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“It will be an expensive winter”

What's going on with gas prices?

What’s going on with gas prices?

Australian gas prices have spiked, especially in Victoria.

Treasurer Jim Chalmers has called it a “perfect storm” and warned of an “expensive winter”. An energy policy expert tells TDA there is no easy short-term solution.

What’s going on? Here’s what you need to know.

The problem

For most of this year, the average price of gas has been about $10 a gigajoule (about two weeks of normal usage for a house with gas cooking and hot water).

In Victoria, the wholesale price would have hit $800 a gigajoule last week, however the independent Government energy market regulator, the Australian Energy Market Operator (AEMO), stepped in and used its powers to cap the price at $40 a gigajoule in Melbourne, Sydney, and Brisbane.

Will that affect me?

Maybe not immediately. The Government regulates a “Default Market Offer” for power prices, which caps the price that electricity retailers can charge consumers on default plans.

However, this gets reviewed every year, and regulators have announced default prices will increase from 1 July in Victoria, NSW, SA, and southeast Queensland. So higher power prices are coming.

Price spikes could come sooner if you’re on a variable plan. Energy company ReAmped, which offers variable plans, told its customers to leave last week as it can no longer guarantee low prices.

Why is this happening?

Grattan Institute energy expert Tony Wood tells TDA there are several causes.

Reason one:

Gas isn’t just for stoves, it’s also a backup electricity source. Gas has had to do more heavy lifting this year because of frequent failures at coal plants. Origin Energy’s CEO said today improving coal reliability was an urgent priority to ease prices in the short-term.

Wood says it’s “inevitable” coal power stations will be less reliable as they age, creating problems until we have enough renewable energy to reduce coal reliance.

Reason two:

We were running low on gas to begin with. Australia has a history of cheap and plentiful gas, but we’ve used a lot of it up, especially in Victoria. “The resource we’ve depended on for the last 50 years is running out,” Wood says.

Reason three:

Europe is desperate for the gas we have. European countries are trying to use less Russian gas to punish Russia for its invasion of Ukraine. This reduced global supply has pushed up global gas prices.

Reason four:

It’s cold. Cold temperatures across eastern Australia have seen a spike in demand for heating. The problem was especially bad in Victoria because the state has significantly higher levels of residential gas usage compared to other Australian states and territories.

Wood says even though the current spike won’t see us run out of gas or electricity, climate change will make these problems more frequent.

What can be done?

In the short-term? Not much. As well as capping prices, AEMO used the Gas Supply Guarantee mechanism earlier this week, which allowed as much gas as possible to be diverted into the system for domestic use – most of it from Queensland – where a lot of gas is exported from.

There have also been some calls for the Government to use the Australian Domestic Gas Security Mechanism. This is a mechanism introduced in 2017 which lets the Government limit exports in the event of a gas shortage.

However, Wood says limiting exports wouldn’t make much difference in the short term. That’s because taking gas from Queensland, where it is awaiting export, and using it in southern states relies on a single pipeline, and that pipeline is already operating at full capacity.

Energy Minister Chris Bowen has also pointed out the mechanism wouldn’t take effect until next year if used today. Bowen did not rule out using the mechanism, but said the Government would avoid “knee-jerk reactions”.

The Renewable Transition

Wood says this week’s issue highlights the urgency of transitioning out of gas and coal and towards more renewables, including building the infrastructure to transmit and store renewable power.

He argues Australia’s successive federal and state governments over the last two decades have not done enough to prepare for this challenge.

Bowen agrees: “More renewables puts downward pressure on energy prices.”

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