Energy

The Australian Government is committed to the provision of adequate, reliable and affordable energy to meet future energy consumption needs and to underpin strong economic growth, consistent with the principles of environmental responsibility and sustainable development.

6.3: Policy challenges and priorities

6.3.1 Ensuring a sustainable pace of transformation
6.3.2 Capturing opportunities from clean energy innovation
6.3.3 Efficiently integrating new technologies into the energy system

The clean energy measures put in place by the Australian Government provide a comprehensive long-term framework that will guide and support the market in achieving our clean energy goals. However, policy development and delivery are not static exercises, and developing a more diverse technology base will continue to involve significant technical, financial and policy challenges.

There are three broad areas where ongoing effort will be needed to transform our economy in an efficient and coherent way:

ensuring a sustainable pace of transformation
capturing opportunities from clean energy innovation
efficiently integrating a diverse range of new technologies into the energy system.

6.3.1 Ensuring a sustainable pace of transformation

Balancing energy and climate goals

Setting and achieving clean energy goals requires an ongoing balance between climate change, economic and energy security objectives.

The pace and shape of our clean energy transformation will depend critically on four factors:

the speed at which emerging clean energy technologies reduce costs and overcome technical barriers, which will occur through global efforts and Australia’s ability to take up new technologies
global and national carbon price paths, which will be a key determinant of the timeframe over which new clean energy technologies become competitive against conventional alternatives
the size and pattern of energy demand growth (particularly for electricity)—slow or flat demand growth will reduce opportunities for new clean energy capacity to enter the market
Australian energy prices, particularly wholesale electricity prices and gas prices—sustained lower wholesale prices and/or higher gas prices will support incumbent capacity.

Many clean energy technologies are currently not commercially mature or are more expensive than conventional technologies. Combined with an outlook of slower growth in electricity demand, this makes it likely that the pace of transition will be incremental rather than disruptive, and that take-up over the next decade will be driven largely through mandated market share under the Renewable Energy Target. From the mid-to-late 2020s, clean energy deployment is projected to accelerate as existing energy assets are retired and more competitive large-scale clean energy technologies become market ready. That said, clean energy growth rates will be high due to the technologies’ modest starting base.

Over this period, we are also likely to see a growing take-up of distributed (household and industrial) energy as such systems become increasingly commercially attractive compared to grid energy. This may place pressure on the network cost base and consumers, and it will be important that distributed energy outcomes reflect efficient investment decisions based on fair value, rather than distorted incentives.

While there will undoubtedly be calls for a faster (or slower) rate of deployment of different technologies, the principal policy aim is to meet Australia’s greenhouse gas emissions targets at the least cost while maintaining energy security. A market-based approach to deployment is the best way to achieve that goal.

Moreover, reducing greenhouse gas emissions is an international effort. The extent to which other countries commit to reducing their emissions, and the support they give to the development of clean energy technologies, will be important factors determining how quickly innovative clean energy technologies become commercially available in Australia.

The importance of policy stability and sustainability

Ensuring that Australia’s clean energy policy framework and related measures provide stable and sustainable support to investors and energy markets is critical. Such support provides investment clarity for the long-term development of new technology.

All policies need to be affordable: measures that impose unsustainable costs across the community are not likely to maintain the community’s support, be effective or produce optimal results. Important lessons can be learned from past policies, which sometimes generated undesirable boom–bust cycles for clean energy suppliers and confusion among consumers.

Premium feed-in tariffs for rooftop solar PV, which were expanded and then wound back, are a case in point. The Australian Government strongly supports the states’ and territories’ move towards more efficient and equitable electricity buyback rates that better reflect the real value of the supplied generation (including any network benefits). With the introduction of carbon pricing, the clear long-term policy goal should be to transition to a level playing field for all forms of energy, necessitating the gradual phasing down of deployment subsidies.

In this context, the government is working with the states and territories through the Council of Australian Governments (COAG) to develop a national approach to assessing the complementarity of existing and future climate change measures with the carbon price mechanism.

The government acknowledges that the Renewable Energy Target, by design, imposes marginally higher costs on consumers in order to ‘pull through’ renewable energy technologies. However, the target is also designed to achieve this at least cost, thereby minimising the cost impact on consumers. It remains a key transitional measure supporting the government’s overall objective of increasing the deployment of renewable energy while the carbon price matures.

The need for review and response

Regular review and monitoring, including of the factors that influence the direction and pace of our clean energy transformation, will assist in addressing any unintended consequences or barriers to progress.

The government will monitor progress in achieving its clean energy objectives, including through the implementation of the Clean Energy Future Plan, the National Energy Security Assessment, four-yearly strategic reviews of energy policy and scheduled Renewable Energy Target reviews. Under the Clean Energy Future Plan, the government established a new independent statutory body, the Climate Change Authority, to advise on pollution caps and progress towards targets and to review the carbon pricing mechanism.

In that work, it will be important to focus on potential barriers to efficient deployment, to ensure smooth interactions between energy, renewable energy certificate and carbon markets, and to monitor the effectiveness of support for innovation, while taking into account the importance of policy stability for market and industry development.

From Australia’s perspective, global and national progress on potentially key technologies such as CCS, large-scale solar and other renewables in the next decade will be important to monitor. If those technologies fail to develop as expected, future Australian governments may need to consider other clean energy alternatives to meet our emissions reduction targets and to minimise the risk of higher adjustment costs (see Box 6.3).

Box 6.3: Is there a future role for nuclear energy in Australia?

Australia’s range of abundant low-cost energy resources has shaped our energy generation base around coal and gas. While other countries have adopted nuclear power as a way of diversifying their energy mix, Australia has not deployed the technology because it has never been economically competitive with fossil fuel technologies and because a community consensus on deployment is lacking.

The Australian Government does not support the use of nuclear energy in Australia. It notes that there is currently no social consensus on the technology or an economic case for its deployment, even taking into account the carbon price and the need to reduce our emissions.

Future Australian governments might not necessarily hold that view. However, in considering the circumstances in which a future government might revisit this issue, the following observations may be pertinent:

Given our diverse energy resource base, there does not appear to be a compelling energy security argument in support of future adoption of nuclear power for electricity generation in Australia.
The strongest justification for developing nuclear energy would be a failure to commercialise new low-emissions baseload energy technologies within the timeframe that analysis suggests is necessary to meet long-term global and national emissions reduction objectives.
Estimates of future costs for representative electricity generation technologies suggest that nuclear energy could potentially be an economically competitive backstop energy option (see Figure 6.2). However, based on experiences in other countries, the establishment of a commercially based nuclear energy industry in Australia would also require additional financial and/or other forms of government support to kick start initial facilities (Australian Government 2006).
This would require a decision to move ahead considerably in advance of expected deployment—lead times would be at least 10 years, with 15 years more probable (Australian Government 2006, EPRI 2010, CSIRO 2011b). A decision would need to be taken by the later part of this decade if deployment were required by 2030 or 2035. This would require new institutional and regulatory arrangements and the development of a local nuclear engineering skills base.
Such a decision would require broad community consensus, including bipartisan political support, particularly in the wake of the Fukushima accident.

6.3.2 Capturing opportunities from clean energy innovation

An increasing global effort to develop clean energy technologies is underway. This will benefit Australia by accelerating commercialisation and providing lower-cost options for meeting our emissions reduction targets. However, Australia should not rely on buying clean energy technology ‘off the shelf’. There are good reasons why we should invest in clean energy innovation, including:

capitalising on established research and technical strengths, such as solar, or on emerging market opportunities, such as for ocean power or alternative fuels
capitalising on the opportunities that arise from tackling the specific challenges posed by Australia’s geography, climate and demographics, for example, by developing off-grid renewable energy solutions
exploiting Australian clean energy resources, such as deep geothermal resources
accelerating the development and commercialisation of technologies with the potential for significant returns to the national interest, such as CCS, which could support our fossil fuel export trade in the longer term if it were exported or further developed elsewhere (see Box 6.4)
attracting international expertise and investment to Australia and promoting the timely adaptation and demonstration of imported technologies in Australian markets and operating conditions, which would generate further flow-on technology development and know-how.

Box 6.4: Commercialising carbon capture and geological storage in Australia

Despite slow progress to date, commercialising CCS remains critically important to meeting long-term global emissions reduction goals, given the expansion of coal-fired power generation planned by China and India. The International Energy Agency estimates that CCS could account for up to 20% of cumulative CO₂ reductions by 2050. Abandoning CCS as a mitigation option now would significantly increase the cost of achieving emissions reductions to limit average global temperature increases to 2°C.

In Australia, work is well underway to develop the legal and regulatory frameworks and to test and demonstrate the technologies needed to support the long-term commercialisation of CCS.

Legislation is in place for CO₂ storage in Commonwealth-controlled offshore waters, and the states and the Northern Territory have either completed or nearly completed the mirroring regulatory frameworks for their jurisdictions.

The National CO₂ Infrastructure Plan, which is intended to strengthen investor confidence by reducing barriers to CO₂ transport and storage, is being implemented. The government is also assessing whether existing pipeline standards are suitable for the safe transport of CO₂.

In partnership with industry, the research community and several states, the Australian Government is implementing a technology development strategy that includes:

$2 billion in support of large-scale demonstration (CCS Flagships) and small- to medium-scale pilot projects
support for R&D and pilot testing of low-emissions coal and CCS technologies through the CSIRO, the CO2CRC and Australian National Low Emissions Coal Research & Development ($75 million, with matching funding from the coal industry)
support for international R&D and collaboration through the Global Carbon Capture and Storage Institute, the Australia-China Joint Coordination Group on Clean Coal Technology, the Carbon Capture, Use and Storage Action Group, and the Carbon Sequestration Leadership Forum.

To clearly articulate the framework for commercialising CCS in Australia, by June 2013 the Department of Resources, Energy and Tourism, in collaboration with the National Carbon Capture and Storage Council, will develop a CCS Roadmap for Australia to 2030. This will focus on:

completing pre-competitive CO₂ storage assessments and regulatory frameworks
identifying single and multi-user transport and storage hub infrastructure options to inform investment decisions
implementing the large-scale demonstration projects announced under the CCS Flagships program
investing in R&D to improve the efficiency and reduce the cost of large-scale CO₂ capture technologies
increasing public awareness of the role and benefits of CCS
exploring the commercial imperatives, investment conditions and transitional incentives needed to deploy CCS in Australia.

Australia is unlikely to develop large-scale manufacturing industries for clean energy technologies as we lack the market scale and lower cost base of many competitor economies. However, there is considerable opportunity for high-value niche industries. Our resource, skills and knowledge bases are already creating valuable intellectual property in many sectors, including manufacturing,construction and professional services, and we are well positioned to continue to develop value-adding business opportunities as part of global clean energy supply chains.

The role of private and public sector investment

Well-functioning energy and carbon markets give technology innovators and end users a powerful pull-through incentive for private sector investment in innovation. It is appropriate that the private sector, which is best equipped to manage business risk, remains the principal driver of technology development and deployment. Private capital also introduces the market discipline and entrepreneurial management needed for long-term commercial success.

However, there is an important role for targeted public sector support to stimulate the creation of markets, to address market failures and, in certain circumstances, to share development and commercialisation risks. Public finances are limited, so innovators need to leverage larger private sector resources effectively and efficiently. Public sector investment should support, rather than reduce, commercial discipline.

While there is an established case for public support of clean energy deployment and development as it builds along the pathway to commercial maturity, the government has removed remaining subsidies for conventional energy or fossil fuel industries over the past several decades (see Box 6.5).

Box 6.5: Does the Australian Government provide subsidies to fossil fuels at the expense of developing clean energy technologies?

Contrary to claims by some groups, the Australian Government does not provide subsidies for the production of fossil fuels or subsidies that encourage the inefficient or wasteful consumption of fossil fuels. This was confirmed by a review of Australian Government energy programs and policies by the G20 Group of Nations in 2010.

A number of these claims relate to the existence of various business tax deductions or specific tax treatments for activities associated with energy resource development or production.

The Australian Government notes that the ability to deduct business expenses does not in itself constitute a subsidy. This is a normal and necessary step in determining business profit and therefore tax liabilities. Particular tax treatments recognise the different risk factors and project circumstances applying in these activities and industries.

The fuel tax credit for business use of transport fuels reflects the principle of not taxing business inputs. It is similar to the tax credits that are given to businesses for any GST they pay on inputs. Thus, excise, collected from manufacturers and importers of fuel, should be a tax on final consumption of fuel rather than a tax on business inputs. Like the GST input tax credits, the fuel excise credit is not regarded as a subsidy.

Fossil fuel taxation contributes many billions to government revenues each year. This is projected to increase through the implementation of new energy taxation arrangements and the coverage of fossil fuel production and some fossil fuel consumption under carbon pricing.

Under the Clean Energy Future Plan, the carbon pricing mechanism is designed to provide an incentive to reduce emissions that primarily result from the production and use of fossil fuels, and to encourage energy efficiency. To assist entities that undertake emissions-intensive and trade-exposed activities, the Australian Government provides assistance through the Jobs and Competitiveness Program. The program is designed to help Australian emissions-intensive, trade-exposed businesses to manage the carbon price impact, while retaining incentives to reduce emissions. Assistance under the Jobs and Competitiveness Program reduces over time and is subject to regular independent review.

In the period to 2020, the Australian Government will provide around $17 billion in support to clean energy development and deployment, along with an estimated market subsidy of up to $20 billion for renewable energy under the Renewable Energy Target.

Improving the effectiveness of government support—lessons learned

Over a decade of government support for clean energy and technology development has produced a number of lessons, including the following:

Many Australian clean energy industries are at a relatively immature stage of development characterised by calls for large-scale early-stage support and relatively low success rates at later stages. There is a need to build capacity and ensure that project proponents have suitable project management and engineering skills, entrepreneurial capacities and the ability to attract financial support to be able to move projects from concept to closure.
Attempts to leapfrog key stages in the innovation chain are usually unsuccessful. Funding should be targeted to move technologies incrementally along the innovation chain to the larger-scale demonstration stage. Specific barriers and risks at different stages must be addressed and follow-up support must be provided to ensure that projects or technologies with merit do not become ‘stranded’.
Large-scale demonstration projects are far more difficult, and some have taken longer than expected, particularly because of their higher risk of failure and higher financing costs. There is a need to minimise the risks in order to attract capital investment. This may require the delivery of funding support through mechanisms other than traditional milestone-based grants programs, while maintaining accountability for the use of taxpayers’ resources. For example, wider knowledge sharing should be a condition of public support for innovation.
There are benefits in having strategies or outcome-focused substrategies to frame policy advice, program design, technology prioritisation and funding decisions.
Effective engagement between the Australian and state and territory governments will be critical to accelerating the deployment of clean energy technologies.

Aligning clean energy needs within the innovation system

To produce maximum value, Australia’s early-stage research incentives and structures need to be aligned with later-stage technology development goals. To that end, the Australian Government takes a strategic approach to its R&D investment, taking into account identified national research and innovation priorities (DIISR 2009). Reducing emissions in transport and energy generation is an identified priority area under the National Research Priorities, which guide the government’s research support.

Australia has world-class strengths in a number of renewable energy and CCS technologies through institutions such as the Australian National University, the University of New South Wales, the CO₂ CRC and CSIRO. New centres such as the Newcastle Institute of Energy and Resources are also bringing together the expertise of industry and the research sector. To help strengthen links between the R&D sector and large-scale demonstration activity, the Australian Government has targeted resourcing and initiatives in the areas of solar, CCS and biofuels. The government has established the Australian Solar Institute, Australian National Low Emissions Coal Research and Development Limited and the Advanced Biofuels Investment Readiness program with funding contributions of $150 million, $75 million and $20 million, respectively.

There may be scope to target R&D support for other strategic priority areas. For example, the Australian Centre for Renewable Energy (ACRE, now absorbed into ARENA) identified a need for stronger R&D support for geothermal energy development and commercialisation in Australia, after significant government investment at the demonstration phase. As a first step, ACRE helped to establish a cross-disciplinary R&D network relevant to geothermal technology.⁴ In 2013, ARENA will also integrate the R&D capacity of the Australian Solar Institute into its innovation activities.

Enhancing collaborative effort

Working internationally with key partners provides a valuable opportunity to collect global market intelligence on developments in clean energy, to leverage Australian investment in clean energy and to increase the impact of Australia’s research, development and deployment effort. For example, the Global CCS Institute is building links with a range of partners to encourage knowledge sharing and information dissemination to accelerate the development of CCS technologies.

Multilaterally, the Australian Government is working with the United States and the United Nations Energy Initiative on the Clean Energy Solutions Center. The centre is an online information and resource portal that puts policymakers, industry and researchers together to explore the challenges facing clean energy development. This work will also support ARENA as it develops its online resources for industry.

Bilaterally, Australia and China have established a close and productive relationship addressing the challenges of reducing greenhouse gas emissions from the combustion of fossil fuels. The Australian Government has allocated $20 million to support a range of activities and projects under the Australia–China Joint Coordination Group on Clean Coal Technology that are specifically focused on the development, application and transfer of low-emissions coal technology.

The Australian Government also works with a number of other countries and the European Commission to foster initial contacts and early-stage collaborations between researchers, industry (particularly small and medium-sized enterprises) and other innovation actors to enable strong, strategic, clean energy research, development and deployment.

Collaboration among Australian governments is also essential. The COAG Standing Council on Energy and Resources has established the Clean Energy Working Group to improve policy coordination and ensure that suitable legislative regimes are in place to regulate new clean energy technologies as they arise. The working group is currently considering the regulatory regimes applying to CCS, geothermal and ocean energy projects.

6.3.3 Efficiently integrating new technologies into the energy system

Australia’s energy systems have historically been developed with conventional fossil fuel technologies, centralised supply and standards calibrated to those technologies.

This will change in coming decades with more decentralised and intermittent large-scale generation and more distributed generation. Depending on the rate of deployment, challenges in managing the efficient integration of these new technologies into the market could include:

cost-effectively managing growing intermittent supply from solar and wind energy and more variable network demand from distributed energy systems
overcoming or removing barriers to efficient connection, in particular by small- and large-scale distributed and remote generators
gaining maximum utility from off-grid power generation.

Managing variable supply and demand in the electricity network

In the future, the installed capacity of intermittent power generators such as wind and large-scale solar PV or solar thermal units will increase and possibly start to exceed current market reserves, creating challenges for electricity system backup and storage.

The structure of the National Energy Market (NEM) positions it well to integrate current and expected levels of intermittent energy. NEM rules have been updated in recent years specifically to improve the management of intermittent generation through the introduction of a new semi-scheduled class of generator. The potential for longer-term impacts on the efficiency of NEM dispatch and pricing from the wider deployment of low marginal cost capacity is discussed further in Chapter 10: Energy markets: electricity.

The Australian Energy Market Operator (AEMO) has introduced a state-of-the-art wind energy forecasting system to deliver forecasts of production from wind generators to all market participants. Good-quality forecasting data supports the semi-scheduled generation category by providing the AEMO and generators with forecasts of output and advance warning of rapid changes, reducing the risk to reliability and supply. Other intermittent renewables, such as solar and wave energy, will require similar forecasting systems to integrate into the NEM. The AEMO is well placed to build on this system for other forms of renewable energy.

The costs of current storage technologies remain high. This suggests that an effective approach would be to explore cost-effective solutions that could be applied across the electricity system, including by increasing fast-start backup system interconnections, demand response mechanisms, load shifting, thermal storage and advanced electricity storage technologies. The government is examining the impact of growing renewable penetration in the NEM through ARENA’s Emerging Renewables Program (see Box 6.6). Energy storage and energy management technologies are both eligible for funding through ARENA.

The economics of off-grid and on-grid storage differ because of the higher cost of providing power in remote locations. As a result, remote off-grid storage options may be developed before urban applications.

Box 6.6: Modelling how the NEM might respond to higher flows of renewable energy

A broad range of work is underway to improve the cost-effectiveness of energy storage and our understanding of how storage technologies could be used in the market.

One example is a recent $900 000 grant by the Australian Government to the University of Melbourne, through the Emerging Renewables Program, as a contribution to a $1.2 million study, Achieving Cost-effective Abatement from Australian Electricity Generation.

The project will produce software modelling of Australia’s electricity market to examine how the NEM might achieve the cheapest cuts in CO₂ emissions while using more renewable energy, such as wind, solar ;PV and solar thermal power.

The open-source modelling software, which will be publicly available, will assess the performance of future energy systems, including transmission networks, under different levels of renewable energy penetration.

The project began on 1 July 2012 and is scheduled to end in early 2015. The University of Melbourne is conducting the study with support from the University of New South Wales. Other participants include the Australian Energy Market Operator, the Bureau of Meteorology, the Victorian Department of Treasury and Finance, General Electric and consultants Market Reform.

Given the relatively low penetration of distributed generation in Australia, there is less experience in managing greater variability in network flows, which is one of the consequences of that form of generation. This is not a major overall concern at this point, although network connection has been refused in some cases because of localised constraints.

Clean energy infrastructure and barriers to connection

The deployment of clean energy technologies will require investment in energy and related infrastructure and the removal of barriers to network connection.

Various barriers to connection may be impairing the timely and efficient development of distributed generation and co-generation. Most relate to the application of standards and processes rather than to market rules. The Australian Energy Market Commission’s reviews of energy market frameworks, distribution frameworks and demand-side participation are addressing these issues.

New investment in generation should be based on market and locational signals, and least-cost generation (taking transmission and carbon costs into account) should be preferred. Some clean energy proponents argue that the cost of connection to the transmission network, which is significant in remote renewable energy locations, is a barrier to deployment. However, the market will choose between sites with more prospective renewable resources but higher connection costs and those that are less prospective but have lower connection costs (and transmission losses).

The government also recognises the particular challenge faced by first connectors in remote areas, which may result in suboptimal investment in nodal connections. The Australian Energy Market Commission rule change on scale-efficient network extensions attempts to address this issue (see Chapter 10: Energy markets: electricity).

CCS projects are also likely to require multi-user pipelines and hubs feeding dedicated storage sites. CCS infrastructure planning and development will be a core element of the government’s CCS Roadmap.

Off-grid power

Off-grid power generation in Australia occurs mainly in remote Australia in mining projects, in Indigenous communities, and on farms and cattle stations. Rising diesel and gas costs mean that renewable energy technologies, either as stand-alone or diesel-renewable hybrid systems, are now becoming more cost-effective in these areas.

The rapid expansion of mining activity in areas such as the Pilbara offers good opportunities for larger-scale solar and solar hybrid systems to reduce carbon and fuel costs for major projects and to support the development of more common-use systems (ACRE 2011).⁵ However, lack of familiarity with such projects and their perceived higher technology risks mean that take-up may be limited, despite their competitiveness. ARENA will continue to examine opportunities for renewable energy in these regions.

⁴ More details are available at http://minister.ret.gov.au/MediaCentre/MediaReleases/Pages/GeothermalExploration.aspx
⁵ A list of relevant studies is available at www.ret.gov.au/energy/clean/acre/studies/Pages/Studies.aspx

Page Last Updated: 8/11/2012 2:39 PM