Australia struggles with high power prices despite abundant resources

Policy paralysis hinders country's transition to clean energy

A solar panel array can be seen at the Windorah Solar Farm, which was installed by Ergon Energy, near the town of Windorah in outback Queensland, Australia. David Gray / Reuters

A bungled transition from coal to clean energy has left resource-rich Australia with an unwanted crown: the highest power prices in the world.

New Yorkers pay half as much as Sydneysiders to keep the lights on, despite Australia boasting among the world’s largest coal and natural gas reserves, as well as ideal conditions for clean power generation. A decade of political dithering and climate policy missteps have set its patchwork power system adrift, ratcheting up manufacturing costs and hurting consumers with a doubling in electricity prices since last year and rising risks of blackouts.

“It is not a bit of a mess, it is a major mess,” said Sanjeev Gupta, 46, the British billionaire owner of Liberty House Group, who saw firsthand the effects of policy neglect after buying an ailing steel-making business in blackout-beleaguered South Australia in July.

Natural gas was meant to bridge the electricity supply gap left by the shutdown of decaying coal-fired stations and the gradual shift to solar and wind energy. But rising exports of the fuel to higher-paying overseas buyers created a local shortage.

With no long-term solution in sight, Prime Minister Malcolm Turnbull threatened gas producers with export restrictions unless they plugged the domestic shortfall. The government is also trying to convince power generators to patch up old and dilapidated coal-run stations, prolonging dependence on a fossil fuel the rest of the developed world is spurning.

“It takes a while to cause a train-wreck this bad,” said Tony Wood, energy program director at the Grattan Institute, a Melbourne-based think tank. “And it also takes a while for a government to think about how they get out of it.”

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The nation’s largest power generators are urging Australia to ditch coal and join the renewables revolution. Turnbull, whose harbour-side mansion is powered by solarpanels, is reluctant to remove the fossil fuel from the energy mix lest it boosts power costs further.

The Liddell power station, perched on a lake in the coal-rich Hunter Valley, has come to symbolise Australia's struggle with an industry linked to greenhouse-gas emissions and climate change. The facility, located 240 kilometers north of Sydney, was the most powerful electricity generating station in the country when it was commissioned in the early 1970s.

Its four coal-fired generation units supply the Tomago aluminum smelter, Australia’s largest single consumer of energy, and enough to power more than 1 million homes. Nowadays, it’s plagued by failures from rusty, leaky equipment that put Liddell on a “sliding scale to oblivion,” according to its managers.

The Turnbull government wants to extend its life. But keeping it running beyond its scheduled closure in 2022 would cost as much as A$900 million (Dh2.6 billion), and lender Australia & New Zealand Banking Group Ltd. said it's unlikely to finance any refurbishment because it probably wouldn't meet the bank's environmental standards. Owner AGL Energy Ltd. instead wants to re-purpose the site, potentially for gas-fired or battery-stored energy.

“It beggars belief that something like Liddell is the backbone of our power supply,” said Barry Millar, acting general manager for technical services with plant operator AGL Macquarie. “In the UK, something of this age would be well and truly gone.”

For EnergyAustralia, a power generator owned by Hong-Kong’s CLP Holdings, the failure to anticipate electricity demand and supply stems from the absence of a clear climate policy.

“In the past 10 years we’ve run into a series of political challenges where schemes have come in and schemes have come out and that’s a terrible environment in which to look at investments that last for 30, 40, 50 years,” Mark Collette, EnergyAustralia’s energy executive, told Bloomberg Television.

Squabbling over climate policy has been a key contributor to political turmoil in Australia, which has changed prime ministers five times in the past decade.

Labor’s Kevin Rudd was elected in 2007 promising a carbon-trading scheme, but he shelved the plan amid resistance in the Senate. His successor Julia Gillard introduced a price on carbon, which was scrapped after Tony Abbott led the Liberal-National coalition to victory in 2013. Though replaced by Turnbull in 2015, Abbott’s sustained support for coal has emerged as a divisive voice within government ranks.

“This issue of energy and climate change could easily once again destroy a prime minister,” the Grattan Institute’s Wood said on Bloomberg Television Friday.

With the government unable to agree on a clean-energy target and electricity prices surging, energy-intensive industry is demanding investment certainty. Melbourne-based BHP Billiton Ltd., the world’s largest mining company, said it may curtail investments in its home country, while rival Rio Tinto Group said price spikes are putting projects at risk.

As well, a third of large industrial users of gas will either cut production or shutter their operations entirely due to the spiraling price of the fuel, according to the Australian Competition and Consumer Commission, the country’s antitrust watchdog.

“There are clear sectors of our economy for whom this is a nasty outcome,” said Wood. “I think we will see some energy intensive manufacturing close down.”

Wood, a former executive at Sydney-based producer and retailer Origin Energy Ltd., doesn’t see energy prices falling anytime soon, even as the country tries to ramp up renewable power sources.

Almost 90 percent of the A$88 billion forecast to be spent adding power capacity in Australia through 2040 will go toward clean energy, according to Bloomberg New Energy Finance. It estimates less than 2 per cent will be spent on coal, and even then only to refurbish existing plants, with the rest invested in gas.

So far, the move to clean energy has done little to lower the world-topping electricity prices in South Australia, where solar and wind account for about 40 per cent of its power generation, the most of any mainland state. A series of blackouts there the past year prompted billionaire Tesla Inc. co-founder Elon Musk to propose building what he said would be the world’s biggest battery system in Jamestown, about 210 kilometers north of the state’s capital, Adelaide.

Across the Spencer Gulf to the west in Whyalla, Liberty House Group’s Gupta is planning to install a variety of alternative energy sources - including solar electricity, hydropower and storage batteries - to overcome uncertainty around power supply and prices for his newly acquired steel assets.

“We have every energy resource you could want - whether its old school or new school - here in Australia,” Gupta said. “Yet, we have the most expensive power in the world.”