The Federal Government says an expected hike in gas prices for east coast manufacturers will not impact on plans to build a proposed gas-fired power plant at Kurri Kurri - a key plank of its gas-led recovery strategy.
The forecast 30 per cent price increase is the result of an arbitration ruling that will require Origin Energy to pay more than expected for the natural gas it buys from Kerry Stokes-backed Beach Energy.
Origin Energy will be required to pay $9.30 per gigajoule as a result of the ruling. It had been paying about $7 per gigajoule in recent years.
The government's COVID-19 manufacturing recovery task force suggested last year that $6 per gigajoule was needed for a sustainable gas-led recovery.
Origin has warned the ruling would increase its cost of supply by as much as $40 million this year and up to $80 million next year. As a result, industrial manufacturers could be paying close to $11 per gigajoule.
The ruling prompted Energy Minister Angus Taylor to remind east coast gas suppliers of the importance of providing internationally competitive gas prices.
But it will not affect whether a proposed $500 million, 750 megawatt gas-fired peaking plant at Kurri is built.
The government has set an April 30 deadline for the energy industry to prove it can replace the 1000 megawatts of dispatchable power that will be lost from the closure of Liddell Power Station in 2023.
It will then make a final investment decision on the Kurri plant, which would be built by Snowy Hydro 2.0.
"If the private sector doesn't step up, we will step in," a spokesman for Mr Taylor said.
"The Government is already preparing to step up if the energy companies don't, with Snowy Hydro securing critical NSW state significant infrastructure status for their proposed Kurri Kurri gas generator."
"Initial, early-stage assessments of the economics of the new gas generator at Kurri Kurri are very strong, with a larger generator expected to deliver a higher rate of return than a smaller generator."
The arbitration ruling will also increase pressure on new gas exploration in locations including the Hunter in an effort to increase supply.
"I would argue, perhaps controversially, that in the Hunter we have more gas underneath us than society needs for the next 200 years," he told the Newcastle Herald earlier this year.
"We should have an adult discussion about how we access that gas. Some of the attempts to do it in the past have been poor. We have got to have the conversation with people properly, but I do think of gas as a transition fuel as we move away from coal; you can't have renewables unless you have fast-start (electricity generation) that fills in the gaps and gas and hydro are the key to that."