Government action killing industry

Summary

The descent into administration of century-old brick manufacturer Claypave is just the latest indicator that Australian manufacturing faces an existential crisis because of high electricity and gas prices caused by government policy.

Expensive electricity is being made more expensive by government restrictions on gas exploration and production, and piecemeal introduction of wind and solar.

Analysis

The list of substantial companies closing or considering relocating overseas because of Australia’s uncompetitive energy prices includes household names such as Incitec Pivot and Brickworks, and less well-known names like Qenos and RemaPak.

Australia’s high standard of living is predicated on high productivity, which depends on a high degree of mechanisation, which in turn depends on cheap power.

Federal and state government policies squeeze prices higher from two different directions.

The increase in unreliable renewable energy increases system costs. While solar and wind may be cheaper when they leave their source of generation, they increase network charges, and require extensive backup (or firming).

Backup is performed by the existing coal-fired generator fleet, and increasingly by peaking open cycle gas turbines. This means we are duplicating capital and raising costs, while the coal-fired generators run sub-optimally, increasing costs again, and that’s putting aside some gaming of the system by power generators.

At the same time Victoria and New South Wales have restricted gas exploration, while the largest proportion of Queensland gas is exported. As a result gas prices are up about 300% to 400% from $3 a Gj to an anticipated price range between $7.63 a Gj to $12.51.

So network costs and backup costs collide with higher gas prices to make prices even more uncompetitive.

There is also a significant number of industries, such as plastics and fertilisers, where gas is a direct feedstock, or other industries, such as glass manufacture, or incineration of hospital waste, that rely on gas for the heat that only it can provide.

These are also suffering.

Restricting gas exports will not solve the problem, and neither will price caps. The solution is to lift moratoria on gas exploration and production and allow producers to do the rest.

This is an area where Queensland, and the Queensland government, are best practice, and the federal government needs to pressure New South Wales and Victoria to follow suit.

Conclusion

“There is a saying that the cure for high prices is high prices. This is because high prices attract investment, which in turn creates a glut, pushing prices down.

“But this will only happen when producers are allowed to produce more to meet the demand.

“If this doesn’t happen, then there is no cure for high prices, and the economy gets very sick.”