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Jan 8, 2014

Amid the climate contention, an energy debate in smelt-down

Recent developments in energy intensive manufacturing illustrate that there's an awful lot more to worry about when it comes to manufacturing competitiveness than obliterating the carbon tax.


The incredible political toxicity surrounding the issue of climate change and carbon pricing seems to have acted to blind us from a rational debate about how we efficiently produce and use energy, and its role in Australia’s international competitiveness.

There are some incredibly important issues surrounding the energy sector and international competitiveness relating to competition and market power, government versus private ownership, the implications of the resources boom for economic structure and workplace labour practices. But these are being drowned out by an ideological crusade against anything that accepts climate change is a legitimate problem.

Yesterday there were reports Boyne Aluminium Smelter in Queensland will cut back production over summer by 14,000 tonnes of aluminium. It attributes this cutback to the abnormally high electricity prices which Queensland has been experiencing.

Queensland has seen increases in wholesale electricity prices — particularly over last summer and also increasingly this summer — which substantially exceed price rises in the other states with cheap coal generation (New South Wales and Victoria). The rises far exceed anything that could be explained by the impact of carbon price, as illustrated in the chart below from the Australian Energy Regulator …

Wholesale electricity prices across the states of the National Electricity Market

The general manager of the Boyne smelter Joe Rea in explaining the reasons for the cutback told The Gladstone Observer:

“It is an ongoing concern for our business that electricity prices in Queensland are significantly higher than other states in Australia at a time when the price for aluminium in Australian dollar terms is 20% lower now than during the global financial crisis. Electricity prices in Queensland are currently 20% more expensive here than in NSW and 30% more expensive than in Victoria.”

Also, in a little noticed news item published just before the Christmas break, Incitec Pivot announced that it had signed up to a 23-month gas contract with Santos for its Phosphate Hill Fertiliser manufacturing plant. Incitec explained that this would increase the plant’s manufacturing costs by $50 million per annum. Equity analysts estimate that it involves a doubling of the delivered gas price they’re paying — to about $10-11 per gigajoule.

Morgan Stanley analysts Nicholas Robinson and Dominic Taylor believe this would means the plant will lose money at current fertiliser prices and exchange rates. They also believe such prices would do the same to Incitec’s Gibson Island plant as well. According to Macquarie’s John Purtell, such a rise would increase Phosphate Hill’s production costs by 17%, which dwarfs any impact from carbon pricing or renewables policies.

Both of these events serve to illustrate that obsessive focus on the carbon price is missing some major issues.

The Boyne smelter episode exposes a major problem with market concentration in the electricity sector and government as owner and regulator. This is getting virtually no airtime in media and political debate about energy. If you take the time to read the Australian Energy Regulator’s State of the Energy Report it explains that many of the very high price events in Queensland occurred during the night when demand was low and there is a large overhang of excess generating capacity in the state. The report explains:

“Following an ownership restructure [initiated by the Queensland government] in July 2011, CS Energy [owned by the government] acquired control over generation plant at both ends of a strategic transmission line in central Queensland. Subsequently, its bidding behaviour periodically resulted in power flows that contributed to network congestion. AEMO was obliged to manage the issue by ‘constraining off’ low cost generation in southern Queensland and ‘constraining on’ higher cost generation around Gladstone. In combination, the reduction in low cost generation in southern Queensland, the dispatch of higher priced capacity around Gladstone, and the counter-price export of electricity into New South Wales caused the Queensland price to spike.”

Essentially, the Queensland government decided it would consolidate its three generator companies into just two. Why this was in Queensland consumers’ interests and effective competition is hard to discern. CS Energy now holds the rights to control the output of more than a third of Queensland generation capacity (supported by a strategic position along a transmission line) and the government’s other company controls a quarter.

Privatisation, however, is not going to solve these types of issues if they just end up consolidating the market power of Origin, AGL and EnergyAustralia. So far the privatisation of NSW government generators and retailers has done exactly that.

In terms of the Phosphate Hill gas contract, this reflects a larger fundamental change in Australia’s economic structure away from manufacturing to raw materials. Abbott might like to believe that because Australia has lots of gas and coal, it therefore constitutes a source of competitive advantage for Australian manufacturing. But if the Japanese, Koreans and Chinese are prepared to pay more for that energy than Australian manufacturers then that’s where that energy will go.

The issue is then more about how we ensure the wealth created by exporting those raw materials can support our prosperity into the future as the resource declines.

In addition, if we look at Japan and Korea we find these countries are vastly better than us at converting a unit of energy into economic value. We must rapidly improve our energy efficiency if we are to remain competitive as the gas price rises. Oh, and by the way, their successful car manufacturing industry is hardly built upon cheap energy.

Pretending Australian manufacturing will be miraculously revived on the back of the abolition of climate change policies is a fool’s paradise.

*This article was originally published at Climate Spectator

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11 thoughts on “Amid the climate contention, an energy debate in smelt-down

  1. MJPC

    Excellent article, it’s a pity that out there amongst the greater proletariat that the current government has hoodwinked them that the elimination of the CT is the solution to all our ill’s, from reviving industry to prosperity for all. It is just a big lie!
    What happens when the tax goes come July and the prices stay high (as they will).
    Meanwhile, we continue to dig, dig, dig coal for the destruction of the whole world environment; Revolution now!

  2. RogerDty

    Nice article, but..
    “International competiveness” is just a misleading metaphor for exchange rate. It’s been adopted by numerous rent seeking lobbyists and a few conservatives including Maurice Newman.
    While some businesses may be doing it tough, such as the Boyne aluminium smelter, that is because the A$ is currently at a high level, mainly as a result of expanding exports of iron ore at high prices. It has nothing to do with “competiveness”.
    David Ricardo demonstrated this with the principal of COMPARATIVE advantage in 1817.
    Ricardo is still right, the “Mercantilists” such as Newman (and Edis) are wrong.


  3. leon knight

    Abbott and Hunt seem most unlikely to produce any worthwhile policies to properly address these two issues, and many other pressing problems facing the country and the environment.
    Economic progress is also sadly lacking, fortuitous improvements in the exchange rate may ease TA’s woes a little.
    Simplistic slogans in opposition seems to be the major skill of the entire Abbott team…incompetence on a far grander scale than their predecessors.

  4. RogerDty

    What do you mean by “Fortuitous improvements” in the exchange rate?
    Higher A$ with less inflationary pressure and more buying power but continuing hard time for exporters
    Lower A$ with higher costs (particularly liquid fuels) and inflationary upward pressure on interest rates but easier time for exporters
    As you suggest, its never that simple!

  5. Scott

    A small, economically open,sparsly populated first world country like Australia does a lot better when the dollar is low in just about every respect. Not only do domestic producers do better from their own citizens (as imports are more expensive, more people buy local), the world (a much bigger pool of customers than our 23 million) also buys our goods/visits the country in greater numbers due to the favourable conversion. All resulting in higher GDP (which flows into increased taxation/Government handouts etc)
    The only people who do well out of a high dollar are generally the wealthy (due to their ability to access tourism, luxury imports and foriegn investments). The ordinary wage slave/pensioner/small business owner does better when the dollar is lower.

  6. tonyfunnywalker

    A well timed article and it again the myopia of the Abbott government and their blind obsession with the carbon tax as the source of all ills with business and domestic power bills. Prices may well even increase after July as demand will continue to fall as manufacturing and metals processing continue to contract output. The generation industry needs full deregulation and the market power of the retailers curbed.

  7. Aidan Stanger

    The obvious improvement would be for the dollar to be lower because of lower interest rates.

  8. Aidan Stanger

    This cutback is far too little IMO. Aluminium smelting should not be located anywhere that relies on coal for its power supply, and the use of fossil fuels for this purpose should be phased out completely.

  9. gapot

    If we had a smart government we would capitalise on our cheap coal to produce electricity and become competitive in the high energy use industries, instead we export the coal to the world and then import the goods we cant make on a cost of energy basis. The USA has never taxed the energy inputs very much but encouraged the rest of the world too. The government here seems to think digging up stuff will keep us in the first world club by third world means.

  10. Aidan Stanger

    No, that would be a dumb government, investing in dodgy ways to get rich at the expense of future generations. If we had a smart government we would invest heavily in solar energy to generate electricity cheaper than could be done with coal. But even then, if NZ had a smart government they could probably poach a lot of it with cheap geothermal energy.