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  • https://au.linkedin.com/pub/dr-georgina-davis/52/454/511

It was recently posed to me by the executive of a leading consumer group that Australia’s intensive agricultural sector is the ‘canary in the coal mine’ in terms of understanding the impacts of Australia’s current energy crisis on the wider business community and, perhaps, even Australia’s economy.

There is no doubt that ‘energy’ is on the mind of all business directors with the Director Sentiment Index showing that 58% of Directors have rated energy policy and pricing as the biggest issue of 2018, ahead of taxation reform and infrastructure development (see AICD Director Sentiment Index, Second Half 2017, Ipsos Connect, https://aicd.companydirectors.com.au/advocacy/research/director-sentiment-index-second-half-2017)

These findings have been mirrored by the World Economic Forum survey, where the number one largest risk identified by Australian respondents was energy price-shock, with two-thirds of the executives identifying this as being one of their top five concerns (see WEF’s Global Risk Report 2018, http://reports.weforum.org/global-risks-2018/). This view was very different to executive concern from China, which focused on natural disasters and deflation; Japan where concern was highest on cyber-attack; or the US where executive concern focused on terror attacks followed by cyber-attacks.

Nowhere else in the world has there been so much focus on energy or, more specifically, energy price as in Australia. This survey would indicate that energy price and policy is seriously impacting Australian businesses but not our trade partners and trade competitors – and perhaps more worryingly, the focus on the domestic energy issues means that our boards and executives may not be focusing on the ‘global issues and risks’ which, in turn, may make us less internationally competitive and more susceptible to risks in other areas.

High energy prices are the number one issue Australian directors want governments at State and Federal level to tackle and the current and historical impasses and inactions of all political parties has undoubtedly held sensible policy, necessary regulatory reform and energy innovation back.

Review after Review – Still No Action

Indeed, 2017 was certainly the year of the ‘Energy Trilemma’ following subsequent review after review of the broader energy market and prices for Australia. However, to date there has been no definitive action to deliver much needed price relief and/or apply downward pressure on electricity prices.

The Energy Security Board published its first Health of the National Electricity Market Report in December 2017. This follows recommendations made by Dr Finkel in his independent review into the future security of the NEM published in June 2017 which set a ‘vision’ for the future with four key outcomes; increased security, future reliability, rewarding consumers, lower emissions.

The Board reported ‘that the National Electricity Market (NEM) is not in the best of health. The three immediate symptoms are:

  • electricity bills are not affordable
  • reliability risks in the system are increasing; and
  • future carbon emissions policy is uncertain.

The Board also noted that retail electricity prices have increased by about 80–90% in real terms over the last decade and that affordability is a major concern. Customers report ‘bill shock’ and ‘in the last two years electricity costs have doubled, or in some cases trebled for business customers’.

The ACCC’s Retail Electricity Pricing Inquiry: Preliminary Report, tabled in October 2017, stated that ‘Australia has an electricity affordability problem’ and that ‘price increases over the past ten years are putting Australian businesses and consumers under unacceptable pressure’.

The ACCC report concluded that ‘network costs were proportionally more significant in Queensland (and NSW) than other states’ and ‘network revenue increased the most in Queensland (and NSW), peaking respectively at 200% (in 2015) and 190% (in 2013) relative to 2006 revenues’.

Furthermore, Queensland and South Australian customers experienced a continuous increase in network costs from 2007-08 to 2014-15 while between 2015-16 and 2016-17, NEM spot prices increased by 60% in Queensland (which was the highest increase).

In its report, the ACCC also noted the effect that large generators can have on a market, illustrating the Queensland Government’s direction to state-owned Stanwell Corporation in June 2017 to offer more capacity in the NEM and alter its bidding strategies to put downwards pressure on wholesale prices. 37% of electricity dispatched in Queensland in 2016-17 was generated by Stanwell Corporation.   The intervention achieved immediate impacts in the market. Before the direction to Stanwell Corporation, futures contracts for the 2017-18 summer months in Queensland were trading at around $120 per MWh. Following the direction to Stanwell Corporation, those futures prices dropped to around $100 per MWh and have remained consistent since.

Example: Impacts to Queensland’s Intensive Agricultural Sector

Electricity prices in Australia are higher than overseas jurisdictions1, disadvantaging commodity exports on the global market and leaving Australian agricultural producers heavily trade-exposed. For example, as Queensland’s electricity costs rise the viability of intensive agriculture is being eroded.

Electricity in Queensland is not internationally tradable like the price of oil. Therefore, businesses which are exporters or competing with imported goods are disadvantaged as electricity prices rise versus their competitors. We are already seeing trends of energy-intensive industries moving off-shore, reducing operations and laying off personnel, or simply closing.

According to the Australian Energy Regulator, there were 698 small business disconnections by Ergon Retail (regional Queensland) in 2016-17 – a substantial increase in the 384 disconnections recorded in 2015-16.

Some of these disconnections have been agricultural and related businesses who could not pay their electricity bill. Decisions to utilise irrigation and therefore use electricity are driven primarily by crop water requirements and regulation governing water access (for example, water licencing conditions which may be based on specific times of the day through to flood levels in a riverine system). Due to these constraints, irrigators often have limited flexibility in their electricity use and cannot respond to different electricity price signals, such as peak versus shoulder electricity rates used in demand tariffs.

Queensland agriculture is the second largest user of water and has the second largest number of irrigated agricultural businesses in Australia. Considering sources of agricultural water, Queensland is the second largest user of groundwater and largest user recycled/recaptured water resources. The amount of energy and, in turn, the financial cost of using these sources of agricultural water is higher than utilising surface waters.

Irrigation electricity tariffs in Queensland have risen a minimum of 136% over the past decade, and post-2020 this rise will be unsustainable with the withdrawal of these specific, ‘non-cost reflective’ (and thus transitional) irrigation tariffs. Electricity is fundamental to our economy and way of life, so it is important to note that over the same 10-year period, CPI increased by just 24%.

There are about 42,000 electricity connections for businesses in regional Queensland. Almost a third of regional business connections are on eight different tariffs classified as transitional or obsolete by 2020. Almost half of connections are for agricultural purposes, in particular, irrigation2.

The impacts of rising electricity prices are clearly eroding Queensland’s irrigation sector, with a growing number of primary producers switching to dryland farming practices as the price of electricity has already become unsustainable for many businesses. Queensland is experiencing a steady decline in the number of irrigation businesses (Table 1) as well as reducing productivity across the sector.

Table 1: Summary of Agricultural Water-Use Statistics for Queensland, Australia , various ABS sources)

  2015-16 2014-15 2013-14 2012-13 2011-12 2010-11 2009-10
Number of agricultural businesses irrigating (no.) 5,416 7,622 7,461  

6,685

 

7,572 8,023 9,402

Farmers are modifying their practices to adjust to water availability and climatic conditions as above average temperatures and dry conditions in Queensland persist, along with increasing high prices for water and the electricity to pump that water. These are critical factors not only in water use and crop selection, but also in the ‘decision to plant’. This includes ‘selling off’ water allocations to recoup costs rather than cropping in a potentially ‘bad year’.

Queensland is experiencing increasing climate variability and, currently around 70% of the State is drought declared. We must therefore address electricity prices for irrigation, processing, animal welfare etc. if we are to ensure economic sustainability for Queensland’s intensive agricultural sector, and take advantage of agricultural expansion opportunities that will realise increased exports and ensure future food security.

In response to price increases, farming businesses, including irrigators, have been installing energy efficiency measures and renewable energy and, in many cases, simply reducing demand. Much of these gains have been diminished by the increasing electricity costs; whilst simply reducing demand has also come at a cost either through reduced productivity or farmers simply choosing not to plant a crop.

Many farmers are now weighing-up options to ‘switch-off’ efficient irrigation technologies or leave the grid, taking opportunities in advancing technologies and their reducing costs. However, due to irrigation demands, through to the need for continuous power to refrigerate produce, some have already installed hybrids of renewables and new diesel generation as they transition key infrastructure off grid. While diesel presents an attractive option, given its relatively low-cost and high-reliability, there is future uncertainty on how diesel may be impacted by Australia’s obligation to manage carbon. This also leaves a legacy for those customers who are unable to leave the grid and may have to pay increasing costs into the future, thus compounding negative outcomes.

So, is Australia’s intensive agricultural industry the ‘canary in the coal mine’ in terms of understanding the impacts of the current energy crisis on the wider business community and perhaps even Australia’s economy? Yes, we are certainly a canary but we are not alone. Perhaps most worryingly, as industries before us have experienced issues, off-shoring and closures (just think manufacturing) we are not alone in being trade exposed, think of the mining sector. The question has been and continues to be, what are we going to do about addressing energy affordability for all Australian businesses now?

 

1 CME (2012). Electricity Prices in Australia: An International Comparison. A Report to the Energy Users Association of Australia. Carbon and Energy Markets, March 2012.

2 Queensland Productivity Commission. (2016). Electricity Pricing Inquiry 2016. Chapter 10: Rural and Regional Industries – Transitional and Obsolete Tariffs.