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Creating clarity during the energy transition

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      March 25, 2024 | Sheraton Grand Sydney Hyde Park

      Australian Domestic Gas Outlook 2024

      June 11, 2024 | Melbourne Convention and Exhibition Centre

      Australian Energy Week 2024

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      Australian Hydrogen Forum
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      Gas, Generation & Storage, Hydrogen, Policy & Regulation, Retail, Transmission & Distribution — 7 mins read

      2022 in the rear-view mirror

      2022 was an incredibly eventful year for Australia’s energy markets. Both global forces and domestic political changes added impetus to the already accelerating pace of the transition. It also featured a mid-year ‘energy crisis’ that almost brought the NEM to its knees, and saw some retailers go into administration. This all has big implications for what happens in 2023 and beyond.

      The war in Ukraine

      Starting in February, the war in Ukraine and subsequent gas market turmoil put energy security squarely in the spotlight. Many nations were suddenly very concerned about their exposure to global fossil fuel supply chains, with European countries in particular desperately looking for alternate gas sources. Domestically the resulting price spikes for trade exposed coal and gas had significant impacts on the domestic market, with gas prices contributing to surging power prices. This (still ongoing) war acts as an important backdrop to most of 2022’s major events.

      The 2023 energy crisis

      Though not the sole cause, the war in Ukraine was a factor in what was to become a serious energy crisis in the middle of 2022. Though it’s difficult to define exactly when the crisis started, the April 29 announcement that the wholesale price in Q1 was up 141% (followed by an announcement of likely load shedding in NSW and QLD on May 13) is as good a spot as any.

      The first energy retailer to collapse was only one week later, with LPE, Weston and Pooled all entering administration within a fortnight of each other.

      On May 31, AEMO imposed a state-wide price cap in Victoria, which was a huge moment for the Australian energy sector. Ultimately, the worst was avoided, with warmer winter temperatures and decisive action by the regulators playing a part in avoiding a major catastrophe.

      Perhaps more importantly, for millions of Australian consumers it was a stark warning that the lights could go out. Energy security was now front of mind.

      New federal government & 43% emissions reduction by 2030 legislated

      On May 21, 9 years of a coalition federal government ended, with Labor taking power.

      With this change came a clear shift in energy policy, with the Albanese government's landmark Climate Change Bills legislating a 43% reduction in emissions by 2030 on September 8, just a few months into the new term.

      This had an immediate impact. Erwin Jackson from the Investor Group on Climate Change put it: “Recent changes in climate policy are giving investors more confidence to invest billions of dollars of capital to accelerate Australia’s transition to a net zero economy.”

      Infrastructure build challenge brought into focus

      Though not a specific moment in time, meeting the 43% target quickly became a key focus for energy executives, who recognised the incredible challenge this created.

      The transmission and renewable construction required to meet this goal in an 8 year period is immense. Origin Energy’s CEO, Frank Calabria, described the challenge “akin to a wartime reconstruction effort,” as saying that it will be a “truly staggering task to achieve those 2030 targets, and we must act with more urgency, as each month that passes makes the challenge harder with the propensity for adding costs.”

      Transgrid’s head of major projects, Gordon Taylor, says that a “whole of country” approach is required, with 10 – 15 year procurement timelines and a combined effort to overcome vast supply chain and logistical challenges.

      Chris Bowen, federal minister for energy said; “Reducing emissions by 43% is an achievable but ambitious target. And we are going to need a collective effort and determination across all of the economy to get there.”

      Gas market intervention and price caps

      August saw global LNG prices peak at $70.50 MMBtu, a dramatic increase on spot prices that had not passed $20.5 prior to 2021 (according to Reuters). This has a huge knock-on effect for Australian industries and consumers reliant on gas, particularly those in manufacturing.

      Many commercial users are on short-term gas contracts, and were seeing their gas bills increase significantly. Some felt they were being driven to bankruptcy, calling for government intervention.

      “It’s our gas, and we won’t pay export prices,” were the words of Ed Husic, Minister for Industry, Science and Technology, who led a push for the federal government to intervene.

      Ultimately they did, imposing a price cap (with limitations), that was not well received by the gas industry. APPEA CEO, Samantha McCulloch commented; “The powers provided through the Bill are extraordinary, providing for the government to control the entirety of the market and intervene in an essentially unlimited way.”

      Independent analyst Mark Samter, of MST Marquee described it as “the single worst piece of energy policy I have seen anywhere in the world in almost 20 years looking at global energy markets.”

      Wrap-up

      2022 will be remembered for a significant shift in policy approach, alongside a renewed global push for energy security. With delays in major infrastructure projects (like Snowy 2.0) already occurring, the challenge of meeting the required build will be an issue that is felt for years, if not decades to come.

      What does this mean for 2023 and beyond?

      The big issues and events of 2022 are not going away, and will significantly shape Australia’s energy future. 

      Politically the shift towards a more aggressive energy transition seems permanent, not only with the legislation of these policies, but also the lack of attack from the Liberal cross-bench. The only thing that could threaten this would be an enormous shock to energy security, or a significant surge in retail prices that causes voter angst. Even so, the likelihood of the development of new coal generation seems next to zero given the long-term investment horizon needed to realise a return on the huge capital costs, and the significant carbon risk associated. Limited gas developments, particularly for peaking, seem possible, but the days of fossil fuel generation are ending. 

      The big question for the coming years is timing. Ageing coal assets are being retired rapidly over the coming decade and building the renewable capacity and firming to replace them is no small task. The demands on transmission networks to link a more disparate generation fleet are immense, the speed at which generation assets needs to be built is rapid. On top of this, there is global competition for these already strained supply chains and significant work that needs to be done to get social license from the communities being impacted by these new developments.

      The gas issue also won’t simply go away. There is a real feeling amongst many that Australian companies and households should get first go at Australian gas, and having to be exposed to high export-parity prices is unacceptable. They argue it could underpin a manufacturing renaissance, or more realistically keep manufacturing cost competitive. Finding a solution to both maximise Australia’s competitiveness in international markets, while delivering for local consumers poses a big challenge for the federal government. This chapter hasn’t been closed and there will likely be more changes over the next 12 months.

      Aleks Zids, Energy Insights

      Energy Monthly

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      March 25, 2024 | Sheraton Grand Sydney Hyde Park

      Australian Domestic Gas Outlook 2024

      June 11, 2024 | Melbourne Convention and Exhibition Centre

      Australian Energy Week 2024

      New call-to-action