The news media has been full of doom and gloom on the energy front in recent times.
Electricity and gas prices have been rising precipitously. The reasons for this are manifold, but include:
- Bitter ideological battles in Canberra and our state capitals over energy and carbon policies;
- The commissioning of three LNG plants in Gladstone, creating a huge new demand for domestic gas supplies;
- The misguided approval of enormous unnecessary investments in the electricity transmission system. These came with guaranteed rates of return for electricity networks, paid for by businesses and consumers (i.e. you);
- Limited competition in the electricity generation market.
None of this is new or unexpected. What has surprised me has been the slow response of energy users, particularly large users, to the crunch in energy prices. Even businesses for whom energy was once barely material to their profitability, rising prices have brought it to the attention of boards and executives.
Sure, there have been some efforts on the part of industry bodies and government to negotiate “better” deals on pricing. But that’s only a marginal improvement, swamped by the huge rise in prices over the past few years.
The question for those of you who are responsible for managing businesses through this transition is this:
What are you going to do now?
If you’re waiting for things to return back to “normal”, may I suggest that you’ll be waiting a very long time. Structural changes in our energy markets have been built in. It is unlikely that prices for supplies of gas or electricity will ever return to the levels industry enjoyed historically.
It’s time to take action
Your energy costs are the product of price and quantity. Most industries in Australia are price takers. So the only remaining options are to look at the quantity side.
This means you need to look at alternative energy supplies as well as energy efficiency.
Yes, I know, you’ve already looked at this. I hear this regularly in my conversations with energy managers. But let’s look at this situation with fresh eyes. When did you last look at energy efficiency? Or at alternative sources of energy? If it was more than 12 months ago, the parameters built into your financial models are already well out of date.
The rapid shifts in energy prices, as well as the precipitous falls in prices for alternative energy sources, mean you need to take another look.
What can we do?
Some suggestions for getting started:
- Most large energy users have already investigated energy efficiency options in the past. It’s time to dig out your old Energy Efficiency Opportunities (EEO) reports and other historic efficiency proposals. Update the numbers with today’s much higher energy prices and lower interest rates. You may be pleasantly surprised how much more attractive some of these options are.
- Look at your older energy-using equipment, in order of quantity of energy consumed. If the equipment is older than 10-15 years, there is a good chance that advances in technology or control systems will make investments in replacement attractive.
- Consider alternative energy supplies. New gas sources are becoming available in the market such as gas generated from biomass or coal. Renewable energy, especially solar PV, it becoming much cheaper every year.
- Investigate making the most of your existing operations. Advances in data science and machine learning have enabled modelling and optimisation of your plant in ways that were not possible even 5 years ago.
Energy efficiency investments can be hard to make. Like all prospective investments, they need to compete with other priorities for scarce capital budgets. Typically the rates of return for energy efficiency projects are lower than some other options available to your business.
However, it’s worth considering that energy prices are likely to continue to rise, even if less rapidly than in the past few years. The sooner you get energy efficiency or new energy supplies in place, the less exposed to this risk your business will be.
Additionally, the spectre of carbon pricing still looms over the Australian business landscape. Yes, the Clean Energy Act (“carbon tax”) is dead and buried. But Australia is a signatory to the Paris agreement, and has committed to significant reductions in greenhouse gas emissions. The current government has taken very modest steps towards those goals.
Regardless of the policy mechanism - carbon tax, emissions trading, industry-based caps, or the existing (but anaemic) Safeguard Mechanism, or government-paid Emissions Reduction Fund projects - the scale of the emissions reduction target means there will be an inevitable impact on energy prices.
Taking active steps now to reduce your exposure to these energy price impacts will help build your competitive advantage and secure your future in the Australian business landscape.