Australia: Energy policy and the CPI – HSBC

As Australian energy exports have risen and renewables policy has been adjusted, local energy prices have increased and higher electricity prices are expected to lift CPI inflation and constrain domestic growth, although may not weaken GDP, according to the analysis team at HSBC.

Key Quotes

“Shifting relative prices

• Despite having a large endowment of coal, gas, sunshine and wind, parts of Australia have recently seen blackouts and electricity prices have risen steeply in recent months. East Coast electricity prices are up by a double-digit rate in Q3. As a result, energy and climate policy have been front-and-centre in the local political debate. The energy and climate policy debates are intertwined as 84% of Australia's electricity is generated using fossil fuels (70% coal and 11% gas on the east coast). 
• The increase in energy prices reflects three key factors. First, in recent years, Australia has built significant capacity to export liquefied natural gas (LNG), which has taken gas out of the domestic system. New export capacity has seen Australia send more gas into the Asian market, where prices are higher, which has seen Australian and Asian gas prices converge. Second, over-investment in transmission capacity in previous years has put upward pressure on electricity prices in some regions, as the price reflects the network having been 'gold-plated'.
• Third, the climate policy has been haphazard. This includes the introduction of a carbon tax in 2012 and its repeal two years later. A major recent government commissioned review into energy and climate policy, the Finkel review, is still being debated. There is also no planned investment in coal-fired power stations and a rapid shift towards renewables, such as wind, in some states (without the associated upgrade in the grid) has contributed to lack of consistency in power availability.
• The immediate macroeconomic implication is upward pressure on CPI inflation. We expect some of this to show through in the Q3 print, which we see running at 2.1% y-o-y (1.9% previously). For growth, the effect is less clear. Exporting gas at a higher price than could be obtained locally boosts national incomes. However, it also redistributes income. Local households and businesses that pay more for electricity have less net income, while exporters gain. This shift in 'relative prices' should have a limited near-term effect on monetary policy.”

“More policy clarity is needed. Without a clear direction for energy and climate policy, increased uncertainty could weigh on local business investment.”