【Ferro-alloys.com】:The Australian government's plans to cap the price of natural gas and thermal coal for domestic consumers has provoked the predictable howls of protest from the industry and warnings of dire consequences.

As usual in cases where powerful vested interests are involved, there are plenty of emotions and attempted political point scoring, but not much considered analysis on what is the best way to ensure that domestic energy prices are affordable.

The starting point for the debate should be whether Australian businesses and consumers deserve to be the beneficiaries of the country's vast reserves of coal and natural gas, or whether it's best to allow these to be sold to the highest bidder on global markets.

If the answer is that Australians are entitled to cheaper energy prices than what global buyers are prepared to pay, the question is then how best to achieve this outcome, while still allowing coal miners and gas producers the ability to run profitable companies that can invest for the long term.

The centre-left federal government of Prime Minister Anthony Albanese has played its cards, announcing on Dec. 9 plans to legislate a year-long price cap for wholesale natural gas and thermal coal in the country's populous eastern states.

Australia vies with Qatar and the United States for the title of the world's biggest exporter of liquefied natural gas (LNG) and is the second-biggest shipper of thermal coal after Indonesia.

The domestic market for natural gas is small compared to the volume of LNG exports, but it's seen as a key fuel for some industries such as glass-making and also as a fuel for generating electricity at times of peak demand.

Australia still generates about 50% of its electricity from thermal coal, although this share is shrinking rapidly as the country installs renewables such as solar, wind and battery storage.

The ruling Labor Party's plans call for a price cap of A$12 ($8.15) per gigajoule (GJ) for gas and A$125 a tonne for thermal coal, with the government saying it will support any coal miner whose costs exceed the price cap.

While the coal industry has so far held fire on criticism while it awaits further details, the gas industry has made it clear that it believes the cap is nothing short of a disaster that will ultimately result in higher prices and less supply.

CRITICISM CRYING WOLF?

It's to be expected that the gas industry, through its lobby group the Australian Petroleum Production and Exploration Association (APPEA), will fight to protect profits and the long-term viability of the industry.

But its arguments lack context and fail to address that the current high price of natural gas, both in Australia and globally, is largely a result of the Russian invasion of Ukraine and the subsequent massive drop in Russia's pipeline exports to Europe, which created a global supply crunch.

The benchmark price of domestic gas on Australia's east coast is at the hub in Wallumbilla in Queensland, where it was assessed by commodity price reporting agency Argus at A$23.74 per GJ on Dec. 9 - almost double the proposed price cap.

But the hub price was only A$10.66 per GJ in the week to Feb. 25 before the conflict in Ukraine. In fact, apart from a brief spike to A$13.25 in December 2021, the hub price had never exceeded A$12 per GJ in Argus assessments going back to 2014.

This inconvenient fact weakens APPEA's claim that the price cap will lead to lower investment and a drop in supply, as the industry itself was prepared to invest some $200 billion in the past decade in order to make Australia a leading LNG exporter.

At the time of the massive expansion of LNG export capacity, the companies involved would have had no expectation of the current high gas prices, rather their long-term forecasts would most likely have been close to the A$12 per GJ price cap.

The gas industry probably would have been better served by asking some more relevant questions, such as whether a price cap is the best method of delivering relief to consumers.

Targeted subsidies may have been a better solution and easier to implement, and possibly more effective given it's likely that the price cap will take some time to filter through to actual wholesale electricity prices, which tend to be negotiated and contracted months in advance.

Temporary higher royalties on gas and coal may also have been a viable solution, as these could have been implemented in such a way to give government additional revenue for subsidies, while also allowing producers to keep some of the huge revenues from the current elevated prices.

But the gas and coal industries also need to be aware that they had plenty of opportunities to work out a way to provide cheap and reliable supplies to the domestic market, but chose not to and instead opted to run a public relations campaign based largely on fears unlikely to be realised, while enjoying surging export revenues.

The energy industry as a whole has likely misread the mood of the public, which now see them as part of the problem of high prices and inflation pain, and the government's price cap, even if imperfect, is likely a vote winner.

• [Editor:Alakay]