Flicking the switch to a powered manufacturing sector

With the federal government announcing measures to reduce the price of electricity and gas for industrial consumers, the manufacturing industry confronts a number of alternate pathways to a green energy future. Connor Pearce reports.

When the federal government announced on August 6 that is was going to act to reduce gas prices across Australia, a collective sigh of relief could almost be heard from the manufacturing sector, with the sound of a sector scratching its head following soon after.

In the five years since 2014, gas prices in Australia have tripled. While this has been felt in the wider consumer market in the form of higher electricity prices, particularly in South Australia where gas is utilised for electricity generation, manufacturers have seen the impact of price rises first hand.

Tony Wood, former general manager of Origin Energy and current energy program director at the Grattan Institute, explained that for a small core of manufacturing businesses, price rises have been a visceral impact on their business.

“There’s a relatively small number of businesses who are what I call gas intensive. That is, the gas input is a material part of their cost structure. There’s not that many of them but the consequences of a gas price increase is quite material and they’ve been grappling with this issue now for several years. Some of them remain in deep trouble.”

Those in deep trouble included Dow Chemical, which announced the closure of its manufacturing site in Altona, near Melbourne, earlier this year. Citing energy price increases as one of the reasons behind its demise, Ben Davis, Victorian secretary of the Australian Workers Union, at the time put it more bluntly.

“While politicians bicker, companies close.”

Wood cited a number of other businesses that are affected by high gas prices, including food processors, brick works, cement processors, kilns, as well as chemical industries such as fertiliser manufacturers, petrochemical, and plastics manufacturing. Despite this being
a large group of industries, Wood highlighted that they have received less political attention than domestic energy consumers.

“One of the problems that manufacturing group has is because every business in Australia virtually uses electricity somewhere, the gas side of it has not historically got the same level of profile as electricity prices have.”

The joint announcement on August 6 seemed to change this dynamic. Minister for Energy, Angus Taylor, joined Treasurer, Josh Frydenburg and Minister for Resources, Matt Canavan in outlining that the government will review the Australian Domestic Gas Security Mechanism (ADGSM), increase transparency and supply, and most radically, consider the establishment of a gas reservation scheme. The gas reservation scheme, which requires state government cooperation, would be the greatest shift from the federal government, which has historically supported gas producers extracting gas in Australia and then selling it overseas for higher prices than could be found locally. With such a scheme only in consideration, and dependent upon states reviewing their bans on coal seam gas exploration, Wood was unsure about how realistic the proposal was.

“The Commonwealth government, as far as I’m aware, can’t make decisions about domestic gas, it can only control exports. So, if it does create a gas reservation scheme, can it actually then require that gas be sold at a certain price, or does it just mean that it will make sure that domestic consumers have access to the gas but the gas price will be determined by either the market or export parity netback, the price the gas producer can expect to receive for exporting its gas?”

With these questions remaining unanswered, and pushback from states, the potential for a gas reservation scheme remains unclear, a situation that Wood described as “very messy”.

“This is not a formal inquiry or review. The government has indicated that they just want to consider their options. The government is also saying, ‘We will only do this if states remove or lift their moratoriums or constraints on onshore gas exploration.’”

With such a lack of clarity regarding the reservation mechanism, attention has turned to other aspects of the government’s pledge to reduce gas prices, one of which is the suggestion that current processes that rely upon gas could turn to electricity.

While the ability of some manufacturers to use electricity for energy intensive processes is possible, Wood remained sceptical.

“It’s questionable whether you can get high enough temperatures with electricity as opposed to what you get with gas. In some cases, the manufacturers, particularly in some parts of regional Australia, are in situations where the power substations and so forth may not have the capacity to supply the electricity, even if electricity can provide the heat.”

Luke Menzel, chief executive officer of the Energy Efficiency Council, noted that fuel switching is a significant opportunity for some manufacturers, particularly when businesses can produce their own renewable electricity onsite, however noted that there are some instances where gas will still be required.

“It’s not a solution for every element of the gas challenge, particularly for manufacturers that use gas as part of their feedstock,” he said.

Held back by history
One element that is exacerbating the impact of current energy prices rises, both gas and electricity, is the history of Australian energy market. While the first step for many manufacturers to reduce their energy bill, is to reduce their energy use, the history of cheap energy has led to inefficient, but cheap processes, according to Wood.

“For many years, energy was so cheap that we had little incentive to be efficient with the way that we used it.”

Menzel concurred, highlighting that, “For most manufacturers this hasn’t been something that’s been high on their radar because energy prices were historically low in Australia. That really changed in 2017”.

With the gas price jumping to extremes of $20 per gigajoule in 2017, the price has more recently stabilised at roughly $10 per gigajoule, a level that Menzel notes is the new normal, with impact on existing businesses.

“Most players expect gas prices to stay well above their historic lows. That places a significant strain on some manufacturers whose business model is predicated upon significantly lower gas prices than we currently have.”

For these manufacturers, as well as those that do not use a significant amount of energy in their processes, energy prices have become a more significant part of their cost structure. To counteract this and remain competitive, energy efficiency has come to front of mind for government and industry. In addition to new tool announced by the federal government, the Business Energy Advice Program, which allows users to cut down on energy use, there is more interest in purchasing energy efficient products as part of a business’s capital replacement cycle.

“When I was running Origin’s retail business we had a lot of commercial and industrial customers who were becoming more interested in energy efficiency. Their position was: ‘Right, next time we replace our cookers, boilers, or air-conditioning units, we will pay attention to the energy efficiency of that process,’” said Wood.

Menzel also notes that there are significant savings to be made through energy efficiency.

“Gas fuelled process heating is incredibly common in manufacturing processes, and improved efficiency can significantly reduce energy spend. Compressed air systems are also very energy intensive, and are another big efficiency opportunity for many manufacturers. Across all technologies, manufacturers can often cut energy costs by around 30 per cent without major changes to plant and equipment.”

However Menzel noted it’s not just about efficiency; it’s about having an energy management system that can drive a balanced range of measures.

“The manufacturers we see that are really on top of their energy management have good, granular data about their energy use, and are using it to drive investment decisions. Businesses have a range of levers that they can pull, which include energy efficiency, renewables, demand response, and smarter energy procurement. With the right data and advice, businesses can bring together a mix of solutions that will work for them” said Menzel.

Australian chain manufacturer, KITO PWB, was able to invest in its own electricity generation to meet the energy demands of its energy intensive process. The company installed 885 solar panels on the roof of its plant in Bundoora.

“Chain manufacturing machines are very power thirsty. For us, particularly with the closure of the Hazelwood power station in Victoria a couple of years ago, power costs have gone up across the board so it’s trying to save some of our power costs. Putting the panels on the roof has saved us 25 per cent of our power costs, but it’s also equally important in giving us a bit more of a green footprint,” said export and marketing executive at KITO PWB, Andrew Betts.

By dealing with both its energy price and the business’s impact on the environment, KITO PWB is linking energy and environment.

One method that is gaining attention is demand response, whereby large energy users temporarily reduce their energy use when prices are high. If the Australian Energy Market Commission’s (AEMC) rule change is successful, manufacturers could have greater control over their energy prices and have wider benefits, as Marija Petkovic, managing director of Energy Synapse highlights.

“Wholesale prices can reach as high as $14,500/MWh, so it is easy to see how large energy users can receive a significant benefit when they have a sophisticated operational strategy and the right contractual arrangements.

“Another important aspect of this proposed change is that it will allow demand response to be bid directly into the wholesale market and compete with generators in the price setting process. This extra injection of competition will benefit all consumers (even those who cannot provide demand response themselves) by putting downward pressure on prices.”

However, without a national incentive to purchase cheaper, renewable energy, it is up to each business to take action voluntarily.

“If you don’t have a commercial obligation to do these things then why would they,” said Wood. “The international literature says that the first thing you should do is give people an incentive to invest in these energy reduction technologies by making sure that the existing
gas users and the carbon emissions coming from those are constrained – most efficiently by a carbon price.”

A silver bullet?
Amid the discussion of gas prices, energy efficiency, and electrification, a new technology is emerging that could upend all of these possibilities. The most abundant chemical element in the universe, hydrogen, is increasingly being touted as an alternative to gas, particularly for industrial heat uses, highlighted Wood.

“Of all the applications that people rabbit on about in relation to hydrogen I think industrial processing as a source of heat might actually be the one that is most interesting. This is because, for a lot of other applications there are alternatives – they can use electricity, whereas in this case there’s challenges.”

Currently, hydrogen as an energy source is produced from coal, as is being explored in the La Trobe Valley, with the resulting CO2 being captured and stored underground.

The alternate method for producing hydrogen requires an electrolyser to produce hydrogen from water. If the electrolyser is run on renewable energy, it is an entirely zero emissions energy source, with the potential to replace gas in energy-intensive processes.

The barrier to either of these techniques, currently, is not technological, but rather cost. The potential to reduce this hurdle is a key issue for the current National Hydrogen Strategy, led by Australia’s chief scientist, Alan Finkel.

As Wood highlights, however, lurking in the background to this discussion of alternative energy sources, and the investment from governments and corporations, is that it is all driven by the need to decarbonise the economy.

“This conversation is fundamentally driven by the climate change debate and in the middle
of all that is what sort of climate policy we should have. Of course in Australia we don’t have very much.”

According to Wood, until there is an incentive to change, or a penalty for not doing so, the potential for hydrogen, or any other alternative, will be hampered, and industrial energy users will have to adapt as the energy market continues to transition. Overall, a new approach is needed.

“At the Federal level, we have had a decade of policy uncertainty coupled with snap interventionist decisions such as Snowy 2.0. This approach creates unnecessary risk in the market, and in the end, it is the consumer who pays for it,” said Petkovic.

“Ideally, what we would need is a bipartisan national approach that integrates energy and emissions policy and can provide a stable long term framework to transition to clean energy.”