Australia is experiencing an energy ‘crisis’. Or as Climate Change and Energy Minister Chris Bowen put it: an outright ‘bin fire’. Energy prices are soaring across eastern Australia, and you might find yourself paying a lot more for your electricity and gas bills in the coming weeks and months. Some retailers have even contacted customers to warn them about looming high prices, and encouraged them to go elsewhere. While the way Australia’s electricity network is set up is a little complex – and the current crisis has been changing by the hour – we’ve done our best to explain exactly what is happening and how we got here.
The short version? Australia depends on increasingly unreliable energy infrastructure powered mostly by fossil fuels. The companies generating this energy are largely in control of how much of this power is exported overseas, and how much they provide to us here in Oz. Because they control those numbers, not the government, it creates a lot of day-to-day uncertainty – with the biggest risks of being power outages and bumped up prices for essential activities like heating our homes.
What are the reasons for the energy crisis aka bin fire? There are several, but the two major ones are detailed below:
Two things absolutely embedded into the heart of Australia's energy industry – relying heavily on fossil fuels, and absolutely loving free-market ideology – together bringing about a catastrophic mess that can only truly be fixed by changing both of these deeply embedded things.
— Ketan Joshi (@KetanJ0) June 15, 2022
1. Coal and gas is extremely expensive right now, globally and locally
Australia generates around 75% of its energy from fossil fuels like coal and gas. Coal power has been central to Australia’s energy supply for decades, and still provides over 50% of our energy needs. In recent months though, our coal infrastructure has been failing. Around a quarter of Australian coal plants have been offline this year because of flooding, accidents, and general maintenance (many are near or at ‘shut down’ age). These disruptions have caused coal prices to soar.
Normally, when coal mucks up, gas is available. But the war in Ukraine and broader global energy issues have meant that demand for Australian gas is high. We’re one of the world’s largest gas exporters and about 80% of the gas we produce is sent overseas. With the international gas market a wee bit cooked, and some very questionable policy arrangements at home, Australians are competing for our own Australian-sourced gas in an unpredictable and expensive international market.
2. Energy generators are playing the system
At home, Australia’s energy is bought, sold, and distributed through something called the National Electricity Market (NEM). In the NEM, energy ‘generators’ (e.g. the folks producing power) sell the energy they make to retailers, who then sell that power to homes, buildings and businesses. When you pay your electricity bill, you’re paying one of these retailers, who purchased the actual power of the generators.
The NEM is split into two sections – the spot-market, where prices can go up and down based on supply and demand; the rest is sold on contracts with agreed prices. The day-to-day operations of the NEM are overseen by the Australian Energy Market Operator (AEMO). They make sure that there’s enough power going through the system to keep the lights on across the country. There are two exceptions, WA and NT, who operate off a separate system.
Because the price of coal and gas fired power is so high right now (for the reasons explained above), over the last few days AEMO put a price cap on what the generators can sell their energy for in the NEM spot-market. They did this because prices were getting too high, and they wanted to stop that being passed down to households already under extreme cost of living pressures.
Because this cap is lower than what energy generators would usually charge a bunch of them took themselves out of the system entirely, because they could not make any money. When generators ‘withdraw capacity’ from the system like this, AEMO can actually ask them to come back online and offer more money to entice them back. But! That caused many generators to deliberately pull out in order to get the cash incentive (which is taxpayer-funded, by the way) that AEMO basically had no idea of how much power would actually be available – making blackouts more likely, and the whole energy network ‘impossible to operate’.
So on the afternoon of 14 June, AEMO called the whole thing off. For the first time ever, they suspended the NEM spot-market and took control of the system, forcing generators to provide energy at a fixed price only to ensure that power could be kept on across the country.
"The well-managed transition to renewables is what will get us out of this crisis in the long term," says @Bowenchris
— Climate Council (@climatecouncil) June 13, 2022
Agreed. The quickest & cheapest way to increase Australia’s supply of clean affordable energy is to replace fossil fuels with renewables.@RNBreakfast #Auspol
The Takeaway
The events of the last few days, weeks and months point to an energy system that is fundamentally broken. Due to a range of cascading global and local forces, energy generators were in a position where they could not provide an essential service and make any money.
Considering that the essential service in question is *checks notes* providing power to the entire east coast of Australia, the whole saga raises key questions about how our energy system is organised. In particular, why heating and powering our homes is at the whim of coal and gas producers who can make money by taking the national energy system to the brink of total blackout?
What is the solution?
In the immediate term, AEMO has steadied the ship – for now. We’re no longer at an immediate risk of blackouts and AEMO will likely maintain control of the system for ‘as long as necessary’ according to Energy Minister Chris Bowen, but this will be reviewed daily.
There’s been a bit of discussion about how to help consumers manage the costs of rising energy bills, and the possibility of sharing the profits of gas exports through a ‘windfall tax’. However, analysts at The Australia Institute say that the only solution is to invest in renewables – particularly the storage of renewable energy – immediately and prevent another crisis like this down the line. And the federal government seems to agree.
With projections of further gas shortages into 2023, this problem is unlikely to ease any time soon. How and if we re-configure our energy grid around people and the planet – and not profit – will be the task of the new parliament, and the climate-focused crossbench in the months and years to come. It should be clearer than ever that unreliable, planet-cooking fossil fuels will not get us out of any current or future energy crises.
Further reading:
Lots of good analysis has come out about this crisis in recent days:
- What is the spot market for wholesale electricity, and how will AEMO’s decision to suspend it affect consumers? on ABC News
- Australia’s National Electricity Market was just suspended. Here’s why and what happens next on The Conversation
- Why our electricity and gas prices are soaring on The Grattan Institute
- Also these tweets from analysts Tim Baxter and Ketan Joshi
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