Gas price caps in Australia will lead to drop in supply: EnergyQuest
Gas price caps in Australia could lead to a decrease in long-term supply and a high subsidy burden for the government, energy consultant EnergyQuest said in a report published on December 1.
“At the wholesale level, price caps have the effect of decreasing long-term supply as capital investment is deferred or redeployed to higher priced markets or better economic opportunities,” EnergyQuest said.
“At the retail level, the cost of subsidising gas prices can be enormous – EnergyQuest estimates this would be in the order of A$1bn per year for gas for just spot markets,” it added.
EnergyQuest said that price caps do not address the cause of high domestic prices - lack of new gas supply and volatility in demand from the electricity market with the transition to renewables. The long term net effect of a price cap is to increase demand with lower prices, and decrease supply with lower economic returns – the opposite of what is required, it said.
Australian media has reported that the federal government will likely cap wholesale gas prices at about A$12/gigajoule as a measure to curb rising power prices.
EnergyQuest’s A Review of Gas Cap Pricing report was commissioned by Australia’s peak oil and gas body Appea.
Appea CEO Samantha McCulloch said the report demonstrated the risk of intervention and that the government should allow the existing mechanisms of a heads of agreement and Gas Industry Code of Conduct to work.
“The report shows that gas price controls won’t solve the pressures in the national energy system and would lead to even larger problems and higher prices down the track,” she said. “We need to look at the entire energy supply chain for solutions, not isolate only one part of it.”
McCulloch said gas can play a part in that solution by bringing on new supply to put downward pressure on prices.
“But this can only be done when positive investment policy settings and regulatory certainty encourage new investment. Intervention does the opposite,” she said.
McCulloch said the unintended consequences of market intervention underscored the necessity of early consultation with industry.