Why power prices have gone up for the waste industry

In the first part of this two part series, Waste Management Review looks at the effect of rising energy costs across the waste industry, why it is happening and what can be done to manage it.

We’re hearing a lot about Australia’s electricity affordability problem. The Australian Competition and Consumer Commission’s (ACCC) 2017 Retail Electricity Pricing Inquiry Preliminary Report, paints a picture of the last 10 years. Based on consumer price index, retail electricity prices have gone up by 80 to 90 per cent in the past decade to 2017. As the major industrial users, including organics processors and other recyclers, largely rely on natural gas to power their heating systems, the prices of these fossil fuels dictate the bottom line.

Likewise, Australian Renewable Energy Agency (ARENA) Renewable Energy Options for Australian Industrial Gas Users report breaks down the largest uses of gas as those involved in metal and alumina production, followed by food, pulp and paper manufacturing, dairy production, beverage, wood manufacturing and a range of other areas. The ACCC’s report argues the international competitiveness of Australian manufacturers has diminished over the past 10 years due to price increases. It notes that the increased cost of gas only adds pressure to the decline of manufacturing, with the exception of the food industry, which is growing.

While reports of how rising power prices specifically affect waste management businesses are limited, Dr Georgina Davis, Founder of consultancy firm The Waste to Opportunity Enterprise, tells Waste Management Review that unlike other sectors, the waste and recycling sector has been quiet on the subject of rising electricity costs. She says it is a significant and growing issue for the industry.

“We need to be putting pressure on governments, state and federal, to address the rising cost of electricity. Our sorting facilities and technologies depend on it, as does our ability to access viable domestic markets and remanufacturers with our products (recyclate),” she says.

Mark Smith, Victorian Waste Management Association Executive Officer, says feedback from members has been that that any site operating heavy machinery is feeling the pinch of rising power costs, in particular those working in metals, liquid waste and soil processing.

Last year, Adelaide recycling business Plastics Granulating Services was forced to close due to power bill increases of $100,000 over the preceding 18 months. Managing Director Stephen Scherer told the ABC News in 2017 the high cost of power had crippled his business of 38 years.

But why exactly have prices gone up?

GETTING THE PRICE RIGHT

In 1990, former Prime Minister Paul Keating, who was Treasurer at the time, asked the Industry Commission, an independent productivity authority, to investigate performance improvement opportunities in the energy market.

Australia has become a major exporter of LNG with Queensland driving much of this.

The 1993 Hilmer report led to National Competition Policy in 1995. Prior to this, the entire market was government-owned, with vertically integrated supply businesses in charge of the generation, transmission and retailing of electricity in the states and territories.

As a result of the report, some state and territory governments, including Victoria, began to privatise the entire supply chain – dubbed the poles and wires – paving the way for competition in the generation and retail segments.

Keating also helped establish a National Energy Market (NEM) in 1995 – a wholesale electricity market in which generators sell electricity to retailers and energy onsellers to sell to consumers and industrial users. Responsible for 80 per cent of the nation’s electricity consumption, the NEM covers 4500 kilometres across five state and territory-based networks in New South Wales, Queensland, South Australia, Victoria and the Australian Capital Territory.

The ACCC report notes that reforms emerging from the National Competition Policy, privatisation of electricity assets, formation of the NEM and gradual opening of retail markets led to initial efficiencies in competitiveness and greater choice for consumers. But that all started to change in the 2000s.

The Grattan Institute’s index of retail electricity prices in its report: Price shock: is the retail electricity market failing consumers? shows real retail electricity prices decreased from the 90s until the late 2000s – where prices start rising sharply.

The prices retailers could charge businesses and consumers were limited by price controls until the mid 2000s, imposed by state regulators.  This was dismantled in most states in favour of an advisory body for state and territory governments in 2005 known as the Australian Energy Market Commission (AEMC). The AEMC was established by the Council of Australian Governments to govern the nation’s main energy markets and makes and amends national gas, electricity and energy retail rules underpinning the NEM.

Victoria, the ACT and rural Queensland still regulate retail electricity prices for smaller customers. Electricity businesses are also state-owned in Tasmania and Queensland. Another body known as the Australian Energy Regulator (AER) regulates electricity networks and sets the amount of revenue that the network businesses can recover from using the networks, in all jurisdictions except Western Australia. However, it does not set the price of energy.

AEMC’s National Electricity Rules set a maximum market price cap on the cost of electricity and the Australian Energy Market Operator (AEMO) manages the set of procedures which send signals to generators guiding them how much energy to produce each five minutes, according to demand.

DEMAND FOR GAS

AEMO’s 2017 Update to gas statement of opportunities highlights that gas-powered generation demand is also dependent on the behaviour of coal-fired generation and other electricity suppliers using fuels other than natural gas. With gas generators providing electricity generation which adjusts during the day as demand changes, and a mix of renewable energy supplementing the prevailing incidence of coal in the NEM – demand for gas-powered generation varies. ARENA’s renewable energy report also mentions the amount of gas consumption, consumer bargaining power, timing of contract negotiation and proximity to the distribution system are additional prevailing factors in the price.

Gas-powered generation demand in the NEM is dependant on a range of multifaceted factors. The main reason for price increases or decreases is pinpointed by a complex interaction of the gas, renewable energy and electricity sector (including network costs), energy supply and demand, competition and controls and price dynamics.

To make matters more complicated, the withdrawal of some old coal fired power stations such as Hazelwood in Victoria, Playford and Northern in South Australia and the now-planned closure of Liddel in NSW puts consumers and businesses in a situation where demand for gas has recently increased. AEMC in its May 2017 State of the Energy Market report finds network costs (wholesale and retail), were the main driver of higher retail bills in 2016, forecasting an upward trend over the next three years. AEMO’s modelling projects that the delivered wholesale cost of gas in Australia will increase by 48 per cent in 2036. The report highlights that wholesale gas prices make up a smaller percentage of the retail gas price paid by energy consumers, so the retail price will be lower in percentage terms. Despite this, high costs are still projected to contribute to less gas being used domestically.

EXPORTATION

Australia has, over time, become a major exporter of liquefied natural gas (LNG), with Queensland driving much of the investment, exporting it to nations such as Japan, China, South Korea and Taiwan. The federal government’s Australian LNG website describes the nation as the third largest LNG exporter in the Asia Pacific region, which plays a role in boosting the prices up and reducing supply in the local market.

The ACCC’s 2017 report also highlights that as a result of power station closures such as Hazelwood, gas power has become the marginal source of generation, particularly in Victoria and South Australia. With a tighter supply-demand balance, it becomes even more difficult for standalone retailers to compete with vertically integrated “gentailers” – those who own and operate both the generation and transmission infrastructure.

AEM’s statement of opportunities takes current forecasts to suggest a risk of shortfall in the total annual quantity of gas to supply the energy needs of the domestic market. Projections of aggregated gas product and LNG are dependant on market conditions and contracting – leading to a “dynamic situation” that can rapidly change.

Roger Horwood, Associate at energy consultancy firm Energetics, notes that the future of gas prices is largely preordained by the infrastructure already in place.

“Gas prices are almost locked in to some extent. We’ve already built these LNG plants to send it overseas and therefore whatever the price is to send it overseas will be the baseline in Australia,” he says.

Prices are also driven by how much gas is needed by domestic gas-powered generators, he says, used for peak load control in high demand times such as summer. Gas prices are currently going down, he notes, but the future remains uncertain. Roger applauds federal government initiatives such as demand response, which has seen electric system planners and operators balance supply and demand in peak periods.

Under the federal government’s Renewable Energy Target (RET), which sets a benchmark to ensure 33,000 gigawatt hours of Australia’s energy come from renewable energy sources, financial incentives are provided for investing in these sources. The RET ends in 2030 and there will be no more certificates released in 2020. According to the Clean Energy Regulator’s large-scale generation certificate market update, there is likely to be a surplus of large-scale certificates through to 2020.

Roger says the absence of a coordinated energy policy framework and response at federal and state levels is a key contributor to the supply issue.

“You need some certainty around what direction Australia is taking. It’s OK to say we’re going to support renewable energy so we can achieve a greenhouse emissions reduction target – essentially 20 per cent renewables into our power generation mix, and there’s incentives around it through large and small-scale certificates.

“But you need to consider the role of gas-fired generation, together with batteries, pumped hydro and demand response, to support the rapid growth in renewables.”

Dr Ariel Liebman, Deputy Director of the Monash Energy Materials and Systems Institute, says that since the AEMC and AER took over regulation of the energy network, it remains unclear as to who is really in control of price intervention.

“Distribution prices seem to have gone up since 2009 in NSW and QLD and they stayed relatively stable in Victoria. Western Australia went up. South Australia went up, which is surprising considering they were still private,” he says.

According to the 2017 ACCC report, in 2014, the AER found that Victorian and South Australian electricity businesses were more efficient than other distribution businesses that had, at the time, remained under state ownership. In 2014-15, the largest component of the customer bill was the cost incurred for transmitting electricity over transmission and distribution networks. “NSW was the worst – they had the highest distribution cost increases. Between 2009 and 2014, their distribution prices doubled, so the cost of using the low voltage network on average. The federal government didn’t gain control, which is the problem. They just had a regulatory framework,” Ariel says.

BUSINESSES AFFECTED

Ariel says the biggest pressures of energy costs have been placed on the small to medium enterprises.

“They’re the ones that struggle the most, because you’re talking about whether it’s worth having full-time people employed managing energy. But the commercial and industrial sector got good deals. The margins they were being charged by the retailers are pretty tight.” He adds that this only applies to the wholesale market price component. They pay more or less the same distribution network prices as the smaller end of town. Ariel says energy costs in the wholesale market have been historically efficient in their energy generation, leading to a competitive and relatively affordable retail price.     

“It got bumped up by the distribution costs in NSW and Queensland and there’s nothing they could do about that. They can’t negotiate that price with anyone as it’s a monopoly business.

“What’s pushed their prices up, until recently, was the distribution prices when they’re connected at reasonably low voltages. The higher the voltage you’re connected to, the more you’re safe because you’re closer to the transmission network and you’re not paying as much of the distribution costs.”

He says the closure of power stations such as Hazelwood has brought the market into a tight balance of supply, allowing certain players to game the market.

TAKING CHARGE

Roger says managing the grid presents further challenges which will emerge down track, as some businesses take electricity generation into their own hands. “You’ll see groups of businesses taking advantage of lower cost renewables and innovative new technologies, working together to look after their own power needs. But they’re also connected to the grid and so the management required is different to what’s needed under a system with centralised power stations.”

Many waste businesses and even water utilities are using solar to reduce their costs. New South Wales’ Newcastle City Council is taking advantage of renewables to manage its costs. In March, the municipality secured a $6.5 million loan from the federal government specialist financier, Clean Energy Finance Corporation (CEFC), to build the region’s biggest solar at the Summerhill Waste Management Centre. With construction beginning in June, the solar facility is predicted to save council $9 million in operational and construction costs across its 30-year lifespan. The five-megawatt installation is anticipated to reduce council’s annual $4 million electricity bill, after it doubled over the past two years. The electricity generated will flow into the nearby Ausgrid substation to offset electricity used at council facilities across the local government area and is expected to cut overall electricity usage by 30 per cent to 2020.

VWMA’s Mark Smith says that when it comes to awareness of potential cost savings via renewables, there has been a mixed response in the waste industry. “It’s not as simple as talking about cost savings, as all this stuff has a payback period. Many operators have flagged that if the payback period is over four to five years, it’s hard to get the project off the ground.

“For many operators it’s not just to invest, in say, solar panels. For example, it also requires investment in reinforcing the roofing on warehouses to support the added weights.”

RELIABLE SYSTEMS

Ariel says that proclamations that renewable energy has caused wholesale energy prices to increase is “fake news”.

“The system is as reliable as it was in the 90s. The risks to reliability will come when we move to huge penetrations of wind and solar because their output can’t be controlled, but there’s still some time to adapt to that,” he says.

“New build renewables are now cheaper than new build coal and gas for Australia because of the rising cost of building a coal-fired power station and the fuel costs are no longer as cheap.” He adds that renewables will replace ageing fossil fuel generators and become cheaper in the long term. In the mean time, Ariel suggests stronger regulatory powers for the ACCC and the AER – a tough decision politically.

The Federal Government’s National Energy Guarantee is aiming to offer reliable electricity and lower carbon emissions as it will require energy retailers and large-scale energy users to write contracts to meet emissions reduction and reliability obligations. The reliability obligations will be conditional on meeting the NEM’s existing Reliability Standard, which will only have to be met if AEMO forecasts the standard may not be met years in advance. Retailers will have to comply with a 26 per cent reduction in emissions by 2030. Waste Management Review has contacted the federal government for comment on the National Energy Guarantee and the Renewable Energy Target, but did not receive a response.

HOW TO REDUCE YOUR POWER COSTS

Rather than waiting for governments to take action, there are measures that can be implemented to reduce power costs. Mark explains that getting an idea of where a business’ main energy consumption is the first step. He says to ask yourself: what machinery or operations chews up the most electricity? Is this machinery efficient and effective or can we do better?

“But this approach only works if businesses have got time and the people available to carry out an assessment or audit. Many don’t,” he says.

“As an association, we are looking at partnerships with energy providers to offer these assessments to our members to tackle the hassle out for them.”

Mark advises to look to numerous energy assessment grants, such as those offered by Sustainability Victoria (https://bit.ly/2tY1Rgt), the Lord Mayor’s Charitable Foundation (https://bit.ly/2I2tM2K) and the CEFC (www.cefc.com.au). When applying for these grants, Mark notes it’s important to understand the criteria the funding body is looking for and articulate how you are addressing that criteria, as opposed to just outlining cost savings. He adds that marketing yourself is crucial.

In part two, Waste Management Review looks at the role of waste to energy in lowering power costs.