The Situation with the Price of Gas in Australia over the Last Ten Years

Introduction

The energy sector is significant part of the Australian economy. Australia’s energy production and exports have grown strongly during the past 30 years, especially in recent years in response to strong global demand for energy. Australia’s energy sector supports a range of industries, and provides employment and important infrastructure development in remote and regional areas. This section examines the key factors that affect energy markets in Australia, and provides an overview of current Australian energy production, consumption and trade.

Electricity and gas prices for industrial businesses and households have increased sharply in last ten years and situations are indicate that the prices will continue to increase. The underlying cause of these increases is different for electricity and gas and the contribution of each factor is also different for each state and territory.

Responsibility for regulating the electricity and gas supply industries is shared between the Australian and state and territory governments. The Australian Government can only directly influence price outcomes in a small way. Its key role is in coordinating and incentivizing action by state and territory governments.

Analysis

Over the 6 years between 2006 and 2014 Australian electricity and gas prices have gone through an extraordinary escalation, both rising more than 100% in some states. Furthermore, gas prices are continuing to rise.

High energy prices have largely been attributable to policy and regulatory interventions of one type or another but particularly to the economic regulation of networks in some key states and the application of a countless of greenhouse gas mitigation measures. In 2007-2008, it became apparent that electricity prices could escalate based on the likely regulatory outcomes from the network pricing reviews for NSW distribution entities.

It had been prefigured since 2004 that network pricing reform would be required to manage the impacts of air conditioning load at peaks. The 2009-2014 NSW network revenue determinations were the first under the new Australian Energy Regulator and coincided with:

• Very uncertain future for economic growth due to the global financial crisis (GFC),
• Claims for major upgrades of ageing assets, driving historically high capital investment in the networks, and
• Move to prescribe (through jurisdictional regulation) much higher levels of reliability in some areas.

The impacts were also highly predictable and are still playing out in the economy in terms of generational industrial restructuring recent high profile cases such as packaged food and car manufacture for example have a significant energy component.

Again, industrial restructuring is not a new phenomenon in Australia as during the late 1980s and early 1990s we saw the rapid decline of the textiles, clothing and footwear industry, or “rag trade”, once tariff protection was removed. There was a rapid restructure in terms of lost jobs in the sector and a shutdown of plants that had been operating for many decades.

Conclusion

This story is being repeated in the gas industry, albeit driven by different factors. The market prices for gas are escalating on the east coast in response to a huge demand for indigenous gas for LNG production and export, driving up the value of new gas and hovering up existing low cost of production gas. Some new price/demand balance will eventually emerge on the east coast domestically reflective of costs of production (as we are now seeing in Western Australia) as the price bubble drives both demand and supply responses.

But once again policy issues are limiting the ability to bring on new production in some sectors and the network impacts are yet to materialize. As outlined, investment in network assets comes from either growth in demand or from increases in prices (or a combination of both) and high prices are already driving down demand for gas.

The impact on gas use for power generation due to the combined effects of reducing electricity demand and escalating gas prices is becoming stark several gas generators have shut down or significantly curtailed production and resold their gas contracts (profitably) in 2013 and early 2014. The flow-on to industrial and domestic use is set to go the same way as electricity demand down.