Writer: Xunpeng Shi, UTS
With vitality costs at traditionally excessive ranges, all eyes are on governments. Disruptions in vitality provide chains because of the battle in Ukraine have prompted international locations to look towards vitality sources they’d begun to shift away from — China has elevated its coal manufacturing and Japan will return to nuclear — to safe their vitality provide.
The Australian authorities, like many others, faces growing stress to intervene within the fuel market. Because the world’s largest liquefied pure fuel (LNG) exporter, Australia’s selections could have important world impacts. Australia’s main LNG customers — China, Japan and South Korea — are nervously awaiting a choice from the Australian authorities. They’re the world’s prime three LNG importers and imported 85 per cent of Australia’s LNG exports in 2021.
Australia’s LNG accounted for 29, 28.7 and 16 per cent of whole LNG imports in China, Japan and South Korea in 2021 respectively. These international locations are looking out for LNG export controls, which can diminish their provide sources and enhance their spot costs.
Regardless of being one of many world’s largest coal and LNG exporters, Australia nonetheless faces an vitality sector disaster. The Australian Power Market Operator (AEMO), chargeable for working the fuel and electrical energy market, made historical past when it suspended the nationwide electrical energy market on 15 June 2022.
Australia’s east coast fuel market can also be in disaster. The Fuel Provide Assure — the fuel business’s mechanism to make sure that fuel provide can meet peak demand within the Nationwide Electrical energy Market — has been activated twice since June 2022.
The first activation in June capped the fuel costs within the state of Victoria at AU$40 per gigajoule (US$27) to guard fuel customers from rising costs. AEMO then ordered Queensland state suppliers to supply fuel to the state of New South Wales as a substitute of abroad on 19 July 2022.
The fuel worth drawback arose after Australia’s east coast began exporting LNG in 2015. This linked home markets with worldwide fuel markets. By making home customers compete with customers overseas, the Australian market turned topic to worldwide fuel costs.
Connection to worldwide markets has contributed to skyrocketing fuel costs since 2020. The month-to-month Japan Korea Marker, a spot worth benchmark for fuel in East Asia, elevated 14-fold in two years. British thermal models — a measure of the vitality content material in fuel — elevated from US$4.2 per million models in August 2020, to US$18.2 in August 2021 and US$56.3 in August 2022. The month-to-month Dutch Title Switch Facility pure fuel worth elevated 24 occasions in the identical interval.
East Australia’s home fuel costs are following worldwide costs, albeit much less dramatically. The quarterly common worth of the Victorian fuel market elevated from AU$4.65 to AU$28.83 per gigajoule from June 2020 to June 2022.
To guard fuel provide safety on the east coast, the Australian Competitors and Client Fee (ACCC) beneficial that the federal authorities activate the Australian Home Fuel Safety Mechanism (ADGSM).
The ADGSM is designed to make sure a ample provide of pure fuel to satisfy the forecasted wants of Australian vitality customers. Within the occasion of a looming provide shortfall within the home market, ADGSM empowers the federal authorities to implement export controls on LNG. For the reason that ACCC forecasts that the Australian east coast may face a shortfall of 56 petajoules in 2023, the federal authorities could have to activate the ADGSM and contemplate export controls.
However given the arduous course of of activating the ADGSM and the perceived ‘sovereign threat’ related to slicing exports, the federal authorities and LNG exporters have a mutual curiosity in avoiding its activation. In an settlement with the Australian authorities in 2021, east coast LNG exporters dedicated to providing surplus fuel to the home market earlier than promoting it to the LNG market in Asia.
As a web fuel exporter, Australia’s disaster is extra a worth situation than a scarcity of provide. On the coronary heart of Australia’s vitality disaster is affordability. However neither the ADGSM nor the fuel exporters’ settlement might be anticipated to scale back the exceptionally excessive costs being inflicted on Australian customers. The LNG exporters’ settlement with the federal government upholds the precept that home costs stay aggressive with costs offshore, so there will probably be no worth suppression impact.
ADGSM can not legally be activated primarily based on excessive fuel costs alone. If worldwide LNG costs keep across the present stage, home fuel costs may attain the AU$40 worth cap set within the Fuel Provide Assure — even with export controls.
The federal government might want to discover new instruments to unravel the affordability drawback. One might be the set up of a fuel reservation coverage on the east coast much like that in Western Australia. This could reserve 15 per cent of LNG manufacturing from every LNG export challenge for home consumption. However fuel reservation insurance policies may have a web unfavourable financial impression on Australia and doubtlessly discourage future funding.
Canberra may additionally introduce a LNG levy particularly on east coast exports. This would supply a beneficial worth differential so producers will probably be incentivised to produce home customers first. The federal government may additionally redistribute a few of the income from fuel producers to prospects to guard weak customers with out distorting the fuel market.
The alternatives made by the Australian authorities could have far reaching implications, not just for the Australian public but additionally for world LNG markets — particularly East Asian markets. It stays to be seen what selections will probably be made and what their outcomes will probably be.
Xunpeng Shi is Professor and Analysis Principal on the Australia–China Relations Institute on the College of Expertise Sydney.
