Australian businesses are now in the grip of an East Coast energy crisis. Energy Action's COO and CFO Michael Fahey discusses everything you need to know to ensure you are managing the risks.
Across the East Coast of Australia, business owners are facing significant cost imposts with surging gas and electricity bills as a major energy crisis grips the energy market. We have recently seen some businesses foreshadowing the impact of the rising forward prices for electricity by changing their outlook on investment and staffing levels.
Market participants generally agree that higher energy prices are here to stay, at least in the short term, but there are steps that commercial users can take to assist in managing these risks and associated costs.
While the recently announced initiatives from the industry and both State and Commonwealth governments are welcomed, many of these projects have a lead time of some 3-5 years. If your contract is expiring in the next 6-12 months, you have a “real-time” problem that needs a “real-time response”.
Here’s everything you need to know about recent developments in the electricity and gas markets, and how you can address the impacts within your business.
What’s causing the energy crisis?
The structural causes of the Australian energy crisis mean that higher gas and electricity prices – along with increased market volatility – are unlikely to abate in the short term:
- South Australia has already been subject to a high-profile string of costly blackouts.
- The impending closure of Victoria’s 1,600 megawatt Hazelwood Power Station at the end of March will mean that base load electricity supplies across the East Coast will be significantly lower next summer than they were this year.
- In addition, market analysis shows that gas power plants face fuel shortages as they struggle to cope with the additional demand.
- A significant portion of East Coast gas reserves have been contracted by the LNG projects that have signed long term contracts with overseas customers, leaving very little additional supply that can be contracted out to the local market.
These factors have raised the very real prospect of a severe energy supply crunch, potentially including load shedding and severe blackouts across the eastern states next summer.
Impact of energy prices on business
Following the laws of supply and demand, these energy shortages are already causing power prices to increase dramatically, and the situation is likely to continue.
February was a particularly tumultuous month in both the spot and retail contract markets, with every state experiencing multiple very high-priced days as the mercury rose across the eastern and southern states:
- In Queensland, the spot price averaged 24c/kWh for February.
- It was slightly lower at about 18c/kWh for both South Australia and New South Wales, where excessively high demand led to load shedding during the second week of the month.
On the ground, many business owners and managers are already reporting that their energy contracts are now double or triple what they were just a few years ago.
Especially if you’re in an energy-intensive industry (such as manufacturing), these higher gas and energy prices can cause serious cash flow issues that can impact the sustainability of your business.
Managing usage and costs
Carefully time when you go to market on your next energy contract, choosing the right contract term, and taking steps to improve and manage onsite levels of energy efficiency can have a massive impact on your company’s energy costs.
Some of the key steps businesses should be considering include:
- Be an “informed” buyer, and while paying for specialist advice may be a considered an unnecessary expense, what is the cost of an “uninformed” purchase?
- Carefully review terms and conditions within current and new contracts.
- Monitor your contract expiry dates: default rates accrued when you go past contract dates can be significantly higher.
- Focus on load forecasting when negotiating new contracts – this can align contracts with actual predicted volumes and secure contract lengths that meet individual business needs.
- Be aware that, given the new paradigm for energy prices and volatility, customers with 6 – 12 months left on their current energy contract should act now and not wait to renew a contract. Negotiating contracts with 2 months to expiry is not a recommended strategy in the current market.
- Energy efficiency projects with an 18 – 36 month payback and with an implementation timeline of 3 – 9 months should be given a high priority as these will deliver “real-time” solutions by reducing the grid demand and insulate your business from the market volatility.
- Increase the emphasis on identify and fixing energy “leakage”. Small leaks in the current market have substantial cost implications.
- Look closely at fuel substitution and switching where possible.
If your business gets this right, it can provide cost advantage over other local competitors who don’t have an energy strategy, and who are subsequently left paying significantly more for their power bills.
However, the optimal procurement strategy and negotiating the right contract terms takes time to implement. Because of this and considering the importance of timing when it comes to approaching the current energy market, you will need to begin acting now to seize the opportunity.
Energy Action offers a range of tailored services that can help your business assess, improve and manage onsite levels of energy efficiency through the use of innovative energy efficiency and energy management initiatives.
With the right advice, your business can gain a competitive advantage by proactively adapting to the new realities of Australia’s energy market while your rivals continue suffering from bill shock.