Australia's energy trainwreck: How we ended up with the world's highest power bills

A bungled transition from coal to clean energy has left our resource-rich country with an unwanted crown: the highest power prices in the world.

New Yorkers pay half as much as Sydneysiders to keep the lights on, despite Australia boasting among the world’s largest coal and natural gas reserves, as well as ideal conditions for clean power generation.

It comes as a global survey of more than 12,400 executives from 136 countries finds that energy price shocks are the number one concern of Australian businesses. 

The World Economic Forum Global Risks 2018 report put energy pricing as the leading concern for businesses operating in Australia within the next 10 years.

Australia was the only country to rank energy price as its major concern, and the only other nation apart from Canada to include adapting to climate change within its top five risks.

This is a massive jump for energy pricing’s risk rating – last year it was fifth on the list for Australian businesses.

While energy prices took pole position for Australian business in the survey, globally, unemployment was ranked first, followed by fiscal crises, failure of national governance and energy prices at fourth. 

A decade of political dithering and climate policy missteps have set the country’s patchwork power system adrift, ratcheting up manufacturing costs and hurting consumers with a doubling in electricity prices since last year and rising risks of blackouts.

“It is not a bit of a mess, it is a major mess,” said Sanjeev Gupta, 46, the British billionaire owner of Liberty House Group, who saw firsthand the effects of policy neglect after buying an ailing steel-making business in blackout-beleaguered South Australia in July.

Natural gas was meant to bridge the electricity supply gap left by the shutdown of decaying coal-fired stations and the gradual shift to solar and wind energy. But rising exports of the fuel to higher-paying overseas buyers have created a local shortage.

With no long-term solution in sight, Prime Minister Malcolm Turnbull threatened gas producers with export restrictions unless they plugged the domestic shortfall. The government is also trying to convince power generators to patch up old and dilapidated coal-run stations such as Liddell in NSW, prolonging dependence on a fossil fuel the rest of the developed world is spurning.

“It takes a while to cause a trainwreck this bad,” said Tony Wood, energy program director at the Grattan Institute, a Melbourne-based think tank. “And it also takes a while for a government to think about how they get out of it.”

The nation’s largest power generators are urging Australia to ditch coal and join the renewables revolution. Turnbull, whose harbour-side mansion is powered by solar panels, is reluctant to remove the fossil fuel from the energy mix lest it boosts power costs further.

The Liddell power station, perched on a lake in the coal-rich Hunter Valley, has come to symbolise the nation’s struggle with an industry linked to greenhouse-gas emissions and climate change. The facility 240 kilometres north of Sydney was the most powerful electricity generating station in the country when it was commissioned in the early 1970s.

Its four coal-fired generation units supply the Tomago aluminium smelter, Australia’s largest single consumer of energy, and enough to power more than 1 million homes. Nowadays, it’s plagued by failures from rusty, leaky equipment that put it on a “sliding scale to oblivion,” according to its managers.

The Turnbull government wants to extend its life. But keeping it running beyond its scheduled closure in 2022 would cost as much as $900 million, and lender ANZ Bank said it’s unlikely to finance any refurbishment because it probably wouldn’t meet the bank’s environmental standards. Owner AGL Energy instead wants to re-purpose the site, potentially for gas-fired or battery-stored energy.

“It beggars belief that something like Liddell is the backbone of our power supply,” said Barry Millar, acting general manager for technical services with plant operator AGL Macquarie. “In the UK, something of this age would be well and truly gone.”

For power generator EnergyAustralia, the failure to anticipate electricity demand and supply stems from the absence of a clear climate policy.

“When you’ve got an environment where the economics will fluctuate from ‘this looks like a reasonable project’ to ‘this is absolutely terrible and don’t go anywhere near it’ over the space of two years, that is un-investable,” said Mark Collette, EnergyAustralia’s energy executive.

Squabbling over climate policy has been a key contributor to political turmoil, which has led to five prime minister changes in the past decade.

Kevin Rudd was elected in 2007 promising a carbon-trading scheme, but he shelved the plan amid resistance in the Senate. His successor Julia Gillard introduced a price on carbon, which was scrapped after Tony Abbott led the Liberal-National coalition to victory in 2013. Though replaced by Turnbull in 2015, Abbott’s sustained support for coal has emerged as a divisive voice within government ranks.

With the government unable to agree on a clean-energy target and electricity prices surging, energy-intensive industry is demanding investment certainty. Mining giant BHP said it may curtail investments, and Rio Tinto said price spikes are putting projects at risk.

As well, a third of large industrial users of gas will either cut production or shutter their operations entirely due to the spiralling price of the fuel, according to the Australian Competition and Consumer Commission.

“There are clear sectors of our economy for whom this is a nasty outcome,” said the Grattan Institute’s Wood. “I think we will see some energy intensive manufacturing close down.”

Wood, a former executive at Origin Energy, doesn’t see energy prices falling anytime soon, even as the country tries to ramp up renewable power sources.

Almost 90 per cent of the $88 billion forecast to be spent adding power capacity through 2040 will go toward clean energy, according to Bloomberg New Energy Finance. It estimates less than 2 per cent will be spent on coal, and even then only to refurbish existing plants, with the rest invested in gas.

So far, the move to clean energy has done little to lower the world-topping electricity prices in South Australia, where solar and wind account for about 40 per cent of total power generation, the most of any mainland state.

A series of blackouts there the past year prompted Tesla billionaire Elon Musk to propose building what he said would be the world’s biggest battery system in Jamestown, about 210 kilometres north of Adelaide.

Across the Spencer Gulf to the west in Whyalla, Liberty House Group’s Gupta is planning to install a variety of alternative energy sources — including solar electricity, hydropower and storage batteries — to overcome uncertainty around power supply and prices for his newly acquired steel assets.

“We have every energy resource you could want — whether its old school or new school — here in Australia,” Gupta said. “Yet, we have the most expensive power in the world.”

Bloomberg