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What is the energy price relief plan and will it actually reduce power bills?

Federal, state and territory governments have agreed at national cabinet to a so-called “energy price relief plan”. Here’s what they agreed on and what it might mean for consumers.

What’s been decided?

A four-point plan will cap, for 12 months, the price of black coal at $125 a tonne and the price of gas at $12 a gigajoule, within about a week. The commonwealth will transfer $1.5bn to the states and territories to cut energy bills for eligible households and small businesses.

Related: $1.5bn energy price relief package for Australians including caps on coal and gas

Federal parliament will be recalled next week to pass legislation, particularly to give the Australian Competition and Consumer Commission more powers. New South Wales’ parliament will amend laws for the coal industry, most likely early in 2023.

How soon will energy costs fall?

The direct benefits are expected to flow to households and businesses by the June quarter of 2023.

The federal treasurer, Jim Chalmers, will work with state and territory counterparts to determine how the $1.5bn in commonwealth support will be shared. Those receiving welfare payments such as pensions, jobseeker or family tax benefits, will have their energy bills reduced.

Small businesses will also be in line for rebates with eligibility yet to be settled.

The other relief will come via the projected fall in wholesale electricity prices because coal- and gas-fired power plants won’t have to pay as much for their fuel. While most of their fuel is on cheaper long-term contracts, the portion exposed to spot prices – for example, about 20% for Origin Energy’s Eraring coal plant in NSW – does fluctuate.

Clare Savage, the Australian Energy Regulator chair, told Friday’s meeting that even the federal government talking about restrictions had put “downward pressure” on wholesale power prices.

Treasury modelling indicates that instead of retail power prices rising 36% in the 2023-24 fiscal year, the increase will be trimmed to 23%. Gas prices, instead of rising 20% this year and next as forecast in the federal budget, are instead expected to increase 18% and 4%.

The saving for the average household will be $230 next financial year compared to no interventions.

NSW, Victoria and Queensland at this stage may not add to their existing energy support programs, the Guardian understands, while the ACT is expected to boost its assistance.

Will it work?

All else being equal, bills should be smaller at least for the year-long period of the price caps. The governments will be hoping Russia’s invasion of Ukraine – the main driver of soaring global energy prices – will be over then too.

Concerns that the transfer of $1.5bn will be inflationary are alleviated because recipients won’t get the money as cash. Lower wholesale energy prices should also help, resulting in an estimated 0.5 percentage trimming of next year’s inflation rate.

Prices caps imply producers could get more for their gas and coal if they exported it. To make sure they don’t, the ACCC will get those beefed-up powers for gas and NSW for coal. Queensland can use existing laws.

The prime minister, Anthony Albanese, insisted on Friday the intervention won’t raise concerns about Australia’s sovereign risk, saying it would “have no effect” on existing export contracts.

What has the reaction been?

Mixed, as you might imagine, with so many interests at stake.

The federal opposition leader, Peter Dutton, said the announcement demonstrated that Labor’s pre-election promise that average household power prices would be on average $275 lower by 2025 was “dead and buried”.

As such, it marked “a significant broken promise” by the Albanese government, about six months into its term, Dutton said.

Lynne Gallagher, the CEO of Energy Consumers Australia, said the plan would bring relief for millions of households and businesses and help curtail further price increases.

More detail, though, was needed before “every Australian could clearly understand what it would mean for their budget”, she said.

Innes Willox, the CEO of Ai Group, an employer association, said that price caps would be “messy to implement and it would be better if we were not still so vulnerable to gyrations in these global fuel markets”.

“But they look likely to be very helpful in dampening the immediate economic pain of this global energy crisis,” Willox said, adding his organisation was relieved governments were “working together to respond effectively”.

However, the gas industry group Australian Petroleum Production and Exploration Association, said the package was “radical”. The price cap and mandatory code of conduct would smash investor confidence, curbing future supplies.

“Less gas will ultimately mean higher prices while threatening Australia’s energy security, our emissions reductions goals and the enormous economic benefits that the industry delivers for Australians,” the chief executive, Samantha McCulloch, said.

“With this decision the government has not given the heads of agreement with east coast exporters and the Australian gas industry code of conduct – both announced only 71 days ago – a chance to work,” she said, adding there had been no consultation.

Tim Buckley, the director of Climate Energy Finance, said the rebates were important as “energy poverty affected the poorest hardest”.

He said the fossil fuel industry should be grateful they weren’t being slapped with a special profit tax. He estimates the companies will book a gross profit in 2022 alone of $120bn.

“These multinationals are using Australian public assets to make war-time profits,” Buckley said. “It’s time we shared some of these windfall gains.”

Why was intervention needed?

Despite Australia’s enviable resources – from fossil fuels to solar and wind – energy prices are mostly at the mercy of global markets. Western Australia, with its 2006 decision to reserve 15% of its gas for local use, is the exception, with among the lowest prices anywhere for energy, EnergyQuest says.

Related: EPA Victoria finds at least six warehouses with 3,000 tonnes of soft plastics after REDcycle suspended

Coal and gas often set the wholesale power price in eastern states, so electricity prices have soared, adding to inflationary pressure and the budgets of households and businesses.

According to the Australian Energy Market Operator, the average wholesale spot price in the national electricity market in the September quarter was $216/megawatt-hour. That was down on the June quarter’s record $264/MWh price but more than triple the $58/MWh of a year earlier. Wholesale prices make up about a third of total power bills.

For eastern states, September-quarter gas prices averaged $26/gj, a 142% increase from a year earlier and only slightly below the $28.40/gj price in the April-June period. Historically, prices were about $3/gj before opening up to global markets.

The ACCC said as of August this year, the majority of offers to commercial and industrial gas users for supply next year were above $30/gj “which is the highest we have seen”. A $12/gj would offer “a reasonable return on capital for a 12-month period”.