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GAS PRICE CHAOS FORCES CAPS (AFR)

A forecast spike in wholesale gas prices in Victoria of more than 50 times normal levels has prompted the Australian Energy Market Operator to impose a price cap, after a polar blast hitting Victoria has driven up household demand to record levels and more gas is used in power generation.

Australian Industry Group chief executive Innes Willox described the recent energy price rises as “apocalyptic”, and said they “threaten chaos for industry and pain for households”.

The surging gas prices come on top of big jumps in wholesale power prices that have swept across the National Electricity Market.

They come after the failure of NSW gas retailer Weston Energy last week resulted in hundreds of customers being transferred to other retailers and put on tariffs based on spot prices.

AEMO has capped prices over the past few days in the Sydney and Brisbane markets. On Monday, it imposed a price limit in Victoria after spot prices were set to soar to $382 a gigajoule.

The shadow price for gas that would apply if the cap were not in place spiked again on Tuesday morning to an unheard-of $800 a gigajoule. Manufacturers typically pay less than $10/GJ if they are on contract rates.

The crisis that has gripped the east coast gas market – and which has been exposed more fully since the failure of Weston – adds to the deteriorating situation for energy prices around Australia, where wholesale electricity prices have also surged and are feeding through to households and industry.

The extreme gas prices will be beyond the reach of many manufacturers reliant on spot prices to source their gas after they were unable to lock in contract rates at prices they thought were affordable at the time.

They come as hundreds of Weston’s customers along the east coast were transferred to “retailers of last resort” such as AGL Energy, where many were put on default tariffs linked to wholesale prices, but with an additional mark-up.

Textile makers and others have said they cannot continue to operate at the high tariffs and will have to consider whether to close plants as they plead for government action to rein in prices.

Mr Willox said short-term responses to help vulnerable industry and households would be needed, in addition to longer-term steps to modify demand and an increased supply of fuels.

“The price pain is already intense for those businesses who’ve found themselves suddenly needing new energy contracts amid local and global turmoil,” he said.

“Households will feel the pinch from higher default electricity prices from July, and more pain is coming for all.”

No luck with alternative supplies

Causmag International, a NSW magnesium products manufacturer that was a Weston customer but is now being asked to pay more than $40/GJ for gas, has been unable to find alternative supplies.

“Our broker is still scouting the market,” managing director Aditya Jhunjhunwala said. “No luck so far.”

The elevated prices are similar to the shocking gas and power price spikes in Britain last northern autumn that led to the closure of energy-intensive industrial plants and squeezed dozens of smaller energy retailers out of the market.

Josh Stabler, managing director of energy adviser Energy Edge, noted that three of the four east coast domestic gas markets were now being administered by the AEMO under imposed price caps.

Prices started to be controlled in the Sydney and Brisbane markets last week, at about $28/GJ in Sydney and $40/GJ in Brisbane, Energy Edge said, based on rules triggered when Weston’s customers were transferred to “retailers of last resort”.

Then on Monday, Melbourne’s market broke the cumulative high threshold for prices allowed over a seven-day period under the energy market rules, causing its market price to also be capped at $40/GJ.

A ministerial direction in NSW issued on Monday would result in the cap on the Sydney price rising to $40/GJ as in the other states, Mr Stabler said.

Victoria’s situation was being exacerbated by the very cold weather expected to hit over the next few days from a so-called “polar surge”. This is expected to result in forecast gas demand for the retail market of 1247 terajoules a day, exceeding last year’s peak, Mr Stabler said.

Gas demand in Victoria on Wednesday is forecast to be 92 per cent higher than the same day last week, he said.

Mr Stabler said the intervention by AEMO meant prices that were due to reach $85/GJ in Melbourne on Tuesday and $800/GJ on Wednesday would – “thankfully for the beleaguered energy markets” – be capped at $40/GJ.

LNG exports from Queensland do not appear to be causing the squeeze, with east coast LNG exports declining this month.

EnergyQuest consultant Graeme Bethune said LNG exports from Gladstone for May were 1.784 million tonnes up to May 30, down from 2.068 million tonnes in April.

But more gas was being used in the domestic market for power generation in May to help compensate for a 26.9 per cent drop in solar generation output, Dr Bethune said, citing preliminary figures.

He said gas use was up 34.6 per cent in May, accounting for 9.5 per cent of generation, up from 7.2 per cent in April. Hydropower generation is also up strongly, by 58.6 per cent, while coal and wind were both 1.9 per cent lower.