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Australia: Are Coal Prices Driving High Energy Costs?

 

 

By Paul Hayes


November 29, 2022 - In what has been described as “the biggest clash between the mining industry and Federal Government in more than a decade”, Australian coal miners are set to launch a multimillion-dollar advertising campaign against a proposed cap on coal prices.


The news comes after the Australian Energy Regulator affirmed its belief that soaring coal prices are driving high energy costs.

 


The federal Treasury has recommended the Federal Government temporarily place a cap coal and gas prices to help drive down energy prices.


“The energy price increases are … significantly reducing the profits of many businesses and raising questions about their viability,” Treasury said in a statement last week.


“This would suggest to us that interventions that directly address the higher domestic thermal coal and gas prices are more likely to be optimal.”


But the Minerals Council of Australia (MCA), whose members include major coal players BHP, Glencore and Whitehaven, has previously argued against the idea that coal is behind spiking Australian energy costs, instead placing the blame on gas and renewables.


MCA chief executive Tania Constable has indicated her organisation is “already having discussions with the government” about potential interventions and an ad campaign would be about “standing up for families, standing up for small businesses across regional Australia”.


“We can’t afford to see jobs go in regional Australia,” she said last week. “When bad policies emerge, the mining industry is going to look at those individually and as a whole and what sort of impacts they’re having.”


Constable said it was misleading to place the blame on coal.


“If a price cap of $70 per tonne of coal is introduced by the government, most mines dedicated to a power station will not be able to meet the costs of production,” she said.


“The vast majority of coal production for domestic use is mined at sites dedicated to the domestic power stations and serviced by dedicated supply infrastructure, such as conveyors from the run-of-mine plant to the power-station fuel stacks. Each generator also has specific needs around coal quality, ash, and energy content and trace elements.”


Constable said coal pricing for domestic power stations depends on the commercial relationship between the mine and the power station, reflecting the cost of mining and transport. It is supplied under contracts with price, quality and volume conditions, with terms measured in years.


“It is worth noting that the energy security issues that emerged in early June were as a consequence of mechanical failures in generation, taking out almost half the available generation capacity in the market, not a shortage of coal,” Constable said.


“Specifically, the electricity price and supply security crisis in June was the result of a shortage of electricity generation when mechanical failures forced more than 10 generator units across Victoria, New South Wales and Queensland to shut down.


“This drove the electricity price escalation in Australia, which resulted from a shortage of electricity supply, not a shortage of coal or high international coal prices as a result of the Ukraine–Russia conflict.”


The Australian Energy Regulator, however, sees the situation differently. The government body believes rising international demand and prices for Australian coal, which have soared to more than $US400 a tonne in 2022, can also have a significant impact on wholesale electricity prices.


The regulator told Nine newspapers it monitors coal market prices because they “impact electricity prices in the national energy market”.


“(The Australian Energy Regulator) said one driver of power prices came when more coal than usual was bought on the spot market after domestic supply was reduced by wet weather,” the papers reported. “This meant soaring international coal prices were unusually influential in driving up wholesale prices.”


The MCA is not the only resources organisation planning a campaign is defence of coal.


The Queensland Resources Council (QRC) last week announced it was launching a large-scale media campaign to warn about the potential impact of a proposed thermal coal tax.


The ‘Keep Queensland Competitive’ campaign will be launched on behalf of the state’s entire resources sector.


“The Queensland Government has severely damaged the state’s international reputation as a reliable place for resources investment by more than doubling the coal royalty tax rate to the highest in the world, without warning and without consultation,” QRC chief executive Ian Macfarlane said.


Support for Australian coal has also come from international sources, with Japanese ambassador Shingo Yamagami last week emerging as a vocal critic of the Queensland Government’s decision in June to introduce a tiered royalty rate many say is aimed at cashing in on record coal prices driven by Russia’s invasion of Ukraine.


“Japanese coal companies are yet to see any glimmer of hope that the situation will improve,” Yamagami told the QRC’s annual forum in Brisbane.


“Alongside coal, Japanese investment and trade in Australian gas is a cornerstone of our partnership based on trust.”