The anatomy of our "energy crisis"

By now you've seen the headlines about the "energy crisis" but what makes such a calamity? 

By now you've seen the headlines about the "energy crisis" but what makes such a calamity? 

Australia is in the midst of an “energy crisis” - some say the worst in 50 years. 

Energy Minister Chris Bowen and Treasurer Jim Chalmers have both warned the country is facing a “perfect storm” of limited gas supply and electricity price hikes.

Firstly, the wholesale price of power (that is, what it costs to generate it) is about 5x higher than last year, largely due to increasing coal and gas prices on international markets. Wholesale price usually represents about 35% of our household bill. 

Secondly, there is a shortage of gas on Australia’s east coast, mostly caused by the demand for heating in this cold weather and coal-fired power plants being offline over the last few months.

And it’s hurting our hip pockets. The Australian Energy Regulator lifted electricity prices by as much as 18% in SA, NSW, and Queensland last month. The price of electricity in Victoria also increased by 5%. Last week, some smaller energy retailers like ReAmped even told their customers to go elsewhere or pay double from July 1.

Electricity and gas prices are expected to stay high for at least two years, the Australian Energy Regulator has warned.

The “perfect storm” is all thanks to:

• Outages at coal-fired power plants mean gas-fired generators are being relied on more. 30% have been offline or not operating since April, for various reasons we go through at the end of the article. But gas generators are way more expensive to run, raising wholesale prices, and much of our gas is exported rather than kept for domestic consumption. One of these coal-fired units to stop running is at Australia’s biggest energy supplier, AGL - but more on that later.
• Europe does not want to use Russian gas and coal so they are going elsewhere including Australia. This means there's not enough supply to meet demand, which has raised global prices.
• Baby, it’s cold outside. The polar surge on the east coast has accelerated the need for electricity to heat our homes.

How’s this...

• Canberrans are somewhat sheltered from this power panic due to a decision that was made by the ACT Government 10 years ago to go 100% green on electricity - meaning they don't rely on coal and gas. Since 2012, they invested heavily in renewable energy, locking in deals with solar and wind farms. The catch is that due to the higher costs of these deals or contracts, Canberra households have been paying about $5.50 more a week for their electricity since July last year.
• WA is also doing alright. The WA Government reserves a certain proportion of its gas (15% of its export volumes) for domestic use, unlike the rest of Australia. In 2012, the Gillard government rejected a proposal to do this for the rest of the country. Back then, business leaders argued it would discourage investment and former PM Julia Gillard listened. 

The cost of living

This surprise spike in gas and electricity prices could push inflation beyond 6%, according to the international financial services provider Deutsche Bank. The inflation rate or CPI is currently at 5.1.

Deutsche Bank estimates that if wholesale prices in each region remain at their current level until the end of June, it will increase household electricity inflation to around 20% by the end of the year.

As a result, the Reserve Bank of Australia (RBA or central bank) could be forced to increase the interest rate by more and sooner. It is currently at 0.35%. Raising the interest rate is a method to reduce inflation. 

What is the government doing right now? 

Energy Minister Chris Bowen is expected to work with the states and territories to ensure there is enough electricity via coal and gas-fired power stations to minimise high prices and blackouts.

The energy ministers will meet on Wednesday to discuss the national energy crisis.

Bowen is set to fast-track a plan (officially called a "capacity mechanism") by the Energy Security Board. It would provide greater investment to companies to keep aging coal-fired power and gas power stations open longer while the nation transitions to renewables. At the Energy & Climate Summit in October last year, Bowen said he would support the ESB’s plan if it served as “a bridge to dispatchable technologies like hydrogen, batteries and pumped hydro”. 

The Albanese Government is facing some pressure to put controls on how much gas can be exported overseas. 

Failure at AGL

A major coal-fired unit at AGL’s Liddell Power Station was taken out of service for at least a month adding to the “perfect storm”. The company blamed a mechanical issue - a generator transformer malfunction.

AGL Energy is Australia’s largest electricity generator and greenhouse gas emitter. 

Last week, an AGL spokesman said “the unit was expected to return to service in July” and that the company was looking for ways to “mitigate the impact” of the failure.

A whole lotta coal outages 

This was all happening as two of the country’s biggest industrial energy users were forced to curtail production in an attempt to take pressure off the grid. This includes the Tomago aluminium smelter in NSW and Alcoa’s Portland smelter in Victoria. 

The “grid” is the interconnected delivery system of electricity from many power stations to homes and businesses. One might “take pressure off the grid” when there is so much electricity being generated that it might overwhelm the capacity. 

There have been a series of coal outages in Victoria, NSW, and Queensland, with AGL’s Loy Yang A, NSW’s Vales Point, and Queensland’s Callide. Origin’s Eraring coal plant (the largest in the country) is struggling to receive reliable supplies of coal from its supplier, an Australian mining company whose output has deteriorated. AGL is also completing planned maintenance at its Bayswater power station which has taken a unit out of commission since March.

Many of Australia's coal generators are aging and so are getting less reliable.