28 August 2014

What does industry need from energy policy?

Speech delivered by Ben Eade, Executive Director at the National AIE Energy Conference, incorporating the 14th Energy in WA Conference.

Can I start by thanking Margaret Sewell from the Department of Industry. I’m fortunate to be following a presentation that so effectively sets the scene as to how the federal government proposes to meet the challenges of developing energy policy in what we all know is a rapidly changing energy environment. 

Let me say at the outset that in industry, we certainly understand that those challenges are formidable. And while we may at times lock horns over what the best energy policies for the nation look like, it is not a result of any underestimation of just how complex some of these issues are.

Can I also congratulate the organisers of this conference for seeing fit to provide a platform for discussion and debate about not just issues specific to the energy generation sector, but also demand-side issues and, more broadly, the role of energy in a balanced Australian economy.

At Manufacturing Australia, our advocacy is based on a premise that I hope we can all agree on: namely that the national interest is best served by a balanced economy capable of mitigating the peaks and troughs of cyclical industries like resources, agriculture, tourism and services. Manufacturing is a fundamental part of such a balanced economy.

As I will highlight later, it is for this reason that we are seeing developed economies around the world fight to “reshore” manufacturing capacity after decades-long trends in “offshoring. More-over it is my view that energy policy, more than perhaps any other policy ingredient, is fundamental to whether Australia succeeds or fails at maintaining that balance in our economy.

The global experience tells us that manufacturing flourishes in those countries that identify and exploit their natural advantages. For some nations, an advantage is abundant or cheap labour, for others like Australia or the USA, a key advantage is energy. 

Today I will talk about the importance of maintaining what I believe is one of Australia’s greatest competitive advantages in the global war for manufacturing investment, namely our abundant, diverse and relatively affordable sources of energy.

That competitive advantage has long underpinned the national interest, making energy an enabler of diverse industries in Australia that create and add value to our resources right along their value chain. It is, however, a competitive advantage that is threatened by policy uncertainty, market dysfunction, perverse incentives and, at times, alarming indifference to the risks of demand destruction.

My talk today is based on the firm belief that Australia can and will continue to have a strong manufacturing base, that it should be a national strategic priority to do so and that, in fact, we are squandering our natural energy advantages if we do not.

Before I move onto those issues, let me first briefly explain who Manufacturing Australia is, and why these issues are so important to us. 

Manufacturing Australia is an alliance of nine CEOs from some of Australia’s largest locally-headquartered manufacturing companies. 

Collectively, Manufacturing Australia’s member companies operate around 300 plants around the country, directly employing almost 50,000 Australians, notably in outer suburban, rural and regional centres.

Not politically aligned, we work with all political, community and industry stakeholders to champion the issues impacting large manufacturing and help secure a sustainable future for the industry.

Strong companies
And let me tell you, manufacturing can and should have a bright future in Australia.

We hear a lot about the challenges to manufacturing in Australia: the high Aussie dollar, high labour costs, unfair competition with importers and over-regulation.

I’m not going to tell you that any of those challenges aren’t formidable, but I would ask you to resist the doomsayers that have you believe they are insurmountable.

Manufacturing in Australia isn’t a sunset industry. The sector directly employs almost 10% of the working population in stable and rewarding jobs - the kinds of jobs around which communities are built, ancillary businesses established and families raised.

Take a look at my members. They are strong companies that have weathered the storm of the past decade through good management, restructuring, re-tooling, innovating and improving their own productivity and efficiency. They are exactly the sort of companies we want in a balanced Australian economy.

What needs to be done
At Manufacturing Australia, we focus our efforts on four main areas of reform that we believe will be crucial to the competitiveness of manufacturing in Australia:

  1. Reducing the burden of regulation and the cost of doing business in Australia
  2. Increasing workplace productivity through direct engagement and workplace flexibility
  3. Ensuring fair trading conditions through a strong anti-dumping regime, coastal shipping reform
  4. Maintaining our competitive advantage of diverse and affordable energy resources – our topic of discussion today. 

Can I say we haven’t arrived at these priorities by accident. Around the world, we are seeing a resurgence of manufacturing in developed nations. 

The USA has created 200,000 jobs a month for the past six months and manufacturing is expanding at the fastest pace in three years, thanks to strong and decisive policy action.

Germany has become an economic powerhouse of Europe because of its strong manufacturing base, while other European nations have been hammered by the Euro crisis.

That is the kind of resurgence we should strive for in Australia. If we address the priorities I’ve outlined, and work collaboratively between governments, industry and communities, it is entirely achievable.  

Australia’s manufacturing advantages 
So let’s get back on topic: where does energy policy fit into all this? Or rather, why is energy so important to manufacturing?

I said before that manufacturing flourishes in countries that identify and capitalise upon their competitive advantages. But what are our competitive advantages?

We hear plenty about our disadvantages:

  • A stubbornly high Aussie dollar
  • High labour costs with low flexibility 
  • The injury associated with “dumped” imports 
  • High project development costs
  • The burden of at times excessive government regulation.

But we also have significant advantages:

  • A highly skilled workforce
  • Our capacity for outstanding innovation and research 
  • Our proximity and ties to growing Asian markets 
  • Our relatively stable governance, and
  • Our abundant energy resources. 

So you see it’s not all doom and gloom. Like most industries, we have some advantages and disadvantages. And the truth is, whether or not we have a strong manufacturing future in Australia isn’t a pre-ordained outcome. It will depend on the choices made by policymakers and industry leaders. 

Will those choices maximise our competitive advantages, or undermine them?
What concerns many in the manufacturing sector is that our longstanding competitive energy advantage is eroding. Instead of spreading the benefits of abundant energy throughout Australian communities and industries, energy policy in Australia, in recent years, has been burdened by policy confusion, perverse incentives for international competitors and pricing uncertainty or inconsistency.  

Energy policy goals
So if maintaining an energy advantage is vital to the competitiveness of Australian industry, what principles should guide our approach to energy policy? Manufacturing Australia endorses the work of the Energy Policy Institute of Australia in outlining an energy vision for the nation.

We believe four key goals are vital:

  1. Australian governments and the Australian energy industry have a responsibility, as custodians of the nation’s resources, to provide all Australian consumers with reliable and competitively priced energy via a resilient, competitive energy market.
  2. That Australia, as an export oriented economy, should grows its energy export earnings, but at the same time ensure that this is achieved without disadvantaging domestic energy users. We can have our cake and eat it, too. 
  3. That Australia moves progressively towards a lower-carbon society in tandem with its key trading partners, without jeopardising our international competitiveness and with carefully managed transitions, and,
  4. That Australian industry leads our efforts to become an energy innovator, pursuing energy efficiency and effective energy innovation.   

Australia’s energy intensive economy 
But if those are the goals, where are we starting from? If we’re going to have an honest and pragmatic dialogue in Australia about energy policy, then we need to acknowledge the energy-intensive nature of much of Australia’s industry.

Recent reports from AI Group have found about a quarter of Australian businesses report that energy expenses (electricity, gas and other fuels) account for a high share of costs. In the manufacturing sector, that figure is about one-third higher again. Whether we like it or not, a great deal of Australia’s manufacturing activity is energy intensive. But that doesn't mean it’s inefficient. Typically the opposite is the case. For these businesses, energy prices are a core issue.

Companies invest substantial R&D into reducing energy costs and improving efficiency. It’s worth remembering that manufacturing accounts for 24% of Australia’s R&D spend, and a considerable part of this spend relates to efficiency.

One of my members is CSR, a building products manufacturer. Last year CSR was ranked 17th on BRW list of Australia’s most innovative companies. A key driver in that ranking was CSR’s investment in efficiency improvements, both in its operations and its products. Lightweight bricks, hybrid ventilation products, low emission glass and other products are the result of years of R&D at CSR, and they have contributed to the companies achievement of constructing Australia’s first 8-star house, in Western Sydney, that was built to a typical project budget.

Energy innovations like these typically aren’t driven by policy. They are driven by demand from consumers for more efficient products, combined with the absolute need for large manufacturing enterprises to drive down energy input costs.  

Uncertainty and transition
Of course, company-led innovation is only one part of the puzzle. Innovation relies on energy policy that is consistent, evidence-based and takes into account the impact on the competitiveness of Australian industry. In recent years, as we all know, that has seldom been the case.

Uncertainty and inconsistency have been common:

  • From first mover on carbon pricing to no carbon pricing in just a few years
  • Constant shifting of goalposts on unconventional gas development
  • Ongoing uncertainty about the Renewable Energy Target. 

While this makes for good fodder for dueling economists as they model what different versions of the future might hold, the rest of us live in the transitions in between. For Australian industry, in particular, those poorly managed transitions have bruised confidence in energy policy and markets considerably. 

In fairness to policymakers, the underlying shifts in energy markets, both domestically and globally, have been themselves unpredictable and erratic. But that only makes it all the more important that policy is stable and predictable to give the market confidence that long-term investment decisions can be made.  

East Coast gas market
Nowhere is this more obvious than in East Coast gas markets. I don’t want to rehash too much of the background. As we know, the commencement of LNG exports from the East Coast will see demand triple from current domestic demand of ~700 Petajoules per annum to ~2100PJ (~1400PJ export and ~700PJ domestic) from next year.

Here in the west, your government chose to strike a balance – sensibly in our view – by having the debate about gas exports before they started and addressing the risk of domestic security of supply via a reservation policy. It’s not a perfect system, but from the perspective of major industrial users, its vastly better than the situation in the east. On the east coast, with no mechanism to ensure domestic demand continues to be serviced alongside export, we are seeing the domestic gas market becoming a residual market for producers, understandably, more focused on lucrative export opportunities.

What does that mean for manufacturers?
Supply uncertainty
In NSW in particular, the real prospect of supply constraints and shortages predicted in NSW from Winter 2015. Is seeing many manufacturers develop forecasts that factor in the risk of forced shutdowns for up to 50 days a year.

Market dysfunction
Rapid consolidation of the domestic gas market has led to what we believe is a highly dysfunctional market: concentration of resource amongst a small number of sellers; withholding of offers; “take or pay” contracts; minimal negotiating parameters; little transparency of pricing.

World’s highest price
Where gas is available, it is now at roughly triple-quadruple previously contracted prices, having jumped from $3-4 per gigajoule to the current gas price of $10-$14/GJ.

And on the subject of price can I make one point: despite what any models or projections will tell you, here in the grey area I described before, there is no world price for gas. There may be one day, but there isn’t one now. So when we import the world’s highest price, we are directly attacking our competitive advantage.  

Let me be clear: MA is not in any way opposed to gas exports. Nor do we begrudge exporters for chasing lucrative export opportunities that will be to the benefit of their shareholders. Unfortunately, however, what’s in the companies’ best interests may not ultimately be in the national interest.

We should have gas policies that strive to achieve a “best of both worlds” outcome: an expanding gas exports sector operating alongside domestic industry that adds value to raw materials.

We should remember, for example, that Australia’s second largest manufacturing sector is chemicals and plastics, where gas is used as a feedstock, not an energy sourse, in the manufacture of products used in 109 separate industries.

But we’re not on track for that best of both worlds outcome, where our gas endowment becomes an enabler and value creator throughout the supply chain. Instead, we are locked into a winners and losers situation where gains from new LNG export projects will be offset by losses in the manufacturing sector and lost investment opportunities.

We’re seeing the evidence of that already:

  • Closures like the CSR glass factories in Ingleburn in NSW
  • Investments taken offshore: Incitec Pivot building a $1bn ammonia plant in Louisiana rather than Newcastle 
  • Deferred investment: BASF, Coogee Chemicals, Dow so far this year.  

What’s at stake – risk of demand destruction 
Maximising our energy advantage requires ongoing, active management of key economic and policy levers.

In the USA, skyrocketing energy prices in the 1980s saw demand destruction in American industry that left a lasting impact on the fabric of that country. The USA today is seeing industrial energy demand return – along with jobs and economic prosperity – on the back of deliberate energy policies that have driven energy costs down and capitalized on the shale gas boom.

My fear is that, in Australia, if we see demand destruction on a similar scale, we are unlikely to see a reshoring of manufacturing because other input costs are prohibitive.

At all levels of government, and in industry, it’s vital that we have energy policy that:

  • Recognises our energy intensive economy. 
  • Positions energy as an enabler of industry and domestic prosperity
  • Ends the cycle of uncertainty and inconsistency.

Thank you.