Australia’s energy crisis

Wednesday 07 June 2017

Price rises are never good news so why is energy getting more expensive?

What’s happening across the whole country is that prices for both gas and electricity are climbing because the national energy system is in crisis. This is the result of years of fragmented, ambiguous policies by successive federal governments and some state governments.

For the past decade there’s been no clear, consistent path to reduce emissions. This policy uncertainty has had a very tangible impact on Australia’s energy system, causing significant instability.

This crisis is playing out through the National Electricity Market (NEM) – known as the national electricity grid. The ACT and NSW are supplied electricity through the NEM, so we are not immune from the fall out. The biggest pain points are around the security (stability) of the grid; and spiralling costs caused by gas supply issues and impaired investment in new generation.

The warning bells have been ringing loud and clear from industry groups, government, regulators and the science community, with hundreds of submissions contributing to more than 25 formal and informal reviews underway. The review led by Chief Scientist Dr Alan Finkel will provide a blueprint for reform of the energy system.

Meanwhile, the reality of the crisis was heralded by the Australian Electricity Market Operator prior to the closure of the Hazelwood coal-fired power station at the end of March. What’s happening is that coal-fired power stations are closing as they reach their end-of-life, while new technologies are rapidly emerging with an increase in wind and solar PV, which are variable-renewable generators.

While a positive for the environment, it has been acknowledged that the variable-renewable generators don’t provide the same range of services or responsiveness that coal, gas and hydro generation provide to handle peak demand and maintain electricity supply.

Gas also plays an important role in electricity generation as it supports the transition to renewable generation. But gas has its own supply and demand crisis. This is because Australia now exports almost 10-times the amount of gas used by Australian households and gas exporters have been significantly relying on domestic gas to meet their export contracts, which has reduced available domestic supply. Policy crackdowns on both conventional and non-conventional gas exploration by some states have been criticised for exacerbating the impact of the burgeoning LNG export market.

This is occurring on the back of the state-wide blackout in South Australia last September, which highlighted the technical challenges of maintaining national grid stability, and brought home the urgency of the crisis.

So why are retail prices increasing? It’s because the wholesale cost of energy has skyrocketed with both electricity and gas prices more than doubling in past 12 months. This is all happening in the national energy system ‘upstream’; however, costs then get passed on ‘downstream’ – through the supply-chain – from generation and production, to transmission, distribution and eventually to electricity and gas retailers and customers. For example, the price that retailers have to pay for electricity is a large component of the regulated retail electricity price set by the ACT regulator, the Independent Competition and Regulatory Commission (ICRC).

Although we are operating in an increasingly volatile market, ActewAGL is working to help manage this unprecedented energy crisis. And the ICRC has confirmed that the price ACT customers pay for their electricity continues to be the lowest in the country.

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Statement by ActewAGL CEO Michael Costello