CHARTS: Here's the massive problem with energy costs for Australian manufacturers

Photo: Getty Images.

While Australian consumers have felt the pain of soaring energy prices in recent years, spare a thought for the nation’s manufactures, facing the same challenge alongside a strong Australian dollar and soaring commodity prices, which all combine to hinder their global competitiveness.

And this chart stands out in today’s Australian Consumer and Competition Commission preliminary report into Australia’s electricity network.

The ACCC notes that industrial users told them energy prices are hampering their international competitiveness and uses BlueScope Steel as a case study.

Here’s the chart that tells the story and will undoubtedly have other business proprietors nodding their heads in sad familiarity with the scenario.

Bluescope’s energy costs. Source: ACCC

In just two years, the cost of energy at BlueScope will more than double — from $59 million in 2015-16, to an estimated power bill of $113 million this financial year. When the company made its investor presentation in August, it also pointed to a 33% increase in gas prices over the same period.

Overall the company is forecasting a 75% energy prices between the 2016 and 2018 financial years to $145 million.

That’s a massive hit on costs and here’s why this is a massive problem, not just for the world’s third largest manufacturer of painted and coated steel products, but the Australian economy in general.

The ASX-listed BHP spinoff has 41% of its production based in Australia. And while the company was pushing hard to drive down costs, when outgoing CEO Paul O’Malley announced BlueScope’s annual results in August, he warned that energy costs would unwind a large chunk of the $300 million in cost savings the company made to keep it competitive.

“We are very concerned about the tightening of supply in the gas and electricity markets, and have highlighted our concerns to government and regulators,” he said at the time.

BlueScope’s share price took a massive hit when the details were revealed.

How businesses tackle the issues is at the forefront of the ACCC’s thinking.

It points to billionaire Anthony Pratt’s packaging and resource recovery business, Visy Industries, which has spent $500 million over the last six years on clean energy, including a 30 megawatt plant at its paper mill in Tumut, with $2 billion total spend planned over 15 years, but notes “not all industries are similarly positioned” to invest in energy alternatives outside the grid.

But the complex range of factors for business is apparent in another chart from the ACCC report, which looks at how network and wholesale costs have doubled prices between 2007–2017 for medium manufacturers in South Australia.

Here’s the chart, which includes a 9.5% annual rise in network cost between 2010 and 2015.

Source: ACCC

Prices were going down as the GFC took hold, and network costs saw rapid rises. Interestingly, they were starting to fall again before the carbon tax was repealed by the Abbott government, although there’s no doubt that Labor policy had already increased costs.

The ACCC cites three other factors coming into play:

  • Increases driven by the introduction of premium solar feed-in tariff schemes, and the introduction of the carbon price
  • Decreases between 2014–2016 due to low wholesale market prices following increased supply and the repeal of the carbon price
  • A sharp increase from the June 2015 announcement of the closure of Northern power station in May 2016, largely as a result of increased tightening in the wholesale market.

It’s a reminder that the factors driving energy costs are slightly more complex than the political grandstanding politicians of all persuasions like to make over the issue — and many of the problems that have led to this moment are the result of political decisions over the past decade, especially after a compromise to unify the national energy market in 2006, John Howard ceded power to the states when it came to setting the market regulator rules.

The sale of the poles and wires in NSW earlier this year, resulting in a $3 billion windfall for the state government, came after several years of fattening that particular calf for market amid consumers paying record high prices for power.

The one thing business needs is certainty, especially when it comes to power prices.

A Business Council of Australian spokeswoman told Business Insider that today’s ACCC report shows the competitive advantage the nation previously enjoyed from energy costs “has eroded due to a decade of poor and uncoordinated policy”.

“We need to recover that advantage ensuring a reliable and sustainable energy supply that sees businesses maximise their productivity while continuing to reduce emissions in line with the government’s international commitments,” she said.

The ACCC has until July next year, when it hands its final report to Treasurer Scott Morrison, to suggest some solutions on that front.

Nothing this report reveals is new or has come suddenly. The current crisis in energy is more a slow burn that’s now a raging bushfire many warned for some time was going to occur. At the current pace of this enquiry, it appears its going to take some time to extinguish those flames.

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