Australia’s power woes a huge challenge for new government

Melbourne — A profit warning on Wednesday from Australia’s second largest power producer and the struggles of its bigger rival furnish the new government with stark evidence of the challenge of moving to a greener future while promising cheaper electricity.

The Labor government, sworn in on Wednesday after Australians voted loudly for climate action, campaigned on cutting carbon emissions by 43% from 2005 levels by 2030, a renewable energy target of 82% by 2030 and lower power bills.

Delivering all three will be a tough task.

Apart from high oil prices, Australia is battling soaring power and gas costs, stoked by rocketing international prices of coal and gas and outages at some domestic coal-fired power plants, which have driven up demand for gas for a generation.

“This is, unfortunately, a perfect storm of conditions and challenges in our energy market,” Australia’s new treasurer, Jim Chalmers, told reporters. “This is the chickens coming home to roost when it comes to almost a decade now on climate change and energy policy failure from our predecessors.”

The country’s second largest power provider, Origin Energy, on Wednesday warned of “extreme volatility” across commodity markets and scrapped its earnings guidance for the year to June 2023.

The company has lost some coal supply for its Eraring power station, forcing it to cut output from the country’s largest coal-fired plant while seeking other coal at much higher prices and running more gas-fired generation. That, in turn, is driving up wholesale prices of gas and power.

Spot gas prices have been capped at A$40 a gigajoule (GJ) this week by the market operator, versus more typical figures of about A$10/GJ, after last week’s collapse of a gas retailer that supplied 7% of the eastern Australian market.

Spot power prices have more than tripled since the first quarter to about A$300 per MWh in the two states with the tightest markets, data from the Australian energy market operator shows.

Origin flagged its woes in the same week that bigger rival AGL Energy scrapped plans to split into an energy retailer and coal-fired power business.

AGL bowed to its top shareholder, tech billionaire and climate activist Mike Cannon-Brookes, who campaigned to keep the company together and hasten closure of its coal plants.

Chalmers has ruled out new taxes to tackle the energy woes, so Australia will not follow Britain’s approach of windfall profit tax on the energy industry to shore up the rest of the economy. However he did not rule out pulling the trigger on the domestic gas security mechanism, a policy measure of the previous government.

This would force east coast exporters of liquefied natural gas (LNG) to reserve supplies for the domestic market at a time when they are fetching much higher prices offshore as buyers seek alternatives to Russian supply.

Cutting LNG exports would hurt Australia’s allies and trade partners and is geopolitically tricky in the battle against Russia, however, said Tennant Reed, climate and energy policy director at the Australian Industry Group.

“I don’t think that is an environment where any Australian government is going to be enthusiastic about cutting off exports to any degree,” Reed said.

Origin CEO Frank Calabria called on the government and industry to work together to beef up coal supply to power plants so as to boost electricity supply and cut prices.

“The immediate focus needs to be on the existing kit delivering greater output today,” Calabria told analysts on a conference call on Wednesday.

The most palatable option to defuse cost-of-living concerns would be to provide billions of dollars in short-term assistance to the homes and businesses most vulnerable to soaring energy prices, Reed said.

In the medium term, speeding up renewable energy development and building new transmission will be the way to bolster and clean up power supply as the government has promised. But first it will have to overcome regulatory hurdles and resolve federal and state squabbles.

“Even if it works, the next few years look pretty grim for energy users,” Reed said. 

Reuters