At the start of a new year it is timely to look back over the last couple of years and view how energy policy has impacted on energy pricing, and how it might change going forward.
Currently the mainstream policies of Government(s) impacting on energy pricing appear to be:
• Use Renewable Energy Policy as the primary tool to impact on reducing emissions from electricity and
• Limit gas supply by placing moratoriums on new production.
The Federal Renewable Energy Target (RET) has introduced a flood of new supply (both wind and solar) over the last few years at a time when demand has been static, if not declining. This has put extreme financial pressure on existing baseload, mainly coal-fired generation, some of which has now been retired with potentially more to come (eg Hazelwood early this year).
Consumers are paying more – both through increased RET charges (up 80% to more than 1.5c/kWh in the last 2 years) and through increased energy rates. To put this into perspective the carbon tax had an impact of about 2c/kWh when first introduced – about half the impact that the renewable policy has had on electricity pricing. We are also seeing negative impacts of this policy on security of supply – the ability for the system to stay on during unusual events (eg South Australian storms).
Gas was an obvious alternative to an all-out focus on renewables. Gas fired generation produces less emissions (per kWh produced) than coal fired generation. In countries like the US and Britain substituting coal with gas fired generation has enabled them to achieve significantly higher levels of emissions reductions than Australia has managed to achieve. Could this still be achieved with a change in policy?
Also acting against gas being used for electricity generation has been the second of the two mainstream policies – limiting gas supply by placing moratoriums on new production. Australia has an abundance of gas, however policies like the RET meant that there was not great demand to use the gas domestically. Export facilities have been set up to ship liquefied gas off-shore. Now a combination of this export market developing and constraints on new supply being developed has seen large increases in domestic gas prices. In areas like Victoria where customers were paying $4/GJ it is now likely to be closer to $10/GJ for new contracts. At these prices existing gas fired electricity generators are also having to increase their pricing which has a flow on effect into the electricity market.
In the current environment it is difficult to see any relief for consumers over the next couple of years. The policy issues are complex and made more difficult by the interaction required between State and Federal Governments. There also appears to be little appetite from politicians to address the issues, a good example is the terms of reference for the Climate Change Review announced in December by the Federal Government. Initially the option of a carbon price was to be included, but was subsequently removed after pressure from within the Government itself.
For companies exposed to high energy prices we can only suggest that you lobby politicians whenever possible – outlining the difficulties this is causing to your businesses. Wherever possible advocate for mechanisms that have been shown internationally to achieve the desired climate change outcomes at the lowest cost to the economy. And advocate for ways to free up new gas supplies to meet domestic demand.
As always our experts are here to assist you in any way we can – whether it be putting together submissions, developing procurement strategy, running tenders, or assisting you to reduce your energy use to help mitigate these increases in your costs.
