Electricity is so high. Bye-bye

Hey team,

The single most asked question since I’ve been writing has been, why are electricity prices going up and up and up? Since 1 July of this year, the average cost to a households for gas and electricity has jumped about 20%. This is in addition to the almost doubling in price which occurred in the 3 years prior. With all the lighting required, it has made running a porn studio out of your living room prohibitively expensive. Well, almost. But not quite. So what’s driving this?

Let’s take a step back
***This is not my field, so am keeping it super high-level***

Electricity is made inside a power plant. And power plants basically take an input like coal, oil or gas, and use it as fuel for a ridiculously hot furnace/fire. This fire then heats up water to such high temperatures it turns into steam and that steam is then used to spin a turbine (think super large airplane engine), which for reasons we don’t need to understand, generates/creates electricity. Simple enough. #shouldofstudiedengineering.

In Australia, right now, coal fuels over three quarters of all our power plants. So much for us being clean.  Another 10% comes from gas with the remainder coming from cleaner, more greener fuels, like hugs and rainbows. So if coal and gas predominately fuels our power plants, the price of them have a pretty significant impact on the price we pay for electricity.

But here’s the thing. Oil, gas and coal have all fallen in price over the last couple of years. Double you tee eff.

Some big mistakes
Gas is kinda viewed as the stepping stone towards clean energy. It’s not, but it is relative to coal. About 10 years ago or so, three conglomerates (led by Shell, Origin and Santos) individually set about developing some of the biggest Liquid Natural Gas (LNG) reserves in the world off the north east cost of Australia. Conceptually it could have been great. The size of these gas fields would essentially guarantee Australia’s energy needs for years to come. The problem however is that these fields cost billions and billions of dollars to develop. In fact well over 150 billion all up and unless you’re Pablo Escobar, you probably don’t have that just sitting about.

So… To finance the developments these conglomerates “pre-sold” the future gas production to the highest bidder. In fact, nearly 85% of all the gas which will ever be harvested from these fields have already been spoken for. The buyers though, were not Australian power plants. They were Japanese, South Korean and Malaysian ones.

It gets worse.

The contracts which were written are based off the price of oil. So the price they pay at any given time will go up if the price oil is up and go down if the price of oil is down. And, like we said, oil prices are down, so the price which the Malaysian, South Korean and Japanese power companies are paying is down too.

It gets worse.

Santos, Shell and Origin are behind on their development schedules so are not producing as much gas as originally expected. Therefore a majority of the gas being produced is being pushed out to the pre-contracted buyers.

It gets worse.

Not only are Santos, Shell and Origin behind, they have also experienced significant cost blow-outs for the development. So whereas initially it would thought Australia would be flooded with heaps of really cheap gas, instead, we are being drip fed extremely expensive gas. In fact, these developments are actually some of the highest cost gas fields in the world.

Remember though, the buyers who pre-bought gas on locked in contracts, do so at a price which is pegged to the price of oil. Which is down. So their price is down. Yet the cost of producing gas is up. Therefore the gas which remains is being sold to Australian power plants at a higher price to compensate the developers for their increased costs. Make sense? So we pay more for Australian gas than do companies overseas. Crazy stuff. 

It gets worse.

A number of coal fired power plants have been closed over the last few years as part of our quest for cleanliness. In fact as of May last year, South Australia is able to boast ZERO coal fuelled power plants. It’s pretty impressive. And great. Except, as a result, they have been left with insufficient supply. Which ultimately led to this.

In Summary
Our power plants are highly dependent on coal and gas for fuel. Coal is dirty and no one likes it. And on the expectation supply could be replaced by gas, it has led to a number of coal fueled power plant closures by the government. Unfortunately the massive gas fields targeted to supply them aren’t producing enough gas, and most of the stuff they are producing is being sent overseas. As a result, Australia is having to source gas from elsewhere, and this has additional costs, all of which is feeding into your electricity and gas bills.

This is hugely simplified, but it’s key for why your bills have been going up and are likely to stay up in the future too.

A website you should visit
Go here. The government has put this together for you because they care.

Anyway, that’s the year. Cheerio

Categories: General Finance

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