Question

• Drawing on your knowledge of the theory of specialisation and exchange – supplemented by appropriate media reports – explain what the consequences of rising energy costs will be for heavy industry in Australia.

Answer 1

The industry of Australia and our community have reaped the benefits of comparitively low electricity and gas prices for many years, without facing any major price shocks.

The policy reforms due to competition bought significant benefits to the energy sector like productivity gains.

Nowadays, the electricity and gas prices have risen rapidly, and are affected by market factors and energy policy decisions.

The three tiers of Government have contributed to price rise without predicting the impacts which would occur from their cumulative effects.

In this new era of higher energy prices in Australia, we have seen the rapid structure change of the energy cost-exposed or more energy-intensive businesses, causing the production to move abroad.

Many industries cannot manage the multiple changes in costs and have therefore lost the edge given to them by low- cost energy which allowed them to remain competitive.

It is also increasing the burden of cost of living on many Australians, compelling many on fixed or low incomes into energy poverty which might result in structure change of welfare benefits and how people accommodate themselves.

High energy prices are mainly the result of regulatory and policy interventions of one or the other type and also to the economic regulation of networks in some of the key states including the application of a large amount of greenhouse gas mitigation measures.

The impacts on industries were highly predictable and are still playing in the economy in terms of industrial restructuring of generation.

High energy costs have also impacted the industries which are not recognized as energy-intensive. The energy costs for materials are an input component to several other industries.

There are substitution effects on the Australian energy industry that can rapidly restructure or distort the investments, and the perceived policy driven and regulatory risks can add to the costs of investments.