The electricity market failed, so the operator suspended it
The AEMO used all the tools at its disposal to try to correct the market, but they were clearly insufficient in the face of the persistence of the problem. The market had failed.
So AEMO suspended the market. This means that the AEMO now sets the price that generators receive in each state and determines which generators will work. If a generator is forced to operate at a loss, it will be compensated.
Beyond the AEMO’s decision to suspend the electricity market, the government must act on the availability and price of gas in the short term.
This addresses any concerns that producers have been placed in an impossible position or have attempted to take financial advantage of the extraordinary market conditions.
The situation was not primarily caused by an over-reliance on coal or renewables, the age of coal-fired power plants, or even the failure of governments to implement an integrated climate change and energy policy. .
On the contrary, it was mainly caused by the simultaneous unavailability of several coal-fired generators and the physical and financial limitations of their gas-fired cousins.
The decisions made so far by the new federal government have been clear, measured and appropriate. Beyond the AEMO’s decision to suspend the electricity market, the government must act on the availability and price of gas in the short term.
East Coast gas producers sell most of their gas under contract and two-thirds to foreign buyers. There is some limited flexibility to meet short-term demand in export or domestic markets.
Gas prices jump on European demand
Since the Turnbull Government introduced the Australian Domestic Gas Safety Mechanism, the Australian Competition and Consumer Commission has published the net export parity price as a benchmark for domestic contract pricing.
This price was around $10 per gigajoule. Demand from Europe to solve Russian gas supply problems after the invasion of Ukraine has driven that price to around $40, an unsustainable level for gas or electricity consumers in Australia.
Neither ADGSM nor an East Coast gas reservation policy would solve the immediate problem.
Instead, the government should sit down with the gas producers and make it clear that sufficient volume at a fair price must be available on the domestic market.
If gas producers fail to do so, the government should introduce a windfall tax, revise the oil resource rent tax rules, or find a way to legislate both volume and price.
Gas producers should accept a fair price
A windfall tax, or the threat of such a tax, would solve the immediate problem of gas pricing, would not meet any reasonable definition of sovereign risk, and would be removed when the windfall ends.
Gas producers must not want to destroy the internal market and they must accept a fair price.
This approach does not solve everything, as there will be physical and contractual limits to getting the gas to where it is needed. The government could further consider requiring export contracts to include a flexibility allowance for gas to be diverted to the domestic market to solve the kind of problem we are currently facing.
Starting today, the focus of AEMO, the power industry and governments will be to resolve the immediate issues with offline generators and restore normal operation of the NEM.
There will be lessons to be learned and some market rules will undoubtedly need to be changed.
Beyond these immediate priorities, federal and state energy ministers must return to the urgent task of agreeing on market reforms to secure Australia’s long-term energy transition.