The Australian energy market is going through a period of unprecedented technological change and there could be dire economic consequences in the pipeline

This is the view of Jamie Summons, head of weather solutions, Asia Pacific, Swiss Re, who will be discussing this looming challenge at the upcoming RIMS Risk Forum 2017 Australasia.

Speaking exclusively to StrategicRISK prior to the event, to be held in Sydney on August 29-30, Summons said that while the energy crisis was being driven in large part by the transition to cleaner intermittent generation sources, most people did not understand how much Australia’s economic prosperity owed to historically cheap energy prices.

Summons went on to predict that today’s high energy prices would impact economic growth and possibly lead to a recession.

“What we are currently seeing in Australia is that the power market is becoming very tight in terms of supply and demand. I have never seen the power market as tight as it is,” Summons explained.

“If you are a BHP or Rio Tinto, they are all feeling the pinch in terms of the price rise. They are well aware of the difficultly of buying gas at the moment and power is hugely expensive.”

Summons told StrategicRISK that Australia was unique in having large amounts of coal and gas, and that over the past 20 to 30 years these natural resources had supported economic growth by keeping power relatively cheap.

“You should not underestimate the growth those resources created,” he said. “Previously power was even over supplied as the government was overdeveloped while it was subsidising jobs.

“The Australia of today has been built around cheaper energy sources and by global standards energy is still cheap in Australia. However, what we are now seeing is a push towards renewables due to a whole host of reasons, including government policy and technology reducing the cost.”

 

Fundamental change
As renewables penetrated the market, Summons said, coal-powered stations that could not compete were being shut down.

“That has fundamentally changed the supply and demand balance in the market,” he explained. “That means the market has become tighter because renewables are variable, while coal-powered stations are constant. When there is variability but no back-up, you have a power system which is under strength.”

Summons said he feared that doubling power prices to large corporate consumers of energy would have “a massive impact in terms of their cost base”.

“In my opinion, that will come at the cost of jobs, or projects, or expansion, or growth, because it is just becoming too costly to do business.,” he explained. “Something that was perhaps a five to 10 per cent line item all of a sudden becomes a 20 to 30 per cent line item, then that fundamentally changes the decision-making in that corporate in terms of whether to expand or not. If you throw that across the entire economy, it is going to have a profound impact.”

And the government was only just getting up to speed with the challenge, Summons said. “It has taken them a while, as per normal, that is the way they do things. However, I do not think they fully understand the true impact of this.

“This is honestly like putting interest rates from five per cent up to 10 per cent overnight and then seeing how economic activity goes. Politically, Australia is very good at looking at a problem and then not understanding the impact whatsoever, then reacting to it with the perception of doing something when they are actually doing nothing. All they are really doing is preparing for the next election.”

Zero planning

Summons said that the energy challenge was also not fully comprehended by many in the corporate world. “This issue has been building for a while, but most organisations have done no planning over the eventuality of this,” he said. “The planning by people who are going to get hurt by this is next to zero.”

Summons added that he did not expect Australia to go down a re-regulation path where prices were capped. “You do not want to stop the investment that we need to solve the problem,” he said. “One thing that free markets are designed to do is that when the price goes high enough, people respond with projects because they can make money.

“So, this is going to hurt for the next little while, but higher prices will attract capital, therefore people will make commercial decisions around that from an investment point of view.”

Summons said that uncertainty remained such a large issue because demand for renewables was flat-lining before targets had been met.

“There is uncertainty about the future of thermal stations shutting down,” he explained. “That transition makes it the most uncertain time in my life for Australia’s energy industry.”