Power for the people

Electricity stopped being a luxury long ago and became a staple supply of modern existence. The industry that produces it has nowhere to go but up. By JASON BAKER of IBISWorld.

By Jason Baker

Electricity generation as an industry is fairly new in Australia, but it has been a steady performer recently, and looks to continue this trend into the future.

The electricity generation industry only began to exist as a separate entity in the mid-1990s, with the disaggregation of the electricity supply industries in Victoria and New South Wales.

Disaggregation subsequently occurred in other states, with only the small power industry in the Northern Territory remaining vertically integrated by mid-2006.

After declining in 2001-02, electricity production returned to growth in 2002-03. However, industry players commented that electricity prices were generally weak.

Lower prices are believed to have offset the favourable impact of higher electricity production, keeping industry revenue flat and pushing down value. Prices eased again in 2003-04, offsetting an increase in electricity output.

However, solid gains in performance are believed to have been made in both 2004-05 and 2005-06, reflecting continued growth in electricity generation and higher average prices achieved by power generators. The volume of electricity generated rose by in 2004-05 and again in 2005-06.

Real industry revenue is believed to have increased in 2004-05 and 2005-06. Indications are that further gains in industry performance will be made in 2006-07, as electricity output continued to expand and prices in real terms edged up.

Overall, real industry revenue and value added are expected to expand by about 1.1% and 0.9% respectively over the current performance period.

The overall level of GDP growth during the outlook period is expected to be slightly stronger than growth over the five-year period to 2006-07, providing a backdrop for continued solid growth in electricity demand and generation.

There is speculation that the prolonged drought in areas of Australia will have an effect on energy prices in Australia. Coal and hydro power generation require very large amounts of water. The prolonged drought has also encouraged isolated instances of opportunistic electricity pricing.

The restricted supply of cooling water to power stations has led to a threefold increase in wholesale prices. A continuation of high prices could lead to a regulatory crackdown, however maintaining low prices might force investors out of the market.

Industry revenue is expected to grow at an average rate of 3% a year during the five year period to 2011-12. Households and the electricity transmission and distribution industries will remain major users of electricity during the outlook, as continued growth in household incomes will tend to lead to further growth in the sector’s demand for electricity.

There is likely to be considerable variability in performance across electricity generators, with low cost producers who are able to take advantage of short-term increases in demand expected to perform well. Private sector participation in the industry will increase during the outlook.

Changes in the regulatory environment facing power generator operators over the past decade have produced a realignment of operators in the industry. Industry players have taken ownership positions that cover electricity distribution and retail gas supply.

Takeovers, mergers, and the formation of new alliances are expected to continue and gather pace during the outlook, matched by ongoing internal restructuring. Greenhouse gas emissions will also remain a prominent issue for the industry, as energy production represents approximately two-thirds of Australia’s greenhouse gas emissions.

So overall revenue growth in the industry should be steady. The industry will be affected by environmental concerns, as well as economical. However, as industry and consumers are not in the position to stop using electricity, the power really does rest in the hands of the generators.