Energy

3.4.1 Managing ongoing change and risks
3.4.2 Attracting timely investment
3.4.3 Bringing new technologies to market
3.4.4 Addressing the rising costs of energy
3.4.5 Building community engagement and energy awareness

The global and national assessments outlined in this chapter project an encouraging energy future for Australia. However, that future is by no means locked in: it will depend on the interaction of dynamic factors, such as patterns in international and domestic economic growth, changes in carbon and fuel prices, the commercialisation of new technologies and investor confidence.

In this context, achieving Australia’s energy goals at the lowest cost is most likely to require the maintenance of a flexible policy framework that provides clear direction to markets, along with effective regulation and targeted support to address identified areas of market failure.

While the key elements of the government’s policy framework, along with specific challenges and energy policy priorities, are discussed further in Parts II and III of this White Paper, some strategic challenges are common to all elements. These challenges, which are discussed below, are:

• managing ongoing change and risk in energy markets
• continuing to attract sustained investment in Australia’s energy system
• successfully developing, adapting and deploying new technologies to support clean energy objectives and to provide more options in managing energy use and costs
• addressing energy prices and related cost-of-living pressures on households and businesses
• improving consumer and community engagement.

3.4.1 Managing ongoing change and risks

As outlined in Section 3.3. Australia’s energy markets are undergoing significant reshaping that is producing new competition and supply dynamics, driven by the advent of new technologies and growing links to global markets. Carbon pricing and changes in international financial markets are also important factors.

The implications of some of these changes will emerge over time, while some may develop abruptly. There may also be unforeseen price or other market shocks, including geopolitical turmoil in key areas.

Markets and businesses are generally best equipped to deal effectively with many of these risks. However, well-targeted policy can assist in sharing, managing or reducing a number of non-market risks.

To ensure that national energy policy is up to date and resilient over a period of great change, the Australian Government will undertake four-yearly strategic reviews of energy policy, as outlined in Chapter 1: A framework for national energy policy. Chapter 4: Energy security also outlines the government’s policy framework for managing ongoing risks that may disrupt energy markets or supply chains.

3.4.2 Attracting timely investment

Meeting Australia’s future energy needs will require higher levels of investment in many parts of the energy system over coming decades. In our domestic energy sector, the requirement may be as high as $240 billion by 2030, while currently proposed energy resource and related infrastructure development projects could require as much as $250 billion in investment by 2030 (IRG 2011, BREE 2012f).

While this appears daunting, it is achievable, particularly as it will be spread over several decades and across different components of the market. It is also not yet fully locked in.

Not all projected energy resource projects will go ahead, and the final size and timing of downstream investments will depend on a range of factors, most critically on how much electricity demand grows in coming years. Sustained lower growth in demand is likely to delay or even avoid a significant proportion of investment in new generation capacity and network upgrades (AEMO 2012a).

Nonetheless, challenges in attracting the necessary capital, which will come from a mix of foreign and domestic debt and equity markets, will include:

• increasingly competitive and less predictable energy markets with rising business costs
• more risk-averse financial markets
• lack of bipartisan support for key policy settings
• ongoing price regulation and government participation in competitive elements of energy markets.

Foreign markets and investors are vital for achieving our energy goals. Foreign institutional investors hold 40% of Australian Stock Exchange equity and up to 20% of AGL Energy and Origin Energy, Australia’s two largest listed energy companies (IRG 2011). Anecdotal evidence suggests that project financiers are now seeking lower leverage in the wake of the global financial crisis, while capital costs are higher, reflecting a lower risk appetite.

In general, Australia maintains a highly attractive investment environment with sound macro-economic settings, competitive fiscal regimes and a skilled labour force. Austrade monitors international investment risk ratings and reports that Australia generally ranks in the top 10 for many important indicators.

However, our competitive position cannot be taken for granted. Further efforts are needed to maintain or increase our attractiveness as an investment destination, particularly because of the rapid growth and improvement in competitor markets. We also need to build confidence in our energy markets through further reforms to promote competition and efficiency.

It is not the role of government to eliminate conventional market risk. However, it should provide sound, predictable and stable policy and investment-friendly economic and regulatory frameworks that offer investors commercially attractive returns. Given the long lives of many energy sector investments, providing practical certainty about future policy is also important. This is critical for Australia to attract the capital needed in highly competitive financial markets.

The continued regulation of retail electricity prices in most states and territories is a continuing barrier to competition, innovation and investment. These and other energy market reform issues (discussed in Chapter 10: Energy markets: electricity) must be addressed if we are to attract the investment we need.

3.4.3 Bringing new technologies to market

Meeting Australia’s emissions reduction and other sustainable development goals will require a massive rollout of clean energy technologies, a number of which are not yet commercially available.

This is an achievable challenge. Commercial opportunity is a powerful incentive, and the right ‘push’ and ‘pull’ policy signals and commercial incentives will mobilise the private sector to innovate and deploy. This has begun to happen through the reforms being implemented through the Australian Government’s Clean Energy Future Plan.

Globally, the clean energy effort is underway and, through growing public and private sector collaboration, is no longer purely a national affair. As an open economy that relies heavily on adopting and adapting international technology, Australia will contribute to this effort and benefit from it.

Determining the optimal level of public support in this space requires governments to strike a balance between technology support measures, other competing policy priorities and costs to consumers. This is why the Australian Government has developed a clean energy framework based on addressing market failures and using public funds to obtain maximum leverage from private sector activity. Support must be flexible and well targeted, and move away from the boom–bust cycle of resourcing that has characterised past efforts. The establishment of the Australian Renewable Energy Agency and the Clean Energy Finance Corporation are important steps in this direction.

The optimal take-up of new technologies is best promoted through a flexible market-based approach that allows the energy sector to adjust to changes in the capabilities, timing and costs of different technology options. For that reason, the Australian Government has chosen not to set specific technology-based deployment targets or construct technology-specific policy frameworks beyond transitional measures currently in place, as that would risk a potentially inefficient and costly lock-in should future developments move in a different direction or at a different pace (as they almost certainly will).

Inevitably, there will be pressure to accelerate the development and deployment of particular technologies. Proposals for additional Australian Government support will be rigorously assessed against criteria that draw out the rationale for and benefit of providing such support. That assessment will also consider how support might affect the efficiency of energy (and carbon) markets, and the additional costs to energy consumers and taxpayers.

Finally, technological development is a long–term undertaking, and there will be failures along the way. Failure is part of the innovation process and provides necessary and valuable lessons to support future development. Building an early understanding of potential is important and will help markets and policymakers to plan and make timely adjustments if required. For this reason, better sharing of knowledge about successes and failures must be an important dividend from public funding and project support.

3.4.4 Addressing the rising costs of energy

Access to reliable low-cost energy has contributed to our national competitive advantage and high standard of living. However, after a long period of relatively stable prices, recent sustained increases in energy costs suggest that Australia’s era of cheap energy is being challenged.

Energy price increases are the result of complex market and regulatory interactions. Underlying production costs are generally rising along with greater demand competition, particularly in gas markets. Measures to improve the environmental and social performance of energy developments are also increasing and have to be factored into the cost of delivery.

Regulated retail electricity prices in all states and territories have increased substantially, by between 37% and 80% since 2007 (Chester & Morris 2012), driven largely by the sector’s need to meet increased consumer demand (particularly peak demand) and high reliability standards. Further average increases of 37% in the larger eastern states are projected over the next two years (AEMC  2011a), placing additional pressure on households and business competitiveness, particularly in energy-intensive industries. Meeting our clean energy and emissions reduction goals will also add marginally to price pressures.

Understanding impacts on households and businesses

Definitive statistics on the impacts of rising prices on household and industry are difficult to identify, making this a serious gap in our understanding of energy cost impacts.

The 2009–10 Australian Bureau of Statistics household expenditure survey indicated that energy bills make up about 2.6% of average household expenses (ABS 2011c). That proportion has remained relatively constant over the past decade.

However, this almost certainly masks significant differences in energy cost impacts between income groups. The energy share of expenditure was nearly 55% higher for the lowest income households, at 4%.

Recent studies and submissions to the Energy White Paper also point to growing evidence that lower income households are spending as much as 10% of their disposable income on energy. A growing number of households are also reporting some form of energy-related stress or are accessing consumer hardship mechanisms (Chester & Morris 2012, IPART 2012a).

Increases in household energy costs are regressive in their impact. Lower income groups are also likely to be less able to access options to reduce energy use or manage costs. Distributional impacts, as well as differences in the ability of groups to access energy services, should therefore be a material consideration for government when it contemplates interventions in the energy market.

To better understand the social and economic implications of energy costs, the Australian Government has allocated $10 million over three years to gather information on household sector energy consumption.

For most non-energy-intensive businesses, energy is a relatively small component of overall costs (typically less than a few per cent). However, for intensive operations, energy costs can make up 10%–30% of overall costs. Increases in businesses’ energy costs, particularly those that cannot be passed through to the market, can erode profitability and competitiveness.

While large energy users are generally well placed to negotiate energy prices directly with wholesale suppliers, it is clear that rising energy costs are a growing concern in the mix of competitive pressures on many industries, particularly the rising impact of multiple regulatory and policy interventions, which are difficult to manage or hedge.

Minimising price pressures

The Australian Government is very concerned about the social and economic impacts of rising energy prices. It believes that governments can collectively do better in ensuring that markets are delivering competitively priced energy, and in giving consumers more choice in how they manage their energy use.

While there is no easy fix to these difficult challenges, all Australian governments must work to preserve our national advantage in competitively priced energy. They should maintain overall affordability by ensuring that energy markets, energy regulation and market reforms are delivering efficient and sustained outcomes for consumers. Policies should also stimulate and support markets to provide better options that help consumers manage their energy demand and costs.

Some have argued that recent price rises demonstrate that moving to more competitive energy markets has failed to deliver better outcomes for consumers. An examination of the source of cost drivers does not support that proposition.

Energy market reforms over the past two decades have resulted in much improved and more efficient energy markets compared to the publicly run and heavily regulated energy markets and businesses of the past (ERIG 2007). The evidence is clear that effective business competition drives down cost and promotes efficiency and innovation, which is in the short- and long-term interests of consumers.

In contrast to the relatively stable prices in the competitive wholesale generation market, electricity prices have risen in the regulated components of the market. The rises have been driven by a combination of rising demand and the need to meet specified reliability standards, and to a lesser extent by various federal and state government interventions aimed at achieving non-market policy objectives.

There is a need to ensure that these policies and our market regulation are producing the most efficient outcomes for consumers.

Australian governments recognise the need to prioritise a review of existing federal and state and territory carbon reduction and energy efficiency measures with a view to rationalising those that are not complementary to a carbon price, or are ineffective, inefficient or impose duplicative reporting requirements on business.

COAG has requested a new interjurisdictional taskforce on regulation and competition reform to do further work and advise it in late 2012 on any additional action needed to deliver a regulatory framework that promotes a competitive retail electricity market, including appropriate support for vulnerable customers, and efficient investment. This process will be informed by the Standing Council on Energy and Resources work program, including proposed responses to various energy market reviews and reports currently underway or recently completed (see Chapter 10: Energy markets: electricity).

However, more needs to be done. In particular, it is necessary to address the growth in inefficient peak demand and to provide a more equitable allocation of costs among consumers, including through retail price reforms and the development of more effective demand-side measures. Ensuring that the regulated component of markets is delivering efficient outcomes is also a priority.

These matters are taken up in chapters 8, 9 and 10 of this White Paper.

It is equally important that governments at all levels continue to support the essential energy needs of the more vulnerable groups in the community.

State and territory governments provide support such as energy rebate programs for low-income households, and service obligations are in place to ensure that vulnerable and regional consumers are not materially disadvantaged.

The Australian Government is also providing assistance under the Clean Energy Future Plan to support households, jobs, businesses and communities to help them adjust and lower their carbon pollution and to protect our international competitiveness. The government’s Household Assistance Package helps to ensure that the impact of a carbon price is manageable for low and middle income Australian households, especially for people who have less financial room to adjust to change.

However, it is clear that if energy costs continue to increase at rates well above other living costs there will be more energy-related financial stresses for households. In these circumstances, the adequacy and effectiveness of consumer hardship and safety net provisions will be tested.

To deal with this issue, we need a better understanding of the true impacts of rising energy prices on households, particularly on low-income households. There is anecdotal evidence but little detailed information in this area. The financial pressures faced by these groups may be compounded by gaps in consumer protections and the inconsistent application of such measures. The government recognises that this is an important issue and considers that there would be merit in further work to better understand the distributional impacts of rising energy costs, including whether current pricing structures add to the problem by imposing inequitable cross-subsidies between different classes of consumers. The implementation of the National Energy Customer Framework (NECF) should be a priority for all governments.

Finally, cost concerns should not be used to justify policies that undermine or distort markets and pricing. Efficient, cost-reflective pricing is vital in achieving a more productive energy system and one of the keys to unlocking demand-side responses that can reduce future costs.

Past approaches in the energy sector have shown that poorly designed interventions aimed at short-term price suppression can lead to distorted investment or demand, producing higher costs for consumers in the longer run.

In this context, all Australian governments should:

• implement further energy market reforms, particularly network, demand-side and retail reforms, to promote efficiency and competition and drive better outcomes for consumers
• review and remove inefficient or ineffective policies that are non-complementary to the carbon price
• ensure that energy costs are taken into account in transparent and effective social policy frameworks (including regional and rural assistance and community service obligations)
• ensure that effective protections are maintained for vulnerable consumers, including through the implementation of the NECF
• work with business, consumer and welfare groups to improve energy literacy and participation in the energy market.

3.4.5 Building community engagement and energy awareness

Deeper and broader community engagement on energy issues is required on several levels.

Individuals and enterprises would benefit from a better understanding and awareness of their energy choices. Decision-making informed by good product information and an understanding of environmental and/or monetary costs will lead to greater energy efficiency and productivity and reduce the impact of cost increases. This information may need to be communicated through a variety of mechanisms to reach all social sectors.

Governments and the energy sector at all levels should improve public consultation and engagement in decision-making, program design and other aspects of energy policy. This will deepen Australians’ understanding of energy issues, particularly the drivers of energy costs and the importance, challenges and impacts of the development of new technologies and resources.

Without a broad social consensus on our future directions, meeting Australia’s long-term energy goals will be more difficult and costly. There will also be a risk that concerns about new technologies will lead the community to close off safe, sensible and environmentally sound options to meet the clean energy challenge. At the same time, there is also a need for the energy sector to better engage with and understand community needs and concerns and to work transparently and proactively to address them.

The Australian Government is committed to working with businesses, state, territory and local governments and communities to improve transparency and community engagement in the development of climate change and energy policy and programs. It will also work with energy market stakeholders to increase their ability to engage on market design and regulation issues, and will expand the energy information base to promote a better understanding of Australia’s energy choices.