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Australia's power problem

By: Chris Williams
17 September, 2014

Australia is the ninth largest energy producer in the world accounting for some 2.5 per cent of the world's energy production, and 5 per cent of world energy exports. We have abundant, high quality energy resources but still industry's energy costs are soaring. What's going wrong?

The price of energy in Australia is a subject close to the heart, or more exactly bank account, of every Australian home owner. If you pay your household power bill you know to your cost that energy prices have been soaring in recent years.

Of course residential consumers make up only a fraction of Australia's total energy consumption. According to the latest Australian Energy Statistics report from the Bureau of Resources and Energy Economics (BREE), residential consumption of energy accounts for only 11.3 per cent of total consumption. Meanwhile the chief power guzzlers are the transport, manufacturing and mining sectors, combined totalling more than 75 per cent of energy consumed, and industry is paying the price.

Manufacturing production, sales, new orders and employment are all going backwards, and as with any business battling weak trading conditions, industry is trying to rein in its costs, easier said than done when the cost of power is going through the roof.

What's going wrong?

Depending on who you ask the reasons most often cited for Australia's spiralling power prices are a failure of energy policy – specifically the carbon tax and renewable energy target (RET) – as well as rising electricity network costs, and counter-intuitively that decreased demand for electricity in the face of rising costs has actually driven prices up, not down.

Brendan Pearson, Chief Executive of the Minerals Council of Australia, says the finger of blame should be pointed squarely at bad policy.

"A decade ago, Australia's energy costs were among the lowest in the developed world. Misguided policy interventions including the RET, the carbon tax and green energy schemes have seen Australia surrender this advantage," Pearson said.

"The RET currently increases retail electricity bills for households by around four per cent, but for commercial and industrial consumers the effect is significantly greater, up to 11 per cent on average. In the minerals sector, the impact is even higher, accounting for as much as 15 per cent of energy costs.

"Australia cannot simply afford to give competitor nations such a head start in global markets."

Gas prices to soar

Australian Industry Group (AiG) Chief Executive Innes Willox, concurs, but said the impact of escalating gas prices would prove especially harmful to the manufacturing, transport and agriculture sectors.

"Price relief is a high priority. Energy users have endured substantial price increases in recent years, and worse is to come in much higher gas prices," Willox said.

The impacts are the result of sharply higher gas prices as Liquefied Natural Gas (LNG) exports ramp up on the east coast, tripling domestic gas prices to export parity levels.

A report from Deloitte Access Economics back in July predicted that under current policy and realistic gas price forecasts, manufacturing output will contract by $118 billion over the next seven years, with up to 15,000 jobs lost. Meanwhile the mining sector will contract by $34 billion and the agriculture sector by $4.5 billion, the report claimed.

"Gas exports should be pure good news for Australia.  However, the strong benefits for investment and export earnings come with serious side effects for domestic manufacturing: tight supply and surging prices. Without reform, our rich energy reserves will no longer contribute to Australia's competitiveness," Willox said.

"We need both a growing LNG export industry and a diverse industry base with a strong manufacturing sector. We need action on two fronts - get more gas flowing, by replacing blanket bans on gas production with strong but workable regulation; and reform the market that gas is sold in to boost competition and transparency."

Impact on industry

Manufacturing Australia is an alliance of nine CEOs from some of Australia's largest locally-headquartered manufacturing companies including Bluescope, Capral, Rheem and CSR.

Collectively, Manufacturing Australia's member companies operate around 300 plants around the country, directly employing almost 50,000 Australians, notably in outer suburban, rural and regional centres.

Ben Eade, Executive Director of Manufacturing Australia, said global experience has taught us that manufacturing flourishes in those countries that identify and exploit their natural advantages.

"For some nations, an advantage is abundant or cheap labour, for others like Australia or the USA, a key advantage is energy," Eade told the National AIE Energy Conference last month.

"Whether we like it or not, a great deal of Australia's manufacturing activity is energy intensive. But that doesn't mean it's inefficient. Typically the opposite is the case. For these businesses, energy prices are a core issue.

"One of my members is CSR. Last year CSR was ranked 17th on BRW list of Australia's most innovative companies. A key driver in that ranking was CSR's investment in efficiency improvements, both in its operations and its products.

"Lightweight bricks, hybrid ventilation products, low emission glass and other products are the result of years of R&D at CSR.

"Energy innovations like these typically aren't driven by policy. They are driven by demand from consumers for more efficient products, combined with the absolute need for large manufacturing enterprises to drive down energy input costs." 

Australia was now locked into a winners and losers situation, Eade said, where gains from new LNG export projects will be offset by losses in the manufacturing sector and lost investment opportunities.

"We're seeing the evidence of that already. Closures like the CSR glass factories in Ingleburn in NSW; investments taken offshore – Incitec Pivot building a $1 billion ammonia plant in Louisiana rather than Newcastle; deferred investment: BASF, Coogee Chemicals, Dow so far this year," Eade said.  

Jim Snow, Director of Oakley Greenwood, an independent energy industry consultant, said the response from businesses has been entirely predictable.

"Customers have responded as could have been expected – they have reduced their demand through conservation, through substitution, through investment in more efficient products and through simply stopping their use," Snow said.

"The latter for businesses has involved relocation of energy price-sensitive production interstate or offshore, or just closing down production as it became uncompetitive. This was and continues to be economic theory being played out in real time.

"It may be tempting to be dismissive of 'inefficient smoke stack' industrial plants but most modern primary and secondary manufacturing is technically efficient and has made best use of low energy prices and other local advantages."

What next?

The government is expected to announce changes to the RET soon, and with the Australian Workers Union (AWU) also throwing its support behind changes just this week, hopes that a bipartisan deal can be struck are increasing.

As Snow says, the consequence of rising energy prices are predictable – demand destruction and the loss of competitiveness of Australian industry.

"The offsets are intended to be greater national income from international sales of energy and the associated economic benefits from being able to source goods from more cost-competitive countries," he said.

"The question then is – do we have the trade-offs right – are the impacts of the policy decisions worth the pain of the restructuring? Do we even understand the consequences?"

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Robert Zimmermann | Thursday, September 18, 2014, 1:08 PM
We need top proven expertise and strategists to maximize efficient return from our resources including infrastructure.
Mike O'Brien | Thursday, September 18, 2014, 1:26 PM
It seems to be another example of government meddling in a commercially oriented market - in this case, energy. Badly structured and implemented policies on green energy schemes et al that remove an advantage this country had in cheap energy ought to be considered treacherous in any company where similar actions pushed commercial advantage the wrong way. Company directors and management would be sacked. Hence the Rudd-Gillard governments were thrown out by the electorate. Trouble is, it will take years before we regain any advantage we previously had to allow manufacturing and/or minerals processing to be economically sustainable in this country. Trouble is, I wonder if we have learnt our lessons and even understand why companies like Incitec-Pivot will go offshore to chase the most cost effective means to manufacture products for the international marketplace. Based on the populist tripe one sees in the media, and the airtime given to anyone with grievances against any attempt to change the course of the ship of state, I have my doubts that as yet we have not experienced sufficient pain to force understanding onto us. Once something like an industry is lost, the associated supply chain and expertise goes elsewhere. Getting it back will prove difficult.
Mario Martini | Thursday, September 18, 2014, 1:35 PM
If we did the costings........what would be the cheapest form of energy production that would allow us to return to metals manufacturing on a large globally competitive scale?
Peter John | Thursday, September 18, 2014, 2:16 PM
Great example of the cost of RET - last week whilst driving Sydney to Cooma, near Lake George the large wind farm did not have 1 single wind turbine turning and further on at Royalla on an overcast day, I am not sure what energy was being produced by the huge solar panel farm. This country cannot afford investments of this magnitude that are questionable on their real output and are a huge financial burden on the cost of energy. But at least the green movement is happy!!
Allen Burrows | Thursday, September 18, 2014, 2:31 PM
Why does the price of gas in Australia have to go up just because you can get a higher price overseas, so market forces are determining the big gas CEO profit and the CEO says up your to Australia and makes them pay the going rate to make more profit....what kind of national interest is this???
Norman Russell | Thursday, September 18, 2014, 7:37 PM
It is very obvious that the Govt is supporting Multinational Companies, taking our money our of Australia, and leaving the hardworking taxpayer to suffer as a result
Ros McNeilage | Friday, September 19, 2014, 9:23 AM
Brendon Pearson is the executive of an organisation whose sole reason for being is to make money for its shareholders by digging up resources (inc coal) as cheaply as possible and selling it as expensively as possible. Linking Australia's usage of the energy/power that those resources provide to international prices for those commodities is a great way to maximise profit by not having the cost of transport overseas, but charging for it. Likewise Innes Willox's group can complain, but the lack of support for manufacturing and science, neither of which has a federal ministry now, by what can only be described as a very short sighted far right wing federal government is where the problem lies. The renewable energy sector, to its credit, at least has a visionary approach, because if we want our grand children to have a standard of living anywhere near ours socially, environmentally and economically, and all three are as important as each other, then it will not be based on digging stuff up and flogging it off.
Ron Raymond | Wednesday, September 24, 2014, 10:55 AM
Great write up by IndustrySearch.
Alan Swales | Tuesday, December 16, 2014, 5:05 PM
Whilst we rely on overseas contracts to provide the basics of efficiency in energy production instead of using the vast experience of innovative staff to implement much more economic solutions, we will never get ahead of the cost increases. Making staff redundant instead of using their skills is very counter productive. Australia has to capatalise on the vast pool of experience in the skills of its employees instead of contracting out to overseas. Now I am just a consumer, I have applied the same innovative skills to reducing my demand, and whilst that will never be sufficient to overcome the energy price increases, it obviously has served to reduce at least my demand. The next step would be to provide energy to run my computers and essential lighting from battery-backed small solar Voltaic panel arrays. If the cost continues to rise, this is my next step. Ex Engineering Officer