Energy pricing and supply is a critical issue for a trade-exposed industry such as Australia’s domestic steel value chain.
Australia’s industry, businesses and households are being squeezed by soaring energy costs and energy supply uncertainty, dampening investment and employment and contributing to a reduction in household budgets and consumption.
Successive governments at both federal and state levels have grappled with energy and environment policies. Their objective of delivering a coherent and lasting policy framework that delivers investment in energy generation and supply to affordably meet the increasing demand of businesses and consumers while meeting Australia’s international greenhouse gas emissions commitments remains elusive.
The ASI supports a renewed focus on the development of a coherent national energy policy framework to deliver long-term stability and investment certainty to business, and an affordable and reliable electricity supply on which our factories, businesses, schools, hospitals and homes can rely. The ASI also supports the ACCC’s 2018 reports into Australia’s electricity and gas markets and welcomes recommendations that we hope will foster competition and bring down prices. We endorse the government’s commitment to give the ACCC an ongoing role in monitoring electricity prices and market behaviour and recommending reforms to ensure there is adequate competition.
ASI major members have been warning of an imminent energy costs crisis for some time.
This is now on us.
Many major manufacturers had forecast electricity costs to increase by over 93% between FY2016 and FY2018, with gas costs increasing 33% over the same period.
These increases are being faced by manufacturers, businesses and households across the country – dampening investment and employment and squeezing household budgets, which, in turn, squeezes consumption throughout the economy.
Examining climate policies and their actual implementation sector-by-sector around the world (and particularly in competitor countries) provides some important lessons for Australian policy:
The recent turmoil over energy and climate policy is having a significant impact on Australian consumers, businesses and our members. The Australian steel value chain is a significant consumer of energy. A coherent federal government energy policy that has the support of the state governments and offers improved long-term predictability of pricing and stability, certainty of supply and clarity over emissions reductions targets and strategy is essential to long-term investment planning within the steel sector. The ASI believes the National Energy Guarantee (NEG) that was proposed by industry and was close to being adopted as government policy was the right approach as it focused on reliability and affordability, as well as emissions reduction.
We now urge the new leadership and ministry of the federal government to redouble its efforts to develop a coherent Australian Energy and Sustainability Policy that can be supported by the state governments and by industry to attract investment in new power generation capacity and to provide certainty to industry.
This policy must explicitly account for competitiveness issues, not as an add-on or afterthought, but as part of the process of policy development.
1. It is very important that the policy is robust enough (‘investment grade’) to attract additional investment in supply (particularly dispatchable supply) to put downward pressure on prices. The Energy Security Board (ESB) states that a greater level of contracting with existing generation will encourage investment and offering of capacity into the spot market to meet contractual obligations (in this way, the proposed NEG represented a financial solution to a physical problem). It is not clear, however, whether retailers are currently over or under-hedged, whether the market will need to be over-contracted to meet physical reliability standards, and therefore whether increasing contract volumes will deliver more physical capacity
2. Care will be required in the design of the policy to ensure the additional costs required to satisfy the reliability and emissions guarantees do not counter the improvements in affordability anticipated through increased supply. Reliability and abatement should not come at any cost. And the cost of compliance should not be under-estimated – compliance requirements need to be fit for purpose without being onerous and costly to large energy users and other consumers
3. The proposed NEG represented a significant shift in the way that the wholesale electricity market operates. The government needs to ensure that forthcoming policy supports an efficient market that has end users’ best interests at the forefront. There is a risk that meeting reliability and abatement targets via the contract market could: increase contract complexity; fragment current contract products; reduce transparency of pricing structures; decrease competition; decrease market liquidity
4. The policy must include an Emissions Intensive Trade Exposed (EITE) exemption from the emissions-reduction component, as currently occurs under the Renewable Energy Target (RET)
5. While the NEG is based on the electricity sector delivering a proportionate share of emissions reduction, it will be critical to understand the abatement policies that will be applied to other sectors and the abatement burden they will be expected to shoulder. The outcomes of the federal government’s 2017 climate change policy review are critical here.
We look forward to working with the federal government, regulators and the states to get that detail right.