Thursday, 27 October 2022

Australian industry must steel itself in preparation for a protracted period of spiralling energy costs.

Although a commercial resolution has been reached on gas supply, the situation regarding our energy crisis continues to unfold as we expected. The coming year will almost certainly bring a material increase in power prices and place many organisations in some of the most testing situations. The Federal budget pointed to the Ukraine war being the primary cause of the increase and prices could rise by up to 50% in 2023^1.Realistic goals and a coherent, and nationally consistent plan are critical in fuelling the race to renewables – optimism and good intentions are not enough.

Current pressures

At a major energy conference in Sydney this month, the nation’s largest energy retailers did not hold back in expressing their concerns at the current situation. CEO of Alinta Energy, Jeff Dimery, told delegates power prices will soar at least 35% in 2023 due to already skyrocketing wholesale energy costs. “It’s unpalatable,” Mr Dimery said. “… [but] that’s the reality of where we are headed, unfortunately.^”2Another CEO revealed they were already training staff in how to deal with distressed consumers unable to pay power bills.

A tricky transition

Energy Australia CEO Mark Collette concurred, attributing steep rises in wholesale gas and electricity prices for “… a lot of upward pressure…”³ on tariffs. At the same time, he stressed the scale of investment needed to build renewables infrastructure was enormous and observed that, to meet the 2030 targets announced by government, two-to-three times more work had to be done in the next seven years as had been done in the previous 20 years.

Mr Dimery placed further doubt on the plausibility of renewable targets, revealing Alinta Energy was already in a “battle for talent” as it struggled to find builders for its current $8 billion of renewables projects. “There are not enough people,”⁴ he told the conference, adding he was doubtful of a smooth transition to renewables given the tens of billions of dollars required and critical labour shortages.

As business and consumers grapple with these realities, governments seem to be treating the transition to green energy as a race fuelled largely by optimism and good intentions. Lack of a coherent plan and detailed strategies have characterised Australia’s energy crisis from the start and continue to do so. Furthermore, the fact being that Australia ranks last out of the world’s 50 largest economies for spending on green initiatives also brings our ambitious net zero targets into serious question.⁵

Net zero commitments

Consider the zealous nature of the various plans across the nation: the Federal and State governments are now yoked by a legislated commitment to a net zero emissions economy by 2050 or sooner – a strategy described as being of a magnitude greater than war-time reconstruction by Origin Energy CEO, Frank Calabria, during the Sydney energy summit. The strategy is expected to cost 5% of Australia’s annual GDP over the next 28 years, a figure estimated at around $7 trillion,⁶ and the plan is to run alongside a 43% interim emissions reduction target by 2030.⁷

In late September, Queensland $62 billion is to be poured into building 22 gigawatts of clean energy projects in the next 13 years,⁸ a scheme described by energy analysts as ‘diabolically difficult’ to deliver given likely cost blowouts and a shortage of skilled workers.

NSW’s Net Zero Plan Stage One: 2020-2030 aims to deliver a 50% reduction in emissions by 2030⁹compared to 2005 levels while enroute to net zero emissions by 2050. Last week Victoria joined the ‘race’, declaring its bold intention to transform the state’s energy network to such a degree that it will be 95% reliant on renewables by 2035. An interim goal has also been set for 50% of electricity to come from green energy sources by 2030¹⁰. This is in addition to Victoria confirming it “… will bring back public ownership of energy resources,” ¹¹ which has caused some concerns in the market around the effective deployment of public funds.

The way forward

Our advice to Australian businesses and corporations for key actions remains consistent:

• If using a hedging provider or wholesaler, ensure they have the capacity to meet their obligations. Otherwise, your business may end up not only covering the arbitrage but also without supply.

• Ensure your supply chain is secure. Large energy users need to be particularly proactive in ensuring suppliers are solid.

• Consider ways in which to team with suppliers, competitors and employees (including unions) –  create a unified voice for lobbying government to take a holistic, national approach to decarbonisation.

• Be aware there will be headwinds for new renewables projects in many areas. Rising interest rates, general tightening of credit, uncertainty over the consistency of federal and state policies and a lack of investment in the network will prove to be challenging.

There are long-term implications of the lack of a coherent national energy policy:

• New energy projects will be placed at risk.

• Australian manufacturing faces a very challenging future with high and volatile energy pricing.

• Foreign investment will face a form of sovereign risk.

• Australian states and territories will compete to acquire enough workers and resources for their individual infrastructure projects.

The signals are loud and clear that Australia requires a coherent plan from state and federal leaders to maintain the reliable provision of energy as the country transitions to renewables. Lofty targets and daring schemes lacking in detail will only serve to damage industry and, ultimately, the economy.