How Rising Power Prices Affect the Food Manufacturing Industry

For many years, we have seen electricity and gas prices rise constantly, causing many Australian manufacturers to tighten their belts. Unfortunately, it seems like the growth in prices is here to stay. Especially after several energy providers announced power price hikes beginning July 1st.

AGL was one of the first companies to report a price increase. The country’s third biggest energy retailer has upped its electricity prices by 18% and 19% in South Australia and in the ACT respectively. Origin, on the other hand, announced a price hike of 16 per cent, while EnergyAustralia increased its electricity rates by around 20% in both New South Wales and South Australia. These rising power prices are due to the closure of several electricity plants. If you could remember, South Australia's Northern power station and Victoria's Hazelwood coal power plant both stopped operations this year.

SMALL BUSINESSES SUFFERING FROM RISING ELECTRICITY PRICES

The Australian Competition and Consumer Commission recently undertook an electricity pricing inquiry to understand the reasons for the price hikes and assess their impact on small businesses, and the outlook is not good. The paper, released in May 2017 showed that small businesses were paying a disproportionately higher share of electricity prices compared to larger businesses and households.

As Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, said, households are experiencing around a 15-18 per cent price increase, while small businesses are bearing a higher amount at 20 per cent.

“It’s totally unacceptable that energy-dependent small businesses like manufacturers and rural industries are being slugged more than householders and big business,” she said. “The energy system is broken and needs to be fixed, but we can’t afford to see businesses close and jobs lost while governments and energy companies get their act together.”

The Ombudsman then listed some examples from the ACCC inquiry submissions:

South Australian Wine Industry Association

We are aware of one larger winery that had invested nearly $400,000 in energy-efficiency improvements and solar power that reduced costs by around $120,000 per year, only to then face an increase in electricity cost of 160% in one year amounting to $250,000 – a cost that comes straight off the bottom line.

Alba Cheese Manufacturing (Melbourne)

All electricity retailers we have dealt with provide complex pricing arrangements which make it hard to make comparison between the various offers. In discussion with energy retailers they focus on the energy rate and blame energy suppliers for the cost increases, they gloss over their own charges and dismiss them as being “beyond their control”. Analysis of electricity charges over the last five years shows that network charges rose by an annual rate of 25.9% over the period whilst energy charges rose 21.3% per annum.

Food manufacturers are big users of electricity. They need power to run their equipment and produce consumer goods. Given this, their daily operations can be severely affected whenever these sudden increase in electricity prices occur. Most of the time, they have no choice but to cut costs to keep their business alive. They reduce staff numbers or trim their employees’ work hours to save money. Even worse, they often pass the costs on to their customers by increasing the price of their products. 

BUSINESSES ALSO BLEED FROM SOARING GAS PRICES

Apart from electricity, energy retailers have also increased the price of gas - rising gas prices have always been an obstacle for businesses. It impacts not only their overhead costs, but also their staffing, product quality and the pricing of their goods.

These businesses also keep up with the rising gas costs by cutting down their employees’ work hours and raising product prices, as evidenced by a Small Business & Entrepreneurship Council (SBE Council) survey. In its “Entrepreneurs & the Economy: Trends, Issues and Outlook” report, 72% of the 304 small entrepreneurs polled said that higher gas prices do affect their business. When asked how:

• 41% answered higher prices have impacted their plans to hire
• 22% said they have reduced employee hours
• 40% have raised their product prices

Frankly speaking, the core reason why gas prices are high is that we lack domestic supply. Gas companies are exporting resources overseas to earn a profit and to keep Australia on track to becoming the world’s largest exporter.

THE IMPACT OF EXPORTING GAS OVERSEAS

Australia is considered to be one of the biggest producers of gas, yet we still fall short on domestic supply. Currently, around two-thirds of gas produced locally are shipped to Asian countries like Korea, Japan, and China. As energy analyst Bruce Robertson said:

“Australia is unique in its sheer stupidity in allowing companies to exploit our resources and not insist they provide for our domestic market.

We are swimming in gas, the idea that we cannot provide for our own population is just a total failure of our energy policy.”

With the bulk of our gas supply being exported overseas, gas prices here are surging and our local businesses have no choice but to pay more for Australian gas. Believe it or not, domestically produced gas is sold cheaper to other countries than it is here in our country. Even Resources Minister, Matt Canavan, noticed this. Astonishingly, he admitted that it is actually cheaper to buy Australian gas in Asian countries than in Australia. According to him, our resources should be cheaper at home.

"We don't want to see a situation where gas prices here are higher than they are in the export markets we are exporting to — that is untenable and not an appropriate outcome," Canavan said.

Fortunately, the Federal Government has recently decided to restrict gas exports to ensure there are no shortages in our country and to keep the gas prices down for small businesses. Energy producers are now forced to boost the supply for local consumers first before they could be allowed to export overseas. As Canavan pointed out, "We're acting to protect the jobs, because gas for these businesses is a staple and the bread and butter of the businesses.”

Let’s just hope this can help solve some of the problems causing rising power and gas prices. We’ll continue monitoring prices and their impact, so be sure to visit our blog regularly.