As demand falls and policy uncertainty continues, a long running boom in the building and construction of power and energy infrastructure now appears to be over.
Expectations of reduced activity abound. In October, participants in an Australian Industry Group/Australian Constructors’ Association survey said they expected the dollar value of turnover in construction work on electricity generation and gas supply throughout the country to plummet by 14.2 per cent and 16.1 per cent throughout 2014/15 and 2015/16 respectively, and for work on pipelines to fall by 17.4 per cent and 4.8 per cent over the same timeframe.
Meanwhile, Australian Construction Industry Forum (ACIF) expects the dollar value of construction work done on the above sectors to drop from almost $17 billion in 2013/14 to just over $11 billion by 2017/18, though that will still be almost 40 per cent above levels seen as recently as 2005/o6. The recent cancellation of Tasmania’s massive Taswind project does nothing to promote optimism.
Reasons behind this are not hard to understand. Throughout much of early part of the last decade, strong growth in energy demand and fears of long-run supply shortages caused power utilities to ramp up investment in poles and wires. Meanwhile, a combination of favourable policy and a general push toward more environmentally friendly forms of energy lead to a massive push in the renewable energy sector.
In July last year, for example, AGL made a final investment decision to pump $450 million into what it claims will be two of Australia’s biggest solar power plants in New South Wales – the largest of which will be the biggest in the Southern Hemisphere when it opens in 2015. Combined, these factors saw the overall value of construction work done on pipeline and electricity infrastructure more than double from just over $8 billion in 2005/16 to almost $18 billion in 2012/13.
Now things are different. Amid the abolition over the carbon tax and uncertainty over the renewable energy target, investment in renewables dropped from around $2 billion throughout all of 2013 to a paltry $238 million in the first three quarters of 2014. Political factors have not helped; wind farm restrictions in Victoria are reckoned to have caused the scrapping or stalling of projects worth $864 million according to a report released earlier this year.
Moreover, the anticipated long-term growth in demand did not happen. Instead, energy usage has fallen every year since 2009/10, and recent forecasts from the Australian Energy Market Operator, which manages the national electricity market, suggests almost 20 per cent of current installed capacity is surplus to requirements.
With the closure of aluminium smelters in New South Wales and Victoria, along with the planned shutdown of Australia’s car production, demand and prices are expected to remain under downward pressure until at least 2016/17. Add to that the cost impact of the falling dollar on the cost of capital equipment needed to build new plants and you hardly an outlook which will encourage further investment.
State by State
On a state by state basis, according to ACIF:
- In New South Wales, the dollar value of work done will drop from $3.843 billion in 2013/14 to just over $2.895 billion in 2016/17 and stabilise thereon after
- In Victoria, activity will drop by more than three quarters from $2.673 billion in 2013/14 to to $563 million by 2017/18
- In Queensland, activity will fall from $4.621 billion in 2013/14 to less than $3 billion by 2016/17
- In Western Australia, the dollar value of work done will fall from $4.167 billion in 2013/14 to just over $3 billion by 2015/16
- In the Northern Territory and ACT, the dollar value of wok done will drop from $339 million and $253 million in 2013/14 to $230 million and $116 million respectively by 2017/18, although the NT is actually going to experience some growth in 2014/15
- The two growth states will be South Australia and Tasmania, with activity in the former dropping from $848 million to $798 million in 2014/15 but then rising above $1 billion by 2017/18 and that in Tasmania rising from $300 million to $434 million in 2014/15 and then rising steadily thereon after as work on a number of wind farm projects keeps activity reasonably strong on the former project and that on the Cattle Wind Farm lifts activity on the latter.