This year’s energy crisis is the most serious since the 1970s oil shocks. Businesses now are also suffering short-term pain, which in the longer term, is likely to transform how companies use energy and how the energy industry will deliver it.
What’s causing the energy crisis?
Australia’s east coast energy crisis has been over a decade in the making, affecting both the gas and electricity markets.
The Gillard Government agreed on a $70 billion plan with Origin Energy, Santos, and Shell Energy to go towards LPG infrastructure and create 11,000 construction jobs. The arrangement allowed the gas trio to export Queensland’s coal seam methane overseas without tax or any gas reservation for local consumers. It also saw east coast gas prices connected to international markets.
In the electricity market, solar generation and wind farms have depressed wholesale electricity prices, often pushing prices to zero in the middle of the day when demand is highest. For coal generators designed for baseload energy production, price volatility means they need to ramp up generation overnight and reduce it during the day which increases the need for maintenance and reduces profitability.
Then, just as Russia invaded Ukraine, pushing gas prices to record levels, Australia’s coal generators started to fail, and it began to rain, hard.
The adverse weather has impacted coal mining, and some rail routes flooded, leading to significant coal shortfalls. Rooftop solar generation has also faltered because of rain cloud cover. Finally, windfarm generation during the first six months of this year has been less than usual.
All this meant gas generators stepped into the gap, but because their fuel source cost had ramped up, they priced their generation at the top of the market.
How energy prices are impacting businesses
This series of events has meant that east coast electricity and gas contract prices are at never-before-seen levels and are significantly higher than Western Australian prices.
A far-sighted Carpenter WA government implemented a domestic gas reserve and later an electricity capacity market that paid baseload generators to stay online even with the uptake of solar.
Some smaller electricity and gas retailers are failing and telling their customers to take their business elsewhere, while some retailers are attempting to sell their purchased electricity or gas contracts to lock in huge profits.
What small businesses can do about high energy prices
Contracting
Some businesses forced to re-contract their electricity or gas supply are looking at a 500 per cent price increase. Because over the longer-term prices are expected to fall (that’s what the ASX futures market is telling us) small businesses have a few contracting strategies open to them. Blend-and-extend, take an existing contract and average its lower contracts with future higher prices. Or take a short-term 12-month contract rather than the normal 24 or 36-month terms limiting the exposure to current high prices.
Planning
It’s important for small businesses to understand the benefits of energy procurement to build a strategy around lowering energy costs and consumption.
Analysts suggest all companies take an agile approach and closely monitor energy prices so they can kick off procurement events quickly when market conditions are right.
Turning to solar
If solar is an option for your businesses, you will find high energy prices reduce the time it takes for solar or energy efficiency projects to pay for themselves (depending on the technology used).
With an implementation timeline of three to nine months, businesses that can invest in energy projects can reduce their grid demand and insulate their business from present and future volatility.
For businesses that get these pointers right, it can provide cost advantages over local competitors who don’t have an energy strategy and are subsequently left to pay significantly more for their power bills.
