Ai Group report warns steep price rises will become ‘the new normal’ based on declining coal-fired generation and gas production shortages

This article is more than 3 years old

This article is more than 3 years old

The “staggering” increase in energy costs faced by households and businesses will continue thanks to rising gas prices, putting jobs in jeopardy, according to the Australian Industry Group.

Warning that last year’s steep price rises are set to become “the new normal”, the Ai Group says in a report on Tuesday that the complexities of the gas market have combined with a decline in coal-fired power generation to produce a perfect storm for consumers.

Wholesale electricity prices are roughly doubling, the report said, and once fully passed through, gas and electricity prices will cost households an extra $3.6bn a year and businesses up to $8.7bn.

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That equates to about $500 a household, depending on gas use, and about $100,000 just in electricity costs for many small- to medium-sized businesses.

Several firms had reported that their energy costs had tripled in 2016, said Ai Group, which surveyed 285 companies across Australia for its report entitled Energy Shock: No Gas, No Power, No Future?

The Ai Group chief executive, Innes Wilcox, said price rises would lead some manufacturers to question their viability and consider moving operations overseas.

“Politics-driven energy policies are making a bad situation worse,” he said. “This includes decisions to put gas development on hold in NSW, Victoria and the Northern Territory, partisan warfare on energy and climate at the federal level, and entirely uncoordinated state renewable energy targets.”



The political warfare around energy issues shows no signs of abating with blackouts in South Australia leading to a renewed assault by former prime minister Tony Abbott on the renewable energy target.

But the Ai Group report pinpointed the gas market as the main culprit behind the rises.



“The high and rising price of gas means that existing gas-powered [electricity] generators will be significantly more expensive,” the report says. “The electricity market’s design means that gas generators often set the price for the whole market. And as they generate more often with more expensive fuel this is translating into higher average prices.”



One reason for the increasing importance of gas was the decline in coal-fired generation, which suffered from the rise of renewables and lack of flexibility.

The closure of Hazelwood power station in Victoria, for example, would have a “significant impact” on the market. The stations were disappearing for “strong reasons”, including age and the cost of updating plant. They were increasingly handicapped by the “physical and financial difficulties inflexible generators face in a market marked by frequent oversupply and occasional shortage”.

The emergence of future renewable capacity under the RET would help push prices down, the report said, adding that greener sources of power would one day replace fossil fuels.

“Looking to the longer term, market forces and climate goals are likely to make conventional coal and, eventually, gas power unviable, and bring on lots of renewables.”

But it said problems remained with the intermittent nature of renewable power and low-cost ways had to be found to to turn “an abundance of energy” into a dependable resource. It suggested that better energy storage could stabilise the system and that technologically and geographically diverse generation “can reduce the impact of intermittency”.

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Underpinning the surge in power prices was what the report called the “huge change in Australia’s gas markets” since the development of LNG export terminals across the country.

This had been expected to link prices to international markets. But the $200bn projects have created supply shortages in the domestic market because the expected output of the fields has not matched up with the amount exporters committed to their clients, meaning they have scrambled to snap up all remaining capacity, pushing up prices for consumers.

This has resulted in the “counterintuitive” outcome whereby international buyers of LNG have been paying “considerably lower prices than have Australian buyers of domestic gas”. The outlook for Australia’s gas market is “grim”, the concludes.

To remedy the problems, the report recommends policies to encourage the development of new gas fields and more efficient household case use to ease pressure on supply and demand.

It also suggested that despite the huge expenditure on LNG export terminals, one way to reduce Australia’s energy squeeze would be to build an import terminal on the east coast. This would enable suppliers to buy gas on the international market and pass on the lower prices to consumers. But it would cost “several hundred million dollars” and the cost would have to be borne by the consumer.

