Power Maze

01 Sep 2008Archived News Energetics in the News

Published: Queensland Business Review by Mitch Gaynor - Adrian Abbott, Queensland Regional Manager, Energetics Pty Ltd talks about ways companies can improve energy efficiency processes.

 

Energy prices are only going up. Knowing why is one thing, but knowing what to do about it will be critical for businesses in the coming years. Mitch Gaynor reports

Fear of the unknown. When it comes to the threat of energy price hikes, businesses have generally done one of two things introduce pro-active energy reform into operations; or nothing.

While authorities and experts within business fail to agree on just how much prices will rise, especially in relation to electricity, they agree on just how much prices will rise, especially in relation to electricity, they agree many businesses are failing to plan for the impact.

This summation comes at a time when independent reports on an emissions trading scheme (ETS), alongside other price drivers, conservatively estimate price rises of at least 25 percent in the coming few years.

John Cole, Executive Director of Sustainable Industries within the Environment Protection Agency, says businesses need to understand the gravity of the cost to business of climate change and energy drivers.

“Too few Australian businesses have their head in this space at the moment,” he says.
“This is bigger than GST, this is bigger than Y2K, this is bigger than anything at a macroeconomic level probably since the 1980s.

“Nothing is not fixable, but the time to make decisions is in this decade.”

Independent economic analyst ACIL Tasman undertook a study showing retail tariffs could rise by 28 percent under a 20 percent emissions reduction scheme. That figure includes a 14 percent ‘business as usual’ input.

So while an emissions trading scheme will play its part, with energy markets already beginning to price this into their figures, there are key drivers unrelated to climate change.

In Queensland those price drivers include steady and above average population growth, strong business and industrial growth, the continued mining demand and an insatiable appetite for domestic air-conditioning.

Then there is the investment that must go into upgrading an ageing state-electricity distribution network and the associated costs of raw materials and suitable labour.

On top of that there is the regulatory push to gas-fired generation and the Curtis LNG Project which will see a LNG (Liquified Natural Gas) terminal built near Gladstone.

Experts say that could place big pressure on gas prices as suppliers partner with overseas buyers willing to pay nearly triple what local buyers will

However, Energy Users Association of Australia Executive Director Roman Domanski says it is difficult to predict specific price increases.

“We don’t know what the prices will be, we don’t know what the network charges will be, we don’t know with certainty what the costs of new power generation might be and we don’t know what the impact of LNG developments in Queensland might be,” he says.

“What we do know is that cost pressures are going one way: up.” He says further drivers to price rises include the cost of building new generators as well as the 2007 drought and diminished competition.

“Drought conditions in 2007 were a key to driving up wholesale energy prices very significantly,” he says.

“According to a survey of our members contracting for energy last year and this year, they’ve seen average increases for their contract price for energy of over 50 percent.

“But we are also seeing diminished competition in the market.

“We’ve had a spate of mergers and consolidation in energy players and that has driven some of the competition out of the market and the competitive tension that was there has diminished quite significantly.”

Domanski adds anyone looking to shift to gas as a buffer, or a greener alternative, will inevitably rethink their strategy.

“In relation to gas we are seeing significant cost pressures,” he says.

“Gas prices have also increased in the last while and those increases have been significant but not as high as electricity prices.

“There are signs of further pressure on gas prices, including through greater use of gas in electricity generation as well as through the possible development of LNG export facilities.

“And also the introduction of the carbon price is likely to give rise to greater use of gas-fired generation which could put upward pressures on gas prices again.”

THE POLITICS OF ENERGY

Closer to the horizon, however, is the pressure on energy and the pressure of politics. Since full contestability of the Queensland market was introduced in July 2007 retailers have grown increasingly frustrated at the regulator – the Queensland Competition Authority (QCA) – and the role it plays determining the benchmark retail price. That is the maximum price a retailer can charge customers.

The issue was played out publicly in April this year when the Government was openly critical of the QCA’s decision to raise the retail price of electricity by 7 percent.

Taking on board a second submission by the Government, the QCA revised the 2008 decision down to just over 5 percent. Despite an 11 percent rise in the previous year and a draft recommendation of a 10 percent increase from June 2008, the retailers say the process is flawed.

The retail energy price is made of 40 to 45 percent in the wholesale cost of energy, 40 percent in network charges (transmission and distribution), and the remaining is made up of retailer costs and margin.

The margin should be about 5 percent, however, retailers are arguing that given the volatility of the market they are unable to maintain that.

AGL is now so frustrated with the process it has gone to the Supreme Court calling for a judicial review of the QCA’s 2008/09 decision.

The retailer argues the QCA’s process underestimates the wholesale cost of electricity to retailers.

Secondly, it argues the QCA has reduced the rate of change in costs in the 2008/09 decision by simply restating the Benchmark Retail Cost Index (BRC) for the 2007/08 base year.

AGL adds the amendment to the 2008 determination sliced $9 million off its bottom line.

At the time Queensland Mines and Energy Minister Geoff Wilson argued the QCA needed to ensure only “genuine” increases in the cost of supplying electricity are passed on to consumers.

However, sources say the Government is “beating retailers over the head” following deregulation.

THE NATIONAL ELECTRICITY MARKET

The National Electricity Market (NEM) was established in 1998 with eh express aim of increasing the competition and providing greater choice for energy users.

This wholesale electricity market is an interconnected power system that stretches more than 4,000km from Port Douglas in Queensland to Port Lincoln in South Australia, and includes a sea bed cable between Victoria and Tasmania.

The NEM is divided into four sectors: generation, encompassing all electricity generators; transmission, the high-voltage powerline network; distribution, the network that distributes the electricity to end users; and the electricity retailers.

MOVING FORWARD

Energy retailers have uniformly panned the current methodology and say by brining forward the 2009/10 determination by seven months, customers could face bigger price shocks.

“The requirement to finalise 2009/10 tariffs by December means that the QCA may not have the benefit of knowing the carbon price set for 2010 or the trajectory of that price, both of which will impact on the energy cost calculations,” Origin states.

“However, if these costs are ignored then Queensland customers will face a bigger price shock in the following year, an outcome that Origin strongly urges the QCA (and the Government) to avoid.”

AGL’s submission to the QCA states it “does not believe the QCA properly assessed the costs of a retailer operation in Queensland in its final determination of the 2008/09 BRCI”.

It says the determination raised “significant issues” and if there is no change, will continue to have a major impact into 2009/10.

It accuses the QCA of not following the rules as required under the Electricity Act AGL also argues not enough consideration has been given to maintaining stable retail and competitive headroom.

Wilson says he will continue putting consumers’ interests first. “With AGL challenging the QCA’s decision over the last price increase, they are entitled to exercise their legal rights,” he says.

“But the Queensland Government made two very strong submissions to the QCA drawing attention to … any price increase should be kept to an absolute minimum.

“We are confident that process has worked well and we took that step because we are concerned that we want to make sure the interest of the consumer comes first, second, and any left over, third.

“In terms of keeping prices down, competition between retailers is very important and in Queensland there is a high level of competition even in the short period of time that competition has been available.”

REGULATION

The Executive Director of Energy Retailers Association of Australia (ERAA), Cameron O’Reilly, says ultimately retailers do not want regulated retail prices.

He says regulators “struggle” to get estimates of the wholesale cost right and fixing prices in a volatile market, especially with the inclusion of carbon pricing, is a huge risk for the industry.

“A better approach from the Government is to create highly competitive retail market which keeps retail markets under control but still allows the cost of energy to be set by the market and reflects costs,” he says.

Wilson says he met with the ERAA in mid-August and reiterated the Government’s position that Queensland will continue with the current system in order to keep costs down for consumers.

O’Reilly says a fully deregulated retail market, with carbon pricing in mind, would allow for new investment in renewable generation, but also “It’s supposed to provide a price signal to consumers to adjust their behaviour”.

“We think the coexistence of states trying to regulate the end price and the NEM (National Electricity Market) determining 40 to 50 percent of that cost and now the AER (Australian Energy Regulator) determining the charges for the network businesses is just a recipe for problems generally in a policy sense.”

COMPETITION

Domanski says it is critical for governments to open up the market to improved competition.

Queensland could be doing better, he adds.

“Queensland hasn’t made a brilliant start on (full retail competition) … the way they sold off their electricity retailers was basically considerate to the main incumbent retailers of energy,” he says.

“They didn’t use the opportunity they had to tell the retailers to create a more competitive retail sector in any meaningful way.

“They basically said ‘we preferred the cash to making a more competitive retail market.”

“If they decide to sell off their generators then they should make sure they will do a better job than when they sold the retailers.”

FORCING THE ISSUE

While the politics of energy abound, the ETS, and the increased use of renewable energy specifically, will inevitably force a change in behaviour.

Cole says businesses need to adapt to change, in part, to mitigate energy price increases.

“Queensland is arguably the most emissions intensive economy in the world,” he says.

“We built our economy here in one of the warmest areas of the world in an area the size of Western Europe; we attracted energy intensive, industries here because of our cheap coal, our cheap energy,

“Not surprisingly we’ve got great distances to travel, our cities are spread along 2,000 kilometres of costal line, and we find ourselves totally exposed.

“Our building codes haven’t been conductive to encourage people to build climate-smart houses, so we find ourselves with Tuscan villas in the middle of sub-tropical climate and we find air-conditioners.

“It is amazing how many people in this part of the world spend $2,000 or $3,000 (per quarter) on electricity.

“They do it because they don’t realize what they’re doing

“This is confronting, it is involving real serious decisions that have to be made. Will we do it, or is it too hard?”

Queensland Regional Manager of energy specialist Energetics Adrian Abbott says in the SME sector there are any number of small and large changes that will have a positive impact on the bottom line of a business.

Energetics has just completed a survey of 87 SMEs for the Federal Government and found there are consistent trends throughout businesses.

That “everything is turned on all day every day” is the biggest issue he finds with businesses.

From simple but effective measures such as turning lights off, using energy efficient light bulbs, turning unused computers off, and adjusting the cycle times of air-conditioners and heaters, SMEs can cut energy use and spending.

For larger equipment Abbott says it could be a matter of looking at cycle times of machinery.

He says internal staff can often become desensitized to the processes of a company.

“A lot of business owners like to think they have perfected their systems, but if you bring in a process efficiency expert, you can improve efficiencies across all level of your business from supply chain efficiency to manufacturing processes,” he says.

Energetics’ auditors undertake gap analysis procedures and depending on the business will provide measurements of usage and plans of specific machinery.

“If you map your energy usage across your site it will give you a transparent understanding of your energy usage,” he says.

AUSTRALIAN COUNTRY CHOICE

One company that has taken the issue of its energy consumption very seriously has been Australian Country Choice (ACC).

David Foote, Chief Executive of the State’s second-largest meat production company, says being green – and energy conscious – is far from easy in his industry. However, the company has taken huge strides to achieve cost efficiencies and improve its ‘green’ status.

“We’ve got 90,000 head of farting, belching cattle,” he says.

“We’ve got 40,000 square metres of factory that has to be washed and sanitized daily to meet our export and food safety standards.

“We have to wash 1,000 cattle daily to meet our license requirements.

“We’ve got 40,000sqm of controlled atmosphere factory, 10,000sqm of deep chilled refrigeration factory, 150,000 plastic trays used daily.

“What’s more we add 20 percent CO2 mix to 62,000 plastic bags and we also use the equivalent of 59 semi-trailers per day on Queensland roads.”

So what does ACC do? Measure and plan.

“On a daily, weekly or monthly basis we measure everything we possibly can into our business. Coal, oil, gas, fuels,” he says.

“With water we measure into and out of the site and into each production is not a guess or an average.” In 2007 ACC spent over $37,000 in water meters.

“We wanted to know what each of our business units cost. We have considerable amounts of waste – effluents, ash, cardboard – which all at some stage can be used,” he says.

For businesses, Foote says there needs to be recognition of the difference between consumption and culture.

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