Power bill increases are due to gold-plating of the system and international pricing. Photo: Michael Mucci
An energy crisis is rapidly unfolding in the Australian electricity and gas sectors that will rival the oil shock of the 1970s. That shock to our energy-intensive economy originated in global changes in the energy industry. The great energy crisis of 2015 will not be caused by an external shock but, rather, it is a uniquely domestic problem caused by dramatic energy policy failure.
Energy in Australia is rapidly becoming unaffordable for industry and domestic consumers. In a country that is one of the world's largest exporters of energy, with abundant cheap coal and gas, it is lamentable that we face high domestic prices.
We have seen a doubling of electricity bills over the past six years. Rising network costs caused the lion's share of the increases. Wholesale gas prices will see an even larger rise over the coming two years as the industry moves to world parity pricing.
Industry groups and business leaders have not been shy of commenting on the dire consequences of high energy costs for their businesses. Industry after industry has felt the effects: some have downsized and many have closed.
The social impacts of spiralling prices for electricity and gas cannot be overstated. Many in our society cannot afford these price rises that bear no relationship to inflation or wages growth.
Meantime, the industry has been busy building poles and wires infrastructure to cope with a supposed increase in peak demand.
Peak demand has not, however, increased by a large amount. It has decreased by a large amount.
The result is that, in one analyst's view, around half of the expenditure - $22 billion over the past five years - was unnecessary gold-plating of the network.
Large writeoffs will come to the electricity industry as power lines to closed smelters and factories around the nation are decommissioned.
In the coming five years, despite falling demand, some network companies are looking to grow spending and assets. All this growth in a market that is rapidly shrinking.
Increased spending combined with falling demand will see prices resume their relentless rise after a short-term reprieve from the scrapping of the carbon tax.
Layered on top of the over-investment in grid infrastructure is technological change. Technological change is rolling over the electricity industry and will be transformational. Solar power is, like the internet, a truly disruptive technology. The media and retail industries were at first dismissive of the internet and resisted change. This proved to be a costly mistake. Solar will change the whole model of the way we generate, store and use electricity. There simply will be less need for grid infrastructure as many people generate their own power.
This is already occurring and many in the financial world are warning of the changes that will beset the electricity industry. In late May, Barclays Bank downgraded the entire electric sector of the US high-grade corporate bond market, stating that it sees long-term challenges to electric utilities from solar energy. Technological change is coinciding with unprecedented investment in the network, much of this investment may ultimately prove to be useless as the entire model of generation and consumption changes.
The changes in the electricity industry that have driven up prices domestically are mirrored in the gas industry. Policy failure is at the heart of rises in the domestic gas price.
Historically, the east coast gas market enjoyed relatively cheap gas, sourced from Bass Strait and the Cooper Basin in South Australia. It was a domestic market shielded from world pricing. The advent of the coal seam gas industry in Queensland saw the need to construct export gas terminals in Gladstone. The government, unlike other governments around the world, allowed unfettered access to global markets. The building of the export gas terminals will see the prices for gas rise inexorably towards world prices. Indeed wholesale gas prices are widely forecast to more than double to match international prices.
In Western Australia, to shield domestic consumers from high gas prices, the government enacted a domestic gas reservation policy. This keeps prices low for domestic consumers. Likewise in the US, consumers benefit from low domestic prices as export licences are hard to come by. The cheap gas benefiting the domestic market in the US has been hailed as one of the reasons for the recent recovery of manufacturing in that nation. On the east coast of Australia consumers and industry have no such protection and the consequences of this can already be seen in the rapid deindustrialisation of our nation.
Looking globally, the explicit government policy of high domestic gas prices is a radical one. The east coast of Australia is an exception to the generally adopted policy of cheap domestic energy.
Many in the gas industry are calling for the rapid development of environmentally suspect coal seam gasfields in NSW to counter higher prices. This policy simply will not work as prices on the east coast are now linked to world prices. No amount of domestic production will change this dynamic.
The great energy crisis of 2015 will rapidly change the nature of the Australian economy from a diversified resilient economy to a very narrow high-cost economy reliant on just the mining and fossil fuel industries for growth. The pursuit of such a narrow vision for Australia is not in the nation's best interests.
Bruce Robertson is a financial analyst who lives on a farm on the mid north coast.
Paul Sheehan is on leave.