Window of opportunity for manufacturers to counter spiralling energy costs

01 Feb 2012Archived News Climate Change Matters

Manufacturing industries previously enjoyed an international competitive benefit from low and stable energy costs. This benefit no longer exists as the cost of investments in electricity networks has flowed through into electricity prices.

 

Annual increases of 20% pa have been common over the past 3 years and can be expected for the next 2 years as well. In July 2012 industry will experience a one-off 15-20% increase in electricity prices from the carbon price in addition to the 20% increase from network charges. We are now steadily moving up the international electricity price comparison list.

Driving a step change in energy productivity

The upside for business in the energy/carbon saga lies in the ability of industry to improve its energy productivity - the amount of energy used per unit of product manufactured. To do this, manufacturers need to look at the range of energy savings projects possible across their business.

We have been very focused on labour productivity for the last two decades, but as energy becomes increasingly expensive the focus will switch to energy (and other resource) productivity.

This is also a time in which the high Australian dollar can work for, not against Australian manufacturers.

While the high exchange rate has been problematic for industry overall, there is a big upside investing in energy efficiency and on-site power generation projects, which largely use imported equipment. The exchange rate escalation from 78c in 2009 to around a $1 today has cut 20% from the cost of energy saving capital equipment.

Applications open for government grants for energy savings projects

And there is some good news for business in the Clean Energy Future legislation with the announcement yesterday of $1B in grant funding available with up to 1/3 government funding contribution for projects up to $10M (and 1/4 funding for larger projects).

There are other significant sources of energy productivity funding for manufacturers that can be accessed from State energy efficiency programs; the Energy Savings Scheme in NSW, the Energy Saver Incentive scheme in Victoria which is being extended to cover business, and programs to trim electricity demand in Queensland and some other regions.

New sources of finance for energy savings project provide additional benefits. Low Carbon Australia, its partner companies, and financial institutions are increasingly interested in lending for energy savings projects.

Project paybacks have improved

The first step for most companies is to identify the available savings projects.

Even large companies that were required to do this under the Energy Efficiency Opportunities Act ought to review their savings’ potential.

The business landscape for energy savings projects has changed considerably over the last 5 years, because of energy price increases.

For example, if you consider an electricity savings project in NSW that would have taken 8 years to pay back the capital invested in 2008 (and would have been discarded as uneconomic without review), would pay back in just 3.5 years in 2012. If imported equipment is used the increase in the exchange rate may have reduced the payback to a little over 2 years.

There is no time like the present to implement energy savings projects. Manufacturers that focus on their energy productivity now have the opportunity to negate price increases and gain competitive advantage.

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