Christopher Niesche: Australia faces biggest energy crisis since 1970s

Australians have been asking how it can be in an energy crisis when the country has been blessed with abundant supplies of oil and gas and a lot of wind and sunshine. Photo / Supplied

OPINION:

As Australians shivered through winter nights last week, we were told to conserve electricity or suffer blackouts.

The warnings came as electricity prices surged to record levels, putting pressure on household and business budgets already squeezed by higher inflation.

The crisis is so bad the Government's energy market operator suspended power trading across the entire east coast and seized control of electricity generators.

When the energy market operates properly, power generators offer electricity for sale into the market and retailers buy the power they need to meet their customers' needs. But power generators are paying hugely inflated prices for coal and gas and last week several generators repeatedly took massive amounts of generation capacity offline as their businesses become less profitable, putting the energy supply on Australia's east coast at risk.

On Tuesday, the Australian Energy Market Operator forced generators to restart about 10 per cent of the grid's total generation capacity and directed where that power should be sent.

The AEMO said the balance between supply and demand would remain tight in the coming days, particularly in NSW.

It's the biggest energy crisis Australia has suffered since the oil shock of the 1970s, which triggered a recession here and overseas.

A lot of Australians are asking how we ended up in this perilous situation, given that the nation has been blessed with abundant supplies of oil and gas and a lot of wind and sunshine.

Like everything to do with the energy market, the answer is complicated.

A major factor has been Russia's invasion of the Ukraine. Global energy prices were already rising before the invasion, but the conflict triggered a global supply shock as businesses and governments around the world embargoed Russia's enormous oil and gas supplies.

Locally, Australia has been hit by unplanned outages in the nation's ageing and deteriorating coal-fired power plants. This has cut the supply of electricity to the energy grid, driving increased demand for gas-fired generation, which unlike coal can be quickly fired up to plug shortfalls in the power market. The generators' deliberate power cuts only made the power shortage worse.

But there are also questions about whether or not we have enough gas.

Australia is one of the world's largest exporters of gas – we ship out three-quarters of what we produce. While the Government has the power to make gas exporters direct more of their supply to the domestic market, the power doesn't take effect until January 1 – which is a bit late to keep us warm in winter. It's also very complicated to invoke.

And there's the longer-term game here. If we broke overseas gas contracts by pulling "the export control trigger", as it's known, it could jeopardise Australia's reputation as a reliable international exporter of energy.

There are still more reasons for the power crisis.

According to market analyst EnergyQuest Australia, cloudy weather resulted in a 27 per cent drop in solar power generation in May compared with April, while wind-generated power fell about 1.9 per cent.

All of this has sent spot electricity prices – representing the immediate price on the power market – towards A$1000 per megawatt-hour, or about 80 times the normal level.

This prompted the energy market operator to put price caps on what the generators could charge and this is why the coal generators pulled out of the market – they were struggling to make a profit.

The coal generators would have received compensation for any losses they made by continuing to produce power with expensive coal and gas.

Their decision to deliberately withdraw electricity generation and place Australia at risk was perfectly legal.

But it represents an enormous breach of their social licence, the idea that a business has a responsibility to the society and environment in which it operates as well as a responsibility to produce a profit for their shareholders.

According to some reports, the power generators were trying to gain access to a more profitable compensation scheme that applies if AEMO orders them to produce power to avoid blackouts.

In the end, their actions might hasten their demise. Proponents of coal power say we still need it to ensure that we have a reliable electricity supply if wind and solar can't meet market demand. But with their unscheduled shutdowns and deliberate withdrawal of supply, the coal generators have demonstrated that isn't true.

Ultimately, the cause of the power crisis is a decade of inaction by recently-deposed Prime Minister Scott Morrison and his Government.

Morrison dug his feet in over his ongoing support of coal generation, to the point of actually trying to stop renewable energy replacing fossil fuel generation on the spurious grounds of security of electricity supply. The real reason was more likely to win votes in coal mining areas of Queensland.

At the same time, he failed to invest in and modernise Australia's electricity transmission network and to build energy storage so that the nation could make full use of free and abundant wind and solar energy.

Of course, it's no longer Morrison's problem. Others will have to fix his mess while the nation faces sky-high power bills and the possibility of a very cold winter.