This is never going to have the desired effect, this will not work, see below extract from AFR

‘Reasonable’ gas price a disaster for the energy grid

Mark SamterDec 12, 2022 – 11.57am

We should be under no illusions that for all the short-term political mileage of lowering energy bills, the government’s proposed gas market legislation risks the very foundations of the east coast energy grid and all who use it.

As the latest piece of evidence shows, short-election cycle democracies are particularly ill-equipped to deal with energy policy through the transition. Labor’s legislation, if passed, will see capital and therefore supply evaporate from the sector, at the same time as artificially lifting demand as gas-fired generators will run harder, particularly if coal plant performance remains poor.

The $12 per gigajoule price cap for 2023 is bad enough, albeit with most gas already contracted, it actually makes little real difference. On top of that, the fact that spot markets in the southern states – and the retailers (who in many cases are the ones selling at $20-$30/GJ – are somehow not included in it at all is puzzling to say the last.

However, the real policy disaster is what the legislation creates for future years, with the mandatory code of conduct that will enshrine a “reasonable price provision”.

In effect, this reasonable price provision is nationalising the gas industry, but still expecting private capital to fund it.

It will allow a “reasonable” return on capital, based on a cost assessment by that bastion of accurate predictions, the Australian Competition and Consumer Commission.

That is the same ACCC that has spent the past five years imploring for pricing to be set on its net back LNG price benchmark – effectively the global price minus international shipping costs. Having maintained that local prices should be pegged to the world price, the ACCC would be made responsible for fixing prices well below the global mark.

Frankly, with this annually resetting gas price assessment, it is hard to understand how either buyers or sellers could confidently enter into a long-term supply agreement.

Who knows what price the government might wake up and decide is fair for the next year, particularly as we get closer to an election. The level of power this legislation would give them over the market is unlike anything I have seen in my career. It is nothing short of abhorrent.

I am afraid this risks that, there but for the grace of Chris Bowen and his Tesla, go all of us.

Instead, what we are absolutely certain to see is a strike on capital spending on further gas production. As if the demonisation of the industry hasn’t hindered enough, removing any prospect of an economic return most certainly kills it.

For international investors, why would you invest capital into Australia to sell at $12/GJ (with risks it could be regulated lower in future years) when you can deploy that capital offshore and sell at $40-$50/GJ in many markets?

For smaller producers, they need those long-term contracts, and a stable environment, to underwrite their access to capital (be it debt or equity). So, even if they wanted to invest, they couldn’t access the capital now.

For a bit of context on how quickly this will all manifest, the July 2022 Australian Energy Market Operator’sGas Statement of Opportunities, which also forecast the need for the LNG imports that would be killed by this legislation, had 161 petajoules of gas production in 2024 coming from “anticipated” supply, and 314 PJ in 2026.

Anticipated supply means new supply, which requires new capital to be spent and would fall under this legislation. That 314 PJ is about 50 per cent of the current domestic market, arguably little of which will now get developed. That is a very big problem manifesting very quickly.

Ideologically, it would be easy to say that the destruction of gas supply will accelerate decarbonisation. A look at Germany, where they are turning back on coal plants and signing long-term LNG supply contracts to past 2040, suggests it might not be that simple.

What Australia may learn the hard way is that gas remains – and will do for some time – the lifeblood of the manufacturing heartland that Labor thinks it is helping with this policy. While the proposed new capacity mechanism for electricity markets is planning to exclude coal and gas, I am yet to find anyone who can show me how you can fully firm renewables with renewables. So, gas is needed to firm the grid for a long time to come.

This policy should frankly ring alarms bells for all parts of the energy system, even those in the renewables world who might be cheering it.

With the vast bulk of capital sunk upfront with renewables, what if a new technology comes along that accelerates the transition and needs funding? Why would you invest believing this government won’t do the same to you in five to 10 years time – long before you have earned your capital back, let alone a return on it?

No, I am afraid this risks that, there but for the grace of Chris Bowen and his Tesla, go all of us.

If this policy is implemented, such will be the strike on capital from the gas producers (let’s be clear most of the world is already telling them to stop investing) and the impact it will have on electricity markets, that I strongly suspect we will see blackouts by the winter of 2024.

Maybe the government thinks it will just intervene in export contracts then. Good luck to them in championing that green export economy, which will be aiming to sell to the same international utilities as the LNG is going to, if that is their masterplan.

The gas producers are not immune from blame for where we have landed, but this policy is pure politics and particularly poor and short-sighted politics at that. It will do irreparable damage to both the east coast energy system and Australia’s standing in the global investment community.