The spectre of soaring power bills, a grim reminder of the global energy crisis triggered by Russia’s invasion of Ukraine in 2022, is once again casting a shadow over Australian households. With geopolitical tensions escalating in the Middle East, particularly following Iran’s response to US-Israeli strikes, the world’s energy security faces renewed threats of regional conflict. While the full extent of this unfolding crisis remains uncertain, the Australian government is asserting that the impact on domestic power prices will not mirror the extreme surges experienced in 2022. However, energy analysts caution that the nation is far from immune to potential price shocks.
So, what has changed in Australia’s energy landscape since the turmoil of 2022?
A More Resilient Domestic Market
One of the key factors contributing to Australia’s improved position is the forward-looking approach of energy regulators. Unlike the situation in 2022, recent forecasts indicate a sufficient domestic gas supply for the year 2026. Resources Minister Madeleine King has publicly stated that Australia is better protected this time around, with domestic gas prices currently remaining below the $10 per gigajoule threshold.
“The circumstances of 2022 are not going to be replicated here in 2026,” Minister King assured reporters. “There will be ripple effects, but we have the tools to manage that for the benefit of Australian consumers.”
In 2022, a significant contributor to the surge in power bills was the Australian gas industry’s strategic pricing decisions, which saw them capitalise on the global crisis by aligning domestic prices with international demand. This strategy reportedly led to an estimated boost in export profits ranging from $26 billion to $40 billion. To mitigate such occurrences, Minister King highlighted the continued effectiveness of a price cap of $12 per gigajoule for new domestic wholesale gas contracts, a measure introduced in 2022.
However, the effectiveness of this cap has been subject to scrutiny. Alison Reeve, Director of the Energy and Climate Change Program at the Grattan Institute, pointed out that certain loopholes meant the practical cap often hovered closer to $14 per gigajoule. Furthermore, she noted that this cap did not always prevent Australian power bills from rising, as it did not extend to the spot market, a crucial source of gas for power generation companies.
Government Safeguards and Future Resilience
Beyond price caps, the government has other mechanisms in place to ensure domestic supply. Minister King referenced an emergency “gas trigger” – the Australian Domestic Gas Security Mechanism – which she has the authority to deploy. This mechanism can compel gas producers to divert supplies to the domestic market in the event of a shortfall. However, energy analysts observe that this mechanism is considered a measure of last resort and has, to date, never been utilised. It’s also important to note that this trigger is primarily based on domestic gas supply forecasts rather than being a direct tool for curbing power prices.
Looking further ahead, the government is actively developing a framework for a domestic gas reserve, slated to commence in 2027. This initiative aims to set aside between 15 and 25 per cent of all gas extracted in Australia specifically for local consumption.
“The reservation we’re working on is about building resilience in supply, and making sure that not just Australian manufacturers but Australian consumers have the gas they need at affordable prices,” Minister King stated. “There’s no doubt when we see global shocks like this … it says to me we made the right decision to go down this path.”
Will a Domestic Gas Reserve Protect Australians?
The concept of a domestic gas reserve is intended to bolster Australia’s energy security. However, the reality of Australia’s energy market is complex. Despite abundant gas resources, Australian households, particularly on the east coast, have not always benefited from consistently low power bills. This is largely due to the prevalence of long-term export contracts with overseas buyers and the direct linkage of east coast gas supplies to the volatile global market through Queensland’s LNG export facilities.
Saul Kavonic, Head of Energy Research at MST Marquee, agrees that a domestic gas reserve could offer enhanced protection to Australians, but its efficacy hinges on its design.
“If you have a broad-based, well-functioning gas reservation policy, it will quarantine Australia from international gas price shocks,” he explained.
Mr Kavonic also raised concerns that gas companies might seek contractual protections that could potentially undermine the reserve’s intended effectiveness. Ms Reeve echoed this sentiment, stating that the extent to which a domestic gas reserve will exert downward pressure on prices is “very much going to depend on how it’s designed.” She elaborated that for the reserve to effectively lower prices, it would need to ensure a surplus of gas in the domestic market, as an oversupplied market naturally tends to drive prices down.
Increased Pressure on the Gas Industry
The gas industry’s role during the 2022 cost-of-living crisis, coupled with its reported windfall profits, significantly tarnished its public image. “One thing that I thought was really astonishing last time was, when the prices shot up to things like $30 a gigajoule, at no point did the gas industry realise that this was going to be politically untenable,” Ms Reeve remarked.
With the government’s domestic gas reserve policy still in its developmental stages, Mr Kavonic believes the industry is facing heightened pressure to avoid exploiting the current geopolitical conflict. “I think there’s a much more heightened awareness of their social licence and responsibility to Australia’s domestic market,” he commented. “But overlaying that is the threat that the government could intervene very heavily if they are seen to be taking undue advantage of the situation to the detriment of Australia’s gas users.”
In light of the current global situation, Independent MP Allegra Spender has advocated for the government to implement a windfall tax on gas and oil sold at inflated prices during the Middle East conflict. “These are Australian resources and the Australian public deserve to share in these gains from war-driven price spikes,” she argued.
Budgetary Benefits Amidst Global Shocks
Australia’s standing as the world’s third-largest exporter of Liquefied Natural Gas (LNG), trailing only the United States and Qatar, means that the current global energy crisis presents a mixed bag of outcomes. Mr Kavonic noted that this situation is “actually good for Australian exports and Australian taxes.”
Disruptions to critical shipping routes, such as the Strait of Hormuz, have significantly impacted global LNG supplies, preventing approximately 20 per cent of the world’s LNG from reaching the international market. This scenario positions Australia as a more attractive and reliable source of LNG for Asian markets.
Australia’s substantial LNG export industry contributes billions of dollars to the federal budget through export revenue, corporate taxes, and the Petroleum Resource Rent Tax (PRRT). Despite these contributions, there is ongoing pressure from some critics for the government to increase these taxes further. In a recent parliamentary move, Independent Senator David Pocock introduced a motion proposing the establishment of a Senate committee to scrutinise the amount of PRRT paid on LNG and explore avenues for generating additional government revenue.
