Why are Australian Gas prices high?

Australian manufacturers facing massive increases in gas prices are warning they could be forced to shut, with tens of thousands of jobs on the line. 

Gas prices on the spot market have quadrupled amid supply constraints, local coal-fired power station outages, and the war in Ukraine. 

Australia's largest plastics producer Qenos buys about 40 per cent of its gas on the open market. 

"Prices have gone up in the spot market to between $30 and $40 a gigajoule. In fact, that's in a month alone, that's an increase of 300 to 400 per cent," Qenos chief executive Steve Bell said.

"For energy-intensive businesses like ours that is not sustainable."

Most energy-intensive businesses are on cheaper long-term contracts. But Steve Bell says if prices don't come down by the time companies are coming off those contracts, it won't just be 750 jobs at his company that are on the line.

"If we can't get, as a country, more competitive energy inputs into our industrial base, then a lot of jobs are at risk in in the Australian manufacturing sector," he said.

"Our competition is from overseas. And if we don't have competitive inputs with what our competition has, we can't compete in the market."

Typically, manufacturers on contract rates pay around $10 a gigajoule. The price on the spot market was similar but now those relying on the spot market are paying $40 a gigajoule -- and that's after the Australian Energy Market Operator (AEMO) imposed temporary price caps on the New South Wales, Queensland and Victorian markets.

On Wednesday, AEMO triggered the Gas Supply Guarantee Mechanism for the first time since it was introduced in 2017. The mechanism calls for the market to release supply and come up with a plan to address a potential shortfall.

Analyst Gilles Walgenwitz said without enough renewables capacity in the grid to make up the shortfall, local coal fired power station outages were also pushing up gas prices. 

"We have about six gigawatts of coal capacity missing in Queensland, six gigawatts in New South Wales. That's huge, when you compare to the total capacity normally available," he said.

"And so, we have much more gas power generation coming into play to meet the demand and it happens that at the same time, the price of gas is extremely high."

Australians pay global prices 

The prices we pay for coal and gas are linked to the international market, despite Australia being a major exporter. 

"The European countries need more gas to replace pipeline gas from Russia, they are therefore very eager to contract for liquefied natural gas that puts lots of pressure and demand pressure on the Asian LNG price," Mr Walgenwitz said.

Mr Walgenwitz said one solution is for exporters to charge domestic users less.

"There is a disconnect there. This could be sorted by the federal government in the short term."

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In Western Australia, 15 per cent of liquefied natural gas available for export must be reserved for domestic use, which has kept prices at around $5 a gigajoule. 

Manufacturing Australia, which is the peak body for big companies like CSR, Incitec Pivot and Brickworks, wants help for the east coast. 

"If you manufacture in Australia, you're essentially in most cases, a trade-exposed business. So you are limited in the extent to which you can pass input cost increases on to your customers," he said.

Mr Eade said it was hard to put a number on how many manufacturing jobs are at risk, but the industry employs close to one million people in Australia.

"We could see energy prices like this, both in electricity and gas prices will reverberate right through supply chains," he said.

"So it's not about individual businesses, although clearly there are a number of businesses under acute pressure. But what we could see is a real dismantling of entire supply chains, in manufacturing, in agriculture and in other parts of industry and in transport.

"The government should invoke the Australian domestic Gas Security Mechanism because what we're experiencing in eastern Australia right now is exactly the set of circumstances for which that mechanism was designed.

"We have an external shock, which has created severe disruption to global energy markets."

Government's 'gas trigger' explained

As gas prices rocket upwards, the federal government is fielding questions on whether it would use its "gas trigger" powers to force gas exporters to keep supplies onshore.

The mechanism was introduced by then-prime minister Malcolm Turnbull in 2017, giving the Australian government the option to intervene, or to use the threat of intervention, to see more gas kept for domestic use.

But business groups warn it could affect Australia's reputation as a reliable trading partner. 

"The federal government would also need to be ready, both for a very strong pushback on export controls from the domestic industry, but also they'd face a lot of intense questions and pushback diplomatically from our trading partners and our security allies," Australian Industry Group (AiGroup) head of climate, energy and environment policy, Tennant Reed, said.

Shell Australia Country Chair Tony Nunan said continued investment in Australia's energy sector was the best way of providing long term certainty for customers.

When asked whether companies like Shell were profiteering from the energy crisis, Mr Nunan said: "Our real focus is on supporting our customers to be able to get the energy that they need to be able to help them through the difficult period.

"But we've also got to remember if we look over the 12 months, we've actually had a really stable period of gas prices here in Australia. 

"In Melbourne, for instance, the average price is set between about $8 and $12 Whilst the international price was the equivalent of $30."

Textiles company on the brink

In Melbourne, one of Australia's last remaining textiles and dye house, Flickers, is now completely exposed to the spot market after its gas retailer Weston went bust.

The producer of fabric for the Australian cricket team's baggy green caps, which also printed fabric for uniforms worn at the Sydney Olympics, is now facing the prospect of closing down. 

Owner of Flickers, Yaron Flicker, said 40 staff at the factory and 500 indirect jobs are at risk. 

"It is absolutely devastating," he said. 

"It's one thing to talk about supporting the local manufacturing industry, but you need to do something, not just talk about it."

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Weston supplied gas to about 7 per cent of the market for industrial and commercial customers on the east coast. Its collapse has left hundreds of customers scrambling to find new contracts.

"They're having trouble securing gas contracts and it is impossible to find gas contracts at a price that is anywhere near reasonable," said energy consultant Mark Searle, who is working with hundreds of affected businesses. 

Mr Searle said in the short-term businesses needed price controls, but in the long-term the energy market needed a structural overhaul.

"Let's be realistic, they [exporters] have a duty to their shareholders to make a profit," Mr Searle said.

"If the international price goes through the roof because of a problem in Europe, that doesn't mean our price should go through the roof and force local manufacturers out of business."

Consumers will also be hit

It's not just an issue for businesses. Flickers has already been forced to pass on some of the costs to its customers. 

"Some of our customers have cancelled contracts," Mr Flickers said.

Steve Bell said when businesses hurt it adds to cost-of-living pressures. 

"At the kitchen table at home, people are also going to be dealing with bigger gas and electricity bills," he said.

"This is going to lead to inflation and all the stuff that everyone's worried about in terms of the economy, because eventually there's going to be a market reaction."

Australia 'on the brink' of energy crisis

Australia is on the "precipice" of a UK-style crisis that could send power retailers broke and fuel a surge of energy poverty, expert says.

Mr Reed said if energy prices did not come down, another solution was for governments to provide financial assistance.

"We'll be talking big dollars. Based on the proportion of households in poverty, and some ballpark figures for the businesses that are most exposed, over the next three years, we'd probably be talking another $3 to $5 billion of spending."

Mr Reed has based his calculations on an estimation that 10 per cent of businesses and households would be at risk.

The UK government has announced a 25 per cent windfall tax on oil and gas producers' profits and a 15 billion pound package of support for households struggling to meet soaring energy bills. 

Posted 2 Jun 20222 Jun 2022Thu 2 Jun 2022 at 6:47pm, updated 3 Jun 20223 Jun 2022Fri 3 Jun 2022 at 12:31am

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  Crude oil is an internationally traded commodity, and its price is determined by changing supply and demand factors. So when COVID-19 restrictions began easing and global demand for crude oil increased due to higher mobility, the more costly price of fuel in Australia was passed onto consumers.

  Why does Australia have a gas crisis?

  Daniel Toleman, Principal Analyst, Global LNG for Wood Mackenzie said: “This recent crisis was caused by a perfect storm of under-investment in new energy supplies, as well as cold weather hitting at the same time as coal outages and supply shortages, low renewable generation and high global commodity prices.

  Why are Australian energy prices so high?

  While we are adding renewable forms of electricity, like solar and wind power, at record rates the majority of Australia's electricity still comes from coal- and gas-fired power stations. The price of coal and gas has gone through the roof in 2022 because of an international shortage of these fuels.

  Why are energy prices going up in Australia 2022?

  "Australia is not immune to the global challenges driving higher global inflation and slower global growth. Domestic inflation is forecast to peak at 7¾ per cent in the December quarter of 2022," budget statement two reads. "Supply disruptions have resulted in large price increases in home building, fuel and energy.