Crisis, Transition, and Debate: Australia's Energy Sector in 2026

A fuel crisis sparked by international conflict, a record-breaking shift to renewables, and a bitter political battle over gas taxation define a pivotal period for Australia's energy landscape.

Fuel Crisis and State Responses

Global Context and Domestic Impact

A conflict involving Iran—including the closure of the Strait of Hormuz and strikes on Qatari gas facilities—triggered global oil and LNG price spikes, disrupting approximately 20% of the world's oil supply. Australia, which imports about 90% of its liquid fuel, felt the impact immediately.

In Melbourne, unleaded petrol prices rose from an average of $1.76 per litre in late February to approximately $2.50 per litre by late March 2026. The ACCC received over 500 reports alleging potential price-gouging and launched an investigation into anti-competitive diesel practices. The federal government released 519 million litres of fuel from domestic reserves and relaxed some safety regulations.

State Public Transport Initiatives

In response to rising fuel costs, several state governments introduced temporary public transport subsidies.

Victoria: The state implemented free public transport for April, later extended to the end of May, at an estimated cost of up to $432 million. From June 1 through the end of 2026, fares were reduced by 50%. The government also allocated $77.5 million for increased service frequency and $673.6 million for 25 new X'Trapolis 2.0 trains. Commuters reported overcrowding, and V/Line passengers faced seat uncertainty on long-distance routes. The government also offered a one-off 20% rebate on light vehicle registration, costing $750 million.

Tasmania: Free public transport from March 30 until July 1, 2026.

Queensland: Maintained its existing 50-cent flat fare policy, introduced in 2024.

Research on Free Public Transport

A University of Melbourne survey found that during the free transport period, 26.3% of Victorians shifted some commuting trips from car to public transport, compared to 23.7% in New South Wales, where full fares remained. Researchers noted the small difference suggested fares were not the only factor—access, coverage, reliability, and travel time were more influential.

Separate research on Queensland's 50-cent fares found they delivered equity gains for low-income households but mostly boosted travel among existing passengers rather than attracting new riders. Research from French cities indicated that free transport can increase passenger numbers, but effectiveness depends on network design, service quality, and reliability.

Fuel Supply and Demand Dynamics

A fire at Viva Energy's Geelong refinery temporarily disrupted supply, though the company stated production recovered within 48 hours. The Victorian Automotive Chamber of Commerce noted that the end of school holidays would increase fuel demand by 15-20%, and the cessation of free public transport on April 30 would further increase demand.

Electricity Grid Transition and Record Renewables

Record Renewable Generation

Australia's electricity grid underwent a landmark transition. In Q4 2025, the National Electricity Market (NEM) reached a milestone where renewable sources supplied over 50% of total electricity for the first time. By Q1 2026, this share reached 46.5%, up from 42.5% the previous year.

This was driven by a record-breaking quarter for new wind and solar capacity, with 2.1 GW commissioned in Q4 2025. Rooftop solar generation also hit records, with capacity exceeding that of existing coal plants. The grid maintained stability during extreme summer heatwaves and record demand, with no major supply issues reported.

The Role of Storage

Grid-scale battery storage capacity more than doubled in the 12 months to Q1 2026, tripling the amount of daytime solar energy shifted to evening peaks. By the end of 2025, 1.9 GW of battery capacity was installed.

This storage helped displace gas generation, which fell to its lowest quarterly level since 1999—a 27% decrease year-on-year. Experts stated that batteries are becoming the primary source for evening peak demand, displacing gas and moderating wholesale electricity prices.

Economic and Market Impact

Wholesale electricity prices in the NEM saw a substantial decline, averaging $50 per megawatt hour in Q4 2025, a 44% reduction from the same period in 2024. The Australian Energy Regulator proposed default market offers (DMO) for 2026-27 that would reduce household prices by 1.3% to 10.1%, depending on the region.

However, the grid remains the most volatile electricity market globally, with prices swinging from negative values during high solar production to highs of $20,300/MWh during periods of scarcity.

Future Outlook

While the transition is rapid, challenges remain. New transmission infrastructure is still needed, and aging coal plants—despite operating at record lows—continue to provide essential grid stability services. Gas is expected to remain necessary as a quick-response backup for some time.

Australia's target is to reach 82% renewable energy by 2030. Separate analysis indicated that delays in developing firmed renewables and transmission could increase wholesale costs by $116 billion by 2050, while recent reports highlighted concerns over Victoria's heavy reliance on gas.

Gas Industry Taxation Debate

The Policy Landscape

A major political debate unfolded over the taxation of Australia's gas industry, which reported paying $21.9 billion in taxes and royalties in the 2024-25 financial year. The primary tax on offshore projects, the Petroleum Resource Rent Tax (PRRT), raised $1.3 billion against LNG export revenues exceeding $65 billion.

Proponents of tax reform—including crossbench senators, unions, think tanks, and the Greens party—argued the current system does not deliver adequate value and called for new taxes, most prominently a 25% levy on gas exports.

Key Proposals and Positions

• 25% Export Levy: Advocates, including the Australia Institute and Senator David Pocock, estimated this could generate up to $17 billion annually. The proposal gained significant public traction through social media campaigns and fundraising.

• Windfall Profits Tax: Former Treasury Secretary Ken Henry advocated for a 100% windfall profits tax on gas companies, arguing it would not deter viable investment and the revenue could fund a sovereign wealth fund or tax reform. He stated criticism from companies was "self-serving."

• PRRT Reform: The government considered further reforms to the existing PRRT, which had been amended in 2023 to raise an additional $2.4 billion, though revenue projections were later revised down.

Government and Industry Stance

"The government will not introduce a new gas export tax or a windfall profits tax in the upcoming federal budget."

Prime Minister Anthony Albanese, citing concerns about maintaining Australia's reputation as a reliable energy supplier and securing fuel imports from Asian partners, confirmed the government would not undermine existing export contracts with key partners like Japan, South Korea, and Malaysia.

The gas industry, represented by Australian Energy Producers, opposed any new taxes, warning they would deter investment, threaten energy security, and make Australia "uninvestable." Companies like Shell, Chevron, and Woodside defended the current tax regime.

A Senate Inquiry

A Greens-led Senate inquiry into gas taxation held hearings, hearing from both proponents and opponents of new taxes. The inquiry requested testimony from CEOs of major gas companies including Santos, Woodside, Chevron, and Shell, as well as ambassadors from key trading partners. The inquiry reported its findings in May 2026, but the government did not support its recommendations.

A Domestic Gas Reservation Policy

Instead of new taxes, the federal government announced a mandatory east coast gas reservation scheme. From July 2027, Queensland's three major LNG exporters will be required to set aside 20% of their export volumes for the domestic market. The policy is intended to create a "modest oversupply" and apply downward pressure on domestic prices. Pre-existing contracts signed before December 22, 2025, are exempt.

Industry groups criticized the intervention, while manufacturing groups welcomed it.

Long-Term LNG Market Outlook

A Report on Structural Decline

A report from Climate Resource titled "The Last LNG Train Home" projected that Australia's LNG export outlook is structurally constrained by declining global demand. The report stated that climate targets by over 130 countries have altered future fossil fuel demand, leading to a projected global oversupply of LNG by 2030 as new capacity from the US and Qatar comes online.

It noted that most of Australia's long-term contracts expire between the mid-2030s and 2040, potentially exposing the country's high-cost suppliers to a competitive market.

Implications for Australia

The report called on Australian policymakers and investors to stress-test LNG investments against demand-constrained scenarios. ANZ analysts noted that higher LNG spot prices from the Middle East conflict could add significant short-term revenue to the budget, but over the long term, earnings are likely to become more sensitive to global price movements as contracts expire.

Australia is the world's third-largest LNG exporter, accounting for roughly one-fifth of global trade.

Victoria's State Budget and Economic Position

Fiscal Details

The Victorian government delivered a pre-election budget that projected its first operating surplus since the pandemic at $700 million for 2025-26, rising to $1 billion in 2026-27. However, net debt was forecast to reach $192 billion by 2028-29, rising to $199.3 billion by 2029-30, with daily interest payments of up to $32 million.

Spending as a share of the economy rose, driven largely by health costs and interest payments. The state forecast a $7.7 billion cash deficit for the next financial year, with similar shortfalls forecast through to 2029-30.

Key Spending

• Cost-of-Living Relief: $750 million for car registration rebates, $432 million for free/half-price public transport, and an extension of stamp duty concessions for off-the-plan apartments.
• Infrastructure and Services: Over $1 billion for road repairs, $1.6 billion for school infrastructure, $1 billion in health funding, and a $3 million review of the Sentencing Act. The government also committed $2.2 billion over four years for disability inclusion in schools.
• Law and Order: $137.7 million for policing, protective services, and youth crime measures.

Reactions and Criticism

• Economists and Rating Agencies: S&P Global Ratings warned that election-related spending could affect Victoria's AA credit rating. Analysts viewed the budget as a political document delivered before a tight election, questioning the sustainability of the state's debt trajectory. The e61 Institute described the state as "not broke, but it is increasingly boxed in."

• Opposition: Opposition Leader Jess Wilson criticized the spending and rising debt, proposing a hiring freeze of one in seven public service roles to save $22 billion over a decade and return to a cash surplus.

• Treasurer: Jaclyn Symes defended the budget as disciplined, noting it delivers the largest surplus of any Australian jurisdiction, with debt stabilizing as a share of the economy.