Energy shock arriving at households in 3,2,1…

Energy shock arriving at households in 3,2,1…now:

Many households and small businesses may face power bill rises of more than 30 per cent as energy retailers ditch their normal practice of offering heavy discounts to customers.

Those discounts, which typically amount to 20 to 30 per cent off the regulator’s benchmark price, are at risk of disappearing as soaring electricity and gas costs push retailers to the wall. The move comes on top of default offers rising as much as 18 per cent.

With a string of smaller retailers already going to the wall or telling customers to find another energy provider, retailers are now offering their customers prices starting from July 1 that are as close as possible to the regulator’s benchmark safety-net price.

This is only the beginning. Wholesale energy prices have risen enough to increase retail bills 100%. If prices do not change, the utility bill shock will land with a thud every quarter over the next year and more.

And why would wholesale prices change? The only driver of the problem – fuel costs – is getting worse not better as global gas prices soar anew:

And global coal prices continue right along with them:

It’s now clear that Russia has every intention of using gas as a weapon against Europe and the global economy in perpetuity. Europe does not even ban Russian coal until August.

Ipos facto, not even a global recession is going to knock these commodities down much so Australian energy bills are going to keep rising.

And the energy generators have their own plans. Mwahaha:

Power generators are devising a plan to raise price caps in the national electricity system to avoid a repeat of the market suspension and ease an ongoing energy crisis.

Regulators imposed an administered price cap of $300 per megawatt hour for the first time a fortnight ago, in a bid to calm a volatile market after a period of unusually high wholesale prices.

However, the cap resulted in more than 10 per cent of supply being withheld because companies could not profit on high-cost generation and feared running out of fuel. That supply standoff led to the Australian Energy Market Operator suspending the market.

Sources said generators were privately discussing pushing for a doubling of the price cap to $600/MWh to enable sufficient supply.

I’m pretty sure that the answer to the crisis is not to let wholesale power prices double again. The former head of the ACCC, Rod Sims, described the solution pointedly late last week:

So what to do now? The errors are in the past. First, I would still urge a price on carbon. It is far less regressive than having high solar feed-in tariffs or electric vehicle incentives that favour higher-income groups. And future investment and innovation need a price signal in our low-carbon journey that has a long way to go.

Second, the federal government needs to pressure the LNG exporters to supply the domestic market at a price close to the WA price, with the threat of legislation. Some will say the market should not be interfered with; I once argued this but was wrong. We now have an immediate crisis that is costing the economy dearly, and we have already lost manufacturing capacity that will not come back, and we will lose more.

Hopefully, the ACCC will also adopt this mea culpa and will conclude the same in its urgent review, with a recommendation for domestic reservation, export levies or super-profits taxes.

What of sovereign risk? There is none:

In 2020 alone, according to analysis of electoral commission returns by the progressive think tank Market Forces, fossil fuel miners donated at least $1,353,202 to Labor, the Liberals and the Nationals – and likely more, given the inadequacy of Australia’s donations laws.

Although a number of factors contributed to the current crisis – the war in Ukraine; record heat in India; La Niña rains in Australia and Indonesia that reduced coal supply; scheduled maintenance and breakdowns at coal-fired power stations; unusually cold weather; and reduced generation from wind and solar – at the bottom of it was the politics of appeasement. For decades, fossil fuel companies were more or less allowed to do whatever they wanted, with no policy drafted to maintain the integrity of domestic energy supply.

Rod Sims, the former head of the Australian Competition and Consumer Commission (ACCC), underlined the point this week, writing a comment piece in which he blamed two things above all for the east coast energy crisis: the lack of a price on carbon and the construction of three liquefied natural gas (LNG) projects in Queensland about 10 years ago.

It is worth noting this occurred under a Labor state government, with the enthusiastic approval of the federal Resources minister of the time, Martin Ferguson.

The developers of those three $20 billion LNG export plants, Sims said, did not have access to enough gas to meet their export commitments. There might have been enough to serve two plants. The result was that the export industry took gas “that historically had been used to meet domestic demand”. As Sims wrote, “This saw domestic gas prices increase substantially and now sees Australia’s gas market operator needing to cap gas prices at 10 times the level of gas prices a decade ago.”

One of those developers in particular, Santos, “plundered” the domestic gas market, says Mark Ogge, principal adviser on climate and energy at The Australia Institute. He suggests this was not simply the result of an overestimation by the company of the available gas reserves.

“Santos in their environmental impact statement, to get the LNG project approved, specifically said that it wouldn’t affect domestic gas prices,” Ogge says. “But Santos was telling their investors that they had a deliberate strategy of linking their domestic gas reserves to global prices, because they could charge Australian customers more for the gas.”

Whether inadvertent or deliberate, the result of the overexporting of gas was the same: shortages and price spikes. As evidence, consider this paragraph from a story about a shortfall in east coast gas supplies: “Santos and its joint venture partners at the Gladstone LNG project in Queensland have agreed to divert about 30 petajoules of gas to the domestic market, in an effort to stave off government export curbs.”

That sounds like a story from last week but it was published almost five years ago.

The gas cartel lied to Australia as it deliberately engineered market failure. Redress for this injustice and restoring market dynamics is not sovereign risk.

Not to mention that 70% of the gas is going to China. Even as it launches its third aircraft carrier to sail around the South Pacific and challenge the liberal democratic order that protects our freedoms.

The only risk in this crisis is to the sovereign, not from it.

Therefore, the choices before the Albanese Government are very simple. It can:

  • Allow a planet-cooking foreign cartel to sell us our own commodities at prices written in Ukrainian blood without even paying tax.
  • Embed the most fundamental inflation imaginable forcing the central bank to “make room” for an economically empty $50bn energy price shock.
  • Smash household wealth via crashing house and stock prices.
  • Demolish the income base of our most vulnerable households.
  • Destroy what’s left of manufacturing and denude Australia of its last defence industry even as it builds China’s.

Or, Albo can do his job and impose domestic reservation, export levies, or super-profit taxes on both the gas and coal cartels.

Why is this even a debate?

Houses and Holes

Comments

  1. Sounds like Rod Sims has already written the report and recommendations and is signalling to the market what is going to happen

  2. Grand Funk RailroadMEMBER

    I think the energy shock will go a while and be joined by a food shock. Abd the punterariat will become progressively more unhappy.

    I wrote the below to a mate last week, which goes into why i think thus.

    My take on the economic outlook is this

    The RBA will likely raise again in a fortnight. That will hammer equities. That will lead to loud squeals from home owners, and add to the weight on property prices. But I actually think that may be the last rise from the RBA.

    My reasoning is this. The prices generating most concern are food mainly, and fuel. The fuel will continue to be a problem for some time to come, reflecting developments in Ukraine and the desire or not for the Americans and Europeans to add to their sanctions on Russia. The Russians are responding with ever tightening restrictions on gas and oil going into Europe. My take is the cutoffs Italy and Bulgaria got las week will be the precursor to more – I think Poland, Slovakia, Czechia, France and Holland can all anticipate a tightening fuel market. It wouldn’t surprise me one iota to see the Russians turn off the taps completely well before the European winter sets in. I have a mate in Edinburgh (Scotland) who tells me that in the lead up to their summer he has just splashed out 500 GBP for a monthly electricity bill on a house with Mum dad and two kids. Much of the rest of Europe must be looking on at something approaching energy shock. My guess is that this will drive pain elsewhere.

    That tightening fuel market will see them look to buy on global markets, some from the US but more from the Middle East, that will drive prices higher for the Singapore based refining operations and then that will see pressure on fuel prices in Australia. The Euro purchases of LNG – out of Qatar mainly – will also underpin Australian LNG prices. Both the above would have me thinking that fuel, heating energy and electricity will continue to be major major problems in the months ahead – about which nothing other than gas reservation can remotely mitigate for the public here in Australia [with AEMO already calling time on the faux ‘market’ we have]. The problem is that raising rates will not cure them, so there is little real logic in the RBA trying to factor them in. What they would be frightened of is the prospect for that to inform income increase expectations – and where they may be pushing a wall of faeces up a one in three incline with knitting needles. But we’ll get to that.

    The only thing government can do about energy is to reserve Australian gas for Australians and do something about the thoroughly stupid situation where Australians are paying far more for their gas then those in offshore markets. Reservation is the immediate answer. Longer term there will need to be far larger spending on large scale and household batteries and maybe some form of mega scale project to generate power efficiently in Australia without fossil fuels. Once upon a time an ALP government would have been up for this kind of stuff but one never knows with the 2020s version.

    The real chicken coming home to roost here is a refusal by the LNP governments of Abbott Turnbull and Morrison to address the Australian economy with anything other than falling interest rates and pointing to rising house prices for a decade as an indicator of glowing economic health while incomes were face down in the pool, and the concepts of ’competitiveness’ or ‘’economic value’ were viewed as manifestations of something living on the far side of Alpha Centauri B. Those same households are stuffed to the gills with debt on those same said houses which now look worryingly close to falling in price. The last of those governments, Morrison’s, also splashed out circa 400 Billion on Covid handouts for the mainly uber set – that has kept the country afloat during Covid, but limits the ability (to some extent, but not totally) of the new ALP Government to spend out of what appears to be an imminent global economic downturn.

    Of the inflation the RBA is worrying about the biggest issue which can be sorted out would be food. Broccoli at my ALDI is about 9 bucks a kilo. The issue as I understand things is that the costs of getting produce picked transported refrigerated and packaged. While I get some of the complaints of the agriculture lobby vis the desirability of foreign serfs, I see nothing to suggest we are on the cusp of a wages breakout – quite the opposite in fact. So that tells me it isn’t labour driving that 9 buck broccoli, it is the lack of trucks drivers, refrigeration and logistics handling. The spectre of wage push inflation which the RBA seems keen to tout, is complicated because all wage claims have been held in abeyance because of Covid (a large number of enterprise bargaining agreements) and come as icing on a decades worth sugar free wholemeal biscuits masquerading as cake, with the 5% minimum wage decision largely a reflection of a generations worth of kicking the poor. I do find myself wondering if the RBA would like to get enough to justify imploding the economy with rate hikes so they can start the whole process over again.

    That inflationary spike should sort itself out with demand destruction. Punters will swap products (eye fillet) and substitute (mince), and that will sort out the prices in the short to medium term. The RBA know this sort of stuff. They also know that if they jack up rates beyond a certain point they are at risk of absolutely hammering demand and probably triggering a housing collapse, after spending a decade trying to get slower lower house price growth (and failing abysmally). They will know that if they do that then there will be limited scope to bring it back. At that point Chris Joye’s 30% fall is easily on the books. Do they think they have political cover for a failing of that magnitude is a question which needs to be asked. That would imply a banking system with 2/3 of its lending in those same mortgages becoming somewhat stressed, and potentially a straightened wince from global capital markets, not to mention Australians asking questions about their banks – the same ones there was a Royal Commission about with none of its recommendations enacted. The questions keep mounting, ‘why didnt?’ becomes a mindset, and outrage the next step.

    Moments later that line of thinking has people identifying that Australia is ‘the’ housing speculation economy in a bubble. Nobody inside that bubble is anywhere near competitive at anything vis a vis the rest of the world. The only thing that has generated any security inside that bubble has been rising real estate prices. For a very large number of Australians these have generated a capacity to spend where income increases haven’t, and that has enabled some consumer strength long after the underlying competitive position would have ceased to do so. By the next 50bp rate hike prices will be falling and large numbers of mainly younger Australians will be underwater to the extent they may owe more on their property than their property is worth. Large numbers of Australians – with mortgage repayments, fuel and food haemorrhaging from their wallets, will tone down spending elsewhere. All those beard trimmers, baristas, and indulgence providers may care to take note.

    Now it may be that the RBA has decided that type of consumer spending needs to end – and I for one would be somewhat supportive of that. But at that point you would be looking at the risks of that stance, in an economy as fundamentally palsied as ours, and then subsequently what other drivers of consumer spending there may be. There are none – apart from government. The debt card is maxed out, there is no capacity investment occurring, wages aren’t going anywhere, and no business making things or doing things using Australians is going to be wanting to do them if they can get someone somewhere else to do them. They wont want to be employing them. Debt servicing is a major issue for a large number of Australians.

    Our new government would presumably like – and is likely being prompted by the blackouts and brownouts Eastern Australia is currently chalking up – to spend on making the energy transition Australia probably needs to make. So far it seems squeamish on the prospect of enforcing gas reservation to use for electricity generation, but that presumably will come as Euro desperation mounts in a couple of months time.

    The Euro screams will accompany the Ian Gillan style screaming we can expect from mortgagees.

    But theres more!

    Those same said Europeans and their nearby neighbours in the Middle East – unlike Australia, NZ and the US/Canada end of things – doesn’t actually feed itself all that well. They rely heavily on produce from Russia and Ukraine. Yep, you guessed it, the Russians are preventing grain getting out to the Middle East and a big load of produce from leaving Russia. More to the point the Russians are taking the Ukrainian grain to sell. The Kazakhs have restricted exports (only to Central Asia) as well.

    Last time there were grain shortages in the Middle East I was in Moscow and the net result was a number of Middle East political administration crumble beneath peeved punters. It began in Tunisia and took out the regimes running Tunisia, Libya, Egypt, and added to the all round hostility towards the developed world which can be found in Iraq, Syria, Iran and Yemen. That should start to appear on the radar at the end of the Northern summer (I would guess late September), and given prices have jumped very sharply in the ME there is plenty of scope for the game to start early.

    In Europe itself that all adds up to a winter where lots of people are a bit nippy and are all of a sudden shelling out more for their food. I have good contacts in Europe and they are all saying the natives are already unhappy.

    In Australia the energy market (global) and the food shortages (global) will play out as handy export earnings against a mounting concern about energy prices (locally) and probably persistent upward pressure on food prices reflecting Australian meat and growing sectors wanting to sell where they can get better prices. That wouldn’t bode all that well for any government.

    Where the volatility this induces becomes critical is in the following.

    In raising rates my take is the RBA is trying to buy itself wiggle room (ie lowering them again) in the event there is a global recession, or if the global economy gets a knee in the cojones from market volatility. These two are combined insofar as any volatility will bring on that recession (globally). The US Fed hiking rates means that US dollar costs around the world are now rising, and that means lots of nations (particularly emerging world) are now looking at paying more for that they important than they did not long ago.

    Those governments can either hike their own rates to lift their currencies too – but at the cost of tightening the monetary circumstances in their economies – or they can completely not worry about it (see Turkey) and have the mother of all inflationary spirals.

    So the above is something of an hour long meandering into why I don’t think anyone here is going to become that tight for all that long. Indeed I wouldn’t be surprised if we get to the other side of Christmas and the OCR is back down or looking at being cut. If the RBA find themselves in that situation then the ALP will probably be a far better bet than the LNP gargoyle set was in considering fiscal stimulus – and to sound like Ken Henry I think that once again it will be something akin to ‘go households, go heavy, go early’ – particularly if the global economy goes to the top of the springboard and starts hopping on the end, with its hands above its head.

    Take it easy mate, you wouldn’t have written and asked if you wanted to hear happy joyous economic prognoses

    • Jumping jack flash

      tl;dr, but if you said that by NH winter we are going to get some incredibly high energy prices unless they settle it down in Ukraine then I agree with you completely.

      The problem is not only the rising energy prices, it is their contribution to inflation, and where there’s inflation there’s interest rate rises (at least it seems that they’re playing this game… yet again!)

      I see you also mentioned a food shock. Again, I agree completely with this as well. Rising food prices will contribute to inflation and they will cause interest rate rises.

      Rising interest rates are the biggest problem because quite simply, prices of services and imported items are irrelevant if there is enough debt to pay them – exactly as we see with houses. And debt depends on debt eligibility which is governed by two main parameters, wages, and interest rates.

      To fix the problem they have several options, if they choose to take any of them –
      1) they could implement a UBI or some other type of supplement to incomes. In a debt economy like ours and almost all of the western economies, this has pretty much the same effect as an interest rate cut.
      2) They could ignore inflation and stop raising interest rates and let the price inflation naturally (or with a bit of help) flow into wage inflation which would assist by creating new debt, and new demand, and save the economy from depression.
      3) They could cut interest rates negative, but nobody, especially the banks, likes this idea.
      4) they could redefine inflation again, or change the rules regarding its consideration towards interest rates. Perhaps use core inflation instead of headline. etc.

      But the likelihood that they will continue to blindly raise interest rates as inflation increases, at least until one or several banks implode, is quite high.

    • Thanks for the foreign ‘boots on the ground’ context. Its always interesting to hear a non media based view on how other locals are reacting to the sh!t sandwiches they are getting served.

      I fear for Australian’s, we have become incredibly soft due to the easy (non earned) gains over the last 30yrs. This could be the mother of all reality checks for some.

    • Yeah, the sovereign risk is all internal!

      (PS. we don’t even need foreign investment from Shell etc we have the knowledge & skills while the government has the ability to fund productive energy assets at will)

  3. Albo’s Labor gawn in 10…9…8…

    (unless they reserve energy at WA like prices, no other country would hesitate to use their natural advantages to save their own country)

    • bolstroodMEMBER

      The fly in the buttermilk is as “Rod Sims, the former head of the Australian Competition and Consumer Commission (ACCC), underlined the point this week, writing a comment piece in which he blamed two things above all for the east coast energy crisis: the lack of a price on carbon and the construction of three liquefied natural gas (LNG) projects in Queensland about 10 years ago.

      It is worth noting this occurred under a Labor state government, with the enthusiastic approval of the federal Resources minister of the time, Martin Ferguson.”
      Labor are as deeply entrenched with the Gas Cartel as the LNP.
      In NSW case it was the Petroleum (Onshore ) Act 1991 that birthed the Coal Seam Gas industry
      http://classic.austlii.edu.au/au/legis/nsw/consol_act/pa1991224/
      that now threatens the Liverpool Plains , Australia’s most fertile agricultural land as well as the water source it relies on, The Great Artesean Basin, which has one of it’s most important. recharging points , The Pilliga Forest, under threat from 850 proposed gas wells.
      What is being lost in all the short term panic and angst surrounding inflation and energy prices is the looming catastrophe of runaway climate disaster that we have all seen up close over the past 4 years.

  4. DingwallMEMBER

    Seems like the answer is “all of the above” …. except the bit starting with “Or”

    What are the odds, in the classic Government way of dealing with things these days, they are discussing the benefits of turning immigration ballistic asap so they can tell Australians a volume discount will come through once the population reaches 35 million

  5. Labour will act once the public feel the pain. Not earlier.

    Remember 2013 Rudd Gillard RR Tax election loss at the hands of the Minerals Council?

    I’ll bet federal Labour does.