Why energy price caps have set off another squabble between the states, Canberra and producers

There is violent agreement between all Australian governments about the need to curb runaway energy prices for consumers and business. But on the eve of finding a mechanism to do this, the debate around who foots the bill has once again degenerated into a squabble between the federal governments, the states and the producers.

If the producers of gas and coal take a profit haircut from having a price cap imposed on the product they sell domestically, they argue that this will have a longer lasting negative effect on investment in new projects and therefore jeopardise long-term supply.

They also argue that any cap on gas and coal prices will cast a long shadow over Australia’s sovereign appeal as a safe place for foreign companies to invest.

Two of the largest oil and gas companies in Australia, Woodside and Santos, have projects in Bass Strait and the Barossa respectively that could become marginal depending on what level of cap was applied to the price of gas.

The reality is that most of the large listed coal companies export most if not all of what they dig up and the pain would be carried by smaller companies.

If as expected, the price cap applies only to uncontracted coal, in NSW for example, this makes up only about 20 per cent of the total volume of coal that electricity producers buy to fire its power plants.

Intervening in the pricing of any market is something governments like to avoid and federal treasurer Jim Chalmers has stressed on many occasions that the government undertakes this only because the problem is so extreme.

The states that produce coal and gas in volume are the loudest in this debate. They are fine with the notion of reducing consumer power bills but don’t want to threaten the rivers of royalties they receive.