11.1.1 The benefits of enhancing energy productivity
11.1.2 Energy productivity trends
Improving energy productivity involves increasing the ratio of economic output or social utility relative to the cost of the energy used in their production. At its core it involves the efficient generation, distribution and use of energy. Improved productivity can reduce the need for investment in energy systems and lower energy and carbon costs for households and businesses. However, achieving sustained economic, social or environmental benefits requires the whole supply and end-use chain to operate efficiently.
Its scope involves ensuring that our energy markets are structured to provide an efficient balance between demand-side and supply-side choices. Energy must be priced efficiently throughout the system, and end users need appropriate tools, information and incentives to make rational decisions. Where appropriate, we must also ensure that regulation, planning standards and other policy measures are coordinated to promote efficient energy outcomes without unnecessary costs to consumers.
While some uses of energy are essential to maintain minimum living standards and support business, many are discretionary and can be traded off against costs or against other benefits. Energy users are increasingly responsive to the cost of energy and are making decisions on energy use in the same way that they decide on other factors of production (such as capital, labour and environmental or resource inputs). Many businesses and households are also seeking cost-effective opportunities to reduce their greenhouse gas emissions.
This chapter focuses on three related aspects of energy productivity:
- developing more efficient markets that better balance supply and demand in decision-making
- addressing market failures and encouraging behavioural changes to promote end-use energy efficiency and energy performance generally
- improving the effectiveness, coordination and application of government policies and programs to increase energy productivity.
11.1.1 The benefits of enhancing energy productivity
Taking cost-effective action to improve energy productivity offers a wealth of benefits to consumers, and a way for businesses to better manage energy and carbon costs and improve their competitiveness. Many actions that increase energy productivity also have flow-on benefits, such as better air quality, more efficient heating and cooling, and more efficient transport. They can also help households to minimise energy-related cost of living pressures (IEA 2012b).
Greater productivity in the use of energy can generate substantial savings. By 2011, companies participating in the Australian Government’s Energy Efficiency Opportunities program reported identifiable energy savings of 164.2 petajoules (PJ) per year, of which 88.8 PJ are to be implemented for a net reported financial benefit of around $808 million per year (RET 2012).
In addition, concerted action to deal with growth in peak energy demand and improve system efficiencies could realise significant economic benefits, leading to cost savings for consumers. Analysis indicates that peak wholesale electricity prices, which apply for less than 30 hours per year in total, account for more than 30% of the annual value of wholesale electricity purchased on behalf of households and small businesses (SRG 2012).
The Energy Supply Association of Australia indicates that strategies to manage consumption at those times, combined with appropriate energy purchasing arrangements, could deliver gross benefits (that is, before taking the cost of actions into account) of $1.6$4.6 billion in the decade to 2022 (esaa 2012b). For consumers, that could mean electricity bill savings of around $4–$15/MWh in 2022, or savings of between 1.6% and 6%, offset against the cost of taking action.1
The savings are not just in energy. Improvements in energy productivity can help reduce our demand for emissions-intensive energy while Australia develops new zero- and low-carbon energy sources. In the nations pursuit of energy affordability, climate change mitigation and energy security, energy productivity stands out as perhaps the single most cost-effective way to achieve those goals. The International Energy Agency estimates that energy efficiency improvements could contribute as much as 72% of the global emissions reductions needed to hold atmospheric CO2 under 450 parts per million by 2020 (IEA 2011a).
11.1.2 Energy productivity trends
Over the past two decades, the Australian economy has become less energy-intensive by 1.3% per year (Figure 11.1) (BREE 2012h). This was largely caused by a shift within the economy from energy-intensive manufacturing to the services sector. However, the improvement in energy intensity (the ratio of output to energy input) has slowed since 2000. Factors such as the mining sector’s exploitation of deeper and lower-grade ores and the sharp rise in liquefied natural gas production as a proportion of mining have contributed to this change (BREE 2012h).
In the electricity supply sector, multifactor productivity (labour and capital usage) also appears to be declining for a number of reasons, including greater deployment of more expensive generation and supply options and growth in network expenditure to service peak demand (PC 2012).
The improvements in Australia’s energy intensity have been smaller than those observed in many other OECD countries. This may be because we have had, until now, less incentive to improve performance due to our relatively cheap energy prices, high levels of energy security and stronger policy emphasis on supply.
There have been important recent changes in electricity demand in Australia. Over the five years to 2010–11, demand in the National Electricity Market grew at an average of around 0.5% per year. Over the same period, peak or maximum demand grew by an annual average of 2.8% in the National Electricity Market (Figure 11.2) and by 6.3% in Western Australia’s South West Interconnected System (DTT 2012). This largely reflected the impact of the high take-up of air conditioners and other energy-using appliances. Peak demand growth has been a major driver of the growth in network and generation costs.
More recently, data from the Australian Energy Market Operator indicates that in the past two years there was a 3.4% decline in average annual consumption in the National Electricity Market and reduced rates of peak demand growth. The market operator has also substantially revised down future annual and peak demand growth forecasts (see Chapter3: Future energy trends and challenges).
The recent fall in demand appears to be due to a combination of factors, including the impact of weather, the global financial crisis, a larger consumer response to rising power prices and a greater take-up of energy-efficient technology and distributed generation (AEMO 2012b). While this is encouraging and may point to future easing in some drivers behind recent price pressures, it will take time to see how sustained those patterns may be.
1 Department of Resources, Energy and Tourism estimate based on an assumed constant real average retail electricity price of around $250/MWh.