The Albanese government’s plan to compensate New South Wales and Queensland for imposing a cap on coal prices could run “significantly” above $500m with most of the money directed to coal-fired power plants, according to Treasury briefings.
The compensation for the $125 a tonne price cap for black coal is part of the package announced by the government on Friday to lower energy prices. There would be compensation for coalminers but the bulk of the money would be for power stations, sources say.
“The generators would get the lion’s share,” one of those briefed told Guardian Australia. “It could be significantly higher than $500m,” they said, with the figure possibly running to hundreds of millions of dollars more.
NSW generators could receive as much as $250m, one NSW official said. Black coal-fired power plants contract most of their coal at long-term rates below $125 but some contracts are above that price – hence the compensation.
The federal government has so far downplayed the potential of a big payment for those affected by the price cap on coal. The prime minister, Anthony Albanese, told the ABC on Monday “there’s nothing in the legislation” that provides compensation.
However, Albanese said if fossil fuel companies faced production costs above $125 a tonne “it is reasonable that there be payments made” to ensure continued supply.
The Nine newspapers reported on Sunday the government could spend up to $500m to compensate producers affected by the coal price caps.
The federal industry minister, Ed Husic, on Tuesday did not specifically rule out compensation to coal companies but said this week’s legislation was focused on gas.
The office of the federal energy minister, Chris Bowen, highlighted comments he made earlier on Tuesday that “a range of mechanisms” could be applied to set the coal price – a power that resides with states.
“The NSW government has asked us to ensure that any coal company which has a genuine cost of production over $125 is catered for,” Bowen said. “We think that is a very, very rare circumstance.”
Albanese on Tuesday also expressed support for a federal gas reservation policy.
The Greens leader, Adam Bandt, said his party would not support compensation for coal. He urged the government to provide more detail on its plan and reiterated calls for a windfall profits tax on fossil fuels. He said the Greens hoped to reach an agreement before parliament resumed on Thursday.
The Greens and the Coalition have asked for more detail on exactly what legislation will be introduced. “We want to see people get energy bill relief, but we still have concerns about Labor’s plan,” Bandt said. “People deserve lower power bills, but massive coal and gas corporations don’t deserve a cent of public money.”
The Australian Manufacturing Workers’ Union secretary, Steve Murphy, said any payment or supply incentive made to suppliers must benefit consumers, not become a “corporate handout”.
“Giving half a billion dollars to some of the richest CEOs in the country without clear and enforceable conditions would do nothing to help workers or bring prices down,” he said.
The government will introduce a bill to cap gas prices at a special sitting of parliament on Thursday. Commonwealth funds to support rebates for households and small businesses will be included as a schedule to the bill.
The schedule will enable agreements to be entered into between the commonwealth and each of the states and territories to provide energy price relief, and the funding will be provided in relation to the 2022-2023 and 2023-2024 financial years up to $1.5bn.
Details of the rebates are yet to be settled. The arrangements will be determined by the federal and state treasurers.
Senators are negotiating how long the debate could continue and whether it would be gagged to avoid sitting late into Thursday night.
Major energy companies said they remained in the dark about how the policy might affect their operations. Gas firms have been public in their opposition to the proposed “reasonable pricing” mechanism contained within the amendments to the Competition and Consumer Act that parliament will vote on.
One of those briefed by Treasury said compensation for coalminers was unlikely to exceed several tens of millions of dollars.
Treasury officials told journalists on Friday the $125 cap had been chosen because few miners would be out of pocket. Their main contracts with foreign or domestic customers would not be affected by the energy package.
Guardian Australia understands NSW continues to negotiate over the terms for its state.
Major generators, too, were unsure how the policy would affect them. “We’re still trying to understand a lot of this stuff,” one senior source said. “There is not any certainty.”
A senior official at another company said they wanted to know whether rivals would essentially be bailed out for poorly managing coal supplies. Their firm had long-term contracts for most of its coal at less than $125 a tonne but had been buying extra fuel well above that price to ensure supply in case of disruptions.
The official questioned the wisdom of making it cheaper for consumers to use fossil fuels. The government’s plan “encourages more burning of coal and gas”, they said.
The government would in effect be acting as a contracting party, picking up the risk and price gap for generators if there is one, said Bruce Mountain, head of the Victoria Energy Policy Centre. Uncertainty over those factors is one reason why the quantity of compensation to generators may be difficult to model.
If the price caps for coal and gas remained beyond the end of June 2024 – the current schedule for the temporary measures – they could discourage the transition to zero-carbon options such as big batteries.
Another person briefed by Treasury said the government was assuming the war in Ukraine would be over in a year’s time – with global energy prices subsequently falling. However, countries would be reluctant to return to sourcing energy from Russia given the risks.
Simon Corbell, the chief executive of the Clean Energy Investor Group and a former deputy ACT chief minister, said his organisation welcomed the short-term price caps as “a reasonable measure”.
But “a long-term intervention could dampen investment signals for next-generation storage and new-build renewable generation”, he said.
Over time, the government should work to reduce the risks for clean energy investments such as setting a clearer timeframe for the orderly exit of coal-fired power plants, and the construction of transmission lines to link up new wind and solar farms and avoid unnecessary congestion and curtailment, Corbell said.
