National energy policy is one of the hot topics in Canberra this year, a debate that is perhaps five years too late.
But if you think your electricity bill is out of control now, just imagine what it might look like in five years if it doubles again.
The problem of rising energy prices in Australia is not limited to households; it also effects the tens of thousands of workers in the building industry in Australia. Australian manufacturers compete on a world scale to attract investment from other parts of the world. The key factors determining investment decisions involve the strength of the local economy, the political environment and other input costs such as wages and energy.
The challenge of sustaining manufacturing in Australia in the face of rising energy costs is increasingly recognised as a major national economic challenge. ACI’s most recent Construction Monitor shows that investment in the construction sector is on a downward trend and looking ahead the positive signs are focused on government spending on construction while the private sector is planning to spend less in the years ahead.
The reasons for the drop in construction activity are complex and include the end of major mining projects in QLD and WA. A record volume of apartments are also nearing completion and a future phase of investment is unlikely to appear until these apartments are sold.
But missing from the future investment horizon is the significant investment in new manufacturing facilities. Investment in new manufacturing facilities dried up after the global financial crisis. As global economies are now heading back closer to three per cent annual growth there is increasing investment in new major manufacturing projects.
Australia is just one country competing to attract this investment dollar to our economy. The long-term benefits to employment, GDP and tax revenue from winning these investment dollars are then multiplied through the economy.
The risk for Australia is that even if we have a stable political environment, low wages and a sound legal framework, our very high energy prices will render us uncompetitive for global investment.
The causes of these high energy prices are well articulated in the Finkel Review (named after its author, Australia’s Chief Scientist) and it also highlights that energy prices may still climb higher.
In the gas market, the Australian Government stimulated the demand for Australian gas at the same time as state governments acted to constrain the supply of gas. The recommendations from the Finkel Review, to increase transparency in the market, are peripheral to the macro impact of supply and demand on the retail price of east coast gas.
The major driver of electricity price increases was an investment cycle in poles and wires caused by political decisions to improve reliability, a regulatory failure to recognise a fall in demand, natural disasters and capital renewal. These were compounded by a range of government interventions in the market relating to renewable/carbon policies that undermined the investor certainty necessary for a capital intensive industry. The absence of bi-partisan support for a long-term policy on carbon will also continue to undermine investor confidence.
The next driver for electricity price rises is likely to come from the generation sector as it upgrades its ageing capital stock to meet future electricity demand.
The energy policy debate has tended to focus on the price impact on Australian households. At the same time, high and rising energy costs are impacting Australia’s manufacturers.
Policy makers must acknowledge the role that energy market interventions have had on the competitiveness of Australian manufacturers and that in order to sustain a viable manufacturing industry in Australia manufacturers need a reliable, low cost, supply of energy.