This is some very bad policy news:
The government is moving to weaken its $12 per gigajoule price cap for gas producers supplying the east coast market by allowing them to charge more, amid growing fears heavy-handed intervention is crashing investment and threatening future supply.
Labor said on Wednesday that it would extend without an end date the price cap, which was introduced in December to last for 12 months, but would allow for “exemptions” from the restraint if producers satisfied the competition regulator they would deliver gas to the domestic market.
In addition, “small producers” of gas will be exempt from the $12 cap altogether “if they supply only the domestic market”, a potential win for paused investments including the $1 billion Senex Energy Atlas project in Queensland backed by billionaire Gina Rinehart.
JKM and coal futures are still elevated all the way out to mid-2025:
I expect prices to fall much further, much sooner but the price cap extension is sensible given the above.
Meanwhile, power prices are expected to improve somewhat over the period:
But that is because today’s price spike is related to coal power closures, not fuel costs.
So, why gut the price caps then? Allowing exemptions makes no sense at all:
- Who is going to buy price-cap-exempt gas?
- Why would we even want price-cap-exempt gas given it is uneconomic?
- Why won’t large producers use exemptions to (rightly) argue that this is not competitive neutrality?
- Why won’t the gas cartel just ship more of the cheap gas offshore as more expensive price-cap-exempt gas stays here?
I agree with disgraced Credit Suisse analysis on nothing but this is right:
“It’s amateur hour policy making, focused on making things up as they go and trying to pressure the industry to be quiet about it, rather than actually delving into policy and market design,” Credit Suisse analyst Saul Kavonic said.
“Depending on Ministerial discretion, the policy could amount to being anything from a hard price cap for most of the market, through to a complete backdown from any meaningful price regulation. All to be decided case-by-case with no guidelines. Basically it is ‘the Government will make it up as it goes’ policy.”
No serious economist can put their name to this dog’s breakfast. It makes no sense. Nor does it make political sense given smashing the gas cartel is a huge political winner.
The only reason for this policy change that makes sense is that Albo has been bribed.
