The end of cheap energy in Australia

25 Feb 2010Archived News Climate Change Matters

Since the first edition of Climate Change Matters back in August 2009, the editorial team has maintained a focus on Australia's steeply rising energy prices and the likely impacts Energetics experts foresee for business.

In this article, the key factors affecting energy prices are discussed to help prepare customers to make the tough decisions on how to invest and respond to a changing energy market.

Factors affecting our domestic energy prices

  • Despite a slow-down in the world economy in 2009, the International Energy Agency is forecasting strong world demand for energy from non-OECD countries including China, India and the ASEAN region. This is refocusing the energy markets towards Asia for the next 20 years.
  • Growth in world energy demand is driving the development of Liquid Natural Gas (LNG) projects on the east coast of Australia. This will increase Australia’s exposure to international price dynamics and may cause eastern natural gas prices to rise from approx $4/GJ to world prices of over $8/GJ. This increase has already occurred in Western Australia.
  • Oil in particular is experiencing long-term price increases as the impacts of peak oil are evidenced.
  • LNG developments and new gas powered generation projects are also creating additional strain on the availability of gas for the domestic market. There have already been curtailments in NSW and much higher financial incentives to curtail industrial customers at peak times. This is already impacting on the costs of the gas and transporting it from the source to the city gate through a transmission pipeline.
  • Major investment is needed in our electricity infrastructure. The Australian Energy Regulator (AER) approved $39 billion of investment in the electricity distribution network (infrastructure to manage supply from the transmission network to the customer) for the National Electricity Market over the next five years. The investment has been justified to meet load growth, ensure the replacement of ageing assets, and to improve reliability as the requirements of the network change to meet embedded generation and higher peak demands. With network costs accounting for approximately 50% of a typical energy bill, the rising costs of new investment are being passed through to customers.
  • Volatility in the wholesale prices for electricity and natural gas markets is increasing risk and costs to the retailers. Costs are passed through to customers as higher margins. This problem can only worsen as the market participants amalgamate and retail competition declines.
  • A number of new environmental charges are creeping into energy bills to subsidise the cost of a range of environmental programs. The introduction of Federal Government’s Renewable Energy Target (RET) scheme, in addition to the plethora of state based schemes, is adding approximately 10% to the delivered costs of electricity.
  • If and when introduced the introduction of a price on carbon will impact on the costs for all energy sources. In the early years of the proposed CPRS scheme the anticipated cost is approximately $10/t.
  • However, in the absence of any formal scheme, there is no current standard approach for suppliers to manage future carbon risk. Business customers are already exposed as they sign supply agreements beyond 2012. As an example, some electricity contracts already include an estimated cost for carbon in the base electricity price and include a retail pass-through clause. This has the potential to add costs beyond 2012 of more than $20/t.

Proactive energy management strategies

In response to these challenges, businesses must counter these risks by changing the way they procure and manage energy.
Some of the proactive strategies being adopted include:

  • Proactive contract management and forward hedging- don’t leave energy purchasing to the last minute – look at the market and buy well in advance if pricing is attractive
  • Negotiating stronger clauses to manage pass-through risk (especially for carbon and other environmental obligations);
  • Better monitoring and instantaneous reporting of energy use and load profile data with online and in house data management systems; Measuring and managing pays off
  • Demand management programs to reduce exposure to critical peak pricing; and
  • Long-term planning and investment in new technologies.

In this edition of Climate Change Matters, Energetics has a provided an example on the potential of cogeneration to achieve considerable CO2 savings. Highlighting the potential impact that large-scale investments in new technology could have in reducing exposure to high energy prices. Please read the article: “How to pull a million tonnes of CO2 out of the atmosphere”.

Energetics can provide advice and support in the development of proactive energy management strategies.

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