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Government intervention to control energy prices now seems inevitable

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The Federal Government has committed to tackling a major cost of living problem – alarmingly large increases in gas and electricity prices over the next 18 months. Labour’s decision will either continue its generally strong start in government, or open up a major point of attack for the Coalition to suffer for the rest of this term.

On Tuesday, Treasurer Jim Chalmers revealed Treasury estimates that retail electricity prices would will increase by an average of 20 percent nationally at the end of 2022 and a further 30 per cent in 2023-24. In addition, retail gas prices are expected to rise by up to 20 percent in both 2022-23 and 2023-24.

Electricity and gas prices will rise quickly.credit:Jesse Marlowe

Although some electricity prices have already increased, these increases would be politically unjustified. The opposition is already using electricity prices as a line of attack, made easier by Labour’s promise to lower electricity bills by 2025.Treasurer and Premier Anthony Albanese seeks to take corrective action. However, their choices are limited, and either option has unpleasant side effects. It’s a challenge created by factors beyond their control, but it comes with the territory.

The main reason is clear. High international gas prices for cargoes of liquefied natural gas (LNG) appeared after the war in Ukraine. Australian LNG producers could get prices for their exports four to five times higher than before. When large industrial companies, gas retailers or gas-fired power plant operators seek supplies, producers refer to the high international spot price as the competitive price they can rely on. The recently revised Government-Producer Agreement recognizes that the Asian spot price must influence domestic prices.

The Australian Competition and Consumer Commission has already warned that these high prices will have serious consequences if these high prices are passed on to domestic consumers, and the Department of Finance has acknowledged this reality.

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Gas-fired power was already the most expensive source of electricity, and like an auction, the price is set by the highest bidder in the national electricity market. All suppliers – coal, gas and renewables – are making super profits. The market is working as intended, but the consequences are unacceptable economically, socially and politically.

The main purpose of the government budget is to control inflation. Thus, he ruled out the option of some form of government payments to consumers. The alternative is price cuts and excess profits. The solution should be straightforward, quick enough to be introduced and removed when the cause disappears, and should not damage Australia’s reputation as a reliable international supplier. Three more options arise.

First, directly limit the wholesale price of gas. This seems almost impossible as there is no transparent spot market covering these gas supplies. These are practically all short-term commercial contracts.

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