Business in the eye of an energy price storm

It’s hardly news that more than a few of Australia’s 9.1 million households have been put under the pump by rising energy prices. What is much less well documented in the media is the impact on business users, apart from all the hullbaloo 12 to18 months ago about 'big polluters' and the carbon tax.

One window on business and energy can be found through the Australian Industry Group, which claims 60,000 firms in its membership and says they employ a million people.

Innes Willox, Ai Group’s chief executive, is out and about at the moment pushing the notion to the Coalition that, after killing the carbon tax once it has won office in September, it should embrace emissions trading with a full international linkage.

He argues that doing this would cut electricity prices by about $15 per megawatt hour, providing businesses with an average cut of about 10 per cent in their power bills.

Ai Group has never supported the carbon tax and has argued from the get-go that emissions trading is the cheapest and most flexible path to greenhouse gas abatement.

It is also in the forefront of the manufacturing push for an east coast gas reservation policy, which is rejected by both the present federal government and the Coalition.

Whether it will have any better success in promoting emissions trading with the Coalition is anyone’s guess, but the pain of energy prices is real enough for businesses and not getting any less hurtful.

Ai Group claims that more than half of manufacturers are unwilling to increase their product prices at present because of the risk of losing business to competitors.

It points to electricity prices increasing by 17.2 over the year to September 2012 and 28.8 per cent since September 2010.

It calculates that electricity prices rose 168 per cent for households between 2000 and 2012 and many of its members would be caught in this rip too.

Exactly how much of the most recent energy bill increases is attributable to the Gillard government’s carbon regime is a topic of debate, but Ai Group claims that manufacturers saw an average 14.5 per cent energy input cost rise after July last year as a direct result of the tax – the pass-through reportedly varies from 1 per cent to 20 per cent – and services businesses were hit with an average 13.6 per cent rise.

Ai Group points at food manufacturers as being among the big losers when energy bills rise, saying that more than 90 per cent have reported at least some higher costs after July last year and only 10 per cent of food processors finding themselves in a position to pass them on to customers.

Part of the media difficulty in getting a handle on the business end of the energy price wars is that the market shares are not especially well understood.

It is much easier to focus on households (aka voters) than managers.

The broad facts are that about 40 per cent of Australia’s grid-connected electricity supply is consumed by the 250 largest manufacturing and commercial companies, by far the largest chunk of demand, versus about 26 per cent by households, 28 per cent by all manufacturers, 25 per cent by all commercial and public services users (a category that includes schools and hospitals) and about 11 per cent by miners.

One of the problems in understanding the current downturn in east coast consumption – with those of a green mindset eager to attribute it as much as possible to rooftop solar PV arrays – is that useful data is still not at hand about how far manufacturing demand has fallen.

We know that it peaked at 35 per cent in the 1990s and has been declining, in terms of market share, ever since.

What still needs to become clear is just how it has fallen since the GFC and how far that retraction has rolled on into the small business sector.

Nor do we yet have a clear picture of how far the ever-rising public services demand for power has made up for these declines.

One of the problems a fair few people have in understanding the power price situation going forward is that bills are set to continue to rise even though peak demand, the big driver of infrastructure investment, is at lower levels now than it was in 2008-09.

The point, of course, is that once the network investment has been made, its costs have to continue to be paid by consumers and, as demand slumps, the “poles and wires” charges per kilowatt hour have to rise.

You can “park” a power station when demand slows (and some 3,000 MW on the east coast have been mothballed or shut), but you can’t “park” powerlines.

The (ever-rising demand) music may have stopped but the (cost of investment) malady lingers on.

This is a significant factor in the recent decision by the Queensland regulator to increase power bills by 21 per cent for households and more than 15 per cent for regulated business customers from July 1 – and it’s why the New South Wales regulator, embarked on the same review process, is careful to point out that prices in 2013-14 will rise more slowly than in the recent past, but they can’t be expected to fall.

The electricity fear for Ai Group and its members, and others in business, is that the next witch on a broom will be wholesale energy input costs as east coast gas prices push towards $9 per gigajoule (having been barely $4 in contracts now winding down).

Enhanced efficiency is an obvious way to go for manufacturers and other business consumers, but, having sailed along insouciantly in the good times of suppressed prices, are now cash-strapped and saving an energy dollar involves spending a fistful up front.

This is grasshopper and ant stuff and the ‘hoppers are, as always, in strife.

For such businesses as non-ferrous metals, basic chemicals, plastics, pharmaceuticals, paints and cosmetics, direct users of the fuel, the even wickeder witch of the east is direct gas prices.

And when these manufacturers get hexed by gas price shocks and cut back on their activities, there will be a flow-through impact on their electricity demand, too.

This is not a pretty picture for business in the decade ahead and heaven only knows where the politicians will take us under the stress of the impending federal election and, in the case of Victoria, a substantial manufacturing state, an almost-hung parliament.