to the ever-reliable Renew Economy website in the hope of hearing about plausible solutions. Their journalist Bruce Robertson, of the Institute for Energy Economics and Financial Analysis, is arguing for a gas reservation policy:
Such a policy on new and existing gas fields means gas companies must sell a portion of their gas into the domestic market – rather than putting it all out for export – with an immediate downward effect on prices. Similar to the reservation policy in place for over a decade in Western Australia, the east coast gas reservation policy could be set at $7 a gigajoule (GJ), a price allowing gas companies to achieve a profit over and above a return on investment. In turn, energy consumers would see their electricity bills cut.
It sounds like magic – like, if it’s that easy why wasn’t it done ages ago? The reason Robertson appears to be putting forward is price-fixing and the unwillingness of east coast governments, and the federal government, to deal with it:
In Australia, gas prices are fixed by a cartel of producers on the east coast… – Shell, Origin, Santos, Woodside and Exxon. For decades they have set the price above international parity prices.
It does seem, well, a little unseemly, that Australia, the world’s largest LNG exporter, is having to pay such exorbitant prices for domestic usage – though, in fact, other countries are suffering more. Locally though, South Australia, where I live, is particularly hard hit. Unlike the eastern states, coal plays no part in our energy mix – it’s all gas and renewables, with wind and solar playing a substantial part, more so than in the eastern states. And yet… Sophie Horvath reported in Renew Economy back in May:
A draft report from the SA Productivity Commission finds that despite the state’s solar and wind delivering some of Australia’s lowest wholesale spot prices, prices faced by the state’s consumers were around 20% higher than consumers in New South Wales. And it warns that without the rapid implementation of market and policy reforms, the situation for consumers will only get worse as more and more renewable energy capacity is added.
This sounds, on the face of it, as if SA’s take-up of renewables has backfired, but the situation is rather more complex, as Horvath explains. One problem is variable demand, which ‘produces challenges for the grid’, and another, highlighted by the SA Productivity Commission, is the ‘various market flaws that are stopping the benefits of renewables being passed through to consumers’.
So what are these market flaws? And what are ‘wholesale spot prices’ and why are they so different from the costs to suckers like us? Here’s an excerpt from a ‘Fact Sheet’ from the Australian Energy Market Commission about how the spot market works:
The National Electricity Market (NEM) facilitates the exchange of electricity between generators and retailers. All electricity supplied to the market is sold at the ‘spot’ price…. The NEM operates as a market where generators are paid for the electricity they produce and retailers pay for the electricity their customers consume. The electricity market works as a ‘spot’ market, where power supply and demand is matched instantaneously. The Australian Energy Market Operator (AEMO) co-ordinates this process.
The physical and financial markets for electricity are interlinked. Complex information technology systems underpin the operation of the NEM. The systems balance supply with demand in real time, select which generators are dispatched, determine the spot price, and in doing so, facilitate the financial settlement of the physical market. And all this is done to deliver electricity safely.
So far, this bureaucratic lingo doesn’t inspire confidence. Complex systems synchronise and balance everything, both financially and powerfully, ensuring our safety. Praise the lord. This Fact Sheet, from early in 2017, goes on for three and a bit pages, and I’m trying to understand it. Maybe Ed Kusic is too.
Meanwhile, back in South Australia, it was reported a few months ago that…
Tens of thousands of SA households are set to be hit with increased electricity bills after the energy industry watchdog made the ‘difficult decision’ to increase benchmark prices by hundreds of dollars a year.
So why indeed was this decision so ‘difficult’? The Australian Energy Regulator (AER – there are a headachy number of acronyms in this business), which sets the Default Market Offer (DMO) – a price cap on the charge to customers who, shockingly, don’t bother to shop around for a better deal – has increased the cap due to an 11.8% increase in wholesale electricity costs ‘driven by unplanned power plant outages and the ongoing war in Ukraine’. The fact that SA experienced massive power outages in the last 24 hours due to extreme weather conditions won’t help the situation. The Chair of the AER, Clare Savage, advises shopping around for cheaper deals rather than just accepting the DMO. The AEC (groan) also recommends shopping around, and even haggling for a better deal from retailers. The state government, in response to criticism from the opposition, emphasises focusing on the long-term and the ongoing shift to renewables. State energy minister Tom Koutsantonis expresses his faith – “Our government will reactivate investment in renewables as a hedge against price shocks on fossil fuels”.
Great – I can’t wait.
References
SA renewables surge bringing down energy prices, but consumers miss out
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