SMEs brace for energy crisis

Energy prices in Australia are set to go through the roof, with price fluctuations predicted to amplify cost pressures for businesses.

10 June 2022 

The Australian Electricity Market Operator (AEMO) reported that in the first quarter of 2022 wholesale prices went up 141% from last year, and the ASX showed prices this quarter at $302.

With factors such as the Russia-Ukraine war threatening energy supplies, and supply chain difficulties having a global impact, commentators have for months now been warning of an oncoming Australia-based energy crisis. 

“Businesses and households will inevitably face an increase in energy prices,”  Katja Ignatieva, Scientia Associate Professor at UNSW Business School said.

“It’s an increase driven by multiple factors including rising gas and coal prices; reduction of thermal power generation due to unplanned outages at multiple generators and increasing generation cost.” 

She said that a challenging global environment and extreme weather events in NSW and South-East Queensland had contributed to the rising prices

"All this has made energy demand spikier (spikes are sharp unpredictable increases in demand), which results in higher cost of wholesale electricity for retailers,” Ms Ignatieva explained.

“Australia exports most of its fossil fuels including coal and gas, overseas. Since coal and gas (as well as oil) prices are increasing worldwide, and transportation costs are going up, the electricity-generating cost from these fossil fuels is rising. This has resulted in an increase in wholesale energy prices on the domestic market.  

“Australia extracts enough coal and gas to sustain its own needs. But it is also part of the global trading market and is linked by supply agreements to export most of its fossil fuels. Revoking or significantly reducing Australia’s exports cannot be done easily in the short term. 

“Australia remains almost entirely dependent on imported energy, leaving the country vulnerable to future global price shocks and supply disruptions.” 

Although the increasing energy prices are mainly driven by the increasing global cost of fossil fuels, inflation and other factors, it is possible that electricity generators could take further advantage of the situation by price gouging in the National Electricity Market (NEM), according to Ms Ignatieva.

Similar to the oil markets where large companies were making windfall profits due to recent price increases of oil, energy generators could try to make excess profits by offering energy to retailers at a higher price, which results in a significant rise in the energy retail prices for customers.  

“The Federal Government and organisations like the Australian Energy Regulator (AER) should take some actions to prevent such scenarios as it impacts other productions and adds to the inflationary pressures,” she added.

Ms Ignatieva said businesses and households will likely see difficult challenges ahead especially in the short term.

Retailers buying electricity from the wholesale market and selling it to businesses and households are facing the challenging task of managing the risk of highly volatile prices. 

“When energy prices spike, these providers pay higher prices on the spot market, where the supply and demand are matched to purchase the power that they need,” she said.

“Consumers pay a fixed price for power, regardless of spikes. But since the wholesale price spikes are occurring frequently in the current turbulent market conditions, the costs will eventually get passed on to consumers in their electricity bills.  

“If retailers were able to effectively hedge against these price spikes, we would be able to see a reduction in the energy bill. But since there is a delay between the time of a decline of wholesale prices and the time of a reduction of the electricity bill, low prices cannot be easily achieved in the short term, but hopefully in the medium- to long-term. 

“In the long term, another strategy to lower energy prices is the introduction of more renewable generation. The savings from generators will be passed down to retailers and finally to consumers, as outlined by the Prohibiting Energy Market Misconduct laws.”

Ms Ignatieva said the adoption of renewable energy sources could help to reduce energy prices in the medium to long run. 

While renewable energy was impacting the profitability of the coal plants (with some like Eraring Power Station at Lake Macquarie retiring ahead of schedule), renewable energy would be an effective way to replace generation from major coal-fired power plants and to reduce wholesale energy prices and energy bills for businesses and households.  

“But in the short-term, when we are going through the transition stage of shutting-down of major coal-fired power plants while increasing the share of intermittent renewable energy generation, and experiencing more extreme weather that results in extreme demand periods, we can expect to see even larger price fluctuations,” Ms Ignatieva said.

“This transition stage of increasing energy prices is likely to continue until there is sufficient hydropower development and battery storage that meet government."

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