Jun 17, 20223 min read

Australia's Energy Crisis: Why are Gas and Electricity Prices so High?

Updated: Jul 20, 2022

Despite Australia being the largest gas exporter in the world, Australian's are facing significant increases in the price of electricity, with gas now costing four times its actual market value, and warnings of power outages. The Australian Energy Regulator (AER) claims that the wholesale energy costs for retailers “have risen by 41.4% in New South Wales, by 49.5% in Queensland, and by 11.8% in South Australia” since 2021.

Why have Energy Prices Increased?

The AER has also stated that the cause of the increase in electricity prices is "reductions in thermal generation resulting from unplanned outages and higher coal and gas prices, slowing of investment in new capacity, and increasingly ‘peaky’ demand (sharp highs and lows) driving up the cost of wholesale electricity contracts for retailers”.

This claim is contrary to the views of some Coalition MP's who believe the rise in cost is due to the growing use of renewable energy within Australia's power grid.

Independent Energy experts claim that the primary cause of the electricity price rise is Australia's gas exports, which have recently soared. In the beginning of 2022, gas was trading for $10 a gigajoule, whereas in June 2022, gas in Victoria's spot market exploded 8000%, reaching $800 a gigajoule.

The price has also been influenced by the recent polar blast across South-East Australia which has increased demand to record levels, and the collapse of Weston Energy in late May, resulting in customers being transferred to other retailers with price tariffs.

Release of 2022 Electricity Prices Delayed Until After Election

Since July 2019, the AER has also been required to release its Default Market Offer on the 1st of May each year, essentially setting a price cap on electricity and informing the public on how much retailers can charge for the upcoming year. In 2022 however, the Morrison government delayed the release of this document until May 26, resulting in consumers only learning of the increase in prices following the election.

Former Treasurer, Josh Frydenberg, had claimed in his final budget in March of 2022 that:

"the government’s actions have helped reduce residential electricity costs by 8% and small business costs by 10% over the past two financial years”.

This appears in contradiction with Australian wholesale prices which had more than doubled during the year prior and continued to increase following the budget address.

Reservation Policy & Supply

Unlike the East Coast of Australia, Western Australia has a 'domestic reservation policy,' where a percentage of all gas supply is reserved for domestic energy consumers.

Gas Analyst Bruce Robertson of the IEEFA states:

"Eastern Australia is the only region in the world that prioritises exports of LNG over the domestic market. It doesn’t even happen in Western Australia. To ensure supply to our domestic market requires a small amount of gas but the gas cartel ensures the domestic market is just “starved” of gas to keep prices nice and high and make super profits”.

Only 1% of the Eastern Australian market would need to be reserved to ensure adequate domestic supply. Mr. Robertson also states that the cost of $5-7 per Gigajoule (Western Australia's average price), is standard in exporting countries. Contrastingly, Eastern Australia is unique globally as a major exporter which does not have "cheap" domestic prices.

Why are Power Outages likely when the Price is so High?

The ongoing energy crisis has led to the Australian Energy Market Operator capping prices at $40 a gigajoule. This has resulted in energy retailers halting powere domestically as it is comparatively too expensive to supply. Adding to the situation is the fact that nearly 30% of Australia's coal generation has gone off-line, putting further stress on the grid and greater reliance on gas generation.