How do businesses power through the energy crisis?

Monday, 18 July 2022

One of the few certainties around Australia’s energy crisis is that it will take considerable time to resolve.

The bleak scenario in which we now find ourselves has been a long time coming, caused by a confluence of short- and long-term factors that have impacted supply and made quick fix-solutions unworkable. Any business exposed to the market without hedging or contracted volume and price in place can expect to feel the full brunt of financial pressures borne by rising energy costs.

The reality is that any meaningful solution to our existing problem will require changes in government policy, a process that goes hand in hand with long lead times. Historically, state and federal policies have not aligned. While states and territories, such as the ACT, South Australia and, to an extent, Victoria, are ahead in the pursuit of renewable targets, this has been reliant on a base load from other jurisdictions outside their control.

Other factors creating our energy crisis are many and varied, starting with the general rise in energy costs worldwide. This has been compounded by the ripple effects of the Russian invasion as well as Australia’s problems with planned and unplanned outages among ageing coal-fired power stations. A particularly cold winter season and insufficient volumes of Australian natural gas to service the domestic market are adding even more pressure to the situation. This combination means soaring power bills will be a fact of life for a protracted period.

Australia cannot rely on its abundance of gas, coal, solar and wind reserves either. The privatisation of state gas infrastructure, electricity generators and grids in the late 1990s allowed gas and coal companies to export vast quantities of resources. While competition increased, this has come back to bite us, placing myriad pressures on the Australian grid and electricity market frameworks when sanctions against Russia triggered a global shortage of natural gas. Our existing domestic gas suppliers are now bound by third party export contracts. Talk of government intervention by pulling the 'gas trigger‘ under the Australian Domestic Gas Security Mechanism (ADGSM) is, hopefully, just talk. Doing so would introduce previously unseen sovereign risk in Australia. Also, despite northern Australia having plentiful gas reserves, there is no pipeline capacity to transport the product to metropolitan areas in the nation’s south.

As for renewables, we still have a way to go. Renewables contributed 24% of total electricity generation in 2020, according to latest government figures (solar (9%), wind (9%) and hydro (6%)). The share of renewable energy generation increased from 21% in 2019.[i]

In comparison, fossil fuels contributed 76% of total electricity generation in 2020, including coal (54%), gas (20%) and oil (2%). The share of coal in the electricity mix has continued to decline, in contrast to the beginning of the century when coal’s share was more than 80% of electricity generation. About 16% of Australia’s electricity was generated outside the electricity sector by business and households in 2019-20.

Feedback from the Sydney Energy Forum held last week confirmed positive intention with industry bodies, government and private organisations all encouraging cooperative commitment to clean energy. The Forum, however, highlighted the requirement for skills migration into Australia to support the clean energy transition and the requirement for supply chain certainty – evidenced by Australia’s current actions to secure the supply chain of critical minerals required to cut carbon emissions.

So how should organisations proceed? Business leaders must meet the situation head-on. Even if clarity on policy is achieved, it will still take years to alleviate the periodic shortage of energy supply. This makes it critical for organisations – especially high-energy users – to take stock of their individual positions and focus on tailoring long-term plans around energy management and budgets accordingly.

Even if solutions are not immediately obvious, there are a number available. For instance, directors can re-cut their forecasts, think left field on contracting and manufacturing options, use the power of their unions to lobby the government and seek expert advice. Given Australia’s energy supply is facing a never-before-seen set of challenges, it is highly advisable to seek professional advice from knowledgeable consultants. With proper guidance, organisations can revise their outlooks to protect the bottom line and survive this current crisis.