3.3.1 Economic and demographic trends
3.3.2 Australia's climate change response
3.3.3 Energy trends
3.3.4 Fuel production
3.3.5 Energy demand
3.3.6 Electricity generation
3.3.7 Energy networks
3.3.8 Transport
3.3.9 End-use industries
3.3.10 Regional development
3.3.11 Energy prices
The Australian energy sector has entered a period of major transformation. The introduction of carbon pricing and the possibilities of new technology development will drive fundamental long-term changes in how we generate and use energy. Our domestic energy needs will expand at the same time, although more slowly than in the past, creating economic opportunities as well as challenges.
The scale and nature of change in Australia's energy systems will be affected by such factors as population and development patterns; structural changes in the economy; carbon and energy prices; technology development costs; consumer choices; varying opportunities across regions; and, importantly, Australian, state and territory government policies.
3.3.1 Economic and demographic trends
Australia will expand and prosper over coming decades. By 2050, our population is projected to increase by 62% to around 36 million (Treasury 2011). Much of the growth will be in capital and major regional cities (DSEWPaC 2011a). In real terms, national GDP is projected to grow by an average of 2.6% a year and average gross national income per person is projected to rise by 56% or $ 30 000 in real terms by 2050 (Treasury 2011).
This will increase overall energy consumption and change patterns of demand. For example, a growing population is likely to require a sharp increase in the housing stock, while increased urbanisation will see more use of different forms of mass transit.
Sustained industrialisation and urbanisation in Asia are likely to support Australia's resources boom for many years, adding wealth to our economy. The Australian economy will become more closely integrated into global and regional trading systems and will continue to restructure around its competitive strengths. In particular, resource-based industries and the services sector are forecast to grow strongly in the next decade (BREE 2012c).
While higher energy prices and high terms of trade will place pressure on a range of end-use industries over the short to medium term, productivity-enhancing reforms, including further investment in our human and physical capital, can maintain or improve our competitiveness.
3.3.2 Australia's climate change response
Australia's commitment to reducing greenhouse gas emissions will be a major factor shaping our energy sector over the next 30 to 40 years.
The Australian Government has set a 2020 goal of reducing greenhouse gas emissions by 5% from 2000 levels irrespective of actions by other countries, and by up to 15% or 25% under strict conditions relating to the extent of international action. As part of its plan to secure a clean energy future, the government has adopted a long-term target to reduce greenhouse gas emissions by 80% compared with 2000 levels by 2050.
These goals will be reached through the measures implemented under the government's Clean Energy Future Plan. In particular, fundamental long-term changes will be driven by carbon pricing and complementary mechanisms, such as the Renewable Energy Target, the Australian Renewable Energy Agency and the Clean Energy Finance Corporation. Treasury modelling suggests that by 2035 energy-related actions could provide around 85% of Australia's domestic abatement, increasing to around 89% by 2050.1 This reflects deepening change over time in Australia's energy sector (Treasury 2011).
An effective global carbon market will reduce global and Australian abatement costs by ensuring that the cheapest abatement opportunities are pursued first, regardless of where in the world they occur. The linking arrangement between Australia and Europe enables Australian businesses to buy European allowances to use in the Australian scheme from 1 July 2015. This will be expanded to allow full, two-way linking between Australia and Europe from 1 July 2018. The arrangement demonstrates the cumulative effort that emissions trading schemes can make in lowering global emissions and addressing the challenge of climate change.
3.3.3 Energy trends
In addition to the imperatives to reduce greenhouse gas emissions and develop clean energy systems, three key intersecting policy drivers will also shape Australia's energy future:
- the need to deliver secure and reliable energy and energy services to a growing population and economy
- the ongoing expansion of our energy exports to Asia and other growth markets
- the need to minimise energy cost pressures as we reinvest in energy infrastructure, particularly our ageing electricity assets and networks.
These factors will require a change in the way we think about and use energy. We will need to take a more integrated approach that recognises the mutually supportive roles played by different energy sources in a more diverse and competitive marketplace. The market will also integrate supply and demand considerations into its decision-making more efficiently, and energy providers and service companies will offer more innovative and cost-effective products for consumers to manage energy use.
Through time, our energy markets will become more closely linked, particularly the electricity and gas markets. This will ultimately improve energy security and price outcomes by providing for greater substitution between fuels or energy sources according to real-time supply and demand balances.
Increased competition and innovation will also generate better outcomes for consumers, particularly as technology becomes more efficient, widespread and cheaper in real terms. Far-reaching advances in information and computing technologies will provide greater interconnectivity and change the way we use and manage energy in our homes and businesses.
3.3.4 Fuel production
Australia's abundant energy resources, reliability as a supplier and proximity to growing economies mean we are well placed as a major global supplier of coal, liquefied natural gas (LNG) and uranium. Rising living standards across the region are also likely to prompt higher environmental standards, which may provide Australia with innovation opportunities in clean energy products.
The Bureau of Resources and Energy Economics (BREE) forecasts an acceleration in the production of energy resources over the two decades to around 30 500 PJ in 2034–35, about three-quarters of which will be exported. In contrast, domestic energy consumption is projected to grow only modestly over the period (Figure 3.4).
Based on current projects, Australia's exports of uranium are expected to decline. However, given Australia's large uranium reserves and a number of projects in the planning stages, there is good potential for uranium production and export to expand over the next two decades.
Coal and gas exports will grow, as will oil imports (Figure 3.5). A large expansion in thermal coal exports is expected to increase black coal production grow by an average of 2.8% a year, while brown coal production (used for domestic power generation) is expected to remain steady to 2020 and then decline over the next decade unless alternative uses for the resource can be commercialised (possible alternative uses for Australia's brown coal reserves are outlined in Chapter 5: Energy resources).
Australia's gas production is expected to increase nearly fourfold, driven by strong growth in the LNG trade and the expansion of domestic gas markets.
Export developments will provide the critical backbone for the further development of our domestic energy infrastructure, but in the nearer term increased demand competition will place pressure on price and availability, contributing to changing market dynamics. The impact of new dynamics on Australia's energy security and on gas market development is discussed further in Chapter 4: Energy security and Chapter 9: Energy markets: gas.
Without major new oil discoveries, Australian oil production will decline. Domestic refining capacity is also expected to decline, so there will be a corresponding increase in imports of refined petroleum products (see Chapter 8: Energy markets: liquid fuels).
Rising oil prices are expected to spur the commercial development of indigenous alternative fuels, such as second-generation biofuels from 2020, as well as new market opportunities for gaseous transport fuels, such as LNG and compressed natural gas. We do not yet know whether synthetic fuel production, such as coal-to-gas or coal-to-liquids, will be viable in Australia. However, with higher future oil prices, some prospective projects could be established using carbon capture and storage technologies to offset carbon emissions. This could potentially unlock otherwise stranded brown and black coal resources.
3.3.5 Energy demand
Over the next two decades, Australia's demand for final energy is expected to grow modestly at around 1.2% per year, reflecting relatively steady growth in gas and liquid fuel use, but potentially slower than previous forecast growth in electricity demand.
Demand patterns in the National Electricity Market (NEM), which accounts for around 90% of Australia's electricity demand, have changed significantly in recent years. Average annual demand in the NEM has fallen by 3.4% since its peak of 197.9 terawatt hours in 2009–10. Demand is expected to remain steady at its current level during 2012–13 (AEMO 2012b) before returning to growth over the remainder of the decade (Figure 3.6).
A combination of factors underpins this result, including a fall in demand from large industrial and manufacturing sector users, consumer responses to sharply rising prices, the impact of energy-efficiency measures and the gradual take-up of distributed solar photovoltaic generation in the residential sector.
How sustained these changes might be is unclear. Much is likely to depend on broader economic conditions, particularly future levels of industrial activity.
Substantial regional variation is also likely. Growth in the NEM will be strongest in Queensland, driven by the needs of LNG pipeline and production facilities. Other states and territories in the NEM are generally expected to record subdued growth, although demand in New South Wales has the potential to rebound strongly. Off-grid electricity demand in Western Australia and the Northern Territory is expected to grow strongly, driven largely by the resources sector.
In the absence of market reforms, peak demand is expected to continue to grow, although at rates loser to average demand. The 2012 Australian Energy Market Operator's forecasts for maximum demand growth in NEM states range from 1.0% to 2.5% per year.
The substantial difference between high and low forecasts of about 34 terawatt hours by 2020 (or slightly more than the size of the Victoria's annual average demand in 2012) means that there could be very different operational and investment implications for the electricity market depending on the future direction of key demand drivers. These issues are discussed further in Chapter 10: Energy markets: electricity and Chapter 11: Energy productivity.
3.3.6 Electricity generation
The electricity sector is perhaps the part of Australia's energy system facing the greatest long-term change.
Three projections of potential changes are shown in figures 3.7 and 3.8, which show the profile of Australian electricity generation by major technology type over the period to 2050.
Figure 3.7 shows the results of modelling by Treasury in 2010–11. Figure 3.8 shows recent modelling by BREE incorporating AEMO (2012b) mid-range demand forecast (including AEMO projections of household photovoltaic deployment) and updated energy generation technology costs (BREE 2012d). Both sets of results use the same carbon price forecast and similar fuel price assumptions.
These results show a broadly consistent pattern of change, although variations in the technology mix begin to emerge after 2020, largely reflecting the differences in assumed technology costs.
Overall, the results show fossil fuels continuing to provide most of our electricity supply for at least the next two decades. In these scenarios, black and brown coal fired generation maintain relatively consistent output until 2030, although their overall market share declines as the market grows.
Gas generation is also expected to play a major role, although the differences in modelling results suggest that its growth prospects beyond the middle of the next decade will depend on relative fuel costs and the possible early emergence of commercially viable utility-scale renewable alternatives, such as solar, wind or potentially geothermal.
While incumbent generators are likely to remain in the market for some time, carbon pricing and the Renewable Energy Target will drive deeper change as clean energy technologies evolve and renewable energy costs decline. As the market grows, technologies such as solar, wind and geothermal may provide around 40% of total generation by 2030, up from around 20% in 2020. By 2050 their share could potentially be over 50%.
From 2035, carbon capture and storage technology could also begin to make an important contribution to clean electricity generation. In this scenario, carbon capture and storage would be applied to between 26% and 32% of fossil-fuel-fired electricity generation by 2050 taking clean energy to over 80% of our total electricity supply.
These results point to a number of potential challenges in the electricity sector. In particular, the projected large long-term increase in intermittent supply (wind and large-scale solar), as well as more variable demand load (driven in part by a large take-up of distributed photovoltaic systems), means that grid and network balancing will increasingly be tested (see Chapter 6: Clean energy).
Combined with lower demand growth, this is likely to make Australia's electricity markets more competitive with a less predictable business environment than in the past with increased pressure to innovate and manage market risk. This is already happening through higher levels of business integration across electricity generation, gas and retail markets along with a move to more diversified generation portfolios.
To help inform the future outlook for generation technologies, BREE released the Australian Energy Technology Assessment in July 2012. This provides additional insight into the key drivers of technology costs by allowing users to vary key parameters for 40 different technologies. The CSIRO has also released an interactive modelling tool in conjunction with the Energy White Paper. The tool uses the Australian Energy Technology Assessment estimates and allows the user to vary future technology costs and other parameters (within feasible ranges) to project a range of different generation mixes.2
3.3.7 Energy networks
As our energy base evolves, so will the energy networks that transmit and distribute energy to our homes and businesses.
Growing energy demand, particularly peak electricity demand, and a more rapid deployment of distributed generation technologies will require the augmentation and reinforcement of electricity and gas networks to meet the standards of reliability that we set. Network costs (particularly for distribution networks) have been the main driver of electricity and gas price increases over the past five years, and this is expected to continue over the next decade.
Increasing differences in demand growth between regions suggest that there may be significant investment in new interconnector capacity in the NEM as new gas and renewable generators emerge (AEMO 2010a). This will allow more trading of electricity between regions and more tightly integrate gas and electricity markets.
Economic development is expected to drive significant line extension into regional areas in South Australia and northern and western Queensland. In Western Australia, it will lead to the expansion of existing grids and the potential development of new ones. However, the cross-continental connection of gas or electricity is unlikely in the period ahead, given the poor economics and low need.
There are various early-stage proposals for major new transmission links, including from Papua New Guinea to import hydro-electric power and for a new link across the eastern states (NEMLink) to underpin grid development. However, the economics of these ideas are yet to be tested, particularly in the light of revised demand forecasts.
The projected strong growth in large- and small-scale distributed generation systems will require greater flexibility in the distribution network. This may bring some reduction in the need for network investment but may also pose challenges, such as managing more variable load and ensuring that consumers are paying appropriately for the cost of network use and backup.
These factors will culminate in a more complex network system with sophisticated communications and information technology platforms to enable real-time load management by electricity distributors, customers, retailers and other energy service providers. This will require technological advances as well as ongoing support through further reforms of market arrangements.
Existing gas transmission and distribution infrastructure will also need to be augmented within the next decade as demand reaches capacity. This will require state and territory governments to ensure timely planning approvals and access for pipeline corridors.
3.3.8 Transport
Transport activity is expected to continue to grow strongly through the period, reflecting rapid population growth and increasing incomes. However, significant changes in the modal mix, new engine technologies and changes in the fuel mix are to be expected. Demographic patterns and oil prices are as likely as any other factor to drive those changes.
The transport sector currently accounts for around 15% of our greenhouse gas emissions, and reducing emissions in the face of growing demand will remain a challenge. While increased fuel efficiency will be essential if emissions are to be reduced, innovation in the use and efficiency of transport systems, along with the greater use of public transport and better urban planning, will also play important roles.
As our growing population concentrates further in our cities and urban areas, traffic congestion and road costs are likely to create a shift towards mass transit systems. This has the potential for improving energy efficiencies, although it will pose infrastructure and planning challenges for governments at all levels.
Road transport is projected to more than double by 2050, shipping to triple, and rail and air transport to more than quadruple. Growth in light commercial vehicle and heavy truck activity is expected to be faster than for private and passenger vehicles. This will influence the types of fuels used as well as the transport infrastructure required (CSIRO 2011a).
Most projections show that alternative fuels (such as biofuels) are unlikely to make a significant impact until after 2020 due to very small production volumes, cost, consumer acceptance and technical barriers. In the longer run, rising oil and carbon prices and improved production technologies are expected to lead to wider commercial take-up. Success will depend on the ability of these technologies to meet consumer needs and, in the case of biofuels, industry's capacity to produce and supply large volumes sustainably.
Similarly, there is likely to be scope for biodiesel to become a mainstream fuel (or fuel blend) in the heavy-duty vehicle sector, with a forecast use rate of 76% by 2050 (Treasury 2011:132). Biofuels may also be increasingly used in aviation. There is also scope for developing and using synthetic fuels, but their production under carbon pricing is likely to depend on the commercial viability of new technologies such as carbon capture and storage.
New commercially attractive technologies are emerging for LNG and compressed natural gas use in heavy-duty vehicles under Australian operating conditions and have the potential to transform the transport sector, particularly for heavy-duty vehicles. Over time, this could also allow the light vehicle market to share fuel distribution infrastructure with the heavy-duty sector. In the longer run, hydrogen may also become a mainstream transport fuel, although technology and infrastructure costs are expected to remain a major hurdle for some time.
There will be further development and take-up of hybrid and fully electric passenger vehicles. While this is expected to be slow to 2020, it is likely to accelerate over the following decade (Treasury 2011). Success will depend on the availability of cost-effective vehicles suitable to Australian conditions, improved battery technologies, timely and effective energy supply options, and the management of the effects on the energy distribution network.
Conventional internal combustion engine vehicle efficiencies will improve, driven by higher fuel prices, the introduction of mandatory CO2 emission standards for light vehicles (in both Australia and those countries from which we import vehicles) and the need to remain competitive against electric and hybrid vehicles.
3.3.9 End-use industries
Energy-intensive industries, which currently account for around 33% of end-use demand (BREE 2012a:27), are expected to continue to prosper, albeit under continuing pressures from sustained high terms of trade and a high exchange rate. Continued access to competitively priced and reliable supplies of electricity, feedstock coal, gas and petroleum products will be important for transformative industries such plastics, chemicals, alumina and steel.
The Australian Government acknowledges the competitive pressures facing many of these industries. It remains committed to developing commercially sustainable energy-intensive downstream projects, including by pursuing further market and policy reforms to minimise energy price pressures. The government is also providing support to improve business productivity and competitiveness, including assistance under the Clean Energy Future Plan.
3.3.10 Regional development
The development of Australia's energy resources will continue to support the economic and social development of many Australian regions. The development of energy hubs such as Gladstone, the Kimberley and Darwin and of our major coal basins will provide a base for further industrial development through local engineering, port, shipping and other services. Once established, those developments will provide a competitive alternative for the co-location of downstream industries.
While Australia's coal and gas industries in particular are set to expand, the rapid increase in renewables and the longer term development of alternative fuels will also develop local businesses and capacities in regional Australia.
The government will also work closely with the Australian energy and resources sector to improve outcomes for Indigenous Australians in regional areas through employment and training opportunities, as well as through native title arrangements that provide fair returns to local communities.
3.3.11 Energy prices
Global and Australian fuel and electricity prices are expected to rise in real terms to 2020 and beyond, reflecting rising costs of production and growing demand for energy (Figure 3.9).
Using its new policies scenario, the IEA has modelled a rise in oil prices in real terms from US$78 a barrel in 2010 to US$120 in 2035 (IEA 2011a:64). Domestic petrol and diesel prices will continue to track international oil prices closely and are unlikely to be affected by domestic refinery developments (see Chapter 8: Energy markets: liquid fuels).
Historically, Australia's domestic coal, gas and electricity prices have not been directly linked to international prices, and we have maintained relatively low delivered energy prices compared to other OECD countries (BREE 2011a). However, this separation is expected to decline over the coming decade, particularly as LNG and coal exports increase competition in domestic markets.
Nationally, the Australian Energy Market Commission forecasts an increase in residential electricity prices of around 37% in nominal terms in the period from 2010–11 to 2013–14. This would be a 22% increase in real terms, or 8.34 cents per kilowatt hour (AEMC 2011a).
Distribution network and wholesale generation costs will continue to be the main driver of price increases in this period. Renewable and feed-in tariff schemes will also add to costs (by 3% each). The Australian Treasury has forecast that carbon pricing will add around 10% to costs by 2018. The prospect of lower demand growth may begin to ease some of the network-related price pressures from 2014 (AEMO 2012b).
Wholesale gas prices have risen markedly on the west coast and are forecast to increase significantly in the eastern market. BREE has reported gas price projections of between $7.70 and $13.90 per gigajoule, depending on state, by 2020 (see Chapter 9: Energy markets: gas).
¹ Energy-related emissions are defined here as those from electricity generation, stationary energy and transport, plus fugitive emissions from mines and landfill.
² Available from www.csiro.au.