Strategic energy management

14 Dec 2010Archived News Climate Change Matters

Australian business and communities have felt the impact of steep increases in energy bills in recent times. Further, energy price increases are expected in the near future, with both electricity and natural gas prices potentially doubling within 5 years.

Electricity prices are likely to rise due to increases in fuel costs for both coal and gas generators. Old coal contracts are expiring and being replaced at much higher prices, while the local price of natural gas will increase as it achieves parity with world prices. In addition, business needs to plan for a price on carbon in the near future. A carbon price levied on electricity generation will largely be another pass-through price increase. Electricity network prices are also rising very substantially due to the need to rebuild and replace aging infrastructure.

All businesses need to understand the impacts of volatile energy pricing. The factors impacting prices are outlined below in more detail.

LNG globalises Australian gas

The markets of Australia’s east coast have always enjoyed very low gas prices by world standards due to plentiful supply and isolation from world markets. With the introduction of LNG, these markets will be exposed to global gas prices. Indications of the potential impact can be inferred from Western Australia where gas prices rose from around $4/GJ to around $8-$10/GJ with the introduction of LNG facilities.
The price increases will impact both large gas and large electricity users, as gas generation starts to set the marginal electricity price. It is Energetics' view, from recent work with large energy users, that we are already seeing impacts on the price and availability of long-term gas contracts.

Volatility in energy prices

The collective impact of more air conditioners, more wind farms and old inflexible coal generators have combined to create greater volatility in energy demand and prices. The energy market has been designed to show very high peak prices as new generation is required. Note that this volatility is not linked to a price on carbon. It is based purely on energy prices.

Energy supply concerns

Security of electricity supply will become tighter. Gas supply may be a problem at peak times
Over the past 10 years of privatised energy markets, much of the surplus generation capacity that the government-owned generators built has been consumed. In addition, little new generation capacity has been constructed, with few established plans for new capacity at present.
Business needs to prepare for a situation where power supply and gas supply are restricted on peak days.

Considerations for business

Even if power only constitutes a comparatively small component of a business' total costs, most resource companies sell at prices set by global markets and therefore lack the ability to pass energy price increases through to customers. A substantial increase in power costs leads directly to an equivalent reduction in profits.

Companies whose business in Australia is heavily dependent on low-cost power are starting to move now to secure energy contracts for the next 10 years before the prices rise, potentially very significantly. While this is not always easy, opportunities remain to secure long-term, low-cost power and thereby create a competitive advantage. To do this, a detailed understanding of the market, sophisticated long term price forecasting, proactive development of new energy choices and new energy projects, and close management of risks is required.

Energetics provides power price forecasts to many large energy users for use in modelling, project evaluation, contract discussions and budgeting.

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