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Corporate Australia and the ongoing energy crisis – Renewables


In a fight against the energy crisis, Corporate Australia must
act to ensure survival.

The battle for Australian businesses to continue accessing both
reliable and cost-effective sources of energy shows no sign of
abating. Among many indicators we are in this for the long haul is
the latest Australian Competition and Consumer Commission (ACCC)
gas report which forecasts a 56 petajoule shortfall to the east
coast market during 2023 – equivalent to about 10% of current
domestic demand.1 “The outlook for 2023 is very
concerning and is likely to place further upward pressure on
prices, which could result in some commercial and industrial users
no longer being able to operate,” the report
said.2

Australian corporates must adopt survival tactics to enhance
their resilience. Businesses that have not prepared accordingly or
been slow to react are in for a rough ride – even if they move now.
This is especially true for those in the hardest hit sectors of
Australia’s largest energy consumers led by transport,
electricity supply and manufacturing.3 These sectors
account for almost 75% of the nation’s energy consumption and
are followed by mining, residential, commercial, agriculture and
water & waste.

Of course, a range of solutions are being considered and
actioned by various states and the Federal government. One of these
is pulling the gas trigger, an emergency provision, which allows
the resources minister to directly intervene in the gas market and
impose export controls to ensure there are adequate supplies for
domestic use. While using this mechanism would cause the price of
gas to fall in a short-term positive for businesses, it could,
ultimately, be counterproductive due to the potentially disastrous
effect this would have on the confidence of foreign investment in
Australia.

The transition to renewables received fresh momentum this week
when the Federal government declared Australia’s first six
offshore wind energy zones starting with waters off the Gippsland
coast, in Victoria’s south-east.4 Wind energy is one
of Australia’s main sources of renewable energy, currently
generating enough electricity to meet 7.1 per cent of the
nation’s total electricity demand and, along with solar, is
viewed as having the greatest potential for our future needs.
However, the journey to that point is a long one. Even though, for
example, costs for offshore wind have fallen, Gippsland’s
transmission infrastructure will now require an update and
extension as the existing system was designed to connect to fossil
resources. “We need to build about 10,000 kilometres of new
transmission lines over the next decade,” said CSIRO chief
energy economist Paul Graham.5

Further, the success of all green energy heavily depends on
aligning state and federal government policy. Climate energy market
analyst Tim Buckley emphasised this when he said that while the
declaration of the six wind zones was a step forward, it requires
all levels of government working together to ensure issues with
supply chains, construction costs and the intermittent nature of
onshore wind and solar could be managed and overcome.6
“We need to weigh up the additional costs related to offshore
wind construction and see where it makes the most economic
sense,” Mr Buckley said. “We need to value the balancing
or base-load nature of the generation, to support the
sometimes-intermittent nature of onshore wind and
solar.”7

A diversified approach is required. Kellie Parker, CEO of the
nation’s largest consumer of energy Rio Tinto, recently
highlighted the imperative for industry to adopt firming solutions
to meet electricity generation requirements and remain attractive
to investment.8 “Renewables are intermittent, and
industry requires largely firm energy,” Ms Parker said in a
speech to the Melbourne Mining Club this month. “Any national
electricity solution must not only go low carbon but also retain
competitiveness,” Ms Parker said. “Investment by industry
requires firm, competitive electricity
prices.”9

While industry races to meet emissions targets and manage and
afford the complexities involved in moving to renewables, it also
faces the fallout from an unprecedented combination of global
events. The pandemic, the Russian invasion of Ukraine, major flood
events and rising geopolitical tensions – not to mention a federal
election – have sent coal and energy costs skyrocketing to new
levels and created costly supply chain issues. Businesses across
the country are feeling the effects of this involuntary roller
coaster ride, with shortfalls of gas expected to mainly impact New
South Wales, Victoria, South Australia, Tasmania and the Australian
Capital Territory, and Queensland less significantly.10
Western Australia is the outlier with the WA Domestic Gas Policy
ensuring the prolific WA gas fields have a portion of production
reserved for domestic gas needs.

The speed at which this has occurred has made it almost
impossible for many business managers to plan for and/or adopt
usual solutions, such as passing input price increases onto
customers, seeking alternate inputs and hedging. Every business
needs a tactical response, combining both offensive and defensive
moves to survive this battle. Their blow-by-blow plan should
include:

  • Cost-base variability – finding ways to make cost bases more
    flexible. This requires keeping a cool head while having those
    uncomfortable conversations with stakeholders from employees to
    lessors, unions and suppliers. However, it will mitigate the
    loss-making risks associated with cost spikes and supply
    disruptions.

  • Rolling with the punches – adapt to, and spar with, the market.
    Seize moments for opportunistic input volume and pricing.

  • Adopt an offensive fight style – aggressively manage your
    working capital and explore non-traditional lending options. Cash
    is king, and this will never change as a business rule.

  • A calm approach – tackle this fight with the mindset of
    managing lumpy conditions as opposed to fundamentally changing your
    long-term business model.

  • Open communication – acknowledging that your stakeholders are
    also in survival mode, collaborate on negotiated solutions. While
    an altruistic motive is unlikely and price increases may need to be
    passed on, regular and transparent communication will go a long
    way.

Businesses could not have foreseen the current scenario. It has
left many grappling to contract energy costs and entering
emergency-style negotiations. While profits are an important
longer-term consideration, survival and consolidation are
imperative: live to fight another day.

Footnotes

1 The Hon Madeleine King MP, ‘Government
responds to ACCC gas shortage report’ (Media Release, 1 August
2022, [1]) https://www.minister.industry.gov.au/ministers/king/media-releases/government-responds-accc-gas-shortage-report

2 Stephanie Borys, Gas outlook
‘concerning’ with government urged to act to alleviate
worsening ‘energy security risk’
(1 August 2022) ABC
News https://www.abc.net.au/news/2022-08-01/energy-gas-shortage-higher-prices-accc-warning/101286764

3 Department of Climate Change, Energy, the
Environment and Water, Australian Government, Australian Energy
Statistics 2020 Energy Update Report
(2 October 2020) 11
https://www.energy.gov.au/publications/australian-energy-update-2020

4 Bec Symons, Federal government declares
Australia’s first six offshore wind energy zones
(5 August
2022) ABC News https://www.abc.net.au/news/2022-08-05/offshore-windfarms-climate-renewable-energy-turbines/101303944

5 Danielle Pope and Rio Davis, Gippsland
offshore wind projects await federal government
declaration (1
August 2022) ABC News https://www.abc.net.au/news/2022-08-01/offshore-wind-zone-gippsland-await-government-declaration/101280796

6 Symons, above n 4.

7 Ibid.

8 Robert Gottliebsen, Low-carbon power
solution must be at a competitive price, warns Rio Tinto’s
boss
(7 August 2022) https://www.theaustralian.com.au/commentary/lowcarbon-power-solution-must-be-at-a-competitive-price-warns-rio-tintos-boss/news-story/3b80c52d458552e982650a199bff13cb

9 Ray Chan, Rio fast-tracks renewable
energy strategy
(8 August 2022) Australian Mining https://www.australianmining.com.au/news/rio-fast-tracks-renewable-energy-strategy

10 Borys, above n 2.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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