September 2017
September 2017
“Turn off the light!” Who remembers this from their childhood? Such recollections are now haunting the boardrooms of Australia’s corporates as our energy-rich nation adds soaring power bills as another plank to its uncompetitive international cost position.
Australia’s rising cost of living has been a concern to Ralton for some time. In the last year, the rapid spike in electricity costs has grabbed headlines with the reality and fear of future blackouts, dysfunctional networks, the spectre of gouging utility companies and government haunting utility CEOs.
The current energy crisis however, dates back many years to a series of policy decisions made across regions and by successive governments. Fundamentally though, community expectations are driving a push away from carbon-intensive electricity generation toward more costly and typically more intermittent sources of renewable supply. Combined with restrictions around coal supply, land-based gas production and water usage, the marginal cost of electricity, provided by either coal or gas, has shifted toward $80/MWh and certainly higher on various measures and forward curves.
So, what does this mean for industry?
The last two reporting seasons have been dominated by investors questioning CEOs about the impact of rising power bills, with corporates likely facing 50% plus increases. In the short term, corporates must seek to mitigate the input costs either via passing on the costs to customers (higher prices), absorbing the cost entirely and crimp profits (likely leading to shareholder ire) or seeking energy-efficiency savings. Whether you make explosives, farm chickens, grow berries or produce wine bottles, the experience is the same. Regardless, the result is almost always some loss of short-term profit.
In the medium term, the investment dilemma is more complex. Would you invest long-term capital in your business given the risk of outright access to contracted energy and volatility that the energy outlook entails? Like the political cycle, the timelines are out of whack. You are making five or 10-year capital allocations involving multi-million dollar decisions – a new mushroom farm or glass bottling furnace, where returns on capital are long dated – measured against the ability to access and seek electricity and gas contracts that only guarantee price for perhaps one, two or three years. This has been particularly acute for gas contracts. Understandably the ‘animal spirits’ of boards often defer to the accountant and banker sets when faced with these capital decisions. As such, construction and employment jobs shift to lower-cost jurisdictions. Employment is the loser and the economy, in general, is poorer for it.
As featured in The Constant Investor