Federal Government introduces interventions to rein in gas prices
Pricing policy interventions aim to save jobs and ensure a stable and well-functioning wholesale gas market with adequate domestic supply at reasonable prices.
The Federal Government is taking action to limit the worst impacts of the forecast gas price increases in order to protect Australian households, industry and manufacturers.
The Government plans to:
- Implement an emergency, temporary price cap on new domestic wholesale gas contracts by east coast producers for 12 months.
- Improve the existing voluntary code of conduct for the gas market and make it mandatory.
- As part of the mandatory code of conduct, introduce a provision to ensure reasonable pricing for relevant domestic wholesale gas contracts with producers.
- Fast-track the implementation of the improved Australian Domestic Gas Security Mechanism (ADGSM) so that quarterly consideration of activation is in place by 1 April 2023.
- Bolster the ACCC’s resources by $12.5 million over the forward estimates, to enhance gas market monitoring, administer and enforce the mandatory code, and accelerate implementation of reforms to the ADGSM.
With these policy interventions, Treasury now forecasts that retail gas prices would rise by around 18 per cent this financial year, with most of this increase having already occurred, and by around 4 per cent in 2023-24 – rather than 20 per cent in each year.
Emergency Temporary Gas Price Cap
Informed by the advice of the ACCC, an emergency, temporary price cap on new domestic wholesale gas sales by east coast producers will be implemented for 12 months to help keep wholesale gas contract prices under control. Subject to a short period of consultation, the Government intends to set this cap at $12/GJ.
The ACCC considers $12/GJ to be a reasonable price allowing for the key costs of domestic supply, including a reasonable return on capital, for gas sourced from currently operational fields.
The ACCC conducted analysis of pre-war offers on the east-coast in 2021 for supply in 2023, and analysis of data on costs of production. Of the 289 domestic offers made over this period, 96 per cent were below $12/GJ, and the average offer was $9.20/GJ.
The price cap and code of conduct apply to relevant domestic contracts and have been carefully designed not to impact contracted sales under existing and long-term foundational contracts with our international trading partners.
Mandatory Code of Conduct
A mandatory code of conduct will ensure Australians in the east coast gas market have access to Australian gas at reasonable prices and on reasonable terms. It will address systemic issues within the wholesale gas market, including insufficient competitive pressure and bargaining power imbalances.
It will be a mandatory and enhanced version of the existing voluntary code of conduct, strengthening requirements related to transparency, reporting, pricing, and timeframes for negotiating. The Code will also include a formal dispute resolution process, with binding arbitration, for the resolution of pre-contractual disputes.
The Government is boosting the ACCC’s resources by $12.5 million over the forward estimates to enhance gas market monitoring, administer and enforce the mandatory code, and accelerate implementation of reforms to the ADGSM.
Fast-track reform of the Australian Domestic Gas Security Mechanism
The Government’s reform of the ADGSM will deliver more flexibility and will mean that decisions to activate the ADGSM can be made every quarter ahead of peak seasonal demand periods, rather than only once a year under the old regulations. The Government’s reforms will result in a stronger “gas trigger” to protect domestic supply.
These reforms will be fast tracked so that quarterly consideration of activating the mechanism is available to Government by 1 April 2023. The Government is consulting with industry on the detailed design of these planned reforms ahead of their implementation.
The Government has released a consultation paper setting out these measures in greater detail, and seeking feedback from industry and other stakeholders to inform final design prior to implementation.
Feedback is also sought on the draft Competition and Consumer Amendment (Gas Market) Bill 2022 and Explanatory Memorandum. If passed, the Bill will establish a new Part IVBB within the Competition and Consumer Act 2010, creating an enabling framework for implementation of the mandatory code and price cap.
The Government intends to introduce primary legislation this year to put in place a strong enforcement framework for the mandatory code and price cap.
Consultation on the price cap (including the draft order) will close on 15 December 2022, reflecting the urgent and temporary nature of this intervention. Subject to the outcomes of the consultation, it will be implemented promptly via regulation before the end of the year.
Consultation on the mandatory code, including the reasonable pricing provision, will remain open until 7 February 2023, and it will be implemented via regulation in early 2023.