Frydenberg pays $300m to subsidise gas cartel’s $20bn theft

Nobody but MB readers seem to understand the level of insult for Australians Treasurer Josh Frydenberg is readying in the Budget:

Josh Frydenberg says he will deliver a responsible budget on Tuesday, after announcing the government will deliver cheques to four million welfare recipients to help pay their energy bills.

The Treasurer said now was “not a time for cash splashes” as he refused to say whether there would be more cash handouts to voters or further income tax cuts in his first budget.

“This is not a time for cash splashes. This is a time for responsible spending, targeted spending, in key areas that lifts the productive capacity of the economy,” Mr Frydenberg told Nine Network’s Weekend Today.

It sounds good until you understand why energy bills are so high and what Frydenberg is NOT doing to fix them. Last week the Asian LNG price collapsed to $6Gj. Under the terms of the Australian Gas Security Mechanism (ADGSM) that should equate to a local gas price of roughly $4.50Gj. Instead, today, it is $10.50Gj while Frydenberg’s government fails to enforce the agreement made with the east coast gas cartel.

The kicker is that every $1Gj move in the local gas price shifts the price of electricity on the east coast by $10MWh up or down. Given it is hovering around $100MWh, if the ADGSM were enforced then power prices would collapse to $40MWh.

That would deliver end user gas and power price cuts across the east coast of 60% and 20% respectively (assuming the wholesale price is 30% of retail). According to Canstar, the average power and gas bills for households are $1,800 and $1,200 per annum. In short, if the ADGSM were implemented properly then households would see an annualised cash windfall of $840 each over time. Given there are 8 million occupied dwellings on the east coast we are talking about a stimulus of $6.7bn per annum as contracts cleared.

The full scale of the theft is hard to appreciate when wider business consumption of gas and power is added. These volumes are roughly twice that of households. In other words, we are talking about utility theft in the vicinity of $15-20bn annualised that is stimulus foregone by every east coast household and business while the gas cartel is allowed to violate its own agreement with the government and Frydenberg hands out a $300m subsidy that goes straight back to it.

These are back of the envelope calculations only but you get the idea. The gas cartel that misallocated $80bn into white elephant LNG plants, has written off multiple billions, and lied about having enough reserves to cover domestic commitments, is now ripping up to $20bn annualised income out of the east coast economy to bail itself out.

Labor must act as soon as it takes power to enforce and strengthen the ADGSM. Put a permanent $6Gj ceiling price on it and create a dedicated regulator to police it. The AEMO and ACCC have failed apocalyptically.

David Llewellyn-Smith
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  1. Sounds like an incentive for them to gouge even further! If government are going to pay to cover some of the collateral damage caused by the way you do business, why not just go for broke and gouge for all it’s worth?

    • How would the gas cartel know if the house is getting a cheque or not?

      The ADGSM puts a cap on gas prices – the cap is too high and should be lowered by the ALP.

  2. SamscoutMEMBER

    Actually it’s the state governments who must act. They control gas reserves not the federal government. Qld labor flogged off all their gas assets and reserves under Bligh/Beattie. Nsw and Victoria have banned gas exploration – why don’t you call them out – there’s nothing the federal government can do except stop the RET which is a renewable subsidy paid for by the consumer.

      • SamscoutMEMBER

        High quality post there – care to point out what exactly is incorrect about my post or does your level of intelligence only allow you to smear without actually using any logic.

    • Hopefully the SA government declares the Leigh Creek gas reserves announced last week as a State Significant project, especially since the project covers the State Mining Minsters seat

    • SamscoutMEMBER

      I should point out that the coalition has tried to break up the big power companies from gouging but Labor has blocked it 12 times. Who would have thunk it – Labor looking after the big end of town – brings back memories of Keating allowing foreign banks into the country.

    • Good point about RET and the inherent stupidity in the way that this plan was structured.
      Serves no real purpose especially not with where we are on the Solar PV cost-curve.

  3. Just strengthens the doom loop

    Waiting for nsw libs to open new free interests scheme so we can upgrade from 3kw pv to 9kw + battery

    If you can afford the cashflow of approx 400 a month (pay off in approx 3 yrs)

  4. tripsterMEMBER

    The analysis is a bit simplistic, because gas retailers and industrial customers are, for the most part, not on spot price contracts. They are on long term supply agreements that have price reviews, at best, once every 12 months. So spot price movements over short periods don’t make much difference to domestic customers. Needs to be sustained over a longer period.

  5. Last week Leigh Creek Energy (ASX: LCK) announced that it had booked 1150PJ of gas Reserves, the same size as the Cooper Basin yet it barely got a mention in the media. If this comes online, it would solve the looming gas shortage plus some.

  6. I don’t know much about running a utility but I do know a lot about managing End-of-Life runout of a product.
    Make no mistake about it as far as Residential Electricity supply goes it is a product in End-Of-Life runout. Nobody really knows if the product still has 10 years left in it but nobody is expecting it to still be around in anything like its present form in 20 years. Residential Electricity will morph into a niche product for houses that are too shady to generate their own electricity and of course apartments (but there’s an expectation that this market will change substantially wrt the nature of the sale (individual retail shifts to apartment corporate body sales)). For everyone else our Electricity Generation and Residential level Distribution systems will be a place to dump our excess PV Electricity and also to Grab emergency (wet week / system breakdown / hot summers day) electricity.
    With this in mind it’s time for Electricity Wholesalers to gouge, it’s definitely time for Electricity Distributors to gouge and as a follow-on it is time for Electricity Retailers to gouge. As for the remaining customers well they’re royally F’ed…in a way being unmercifully F’ed is the impetus for many Residential laggards to get off their lazy fat butts and install Solar and batteries to meet their daily (read evening/night) electricity needs.
    The Electricity Market is signalling to the consumer, in the best way (the only way) that the market understands, and pointing out the actions the consumer needs to take….it’s just the way that markets work.
    This is End-Of-Life product management course 101….I don’t think there’s anything else that one needs to understand.

    • You nailed it fisho, it’s a gouge-a-thon from here on. Add in the fact that the cheap East Coast Gas is running out and the only way is up.
      All well and good except that gas is not just used for household energy, its also the only viable energy source for manufacturing things that need stable high heat so stuff like chemicals, aluminium, galvanising, steel etc. Everyone cops the effects.
      Ban The Neo-libs.

      • Well that goes without saying, after all tenants are the non-believers desecrating the Holy Church of the RE Ponzi.
        Tenants deserve their fate and landlords have a moral duty to enforce these Natural laws by preventing tenants escaping the consequences of their own inaction(not buying RE and further pumping up the price).
        A little extra Gouging is exactly what they’ve earned.

  7. MB readerMEMBER

    Macrobusiness will need to write a book about a number of the issues it writes about, including this one. This is so complex. It is rarely mentioned in the media, probably because journalists don’t understand it.

    • Well, RenewEconomy is corrupt and ignores the fact that gas is needed between sunset and sunrise.

      Batteries actually went up in price recently.

      Giles simultaneously says “we need a carbon tax” and “solar power is cheaper than coal power”!

  8. Francisco d'AnconiaMEMBER

    One thing this site has consistently missed is the math on energy prices. Only 600PJs of gas is consumed on east coast. No way even a $6/GJ price reduction on spot prices (not contractual) can lead to $6.7 billion in savings.