NEWS

28Sep2015

Report on the current impact of the Energy Market on Australian Agribusiness

 

Whilst there is some variability between industries, the agricultural sector in Australia is performing strongly due to sustained demand from export markets. The future holds many opportunities for the expansion of this sector, but also brings with it a number of risks and challenges.

In order to capitalise on foreign demand for Australian products, Australian agribusinesses must improve their efficiency and increase production. This means that many agribusinesses will be forced to modernise, automate and implement new or upgraded machinery, which will lead to an increase in energy consumption. With energy prices predicted to increase, a deteriorating electricity grid, worsening grid reliability, agribusinesses will face higher operational costs which will have a direct impact on profits.

Over the last decade, electricity prices in NSW for example have almost doubled. The primary driver of this increase are rising network costs across the country. In regional NSW, network costs can comprise almost 60% of an agribusiness’s energy bill. Electricity networks have built massive amounts of energy infrastructure to service their predicted demand, which was exaggerated. To recover these costs, network costs have increased significantly through raising energy costs on small to medium enterprises. Dependence on the national energy grid leads to uncertainty about long term energy costs, as well as exposing the agribusiness to reliability issues.

The long term nature, coupled with the minimal maintenance of energy sources such as Solar PV or Micro-Wind allows Agribusiness’ with the maturity to invest now, the opportunity to realise strong financial long term goals. Traditional farm energy sources such as diesel generation are losing their competitive edge as the global focus on cheaper renewable sources expands.

The purpose of this report is to provide a general overview of the current state of the Australian agricultural sector, and to identify and analyse the opportunities and risks which these agribusinesses will be subject to in the future.

 

Future opportunities for agribusinesses in Australia

All export-competing Australian industries have been negatively impacted by the high Australian dollar in recent times, which has made products less internationally competitive when compared to exports from other countries.  Since mid-2010, the Australian dollar has hovered around parity with the US dollar, driven by China’s insatiable for Australian commodities (particularly iron ore).

Since mid-2013, the dollar has depreciated significantly, easing some pressure on Australian export-competing industries. Since mid-2014, there has been a rapid decrease in the value of the Australian dollar. This has been caused by a massive reduction in demand by Chinese manufacturing sectors. Economists are predicting that the dollar will continue to fall, before stabilising at approximately US68c.

Whilst this sounds ominous, a severely weakened Australian dollar presents an opportunity for Australian agricultural producers. A lower Australian dollar will make Australian products more internationally competitive, and thus cheaper to foreign buyers. For example, when the Australian dollar was at parity with the US dollar, a bottle of wine may have cost a US customer $10. At the time of writing, the same bottle would cost the US customer $7. This will increase demand for this product.

(If the dollar declines too far, Australia’s terms of trade could become so steep that businesses cut back on importing new technologies, influencing their international competitiveness, which flows through to employment concerns.)

Risks

Rising electricity costs:

Over the last decade, electricity prices in NSW have almost doubled. With the privatisation of the NSW energy network along with the over-investment in the infrastructure, the medium to long term energy costs are predicted to rise steadily. In addition to rising network costs, electricity networks are attempting to increase power bills in order to cover their excessive infrastructure spending where small to medium sized consumers will be hurt the most. Agribusiness’, being located regionally, are the most expensive infrastructure maintenance costs for energy network businesses and will always be the first locations to notice this price hiking.

Climatic concerns: The Bureau of Meteorology has determined that Australia has entered an El Nino weather event. This is predicted to increase temperatures and reduce rainfall substantially, which will almost certainly lead to significantly lower yields. In cooler months, El Nino events lead to an increase in the risk of frost, which may damage crops. El Nino events are predicted to increase in severity for the foreseeable future.

If this is the case, farms will need to secure more water for irrigation purposes, and increase the capacity of their irrigation infrastructure to make up for the reduction in rainfall. Farms will increase their demand for electricity in order to power/fuel water pumps. If this electricity is sourced from the national grid, it will lead to a substantial increase in the energy costs of the farm (due to the rising electricity costs outlined earlier).

 

Solutions/Strategies:

The optimal solution for any agribusiness is to capitalise on newly-available opportunities which insulate themselves from risk and potentially unfavourable conditions. This translates simply to increasing production – and thus revenue – whilst minimising operational costs where possible. This can be achieved through improving efficiency of technology throughout the business.

The implementation of renewable energy can be an effective strategy to achieve the goals of the business. The long term nature, coupled with the minimal maintenance of energy sources such as Solar PV or Micro-Wind allows Agribusiness’ with the maturity to invest now the opportunity to realise strong financial long term goals.

Almost all varieties of agribusinesses require a system of pumps. Farms generally require at least one water pump which transfers water from some source to the farm. This water is often required for irrigation activities or to be provided to livestock.

A significant amount of energy is required to pump water from the water source to the feedlot. The amount of energy required is directly related to the distance from the water source to the activity, and is also dependent on the water source itself (for example, it may be more expensive to pump water from an artesian bore than it is from an on-farm dam). Thus the cost of pumping water is highly variable between farms and depends on a number of factors as listed above. Additionally, the efficiency of the pump system directly influences energy costs, with gravity pumps requiring significantly less energy than wholly electric pumps.

Agricultural processing facilities also have a need for a system of pumps. For example, wineries require a number of pumps to transfer hot, cold and waste water throughout the processing facility. Sugar processing facilities require pumps to transfer sugarcane juice to be evaporated. These can contribute significantly to energy costs for these agribusinesses.

Energy consumption through water supply can be offset through the installation of a solar pump. This will reduce the impact of reliability issues that are typical to the grid.

 

Application of Battery Storage:

As a growing global focus occurs on the viability of battery storage, prices have dropped significantly whilst technology innovation has helped the industry expand. Large global electronics businesses such as ABB, Bosch, GE, LG, Panasonic, Samsung, Sharpe, Siemens and of course Tesla are investing heavily into battery storage. Battery storage is applicable for many different residential and commercial situations and commonly used as backup storage to mitigate risk again grid reliability issues such as blackouts or energy supply issues.

When considering battery storage options it is most important to consider the size of the system. Existing battery technology has a great lifecycle when discharging between 30-40% of the battery storage capacity overnight, then recharging during the day from the Solar system. The main complications occur when above 70% of capacity frequently, whereby the battery’s lifecycle can be shortened significantly.

Battery management systems also are beneficial at ensuring the best financial outcomes occur from installing a complete Solar and Battery system. An Australian organisation – Reposit Power based out of Canberra – provides a globally leading product potentially reducing demand changes whilst giving the potential to sell your stored battery energy in to an energy supplier at a significantly higher rate than offered from your retailer.

The application of Battery with Solar systems are appropriate in a range of circumstances for an Agribusiness. When considering the significant costs associated with building electricity infrastructure such as polls and wires, or dredging underground batteries can help one application of the farm run sustainably, whilst being the most cost effective option. Solar water pumps for irrigation or bore water pumping; Solar PV systems on top of a house, feedlot, shed, processing facility, chilling facility; Solar hot water for cleaning.

 

Conclusion:

There are a range of variables effecting the energy market, directly impacting revenue on the Agribusiness sector. Agricultural performance is growing significantly more important in the Australian economy as we move away from a raw minerals economy to a primary producing focus – because of this, we need to see greater sustainable development, and automation to ensure best in business practices are upheld. Agriculture is an industry at the mercy of its environment, so the increasing application of renewable energy sources is an important message to be told.

  • 28 Sep, 2015
  • Dean Johnson
  • 0 Comments

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