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National Cabinet will meet to discuss power prices

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The Federal Government has announced $1.5 billion in power bill relief amid rising energy prices

The Prime Minister will meet with state and territory leaders on Friday to discuss steps to reduce power prices.

The Federal Government says the energy “chaos” gripping the world is a reason to consider options it “wouldn’t have contemplated” in the past, including possible restrictions on coal and gas prices.

How could that work? Here’s some background.

How we get power

Every Australian jurisdiction except WA and the NT gets power from the National Electricity Market.

That system connects power producers (coal, gas, and renewable) to users (households and businesses), sometimes with an energy retailer in between.

This winter – through a combination of global gas shortages, failing coal plants, and insufficient renewable capacity – the system struggled.

Trouble continues

During winter, the short-term focus was on making sure the system had enough power at all. Now the focus is on price.

There is a global energy shortage, which has its roots in Russia’s war in Ukraine – Russia is a major gas provider, but Western sanctions constrain the gas it provides.

This has driven up global gas prices and also coal prices, since coal is a substitute.

Australian context

Those high global prices mean soaring profits for Australian gas and coal producers. Australia exports about three-quarters of its gas. There are no legal requirements (except in WA) to keep any of that gas for domestic sale, or to sell it here at lower prices.

That means higher power bills for Australian consumers. Households are protected by maximum bill levels set by government agencies. However, these are updated every July to reflect market conditions. They rose sharply in July and there are fears they will do so again next year.

So what can we do?

The Government could simply pay people directly, either by subsidising their bills or giving them cash. It could fund this by taxing the profits of coal and gas companies, since those companies are making higher profits due to the crisis.

Alternatively, it could put in place price limits directly on the coal and gas itself.

Treasury Secretary Steven Kennedy, the Government’s chief economic adviser, said last month he was open to these ideas in a “temporary” form.

National cabinet

The Federal Government hasn’t finalised its preferred plan, but it seems to be leaning towards some form of price control.

In September, gas producers agreed (voluntarily) to keep more gas aside for domestic supply. The Government could cap the price of that gas, and possibly compensate the producers for it.

Compensation

To make matters more complicated, state governments in Queensland and NSW are warning they would need to be compensated financially for any price controls on coal.

In Queensland’s case, that’s because the Government owns coal plants, so the Government would stand to lose money if the price were lowered. In NSW, it’s because the Government charges royalties on coal, so would again stand to lose money from a lower price.

Timing

Finally, there’s the question of when any of these measures would actually make a difference to power bills.

The power bill caps imposed by government agencies are only updated every July. It’s not clear whether any price caps could actually flow through to households before then, and it’s also not clear whether in July this would actually mean lower prices, or simply a smaller price hike.

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