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Leading CEOs on the realities of energy policy paralysis

After another year of chaos and anarchy in the energy sector it was inevitable that a question about energy in Chanticleer’s annual CEO Survey would provide plenty of insights into the risks and opportunities from continuing policy paralysis.

Business began the year with an open mind about the coalition government’s National Energy Guarantee and ended it with confirmed desperation that nothing will happen until there is a change of government.

The leading CEOs who participated in the survey are doing what you would expect when confronted with a lack of political leadership. They are implementing strategies to cut their energy costs and protect their businesses against further policy uncertainty.

Alison Watkins, the chief executive of drinks manufacturer Coca-Cola Amatil reflects the views of many in business when she says “it was disappointing that the National Energy Guarantee didn’t proceed, and that there’s been little action on the mid-year ACCC report on energy reform”.

“I think all Australians would like to see measures to better balance energy export opportunity and competitive domestic pricing, as well as support for concepts like buyer groups which can deliver solid commercial outcomes.”

Jeanne Johns, the CEO of Incitec Pivot, a manufacturer and distributor of industrial explosives, industrial chemicals and fertilisers, is facing some stark choices in relation to the company’s Gibson Island fertiliser plant in Queensland thanks to soaring energy costs.

“Our energy costs in Australia have roughly tripled over the last several years, while energy prices in other resource rich countries like the US have stayed roughly flat,” Johns says.

” The current energy prices in eastern Australia are a threat to Australian industry and the economy at large. If we can’t find affordable gas for our plant on Gibson Island in Queensland, we will need to shut it down – which would be a very disappointing outcome for our people and the business.”

The Gibson Island plant, on the Brisbane River, employs about 450 people during normal operations and 800 when conducting maintenance.

Chanticleer understands that Incitec Pivot’s current gas contract expires at the end of 2019. If the company cannot secure cheaper gas it will face closure. To replace the plant today would cost about $1 billion.

Brambles CEO Graham Chipchase says his energy costs in Australia have risen 51 per cent. One way he wants to cut costs is to use innovative printed solar technology being developed by the University of Newcastle.

The chief executives of Wesfarmers, Woodside and BHP Group highlight the split that has occurred between the east and west coasts of Australia with energy costs prohibitive in the east and manageable in the west.

Woodside CEO Peter Coleman summed it up well when he says: “In Western Australia, we are in the fortunate position of being isolated from the chaos of east coast energy markets – and stable bipartisan policy has ensured adequate provision of gas for local customers.”

BHP’s Andrew Mackenzie says in 2018 the electricity bill for BHP operations in eastern Australia was around $300 million, an increase of more than 60 per cent from just three years ago.

“We have studied the future of our energy procurement and will take the necessary steps to achieve greater reliability and reduce prices and emissions,” he says.

Rob Scott says his company’s energy costs have increased at double digit rates, particularly on the east coast.

“We have been able to mitigate some of the cost increases through investing in energy efficient processes and technology and this shows that a concerted focus on reducing emissions intensity has a good commercial outcome,” he says.

“Ultimately higher energy costs flow through to higher costs of living and make Australian businesses less competitive.

“In our chemicals and energy business, we are focused on new developments in Western Australia as a result of the state’s domestic gas reservation policy rather than the east coast where the costs of gas are prohibitive.”

Alberto Calderon, CEO of explosives maker Orica, says he is doing everything he can to mitigate the impact of high energy costs, “but ultimately it does impact on the global competitiveness of our Australian operations”.

“East coast consumers pay among the highest natural gas prices of any producing country in the world, generally by a factor of two or three times,” Calderon says.

Increased use of renewables has been the obvious response to the rising price of energy generated by fossil fuels.

Watkins at Coca-Cola Amatil joined forces with Andy Penn from Telstra, Shayne Elliott from ANZ Banking Group and the University of Melbourne to purchase renewable energy from stage one of the Murra Warra Wind Farm near Horsham, Victoria.

Penn says Telstra’s investment in the wind farm in Victoria is part of a broader strategy to manage costs after Telstra’s energy budget rose by $100 million in 2018.

He says Telstra this year entered a long term power purchasing agreement (PPA) to underpin a 70MW solar plant in Queensland in order to have longer term price security.

Elliott says the wind farm in partnership with Telstra and Coca-Cola Amatil will save ANZ about $16 million in future energy costs.

“In the power generation sector, it is important that as we move to cleaner energy sources we seek a just and orderly transition,” Elliott says.

“There remains a significant opportunity to align our energy and emissions reduction policies. One way we are doing this is to fund and facilitate at least $15 billion by 2020 for renewable energy, green buildings, low carbon transport and more energy efficient farm equipment. We are on track to achieve this goal with $11.5 billion achieved in the past three years.”

Geoff Culbert, the CEO of Sydney Airport, is another CEO getting on with the job while the politicians fumble and bumble. Culbert knows a thing or two about energy thanks to 15 years working for GE, a major supplier of turbines and power systems.

“Our (energy) prices are coming down significantly because we entered into our own corporate PPA where we are taking 75 per cent of our energy demand from dedicated renewable sources and firming the remaining 25 per cent from the grid,” Culbert says.

“We have taken matters into our own hands and are not waiting for government policy to be settled.”

Another big user of renewables is Stockland. CEO Mark Steinert says Stockland rolled out $33 million in solar panels across 20 retail town centres and logistics parks to insulate the company from variations in energy prices.

Elizabeth Gaines, CEO of Fortescue Metals, wants to integrate more renewables into the company’s power mix. In the meantime, it has converted its Solomon power station in the Pilbara from diesel to gas.

Graham Kerr, CEO of South32, is fortunate that his Australian coal, alumina processing and silver and lead mining operations are largely off the grid, Even so, he sees the logic of using renewables to cut costs.

“At Cannington we recently installed a large 7200-panel solar farm and also use gas,” he says.

It is a similar story at Santos. CEO Kevin Gallagher says the creation of an energy solutions team last year is paying dividends. The company has converted oil beam pumps in the Cooper Basin to solar, it is investing in battery technology to reduce fuel consumption in its Moomba gas plant and using solar and batteries for its Queensland operations.

In a sense business is doing what Australian households have been doing for years. Shifting to renewables to cut energy costs.

Australian households installed 200,482 solar PV systems in 2018, up 28 per cent on the 155,650 in 2017, according to data prepared by solar consultancy SunWiz for Chanticleer. Total household solar PV is now about 2 million with a capacity of 7.9GW.

The CEOs of the big energy companies in the survey, Frank Calabria from Origin and Catherine Tanna from EnergyAustralia, say they are doing what they can to reduce household energy bills.

“The spike in energy prices in 2017 placed additional pressure on businesses, though the news was better in 2018 with prices coming down from their peak,” Calabria says.

“We have been working hard with customers to help them find ways to keep costs down, with many businesses going solar backed with firm supply agreements.”

Jennifer Westacott, CEO of the Business Council of Australia, says bad policy created the energy mess, and “ill-conceived and rushed policy won’t solve it”.

“The government has countless expert recommendations on the table, it needs to explain why it hasn’t adopted them.”

Source: Financial Review