WEEKLY E-MAIL

11 October 2017

AUSTRALIA’S ENERGY CRISIS

By Nicola Beswick

Australia’s energy crisis has now reached boiling point. Prime Minister Malcom Turnbull is the latest Prime Minister to get caught up in this energy saga, following the commission of an investigation into this Australian energy situation.

Regardless of what is happening in politics, consumers (both households and companies) are paying an extremely high price for energy. This high cost, for many household and companies, is becoming crippling.

What is this crisis all about?

The National Energy Market (NEM) is managed by Australian Energy Market Operator (AEMO). AMEO are the control centre for managing supply and demand between providers and customers. AMEO also have the ability to request the increase in supply, if required. This centralised system ensures that all providers, whether black coal, brown coal, natural gas, wind, hydro or solar, have a common energy spot price.

Spot prices are determined by a bidding system that runs in 30 minute cycles. However, consumers with large demand requirements contract directly to providers to overcome the volatility that spot prices have.

How did we get here?

Prior to 2014, demand for energy compared to supply was lower and renewable energies were supportive in keeping the spot price down. However, with high temperatures being felt across most of the country, an increase in the demand for energy soon followed.

Couple this with the decommissioning of a number of old plants (although replaced by new facilities such as a new gas plant located in Queensland), prices have increased.

While some states have a more diverse range of energy providers than others, the transmission systems also don’t allow for easy and cost effective energy transport between states.

In July 2016, South Australia’s electricity prices increased 800% above its long term average. While prices increased across the country, SA was hit the hardest due to low power generation from the State’s own resources. The closure of Port Augusta, a coal based power plant, in May 2016 did not assist matters. A blackout, due to damage to transmission lines after a severe storm, further impacted the State.

The closure of the Hazelwood Power Station, located in Victoria, was announced in early 2017. This left a hole in a small town, and also brought into question how consumers would be impacted.

While work around attempting to bring Clean Energy Technologies has been hindered politically, a number of energy companies are embracing this technology. An example of this is AGL, who are currently trialling battery energy storage systems in SA, and upon the proposed decommissioning of the Liddell Power Station will be, installing this new technology. However, Prime Minister Turnbull wants AGL to halt its plans for the decommissioning of the Liddell Power Station based on concerns of ongoing reliable power supply.

The players

Australia’s energy assets are owned by a small number of players. AGL is the dominant player in New South Wales, Victoria and South Australia. The majority of Queensland’s energy is produced by state owned Stanwell and CS Energy.

Concerns that markets were being manipulated by providers have also surfaced. All providers receive the same spot price regardless of how much they offered to the market.

This level of competition between players is of concern to the Australian Energy Market Commission (AEMC), the regulator for energy within Australia. Changes to the legislation in December 2015 highlighted the potential concerns AEMC had with the monopoly between a small group of providers. This increase in competition becomes more significant as plants close down and the resources to meet supply is more concentrated.

Where to from now?

Energy companies have agreed to the Government’s request to ensure energy supply to support Australian consumers is sufficient and does not become to the detriment of supplying overseas customers.

However, it is likely that our politicians will continue to debate on the best outcome for managing rising energy prices, including clean energy technology targets.

Regardless of the outcome, and what happens politically, it is likely we are still a long way from seeing any real decrease in energy prices for all customers.

Nicola Beswick
Financial Planner
SMSF Specialist Advisor™
Authorised Representative No. 459008

If you have any questions or comments, please email me at nicola@gfmwealth.com.au

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