Jan 31 2018
Electricity is a key input in many manufacturers’ production processes. As a result, the price of electricity affects many industries in Australia, and the rising cost of electricity over the past five years has had a substantial effect across the economy. The electricity service price is expected to increase at an annualised 3.3% over the five years through 2017-18. Rising domestic natural gas prices have caused costs to increase at gas-fired power stations, which has led to higher electricity costs. Furthermore, some coal-fired power stations, such as the Hazelwood Power Station in Victoria, have been decommissioned over the past five years, increasing demand on gas-fired power stations.
Industries with the ability to pass on costs to downstream markets have generally benefited from the rise in electricity prices, and have been able to boost revenue. However, the rise in the electricity service price has had a negative effect on many other industries, particularly those that rely on electricity inputs, experience high import competition and produce homogeneous products. Industries such as the Iron Smelting and Steel Manufacturing industry, and the Petroleum Refining and Petroleum Fuel Manufacturing industry have felt the brunt of the price rise. Both industries incur significant electricity costs in their production process and are unable to pass on higher costs to downstream markets. Iron and petroleum consumers can easily transition to homogeneous imported alternatives. As a result, operators in both these industries have been forced to absorb higher electricity costs over the past five years.
The Iron Smelting and Steel Manufacturing industry’s revenue is expected to decline at an annualised 1.8% over the five years through 2017-18, to $10.3 billion. The Petroleum Refining and Petroleum Fuel Manufacturing industry’s revenue is anticipated to fall at an annualised 15.6% over the five years through 2017-18, to $16.5 billion. Both industries face strong import competition, which limits operators’ ability to increase their prices.
In the case of the Iron Smelting and Steel Manufacturing industry, the existence of cheap international suppliers in proximity to Australia, such as in China and Japan, has traditionally provided intense competition. This competition has forced some large players to exit the industry or enter voluntary administration. For operators in the Petroleum Refining and Petroleum Fuel Manufacturing industry, competition has come from international oil and gas companies that are investing in new refineries in the Asia-Pacific region. These new refineries are larger and more sophisticated than their Australian counterparts, and can produce at a lower cost. In an industry where such international competition already exists, the domestic rise in the electricity service price adds significant pressure.
The balance between electricity supply and demand will continue to adjust over the next five years, as Australia transitions away from fossil fuels towards renewable energy sources. This transition is likely to cause volatility in wholesale markets. The electricity service price is forecast to trend downwards over the next five years as electricity generation assets come online, which is anticipated to provide much-needed relief to manufacturing industries.