Tuesday, 16 August 2022

In a fight against the energy crisis, Corporate Australia must act to ensure survival.

The battle for Australian businesses to continue accessing both reliable and cost-effective sources of energy shows no sign of abating. Among many indicators we are in this for the long haul is the latest Australian Competition and Consumer Commission (ACCC) gas report which forecasts a 56 petajoule shortfall to the east coast market during 2023 – equivalent to about 10% of current domestic demand.[1] "The outlook for 2023 is very concerning and is likely to place further upward pressure on prices, which could result in some commercial and industrial users no longer being able to operate," the report said.[2]

Australian corporates must adopt survival tactics to enhance their resilience. Businesses that have not prepared accordingly or been slow to react are in for a rough ride - even if they move now. This is especially true for those in the hardest hit sectors of Australia’s largest energy consumers led by transport, electricity supply and manufacturing.[3] These sectors account for almost 75% of the nation’s energy consumption and are followed by mining, residential, commercial, agriculture and water & waste.

Of course, a range of solutions are being considered and actioned by various states and the Federal government. One of these is pulling the gas trigger, an emergency provision, which allows the resources minister to directly intervene in the gas market and impose export controls to ensure there are adequate supplies for domestic use. While using this mechanism would cause the price of gas to fall in a short-term positive for businesses, it could, ultimately, be counterproductive due to the potentially disastrous effect this would have on the confidence of foreign investment in Australia.

The transition to renewables received fresh momentum this week when the Federal government declared Australia's first six offshore wind energy zones starting with waters off the Gippsland coast, in Victoria's south-east.[4] Wind energy is one of Australia’s main sources of renewable energy, currently generating enough electricity to meet 7.1 per cent of the nation’s total electricity demand and, along with solar, is viewed as having the greatest potential for our future needs. However, the journey to that point is a long one. Even though, for example, costs for offshore wind have fallen, Gippsland's transmission infrastructure will now require an update and extension as the existing system was designed to connect to fossil resources. "We need to build about 10,000 kilometres of new transmission lines over the next decade," said CSIRO chief energy economist Paul Graham.[5]

Further, the success of all green energy heavily depends on aligning state and federal government policy. Climate energy market analyst Tim Buckley emphasised this when he said that while the declaration of the six wind zones was a step forward, it requires all levels of government working together to ensure issues with supply chains, construction costs and the intermittent nature of onshore wind and solar could be managed and overcome.[6] "We need to weigh up the additional costs related to offshore wind construction and see where it makes the most economic sense,” Mr Buckley said. “We need to value the balancing or base-load nature of the generation, to support the sometimes-intermittent nature of onshore wind and solar."[7]

A diversified approach is required. Kellie Parker, CEO of the nation’s largest consumer of energy Rio Tinto, recently highlighted the imperative for industry to adopt firming solutions to meet electricity generation requirements and remain attractive to investment.[8] “Renewables are intermittent, and industry requires largely firm energy,” Ms Parker said in a speech to the Melbourne Mining Club this month. “Any national electricity solution must not only go low carbon but also retain competitiveness,” Ms Parker said. “Investment by industry requires firm, competitive electricity prices.”[9]

While industry races to meet emissions targets and manage and afford the complexities involved in moving to renewables, it also faces the fallout from an unprecedented combination of global events. The pandemic, the Russian invasion of Ukraine, major flood events and rising geopolitical tensions – not to mention a federal election – have sent coal and energy costs skyrocketing to new levels and created costly supply chain issues. Businesses across the country are feeling the effects of this involuntary roller coaster ride, with shortfalls of gas expected to mainly impact New South Wales, Victoria, South Australia, Tasmania and the Australian Capital Territory, and Queensland less significantly.[10] Western Australia is the outlier with the WA Domestic Gas Policy ensuring the prolific WA gas fields have a portion of production reserved for domestic gas needs.

The speed at which this has occurred has made it almost impossible for many business managers to plan for and/or adopt usual solutions, such as passing input price increases onto customers, seeking alternate inputs and hedging. Every business needs a tactical response, combining both offensive and defensive moves to survive this battle. Their blow-by-blow plan should include:

  • Cost-base variability – finding ways to make cost bases more flexible. This requires keeping a cool head while having those uncomfortable conversations with stakeholders from employees to lessors, unions and suppliers. However, it will mitigate the loss-making risks associated with cost spikes and supply disruptions.
  • Rolling with the punches – adapt to, and spar with, the market. Seize moments for opportunistic input volume and pricing.
  • Adopt an offensive fight style – aggressively manage your working capital and explore non-traditional lending options.  Cash is king, and this will never change as a business rule.
  • A calm approach – tackle this fight with the mindset of managing lumpy conditions as opposed to fundamentally changing your long-term business model.
  • Open communication – acknowledging that your stakeholders are also in survival mode, collaborate on negotiated solutions. While an altruistic motive is unlikely and price increases may need to be passed on, regular and transparent communication will go a long way.

Businesses could not have foreseen the current scenario. It has left many grappling to contract energy costs and entering emergency-style negotiations. While profits are an important longer-term consideration, survival and consolidation are imperative: live to fight another day.

[1] The Hon Madeleine King MP, ‘Government responds to ACCC gas shortage report’ (Media Release, 1 August 2022, [1]) <https://www.minister.industry.gov.au/ministers/king/media-releases/government-responds-accc-gas-shortage-report>
[2] Stephanie Borys, Gas outlook 'concerning' with government urged to act to alleviate worsening 'energy security risk' (1 August 2022) ABC News <https://www.abc.net.au/news/2022-08-01/energy-gas-shortage-higher-prices-accc-warning/101286764>
[3] Department of Climate Change, Energy, the Environment and Water, Australian Government, Australian Energy Statistics 2020 Energy Update Report (2 October 2020) 11 <https://www.energy.gov.au/publications/australian-energy-update-2020>
[4] Bec Symons, Federal government declares Australia's first six offshore wind energy zones (5 August 2022) ABC News <https://www.abc.net.au/news/2022-08-05/offshore-windfarms-climate-renewable-energy-turbines/101303944>
[5] Danielle Pope and Rio Davis, Gippsland offshore wind projects await federal government declaration (1 August 2022) ABC News <https://www.abc.net.au/news/2022-08-01/offshore-wind-zone-gippsland-await-government-declaration/101280796>
[6] Symons, above n 4.
[7] Ibid.
[8] Robert Gottliebsen, Low-carbon power solution must be at a competitive price, warns Rio Tinto’s boss (7 August 2022) <https://www.theaustralian.com.au/commentary/lowcarbon-power-solution-must-be-at-a-competitive-price-warns-rio-tintos-boss/news-story/3b80c52d458552e982650a199bff13cb>
[9] Ray Chan, Rio fast-tracks renewable energy strategy (8 August 2022) Australian Mining <https://www.australianmining.com.au/news/rio-fast-tracks-renewable-energy-strategy/>
[10] Borys, above n 2.