Why our electricity and gas prices are soaring

The new Energy Minister Chris Bowen said that ‘Australian energy markets are facing a perfect storm.’ But why are electricity and gas prices soaring?

Join Kat Clay, Head of Digital Communications, as she discusses the energy pricing crisis with Tony Wood, Energy and Climate Change Program Director, and Esther Suckling, Graduate Associate.

Transcript

Kat Clay: Last week I received an email from my electricity provider encouraging me to switch to another company before power prices doubled. It’s not what you’d expect to receive from your power company. My first reaction was, not another bill going up. The new energy minister, Chris Bowen, said that Australian energy markets are facing a perfect storm, but why exactly are electricity and gas prices soaring?

I’m Kat Clay and here to discuss the energy price crisis is Tony Wood, Energy and Climate Change Program Director. And Esther Suckling, Graduate Associate. Welcome, Tony. Welcome, Esther. Hey, Kat. Hey, Kat. Tony, there’s never just one reason for a perfect storm, and you’ve identified four key events that have led to this crisis.

I do want to break them down for our listeners today. But first, what’s the relationship here between gas costs and electricity prices?

Tony Wood: I think the, I’m trying to work out how to extend the analogy into the perfect storm. but they’ve certainly, managed to send our ship slightly off kilter. The issue is that broadly speaking, the vast majority of our electricity used to be produced from coal fired power stations.

In some parts of the country where they didn’t have quite so much coal, Western Australia and South Australia, they had plenty of gas, so they used gas for some of their power. The rest of us didn’t use very much. More recently, we started to use gas. For peak demand, which is when we have big spikes in demand, such as in summertime, and gas was, could be very quickly brought on stream and could complement coal.

We’re now going through a very, on a very different journey as we move towards a low emissions future. And we’re now focusing on bringing more renewables into the system, wind and solar. And in that world, gas starts to play a slightly different role because it could also help balance wind and solar, which are clearly intermittent.

What’s going on now is something a little different. In that because we’re entering a modest demand period, it’s cool-ish, colder in Melbourne, and we’re seeing high demand, not as high as peak summer, but high demand. Unusually for this time of year, the coal fired power stations are also, some of them are offline.

Now, some of them would try and do their maintenance at this time of year, because normally it’s not too bad. But because they’re off, they’ve been offline for other reasons, including lack of coal supply for heaven’s sake in the Hunter Valley, that’s meant they’ve not been available. As a result, gas has been called to step in more so than it normally would.

Now, because the gas producers, the gas power stations wouldn’t normally do that. They haven’t had enough gas under contract. to meet that demand. So, they had to go and buy gas. Long story to get to the point is that when they’ve gone to buy that gas, the people who could provide it are also saying, you know what?

I could export this gas for a lot more than you’re prepared to pay. Here’s the price. And that’s where the problems arisen because when you pay that high price to make electricity, it’s very hard to make any money in the electricity market on that basis. So, we see this nasty combination of circumstances arising.

Kat Clay: And we’ll get into those gas prices, in the Northern Hemisphere in a minute, but the first thing that I want to tack back to is. That coal fired generators have been failing and what’s going on here and how does this affect the pricing?

Tony Wood: On average, over the four months or four or five months of this year so far, 25 percent of the coal fired power stations, and there’s about a dozen of them, have been offline at any one time.

That is really unusually high. You don’t lose that much without having a problem, right? Now, they’re all offline for slightly different reasons. So, one, some of the ones in Queensland and or offline because There was one that had an explosion last year as an industrial problem. The plant’s still offline.

Won’t be online back until sometime next year. In New South Wales, partly due to flooding of the coal mines with all that rain they’ve had earlier this year, the coal miners weren’t able to get the coal to the power stations and some of the infrastructure that delivers the coal to the coal fired power stations has been in trouble.

And so, the coal fired power stations have had trouble getting coal. to make their electricity. And then in Victoria, you’ve had a couple of units of power stations that have been offline for, normal maintenance type problems. This is one of the, one of the Trove Valley generators has had one unit.

Remember these big generators normally have one or one to four units. One of the units at Loy yang has been offline for a while. So, any one of those wouldn’t be too bad. But the accumulation of those really has been a problem. And we do know that these plants are getting old. Some of them probably getting towards their retirement age anyway.

They start to feel a bit weak at the knees, they need to be maintained more, and so on and so forth. So, it’s become that combination of circumstances, the multiplicity of them, has what’s created the problem we’re seeing now, not one singular problem by itself.

Kat Clay: So, the Australian energy market operator, AMO for short, has been warning of gas supply shortages.

Is Australia really running low on gas?

Tony Wood: No, we don’t have a volume problem. we do have a short-term constraint of the sort we’ve just been talking about, Kat. In Victoria, we do have a slightly different issue. And that is that Victoria, since the early 1970s, I wasn’t around in this business at the time, basically took advantage of huge volumes of oil and gas in Bass Strait.

And that became the source of very low-cost oil and gas. It became the basis of a lot of manufacturing in Victoria, based upon that low-cost energy. And that has been. Basically, a source of our energy and our gas for the last 50 years. Victorians also live in a part of the world, which relative to the rest of the country is fairly cold.

And so, what that’s meant is that we depend upon gas for our homes because we use it for heating more than anybody else. So, a third of all the gas consumed in Australia in households is consumed in Victoria. So that means that, we’ve been depending upon this gas for a long time. Now, that gas is a physically limited resource, and we have known for some time that the gas is gradually running out.

And even though the big companies who own those gas fields have been exploring for more gas, they have not been very successful. A few small amounts have been found, but not much. The market operator has been warning. This problem is coming, but nothing’s been done about it. We didn’t, we, for a long time, both sides of state government refused to have any more exploration development of onshore gas of any sort.

And then they didn’t like unconventional gas commonly associated with fracking. So, there was no more gas line tool development. They knocked back an import terminal to get gas maybe from other parts of Australia into Victoria on environmental grounds. Maybe that was justified. There was a proposal to build a gas, a terminal, import terminal in Port Kembla.

That one’s running behind schedule. We have run out of options to get gas into Victoria. Beyond a certain limit. And so, when you’ve got this situation where you’re needing gas more and you’ve got less, it’s going to be a crunch. And we’ve seen a bit of that crunch. Now we haven’t run out of gas. We’re not about to start freezing in our homes or anything like that, but the situation is tight and unless we start to do something, it will get tighter next year in the year after.

Recognizing this is a strange problem in a sense, because. We don’t want to invest in long term gas infrastructure because we also know that gas is a fossil fuel, and we’ve got to stop using it. so how do we stop using it, but make sure we’ve got enough for a while? That’s where the problem lies and not surprisingly, our political leaders have found that a very difficult problem to solve.

The rest of the country is nowhere near that sort of difficulty because they don’t have a that bigger demand for gas and B, they haven’t been running out quite so quickly.

Kat Clay: Esther, another reason that the gas supply is obviously limited, the war in Ukraine has surely taken a toll here. Are we seeing the impact of boycotting Russian gas in the northern hemisphere?

Esther Suckling: Thanks Kat. So, in part, yes, we are. So, tying into what Tony has been saying, the global energy prices at the moment are extremely high. And that’s because a lot of countries who typically import their gas from Russia, for example, Europe, a lot of countries in Europe where Europe on the whole imports 40 percent of their gas, from Russia, we’re seeing these countries boycotting, deciding to turn away and looking for other countries to step in and provide that supply.

So, Australia with our LNG in 2020, we were the world’s biggest LNG exporter. So, we are filling that gap along with other countries like Qatar and the U S and essentially, as Tony has been saying. Because our gas situation domestically is quite tight, where the demand is quite high with this cold period we’re going through, and supply is lower than usual because we’re using gas to substitute in the electricity market, that means that some gas suppliers are going abroad and buying at that high international price, which is caused by the situation, the invasion of Ukraine.

so that’s definitely playing a role and it’s the same for a lot of other commodities, but in the Australian context, LNG is the commodity, which is taking the hardest hit.

Kat Clay: Tony, I want to actually ask you about one of your recommendations now, because I think it ties into that, quite nicely.

And it’s a taxing, what was the word you used? It’s a windfall tax on gas exporters. Can you tell us about that idea and how that could actually help Australians get lower gas prices?

Tony Wood: The starting point for thinking about this is that the gas is Our gas, the gas literally should belong to all Australians.

The government manages on our behalf. They give companies the opportunity to extract that gas and sell that at a profit. What you’d like to think is that those companies then pay tax so that we get the benefit of that gas being extracted. The difficulty is twofold. One is. That the petroleum resource rent tax that was implemented some years ago now to extract that tax from the rent that these people are getting for extracting that resource and selling it, was an appallingly designed tax.

It was so clever that no one pays it, virtually. It’s never been fixed. It should be fixed. Because it means that the gas producers are making a lot of money, but the rest of Australia is not getting the benefit of our gas. That’s been bad enough, but now we’ve got a situation in which the companies who export this gas are making some very significant promise.

And by the way, this is also applying right now to coal producers, because they’re also taking advantage of very high. Overseas prices for their coal. Now, I don’t mind people making a profit. That’s absolutely fine. In the normal commercial run of things, sometimes you’re lucky enough to be in the right place at the right time, and you can sell your product to make a lot of money.

That’s fair enough. What’s happening right now is that these businesses are getting significant windfall profits. They’re not paying the appropriate level of tax. And therefore, and that’s also putting Australians under pressure. Their prices are higher, and they’re worried about running out of gas.

They’re not going to run out of gas, I don’t think, literally, but there’s a lot of concerns. There are two ways to solve that. One is to fix the petroleum resource rent tax. That would be tricky because it would be retrospective. Another one is to say, look, this is a windfall profit. This is, you’re just getting this money because you happen to be there at the time, which some of that at least should be used to support people who are being adversely affected by this, homes and businesses.

Now, even the threat. of doing that, I would think might be enough for the companies to come into a deal with the government and say, we will reduce the prices to a level that would give us, gives us, the producers a fair return, but also we don’t get these windfall profits, which, you can argue is not, is something that really we should all be getting as Australians, not just the producers.

And so, I don’t mind which of those they do, but it seems to me. That situation needs to be addressed because it’s a very unusual situation. And it means what you might call the normal working or demand of a market and supply, and demand is not working, but two distortions. And that’s resulting in this very unusual situation.

And I think the role for government, that’s when the role for government is one, they should step in and say, what are we going to do? Don’t just make idle threats, threaten some real action and they’ll get a response.

Kat Clay: Thanks, Tony. Now, there’s One last little measure that goes into your perfect storm.

the perfect storm has a lot of elements here, but it’s actually the weather itself. It’s freezing in Melbourne right now. And it goes without saying that everyone turning on their heaters can’t be helping electricity prices, right?

Tony Wood: In Australia, we, depending on where you live, of course, peak demand these days in Australia is usually in summer.

And so, the system is designed to meet that peak demand in summer. And so that means that usually. This is a pretty cool, cruisy time of the year from an electricity perspective. Gas demand in Victoria, where we do use more gas for heating, tends to be peak winter demand. And so that’s the sort of tension you get at the moment.

That by itself isn’t so much affecting price, the heat, the temperature but it is affecting volume. It is one of the reasons why we’re sucking gas, and that’s adding, so the fact that we are sucking more gas is also another reason why. There’s a, there’s less gas available in a sense to be able to step in and meet that power needs of the electricity system for the other reasons we’ve been discussing cat.

So, you can see why they’re connected. Now, many people already, since the AIR stepped in, have already seen their electricity bill go up. I know that some of the retailers are now telling their customers their gas bill is going to go up as well.

Kat Clay: Yeah. I’ve been thinking about putting solar panels on my roof, but it’s been pouring with rain.

So, I don’t know how I can break here. It’s the. There are some people in Australia who are quite lucky and cutting a break right now. It’s this one city where electricity bills are going down. Why are Canberrans so lucky? And what can we learn from this example?

Esther Suckling: Canberra’s just winning at everything this year.

The reason that electricity prices are forecast. to go down this year in Canberra by around 2 percent compared to an increase of 18 percent in other parts of the country is because all of Canberra’s electricity comes from renewables. So, the ACT government has entered into what we call fixed term contracts with renewable energy suppliers like wind farms, solar farms, and that essentially means that Canberra is It’s not exposed to these huge swings in price that we’re seeing in the electricity and the gas markets.

They are insulated from that. And it’s a good lesson as well in how planning and foresight from the government and a kind of clear policy direction, which the ACT government has taken in this case, can, Pay off down the track.

Kat Clay: So, I can hear a lot of the Canberra public servants listening to this podcast breathe a sigh of relief as we’re talking about electricity prices. Tony, we’ve talked about the windfall tax. What else can governments and agencies do or have done already to reduce costs for consumers?

Tony Wood: What they can’t do, and what fortunately this time around the government is not pretending to be able to do, is suddenly magically change the physical world.

Unless Minister Bowen’s gonna go around and start shovelling coal into coal fired power stations, you can’t solve that problem, and you can’t suddenly miraculously find gas. the short-term issues are very difficult. Now, there’s two things governments can do. One would be if they did want to seriously think about the idea of some form of, windfall tax or changing the petroleum resource rent tax, that extra money could be used.

Obviously, they’d love to use it to improve the deficit and the budget, as we all know, is in a difficult position, but they could also use it for targeted support for people who really are in financial difficulty. As a result, partly, Of higher electricity bills. But as we all know, other things are going up in cost as well.

So, electricity and gas bills are adding to that. The second thing governments can do, and sometimes they do, and the Queensland government, for example, has done this. They’ve given small relief in cash terms to some of their consumers, 175, I think, for their winter. Electricity bill. sure, Queensland and winter go together, but anyway, so I think that’s where, they can do those sorts of things.

The real issue though, is to get the system working again. And that means the first priority has to be to get those coal fires, power stations back online. Now there are some things governments. There have been some challenges with the rail system in New South Wales to get the coal from the coal mines to the power stations.

They can work in that area. They can also make sure that there are no regulatory barriers to getting what we need. So for example, what they announced yesterday was a move to try and help the market operator, the person, the organization that’s responsible for Effectively the reliability of supply in the grid, both gas and electricity, to step in and try and establish a reserve of gas that could be used in emergency circumstances.

And that might or might not improve the situation. I suspect it won’t magically solve any of this. There’s a number of other things they could do, which they’re talking about, but. But what I like about the approach we’ve seen for the government so far is that rather than step in and try and make some drastic decisions, which probably wouldn’t work anyway, they are taking a considered position.

All of the ministers, state and federal and territory ministers, Labor, Liberal, Greens, met with the federal minister yesterday. And what they announced wasn’t so dramatic, but what was very interesting was they all agreed. to announce something which was more or less the same, not something we’ve seen in recent times.

And they put out a communique, which just means we can understand what they actually did talk about and decide. So that’s a very different dynamic from what we’ve seen very recently. And the fact that they’re taking advice and listening to the experts, the market operators, the technical people, as to what they can and what they could and should do is also a good move.

It could look like they’re not doing very much, but rushing it, you can’t rush in and fix this, taking a considerate view, but still making sure there is going to be action is what I think they’re going to do. We’ll see how that plays out.

Kat Clay: Well, that’s a good sign working together already on potential solutions to this is a great sign.

I think obviously our long-term recommendation would be that move away from fossil fuels and towards renewables.

Tony Wood: If we’d stayed on the journey that we tried several times to begin this century, we would have been a lot further down the path. And we would have had a system that was not reliant on coal or gas as much.

Now we wouldn’t have avoided it completely. We wouldn’t have avoided; I don’t think we would have avoided the Ukraine war by doing that. We wouldn’t have avoided cold weather, and we wouldn’t have avoided some of these coal fired power stations having the problems they have. But our system would be looking very different, and we’d be making a lot of progress.

Now you can go back over successive federal and state governments and blame them for doing that, but we are where we are. And now of course, we’ve got to move faster to achieve the same level of emissions reduction and renewables growth, than we would have done if we’d started earlier, which means doing it faster is harder, probably more expensive and needs a lot more resources.

We’re going to have a challenge to, really to catch up on where we should have been. But again, I think we’re seeing signs that we’re about to seriously And

Kat Clay: I’m sure we’ll talk more about that on the podcast through the rest of this year. Now Esther, one final question for you, apart from sitting in my puffer jacket in the dark in my house, is there anything our listeners and myself can do to reduce their energy bills this winter?

Esther Suckling: One of the main things that you can do potentially That would have the biggest impact is to shop around and check that you’re actually getting the best deal with your electricity and gas, retailers. So, for anyone living in Victoria, the Victorian government is actually offering a 250 check to each household who goes onto their website Energy Compare and essentially give some details about their electricity provider.

Has a look at the different options available and whether or not they change providers, you can receive that money. It’s an incentive from the government to look around. Electricity bills are one of those things where I think for a lot of people, including myself, before I joined this team, you set it up when you.

Move to a new house. And then you completely forget about it until you absolutely have to think about it again, if you move or something else comes up, your electricity provider asks you to move as you were saying cat. So that’s one of the main things that you can do. There are also tons of other websites, which allow you to compare.

Between different retailers and also, there’s all the classic thing, Tony, you got asked about wearing a dressing gown the other day on the radio. I don’t know, like an Oodie, buying an Oodie.

Kat Clay: I’ve got an Oodie. I’ve got to say it’s the best thing. You just sit there in the cold and you’re like; I’m never going to get cold in this thing.

Yeah. I can’t say it’s the most fashionable item, but if you’re at home, yeah. put another jumper, all of the things your mum would tell you to do. Don’t need any hot tips.

Tony Wood: I think Esther’s right. I think the things we can do, and you, alluded to this earlier, Kat, things like solar on the roof.

Australians have adopted solar on household rooftops more than any other country in the world. but there’s still plenty of roofs that don’t, have solar on them. And there’s places that could add more solar panels these days, because they are cheaper. That you can do that. that will help your electricity bill.

It will also. improve the environment. So do for that. Do it for both reasons. I think there’s, the other question is really having a close look at, the way in which you’re using energy in the home can make a big difference. Energy efficiency, a lot of our appliances might be old. There may be leaks around doors, particularly in cold weather.

you can feel the wind blowing under the door and that sort of stuff. making sure that you, whether or not your house is, if, particularly if you’re, own the house, is it properly insulated? It makes a big difference in both summer and winter. And for reasons, this would be an expensive option, but for many reasons that we don’t think about our homes, we don’t have double glazing very much on our windows, for example, right?

That could be a big deal. And by the way, the other thing you can do. And this could be expensive depending on where you are in your, in your accommodation, is to convert from gas to electricity. And we are going to probably do that, or in fact almost certainly do that over the next couple of decades, because gas is a fossil fuel, it is becoming scarce, it is becoming more expensive.

And, we’re going to have to move away from it. It’s not a big problem. if Neil Perry says you can cook with electricity on an induction cooktop, of course he must be right. We don’t use much gas for cooking really. the big issue is for gas for heating and, it just, if you’ve got reverse cycle air conditioning, use that.

You don’t have to go and buy a new appliance, just hit, push the heat button on your air conditioner and away you go. You don’t need the gas. So, moving away from gas is something many Australians have started to do. They will save money, although they’ll have to some, in some cases, replace their appliances.

And so, there’s, as Esther said, there’s plenty of things you can do. But most of us, this energy is not something we think about, it’s not something we talk about much over the barbecue at all really. And maybe we should, but there’s been companies who’ve tried to make electricity exciting.

It’s not very exciting.

Esther Suckling: And I’ll just add quickly to that, Tony, because it’s quite a big theme we see in energy that something’s expensive as the upfront cost, but over time it saves you money. And that’s what people who put solar panels on their roof. will have experienced and it’s what you’re talking about with switching from gas to electricity.

and the same goes for appliances that you might buy, like buying a more energy efficient fridge or TV. The price tag doesn’t necessarily reflect how much you’re paying for that because your electricity costs are going to be influenced by how efficient your appliances are. So also, just when you’re You know, if it’s time to replace your fridge or your heating system, just thinking about that.

And when you’re comparing different prices, thinking a little bit more long term as well about your bills.

Kat Clay: Yeah, that makes sense because I bought myself a condenser dryer because I didn’t have space for two. And although that was more expensive, the energy rating on that as a dryer, because it uses different technology is much more efficient.

So, there you have it, some hot tips on how you can keep yourself warm this winter, as well as the policy behind it. So, if you’ve enjoyed this podcast, please talk to us on social media. We love to hear from you on Twitter at Grattan Inst and all other social media channels at Grattan Institute. As you probably know, Grattan is a not-for-profit organization, and we are in the midst of our end of financial year.

Fundraising campaign. We rely on donations from our lovely listeners like you. If you’d like to donate, please visit grattan.edu.au/donate. As always, take care, please stay warm and thanks so much for listening.