Energy market enlightenment? Just an ASX release away

By just checking Alcoa's statements to investors, the AFR's Phil Coorey put a plug in the pipeline of sewage that spews forth on how climate policy is driving industry overseas. If only other journalists could learn to follow the money rather than the rhetoric.

Money isn’t given enough credit as an arbiter of truth. Sooner or later the financial data tends to sort out the rubbish from the reality. You see, while businesses and their lobby groups can tell fanciful tales until the cows come home to politicians and the media, they face jail time when they lie in financials to investors.

Credit where credit is due, Phil Coorey from The Australian Financial Review, by doing a simple check of Alcoa’s statements to investors, put a great big plug into the pipeline of sewage that spews forth in the press about how climate change policies are driving industry overseas.

Joe Hockey, Greg Hunt and Ian Macfarlane can say whatever they want about why Alcoa shut Point Henry but you can’t deny a filing to the US Securities and Exchange Commission explaining that the company had “a favourable change of $53 [million] in prepaid expenses and other current assets, mostly caused by the sale of excess carbon credits in Australia”.

This comes on top of the Alcoa stating that the carbon price was not the driver for the decision to close.

For much of this political debate around the carbon price, the bulk of the Australian press seem to have ignored the fact that trade-exposed emissions intensive industry have the vast bulk of their carbon emissions covered by free permits. Back almost two years ago, in May 2012, I wrote the article How some polluters will make money from the carbon tax, explaining how the formula for allocating free permits based on the historical industry average levels of emissions intensity would mean some firms would receive more permits than they require. Also it meant that if some firms put in place some reasonable measures to lower their emissions, they’d also end up making money from the carbon tax. This is a particular windfall opportunity for manufacturers of explosives and fertilisers.

In the case of Alcoa I suspect the windfall gain largely flows from its alumina refineries rather than the Point Henry smelter, nonetheless this serves to illustrate that the free permits go a very long way towards ameliorating any risk the carbon price would send industry and jobs overseas.

Yet, for the most part the media have gullibly swallowed rent-seeker claims of carbon cost impacts which simply fail to take into account the fact that where an industry is (a) trade exposed (and hence might lose out to a competitor overseas that doesn’t face a carbon price); and (b) has a carbon price liability that is remotely significant to its profitability they receive between 60 per cent to more than 100 per cent of their permits for free.

This exemption formula also applies to the expanded proportion of the Renewable Energy Target beyond the original 9500GWh instituted by the Howard government.

Unfortunately, judging by a number of other articles in the press, others are still yet to learn about the importance of following the money and prefer grand narratives. Take this article as an example:

Since this has been going on ever since the shale energy boom loomed as a game-changer for America and the world three or four years ago, it is odd that so many in Australia remain in denial about the consequences of high-cost energy.

The Abbott government has taken a few steps towards trying to solve the onshore gas production impasse by reviewing the renewable energy target, seeking to abolish the carbon tax and establishing an east coast gas task force.

But there’s a long way to go and more manufacturing and jobs will likely be lost along the way.

Vaclav Smil, Bill Gate’s favourite author, and one of the world’s most sage researchers of energy issues, put this apparent shale-driven manufacturing revival all into perspective when he observed:

“…people think there is a renaissance in US manufacturing – but of course, there isn’t. In the past 12 years, America lost 7 million manufacturing jobs, and it got 400,000 back. Would you call that a renaissance? Definitely not. A renaissance is a glorious flowering beyond the previous state. The US will never regain those millions of manufacturing jobs. Never. Never.

People think that because fracking gas is cheap, everybody will come and locate in the US. Well, if you go to the US and make a petrochemical factory, that’s fine, but how many people does a petrochemical factory employ? Have you seen a big refinery? There are like 20 people sitting at the controls and controlling the whole refinery. These modern industries, they don’t employ people.”

By the way, before you write Smil off as some greenie he has on a number of occasions spoken favourably about shale gas and believes its environmental issues are manageable.

Here’s another thing, if you look up the ASX energy futures website you can get price quotes for baseload electricity contracts for states across the eastern National Electricity Market. You’ll find Victorian power can be bought for less than $34 per MWh for 2015 calendar year and $35 for the 2016 calendar year. For NSW it’s about $39 across the two years. In real terms these prices are lower than the average prevailing over the first six years of the NEM, from 1998-99 to 2003-04, of roughly $40 in Victoria and $42 in NSW (in 2013 prices).

Now SKM-MMA estimate that the extra cost per MWh associated with the RET, not taking into account any depressive effect the extra renewables have on the pool price for 2015 and 2016, is less than $7.80. Taking into account the 90 per cent exemption trade-exposed heavy industry receive (accounting for no exemption for the original 9500GWh target) this works out to about $2.90 of extra cost per megawatt hour. Even after adding that to the futures price, wholesale electricity prices in 2015 and 2016 are still lower in real terms than they were more than a decade ago.

If you want to find the culprit in manufacturing decline, this just isn’t the right place to go looking. Electricity prices have been rising a lot over the last few years but it comes down to regulation of monopoly networks, not energy generation.

Now gas prices on the other hand are most definitely rising in real terms but, again, we must be careful in assessing what this might mean for government policy.

Yes, we could make it easier to extract coal seam gas in NSW but will this in any way turn back prices to the past?

The answer is simply 'no' if you make the effort to follow the money. Origin made a series of announcements to the stock exchange last year about gas purchasing agreements they had signed with non-Queensland suppliers that are distant from the LNG plants, such as Exxon-Mobil. These will be linked to oil prices, just as is occurring with LNG exports. 

Unless we were to free up an incredible amount of additional gas (and none of the gas project developers have an incentive to do such a thing) prices in the Australian domestic market will now largely be set in reference to the price the Japanese are prepared to pay. This is essentially set by the price of a barrel of oil. 

Now of course we could always do what the Middle East does and China which is to massively subsidise energy supply, as well as provide other subsidies to heavy manufacturing industry.   

Sound like a good idea?

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles