Macfarlane’s energy price squeeze

Ian Macfarlane faces a tough bind as rising gas prices will overwhelm any energy price relief from repeal of the carbon tax. The last thing he needs is to increase demand for gas and increase wholesale electricity prices by slashing uptake of solar and wind power.

Earlier this week I wrote about how moving over to the government benches is likely to alter the way Greg Hunt looks at things (Can Hunt slip his Coalition chains? September 25). It will do the same thing for Industry Minister Ian Macfarlane. 

While in opposition all you had to do was highlight problems. In government you’re expected to have answers.

In terms of Ian Macfarlane, he’s got a major problem on his hands that won’t be easy to answer. His leader, Tony Abbott, has created a big expectation among the electorate that energy prices are going to drop dramatically. The problem is that it ain’t going to happen, even if the carbon price is repealed. 

In fact, gas prices are now skyrocketing by levels that make the carbon price look like a storm in a teacup by comparison. 

To date, Macfarlane, and the now deposed Sophie Mirabella, have been able to shield behind the carbon price. But this won’t work for much longer. People will find that, in spite of the imminent repeal of the carbon price, energy intensive industries like cement, chemicals and alumina refining will still be threatening to shut-up shop and shift overseas. With the repeal of the carbon price part of government policy, their shrill cries will shift to demands that government reserve gas for domestic industry over LNG exports. 

Macfarlane can free-up environmental restrictions surrounding coal seam gas, but it probably won’t help by much. As an illustration, Origin just signed a huge deal to purchase 432 petajoules of gas from Bass Strait in Victoria that will be linked to oil prices. This is just like the gas in Queensland and out of Moomba in South Australia that is bound for LNG markets overseas. So even if they pull out more gas from NSW, in the end it will be priced relative to competing gas supplies that are now all linked to the oil price. 

Unless Macfarlane can miraculously change the global price of oil, gas prices will be going up by a lot.

His only option to push down price is to reserve gas for domestic industry. But he doesn’t want to do this. He’s one of the biggest supporters of Australian LNG development and knows it will represent a major export money spinner and support construction employment. So he’s between a rock and a hard place.

Now, drop into this mix gas producers and electricity generators complaining to him respectively that the Renewable Energy Target is reducing the demand for gas and depressing wholesale electricity prices. Heavy industry, meanwhile, could barely care less because it benefits from the lower wholesale electricity prices while receiving a 90 per cent exemption from the cost of Renewable Energy Certificates.

So how do you think Macfarlane might respond to such demands to water down an electorally popular policy?

– He’s made it easier for the energy supply sector to extract gas at the expense of farming votes.

– He’s increased their profits by removing the carbon price.

– And he’s repelled demands for reserving gas for the domestic market.

In return he’s confronted with rapidly rising gas prices and heavy industry threatening to go overseas ... after his leader had promised the electorate precisely the opposite would happen.

And now the energy supply sector would like him to water down a policy that will add further demand for gas for electricity generation, and possibly mean wholesale electricity prices are regularly dictated by increasingly expensive gas.

And then to top it all off he has detailed economic modelling from the last government review which suggests watering down the RET would deliver: “...no material change in estimated average household bills.”

Plus it will mean the government needs to find a few hundred million dollars more money in the budget to fund Direct Action to purchase the abatement that would have otherwise come from the RET.

Yes, it’s quite safe to say that Macfarlane is not the biggest fan of renewable energy in the Coalition. But now he’s in government he has a lot of problems to weigh up, and not a whole lot of easy answers. 

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