4.2.1 Maintaining and supporting well-functioning energy markets
4.2.2 Maintaining responsive and effective energy emergency response arrangements
4.2.3 Building critical energy infrastructure resilience
Policy objective
Consistent with the core objective of the Australian Government's energy policy, Australia's energy security framework aims to ensure an adequate, reliable and competitively priced supply of energy and energy services to support our ongoing economic and social needs.
Principles
The framework is guided by the following principles:
Australia's energy security policies should be implemented where they are rigorously assessed as delivering net positive benefits to the economy and consumers.
Energy security does not equate to energy independence or self-sufficiency in any particular energy source.
Energy security is generally enhanced through a diverse set of fuel options and multiple points of supply.
Efficient, transparent and open domestic, regional and global markets that create clear incentives for timely investment and efficient operation and end use are the best means for ensuring energy security at least cost.
Government intervention to manage disruptions should be as a last resort. Decisions to intervene should be based on an agreed, transparent and objective emergency management framework that ensures cooperation between industry and government to minimise market distortion.
In the event of a disruption, energy market participants should be able to make independent decisions in response to price signals and existing or revised contractual arrangements. Those decisions are likely to provide the most effective, flexible and timely responses to minimise the impact of disruptions at least cost.
Australia should continue to promote energy supply chains and market efficiencies (including demand-side management and end-use energy efficiency), reduce barriers and improve regulatory transparency and consistency across jurisdictions.
Australia's energy security policies should take into account our national security needs and objectives, including building critical infrastructure resilience.
Framework elements
The key elements of the government's energy security policy are:
- maintaining and supporting well-functioning and efficient energy markets
- maintaining responsive and effective energy emergency response arrangements
- building critical energy infrastructure resilience.
These elements are described in this section. Details on key issues such energy resource development, energy markets and energy productivity (demand-side reforms and end-use energy efficiency) are in subsequent chapters.
4.2.1 Maintaining and supporting well-functioning energy markets
Well-functioning and competitive markets supported by effective policy and regulation underpin our ongoing energy security through their intrinsic ability to:
anticipate and respond to changing energy demand and supply needs
deliver timely investment in the energy system, from upstream energy resource development to customer supply
access a diversity of supply chains
respond flexibly to energy shocks through energy substitution, diversion of energy supplies, and demand reduction responses
allow free-forming competitive prices, which are an efficient balancing mechanism and a stimulus for the development of additional supply and supporting infrastructure.
Markets also play an important role in managing supply disruptions before and after government-managed emergency management and interventions, as well as during them. This role was demonstrated in 2011 by the way global energy markets adjusted to supply disruptions following the Libyan oil disruption and the shutdown of nuclear plants in Japan in the wake of the Fukushima tragedy.
In the case of Libya, 1.2 million barrels per day of oil was lost from global supply. The market responded by increasing production from other sources, particularly Saudi Arabia and other countries in the Organization of the Petroleum Exporting Countries (OPEC). This effectively replaced the loss of Libyan oil supplies and allowed markets to continue to meet global demand. This market response was supported by the IEA Libya Collective Action, in which IEA member countries released oil stocks to add short-term liquidity to the market, and cushioned the economic impact of surges in oil prices. Australian fuel prices reflected movements in the global market, and we did not suffer any disruption to our liquid fuel supply.
Japan managed the consequences of the shutdown of its nuclear power plants by moderating demand with rationing and switching to gas supplied through the global LNG market. These supplies were in large part made available by a substitution of LNG stocks normally sold into European markets, supported in turn by an increase in coal exports from the United States. Responses to both of these large-scale disruptions were enabled by the market's ability to increase production, access to a diversity of supply options, fuel-switching, and responsive, well-connected supply chains across key markets (BP 2012c).
In Australia, the market was able to contribute significantly to the response to the Varanus Island incident in 2008 where, in conjunction with emergency management measures in Western Australia, it established an emergency gas bulletin board, undertook fuel-switching where possible and returned mothballed coal-fired generation to service. This was also supported by voluntary (and involuntary) reductions in energy use by consumers.
Australia's abundance of energy resources allows us to meet our electricity and gas needs. However, we are a growing net importer of petroleum products due to declining crude oil production.
Our lack of oil self-sufficiency and the prospect of further refinery rationalisation does not in itself compromise or reduce our energy security (see Box 4.1). Our liquid fuel security is expected to remain high because of our access to reliable, mature and highly diversified international liquid fuel supply chains.
Diversity of supply prevents over-reliance on any single supply source and helps mitigate risks from potential supply disruptions. Australian governments at all levels will not allow energy security to be compromised and will intervene to maintain supply if necessary. However, government intervention should always be a last resort, since it can have negative short- and long-term consequences, including by increasing consumer costs.
Box 4.1: Should Australia pursue self-sufficiency as a goal of energy policy?The findings of the Australian Government's 2011 National Energy Security Assessment show that energy security does not depend on energy independence or the ability to be self-sufficient. Instead, the growing interconnectedness of the global energy trade provides Australia with flexibility and energy security benefits, as we are both a buyer and seller of liquid fuel and other energy commodities in global markets. The international trade in energy resources is like the trade in other commodities: the benefits unambiguously increase national development options and boost national and global wealth. While disruptions in international markets can increase short-term energy costs, history has shown that they are generally managed with minimal or no supply disruption. Since the mid-1990s, most of the crude oil and refined petroleum product consumed in Australia has been imported. We share this reliance with most other OECD countries that lack extensive indigenous oil resources. Pursuing self-sufficiency in energy resources such as liquid fuels would impose higher costs on Australian consumers without necessarily providing a material economic benefit. Maintaining diversity of supply (with alternative source countries, import points, and commercially viable fuels and technologies) is prudent, but does not justify the pursuit of self-sufficiency as a goal in itself. For a major energy trading nation like Australia, pursuing a goal of national energy self-sufficiency would make little sense. |
4.2.2 Maintaining responsive and effective energy emergency response arrangements
Energy market reliability depends on robust critical energy infrastructure (physical energy facilities, energy supply chains, information technologies and communication networks).
The emergency management arrangements for Australia's energy market systems have been developed to improve responses to significant supply disruptions, including those caused by extreme weather. While the arrangements identify supply options, facilitate communication and ensure effective responses in the event of a major disruption, they largely rely on the market to resolve supply emergencies. Government intervention is reserved as a last resort to protect consumers or to preserve system security.
Energy emergency responses are also reflected in broader national emergency management arrangements through the Department of Resources, Energy and Tourism's involvement in the Australian Government Crisis Management Framework. This includes engagement with the Australian Government Crisis Committee, or through the National Crisis Committee, when a whole-of-government response is necessary and when the states and territories have requested national support.
Liquid fuels
Where an event or circumstances in liquid fuel supply are beyond the capacity of the market to manage, the state and territory governments have constitutional responsibility for planning and coordinating emergency responses within their jurisdictions. Those regulatory powers are primarily focused on supply allocation and demand restraint and the priority needs of essential users.
As a member of the IEA, Australia is a signatory to the 1974 Agreement on an International Energy Program, which contains a commitment by participating countries to 'establish a common emergency self-sufficiency in oil supplies'. To that end, participating countries are obligated to meet an 'emergency reserve commitment', which requires each country to hold oil stocks equivalent to no fewer than 90 days of the previous year's average daily net imports.
The agreement also includes coordinated emergency response measures that allow IEA members to act collectively in the event of a major international oil disruption. The response measures include drawdowns of oil stocks, demand-restraint measures, fuel-switching from oil to alternative energy sources, 'surge' oil production and the sharing of available supplies.
Australia does not hold government-controlled or regulated industry stocks for drawdown in an emergency, and our capacity for short-term surge production and fuel-switching is limited. Therefore, we rely on commercial stockholding practices of industry and market flexibility to maintain supply during short-term global and domestic supply disruptions. To manage deeper disruptions without activating the Liquid Fuel Emergency Act 1984 (which provides wide-ranging rationing powers to the Commonwealth Minister for Resources and Energy-see below), we can only participate in an IEA-coordinated emergency response, or collective action, through a combination of market and industry mechanisms and voluntary demand restraint.
In the event of a fuel shortage with national implications or the need for Australia to meet its commitments to the IEA under treaty obligations, the Australian Government can activate the Liquid Fuel Emergency Act, which then provides the Minister for Resources and Energy with wide-ranging powers to control the drawdown, transfer and sale of industry stocks of crude oil and liquid fuels, to control the range of products produced by Australian refineries and to direct bulk and retail sales of fuel across Australia.
Gas
The National Gas Emergency Response Advisory Committee is a committee of officials that reports to the Standing Council on Energy and Resources and provides a communication channel to resolve gas supply disruptions.
Recent developments in the Australian gas markets, such as investments in pipelines to major demand centres, the National Gas Market Bulletin Board, the publication of the Gas Statement of Opportunities by the Australian Energy Market Operator, the gas short-term trading markets and the contingency gas arrangements, have made market arrangements more resilient.
Electricity
The Australian Energy Market Operator is responsible for ensuring a coordinated and timely response to power system incidents, and for fulfilling its obligations under the National Electricity Market rules and policy framework to return the power system to a secure operating state.
The Australian Energy Market Operator also provides leadership and decision-making during a power system emergency to ensure cooperation between industry participants and coordination with jurisdictional authorities. National Electricity Market jurisdictions can also intervene by using energy emergency powers in response to power system emergencies.
As the Northern Territory and Western Australia are separate networks, those jurisdictions maintain separate electricity emergency response arrangements under their market operators.
As part of the Clean Energy Future Plan, the Australian Government has established the Energy Security Council to provide additional assurance and advice to the government in the event that systemic risks to energy security emerge from financial impairment arising from any source, including from the introduction of carbon pricing.
The Energy Security Council's role and responsibilities reflect the intention of the Clean Energy Future Plan, which is to transform Australia's energy sector from high-emissions intensity electricity generation to cleaner forms of generation. The ongoing need for the council will be assessed in a review to be completed no later than 1 July 2014.
4.2.3 Building critical energy infrastructure resilience
Resilient systems can adapt to and manage change by reducing risk and responding to and recovering from any type of hazard, from natural disasters to terrorist or cybersecurity attacks. Resilience is a shared responsibility of individuals, households, businesses and communities, as well as of governments. The managers of such systems learn from adverse incidents to build capacity. An important part of national security and a more resilient Australia is more resilient critical infrastructure (Australian Government 2011a).
The responsibility for building resilient infrastructure is shared between owners and operators and the Australian, state and territory governments. Collaboration is supported through the Trusted Information Sharing Network for Critical Infrastructure Resilience, managed by the Attorney-General's Department and supported by relevant Australian Government line agencies.
The network allows infrastructure owners and operators to share information on protection, resilience and cross-sectoral dependencies. It comprises seven groups for different business sectors and is overseen by the Critical Infrastructure Advisory Council.
The Energy Sector Group, which is part of the network, shares information on hazards and vulnerabilities and identifies mitigation strategies. It also shares information with other sector groups, such as the banking and finance and communications sectors, on the interdependencies between those sectors and the energy sector.
Climate change adaptation is another way the energy sector is enhancing infrastructure resilience. Since 2009, the COAG Ministerial Council on Energy (now the Standing Council on Energy and Resources), the Australian Energy Market Commission, the Australian Energy Market Operator and the Australian Energy Regulator have considered climate change adaptation in their work programs.
More frequent or severe extreme weather and the incremental pressures of climate change, such as peak demand and water availability, have the potential to increase risks to energy security. However, investment in infrastructure and planning can ameliorate risks in the longer term. Ultimately this is a responsibility of infrastructure owners, rather than governments.