4.3.1 Managing risk and uncertainty
4.3.2 Adjusting to new market dynamics
4.3.3 Managing our IEA 90-day stockholding obligation
4.3.4 Providing a resilient energy security response
Australia's overall energy security is expected to remain adequate and reliable, but will increasingly be shaped by the strength of future investment, the cost of energy and our ongoing response to climate change. All of these factors will be materially influenced by global trends (RET 2011a).
A number of emerging issues highlighted in the 2011 NESA could have implications for maintaining our energy security in the medium to long term. They include the need to attract steady investment to maintain system security and reliability, ensuring a smooth transition to a clean economy, the development and integration of new technologies, and continued energy price pressures. These issues are addressed in following chapters on energy resources, energy markets and clean energy.
Four issues warrant further consideration as overarching energy security policy challenges, given the expected trends over the next decade:
- managing risk and uncertainty
- adjusting to changing market dynamics
- managing our international liquid fuel stockholding obligation
- providing a resilient energy security response.
4.3.1 Managing risk and uncertainty
Accelerated and continual change will remain a dominant theme in global and Australian energy markets in the coming decades. Some changes will emerge slowly, while some may occur abruptly and pose risks to energy security.
Markets and businesses are generally well equipped to deal effectively with market and price risks.However, well-targeted policy can assist in sharing, managing or reducing a number of non-market risks.
Uncertainty, particularly policy uncertainty, is considerably more difficult to manage. While sometimes not apparent, left unaddressed it can impose additional costs through suboptimal investment decisions or 'wait and see' risk-aversion in the market (IRG 2011:72).
Key strategic considerations for the Australian energy sector in coming decades include:
- the nature and timeframe of the international response to climate change
- unforeseen geopolitical or economic developments that reshape or disrupt international energy or capital markets
- unanticipated increases in production costs.
The nature and timeframe of global and national responses to climate change are key strategic issues for Australia's energy future. The energy choices of our trading partners, along with carbon prices, abatement strategies, and the speed and direction of technological development, will affect the development of our energy sector and broader economy.
There is broad consensus among nations to collectively reduce greenhouse gas emissions (UNFCCC 2010). Ninety countries, representing over 80% of global emissions and 90% of the global economy, have pledged to limit their emissions. However, there remains uncertainty about how deep those cuts will be. Australia's Clean Energy Future legislation and plan, including the carbon pricing mechanism, effectively translate much of this international policy uncertainty into manageable risk for business. They are deliberately constructed so that changes in international settings or scientific understanding can be relatively easily aligned with Australian conditions, with less risk of sharp adjustment costs.
A confluence of higher than expected carbon prices, higher fuel prices and poor technological progress could increase costs, although this is considered less likely because energy and carbon markets can have in-built adjustment and cost-capping features that work to mitigate extreme outcomes.
As seen in recent Australian energy trends, high energy costs or poor economic conditions will work through the market to moderate demand and induce supply-side innovation and substitution responses. Australia's carbon pricing, energy security and target-setting arrangements also allow the government to calibrate settings to ensure that the economic cost of action remains tolerable. However, governments should adopt a cautious and well-considered approach in any response to price movements, which are critical signals that drive market and consumer responses and underpin efficient investment.
Australia's energy security policy framework also positions us well to respond to geopolitical or other events that may disrupt energy markets or supply chains. The government also has well-tested response frameworks for managing economic and financial crises.
While one approach to managing risk is to 'design for the worst', experience in energy markets over the past 50 years suggests that this would be very costly and largely unnecessary.
Most energy security events, if they emerge at all, are likely to develop over time. Rather than implementing prescriptive and potentially costly policies in an attempt to eliminate risk, a more effective and less costly approach is to ensure predictable, resilient policy frameworks, efficient markets and robust institutional arrangements that allow us to look ahead and to respond quickly if we need to. Apart from the highly exceptional circumstances that could arise from major unforeseen national, regional or global security events, the Australian Government believes that the practical set of energy security developments considered possible in the foreseeable future can be managed effectively using existing energy security mechanisms and market responses.
That said, Australia's energy security policies are continuously informed by and interface with Australia's broader national security framework, including any relevant needs or emerging risks and threats. For example, critical infrastructure resilience is an element of energy security that complements the interests of national security.
From the strategic defence perspective, the Australian Government is committed to ensuring that Australia's energy security is not compromised. The Australian Defence Force Posture Review, released in May 2012, addresses a range of current and emerging global, regional and national strategic and security factors (Australian Government 2012a). This includes energy and other security issues associated with expanding offshore resource developments in Australia's north-west and northern approaches.
4.3.2 Adjusting to new market dynamics
Carbon pricing, growing export opportunities, new technologies and evolving consumer preferences are changing the dynamics of Australia's energy markets. While our refining sector is undergoing structural change consistent with global trends in the industry, our liquid fuel market is comparatively stable. This is largely because this market was internationalised through price parity and supply in earlier decades.
However, this is not the case in our coal and gas markets, in which domestic prices are expected to become more closely linked with international prices as our LNG and coal exports increase competition in domestic markets and as international carbon markets expand.
New dynamics in Australia's gas and electricity markets have yet to mature, and the impacts of changes are not yet fully understood. Market competition is expected to intensify, and large users will look for more sophisticated and flexible ways to manage supply and price risk. As markets adjust, there are likely to be transitional pressures and conservative strategies are likely to guide market behaviour.
These pressures may push gas prices, and to some extent coal prices, towards international or netback levels3 over the course of the decade, with a consequent impact on the competitiveness of large energy users as well as higher prices for other consumers. This has led to some suggestions that more commercially attractive export opportunities, particularly new LNG developments, may be compromising Australia's energy security, particularly our low-cost energy base, and are not necessarily in the nation's long-term interests.
The government strongly supports the efficient development of new supply, infrastructure and downstream industries in Australia, and believes that markets and competitively formed prices are a natural and necessary balancing mechanism providing the critical incentive to guide efficient development.
Export development will continue to play a critical role in Australia's energy future and bring substantial economic benefits to the nation, and particularly to the regions where developments are located. Many new energy resource developments are unlikely to have occurred without export prices and volumes to justify their massive capital infrastructure requirements, or would have been delayed until domestic prices rose well above historical levels. In particular, many of the LNG projects currently underway will provide a critical long-term backbone for the continued development of Australia's domestic gas markets and our energy security.
While there will need to be a period of readjustment and learning by market participants, financiers, regulators and policymakers, there is no clear evidence at this point to suggest that our energy markets cannot deliver as needed.
Transitional pressures and market development issues in the liquid fuel, gas and electricity markets are discussed in more detail in chapters 8, 9 and 10, respectively.
4.3.3 Managing our IEA 90-day stockholding obligation
Australia's ongoing liquid fuel security is not considered to be at risk, given our access to international supply chains, however our membership of the IEA and 90 day oil stockholding obligation needs to be managed.
Although our five-year average stock levels have not fallen, continually increasing net imports of liquid fuels have led to an increased stockholding obligation, which Australia's commercial stockholdings no longer meet. The projected long-term decline in Australian domestic oil production, combined with growing liquid fuel demand, suggests that Australia's IEA stockholding gap will continue to increase in the absence of action. The 2011 NESA did not find any evidence that breaches of Australia's IEA stockholding obligation were an indication of a decline in domestic energy security.
The IEA collective emergency response arrangements help provide added insurance against the effects of a temporary large-scale global supply disruption and are an important part of global energy security.
The Australian Government is currently considering possible options to respond to the issue of Australia's non-compliance with the IEA 90-day stockholding obligation.
4.3.4 Providing a resilient energy security response
Many of the challenges in our energy future will be managed through well-designed policy and regulation, along with targeted support from governments to help mobilise the private sector and markets. However, the likely prospect of further significant changes in national and global energy systems, as well as evolving relationships between the energy sector and other sectors mean that our frameworks and systems need to be constantly monitored and tested in line with those developments.
In that sense, this Energy White Paper plays a key role in testing whether our policy frameworks and markets are resilient to emerging challenges and risks.
The government will also institutionalise the biennial release of the NESA, with the next assessment to be delivered in 2014. The NESA framework will be reviewed with the aim of providing a more systematic assessment of energy security risks, and the associated resilience measures for managing those risks. As part of the NESA review, consideration will be given to whether the use of quantitative indicators can better inform the assessment.
There would be benefit in a deeper assessment of the overall energy risk management framework, to better map critical relationships and test information and decision-making mechanisms in a more systematic and integrated way. Therefore, the government will undertake a national energy risk preparedness audit across the energy sector as part of the NESA process to test the appropriateness and effectiveness of response mechanisms for managing critical risks to the sector.
In addition to these assessments, the government will continue to implement policies and measures to improve the resilience of Australia's energy system by:
- promoting the timely, efficient and sustainable development of Australia's energy resources
- encouraging diversity of supply, infrastructure reliability and supply chain resilience
- undertaking further reforms to ensure robust energy markets that provide reliable and efficient supply-side and demand-side outcomes
- providing climate policy certainty through the Clean Energy Future Plan, particularly the carbon pricing mechanism
- ensuring that energy and related resource policies are appropriately and efficiently integrated with climate change and other key environmental policy frameworks, such as those covering biodiversity, water, pollution and marine protection
- supporting the development of new energy generation and end-use technologies, diversifying the energy system and reducing critical dependencies
- undertaking the four-yearly strategic reviews of energy policy (as discussed in Chapter 1: A framework for national energy policy)
Acknowledging the relationship between Australia and the global energy market, the government will also continue to work to:
- provide a stable, attractive and open economy that facilitates international trade and investment
- undertake effective international engagement and collaboration with key trading partners and international energy organisations
- promote well-functioning international energy markets.
The focus should remain on developing mutually reinforcing policy frameworks that deliver our energy security objectives, enhancing markets while maintaining Australia's economic prosperity, and meeting our social, environmental and climate goals.
Stable policy is central to the delivery of the framework and our energy security objectives. Without this fundamental underpinning, it will be difficult or more costly to attract investment to meet our energy needs.
3 The LNG netback price is based on the delivered price of the gas, less the costs of marketing, liquefaction and transport (BREE 2012i).