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Taking control on energy

Gas prices are skyrocketing and gas intensive manufacturers are bearing the brunt. There are ways to take back control – here’s how. 

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Australia's energy debate has moved into a new phase. Anger about skyrocketing energy costs and falling reliability is at boiling point. The pain being felt by Australia's large energy users – caught in a pincer movement between rising gas and electricity prices – is intense.

" Many businesses have opportunities to use gas more efficiently, to better control the demand side."

The arguments in Canberra over long-term reform of the energy system rage on. In the meantime, many manufacturers are wondering whether they can keep operating in the face of massive gas price hikes.

At the core of the challenge is a familiar economic scenario: when gas was cheap, there was little penalty for inefficient use and so little incentive for users to pay much attention. But now gas is not cheap… and it won’t be again in the foreseeable future.

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Suddenly gas prices are a significant operating risk.

However, despite the mess on the supply side, there are opportunities for businesses to take back some control in the short term by looking at how effectively they are using their gas.

Until recently, Eastern Australia’s relatively low gas prices occurred because large gas resources exceeded consumer demand for gas. This kept prices low. But gas prices have risen dramatically after new liquefied natural gas terminals were built to export gas overseas.

Prior to 2015, many industrial customers enjoyed stable and relatively low gas prices of between $A3 and $A4 per gigajoule (GJ), rising to around $A6 per GJ by 2015. After gas exports from Queensland commenced, gas prices offered to businesses in bilateral contracts increased substantially, with some offers in 2017 exceeding $A20 a GJ. 

Gas prices have fallen since the Australian Government threatened intervention in the gas market to increase supply. Gas producers have made more gas available to the domestic market and retail price offers for industrial users have moderated to around A$10 per GJ in 2018. Most experts expect gas prices to stabilise around this level, at double to triple the historic price.

That’s a massive problem for manufacturers, who are bearing the brunt of policy failures on the supply side of the market. For some manufacturers which rely on gas it is an existential threat to their business.

Taking control

The gas crisis debate has been very focused on the supply side problems driving price increases. That makes sense – the supply side is a mess and absolutely needs to be sorted out.

But many businesses have opportunities to use gas more efficiently, to better control the demand side. In Australia we know there is a big gap between average performance and the best performers in terms of energy productivity.

Research commissioned for the Federal Department of Industry found when they ranked the activity of big energy users cutting their energy waste, the top 20 per cent of companies pursued energy efficiency projects which resulted in four-times more energy savings than average.

Those 20 per cent of companies which were proactive about pursuing energy efficiency improvements got the immediate benefits of those savings - but they have also been less exposed to price hikes in gas and electricity markets.

High risk

Now 10 years ago you could safely argue sitting around the average in terms of energy performance was fine. Energy was pretty cheap, and prices relatively stable. Straightforward efficiency projects with a quick payback got done. But more complex projects stayed on the backburner.

For managers and executives with limited time it made some sense to manage energy spend primarily through procurement; locking in the cheapest possible unit cost for energy was the name of the game.

Today it is harder to argue the gap between average performance and leading performance doesn't matter. Companies are operating in a very different environment – a world of massive price hikes, reliability issues and inherent volatility in gas and electricity markets.

For businesses which rely on gas as a significant production input, the risk associated with energy has gone through the roof. This is why many companies are bumping energy productivity up to the top of the list of strategic issues they need to deal with.

Ambitious

Sorting out the problems on the supply side of the market will take time. The Energy Efficiency Council is working to make sure opportunities to use gas more efficiently and productively are on the agenda for business and government.

It’s a discussion we have to have. Many energy users feel they have been failed by governments, market institutions and energy companies over the last ten years and they have been left to pick up the tab.

Energy efficiency and productivity is a way of taking back some control. Let’s be frank – getting more out of every unit of energy behind the meter is a way of reducing exposure to the craziness playing out on the other side.

Luke Menzel is the CEO of the Energy Efficiency Council, Australia's peak body for energy efficiency experts.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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