Election 2022: Manufacturers scrap for survival amid power surge

Manufacturers are struggling with a big hike in electricity and gas costs they is forcing some operators to wind down production to avoid high prices

Jamie Gilkinson, assistant manger at Sell & Parker, with supplier Husain Saleh in Banksmeadow, in Sydney’s south. Picture: Britta Campion

Sell & Parker, a scrap metal buyer in Sydney‘s Banksmeadow that supplies to BlueScope Steel, told The Australian high power prices and huge volatility in the market was putting pressure on its business.

The company has been shutting off its metal shredder, one of only three in the state, during high price events and complained the cost impost was putting it at a disadvantage compared with its international rivals.

“It‘s been very, very expensive power. And that has meant we have had to curtail production rather than incur these absurd levels of cost,” Sell & Parker chief executive Luke Parker said.

Spot wholesale prices can jump as much as 100-fold when electricity supplies are scarce, adding a significant cost to running its business.

“For a lot of the big manufacturers, it‘s the volatility that really hits us. Because if you’re paying $10,000 per megawatt hour, you can chew up 100 hours of power compared with if it was priced at $100MWh,” Mr Parker said, referring to where prices were often trading last year.

“So it has a massive impact for the production for that hour when you‘re probably unprofitable and it’s really hurting your cost base.”

“Manufacturers are making decisions to avoid the high costs which can save money, but that means you‘ve lost some production for the day.”

While big energy users can manage their exposure to wholesale price spikes by entering hedge contracts that lock in firm power prices, Sell & Parker said it had a benchmark price with its supplier which changes depending on its consumption relative to market rates.

A series of coal outages spanning Victoria, NSW and Queensland have contributed to big jumps in power prices with electricity stations including AGL Energy’s Loy Yang A, NSW’s Vales Point and Queensland’s Callide all running below capacity. A spike in coal and gas prices, exacerbated by tight global markets following Russia’s invasion of Ukraine, have also contributed to price pressures.

Surging gas prices claimed another victim with a major NSW wholesaler forced to shut its doors on Monday, saying thousands of jobs were being put at risk due to an “unprecedented rapid rise” in gas and coal costs.

Weston Energy, which supplies gas to more than 400 companies and government agencies, has ceased trading with immediate effect and its customers like Causmag are reeling as they contemplate whether to sign up to much more expensive deals on the spot market.

Wholesale prices soared in Queensland for the first three months of 2022 to $171 per megawatt hour, its second highest level on record, with NSW at $89MWh and Victoria fearing better at $64MWh for the period, the AER’s wholesale markets quarterly report shows.