Attracting timely investment
Minimising energy price pressures
Improving energy productivity and reducting inefficient peak demand
Managing transitional pressures in our gas markets
Brining new technologies to market
Ensuring our long-term liquid fuel security
Safely and sustainably developing our energy resources
Promoting informed energy choices
Our success in securing a positive, strong and clean energy future will depend critically on how well we manage both the near- and longer-term challenges that may arise from these and other changes. Some are foreseeable, some will develop through time, and others may emerge abruptly. They include:
- attracting timely and efficient investment in our energy sector
- minimising energy price pressures
- improving energy productivity and reducing inefficient peak demand
- managing transitional pressures in our gas markets
- bringing new technologies to market
- ensuring our long-term liquid fuel security
- safely and sustainably developing our energy resources
- promoting informed energy choices.
Attracting timely investment
Meeting Australia's future energy needs will require significant levels of investment over coming decades. By 2030, the requirement in our domestic energy sector may be as much as $240 billion, while energy resource development projects may need up to $290 billion in investment.
While these estimates appear daunting, they are achievable, particularly as the investment will be spread over several decades and different components of the market.
This investment pipeline needs to be locked in more tightly. Not all proposed energy resource developments will go ahead in the face of growing global supply competition. Investment in our energy generation and supply infrastructure will also depend on a range of factors, most notably the extent to which electricity demand rebounds in coming years after its recent decline. While sustained low demand growth can be expected to defer some of the need for new generation and network capacity over the next decade, this is by no means certain and we cannot afford to be complacent.
Our ability to deliver investment in a timely and cost-effective way will depend critically on access to finance and capital. Given the relatively small pool of Australian investors with deep experience in greenfield energy investments, it is likely that a significant proportion of the required capital—debt and equity—will need to be sourced from overseas.
The footloose and competitive nature of foreign capital means that Australia must maintain attractive and stable investment and policy frameworks, particularly if the current turmoil in international financial markets is sustained. This includes ensuring that energy markets provide opportunities for fair commercial returns.
In this context, governments must take decisive steps to define and implement a program of reform that provides clear direction to markets during a period of heightened public debate about our energy future. The Australian Government has acted to provide long-term certainty to the market by implementing carbon pricing and other critical clean energy measures. However, the lack of bipartisanship on key climate policies continues to generate uncertainty and risks for investors in electricity generation, downstream energy users and emissions-intensive industries.
Minimising energy price pressures
Rising energy costs are affecting the costs of living of many Australian households and the competitiveness of Australian firms. In particular, retail electricity costs have increased on average by around 40% in the past three years, and by well over 50% in some regions. Wholesale energy costs for large users have also risen. Increases of that size are unsustainable.
Addressing the causes of price rises presents complex policy challenges for governments and, unfortunately, there are no easy fixes.
For example, recent increases in power prices reflect mainly increases in network costs caused by a complex combination of increasing peak demand, the need to replace and augment ageing infrastructure and meet higher reliability standards, as well as a marginal impact from various energy efficiency and renewable energy policy interventions at the national and state levels.
If we are to maintain investment and promote the efficient use of energy, prices must reflect the cost of supply in a competitive market. Interventions to suppress efficient pricing outcomes will have detrimental investment and supply consequences that are not in the long-term interests of consumers.
There are positive signs that some price pressures may begin to ease into the future. In particular, lower growth in demand for electricity may defer some of the projected investment need until current capacity is fully utilised. Proposed changes to market rules will also assist in more efficiently targeting network investment-a key driver of recent price rises-to consumer needs.
However, many of the underlying factors driving price rises are likely to continue into the future. Governments have a responsibility to ensure that the cost of supplying energy is as efficient as it can be, but do not have exclusive control over price pressures (such as the prices of liquid fuels, which are largely set by international market forces). Governments have a role in ensuring that consumers are confident that the costs they are paying for services are justified.
Governments at all levels need to embrace key reforms to improve market and regulatory efficiencies, promote competition and innovation and eliminate inefficient policies that impose unnecessary costs on consumers. The Australian Government is committed to advancing an ambitious energy market reform agenda through the Council of Australian Governments' Standing Council on Energy and Resources (SCER), in cooperation with the states and territories.
Nor can the social impacts of rising energy prices be forgotten. There is a need to better understand the impacts of rising energy prices, particularly for lower-income households, and to ensure that any assistance effectively targets those who need it. Market protections for vulnerable customers are critical, so the National Energy Customer Framework should be implemented as a matter of priority by jurisdictions that have not yet done so.
Improving energy productivity and reducing inefficient peak demand
Strong growth in peak or maximum daily demand over recent years has been a significant contributor to rises in electricity costs. This is because of the need for high-cost, fast-start generation capacity and the additional proportion of network infrastructure that must be maintained to service demand that exists for very short periods.
In our main markets, between 10% and 25% of maximum demand occurs for only 1% of the time, which means we are all paying higher power bills because of this inefficient use of system capacity (AEMO 2011).
For example, it has been estimated that 25% of retail electricity costs in New South Wales are derived from peak events that occur over a period of less than 40 hours per year (Fraser 2010).
The main drivers of the growth in inefficient peak demand are the increased use of relatively low-cost, energy-intensive domestic appliances, such as air conditioners and large-screen TVs, and inefficient pricing structures. Current electricity pricing does not reflect the true cost of generating and supplying electricity at various times of the day, and so fails to provide a critical financial incentive for more efficient behaviour. As a result, some consumers are likely to be paying more than they otherwise should and are effectively cross-subsidising those who are driving the growth in peak demand.
One example of how significant this can be is the true cost of air conditioning. It is estimated that the installation of a 2 kilowatt reverse-cycle air conditioner can cost a consumer around $1500, but imposes costs on the energy system of up to $7000 when adding to peak demand-costs that are spread across all customers.
Action to lower the growth in peak demand and improve end-use energy productivity can reduce system costs for consumers.
Demand-side participation and improved energy efficiency are fundamental to curbing peak demand. This requires an integrated approach to market reform that provides efficient market signals to guide behaviour, along with the right incentives for energy service businesses to provide consumers with better information and better products to manage their energy use at peak times.
Smart meters and smart appliances are also important tools to reduce peak demand. They can assist consumers to become more engaged in their energy use and help to inform their energy choices. Finding the right deployment model-with appropriate consumer protections-is essential.
In this context, competitive retail markets are critical to accelerating business innovation and the rollout of new products and services, which could include smart meters connected to industrial, commercial or domestic energy management systems, allowing energy users either directly or remotely to efficiently cycle major appliances such as air conditioners or pool pumps. In the near future, such products could be part of competitive retail packages offered to customers along with differentiated tariff structures that provide incentives for customers to shift energy use to lower-cost periods.
Protecting the interests of vulnerable consumers must be part of any reforms in this area. This includes recognising the varying ability of consumers to access programs and information and shift usage patterns to respond to price signals, and understanding that communication may be needed through a range of channels to reach the intended audience.
Managing transitional pressures in our gas markets
Australia's eastern and western gas markets are undergoing major transformation, including increased demand competition and rising costs of production from new gas fields.
While we have adequate overall reserves of gas to meet projected domestic and export production needs in all markets until at least 2035, there may be some transitional tightness in the east coast gas market as new coal-seam gas and LNG projects ramp up to full production. These factors are already manifesting in higher gas prices and tighter supply dynamics.
This has led to some suggestions that more commercially attractive export opportunities, particularly new LNG developments, may be compromising Australia's energy security, and to calls to mandate a proportion of gas reserves for the domestic market.
The government does not believe that such an approach would effectively address current pressures or be in the long-term interests of consumers and the Australian community. However, maintaining Australia's energy advantages (cost, supply, diversity of sources and reliability) are critical in attracting investment in large-scale transformative industrial plants and technologies.
There is little convincing evidence that interventions designed to force non-commercial outcomes are effective. Given that they are more likely to constrain rather than increase incentives for exploration and new supply, they would impede the development of more efficient gas markets and should be considered only where there is a clear market failure.
Export development will continue to play a critical role in Australia's energy future, bringing substantial economic benefits by maximising the returns from our resources. Many of the new energy developments in Australia 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. Importantly, a number of the LNG projects now underway will provide a critical long-term backbone for the continued development of Australia's domestic gas markets.
While there will need to be a period of adjustment to changing market dynamics by market participants, financiers, regulators and policymakers, there is no clear evidence at this time to suggest market failure or that our gas markets cannot deliver the necessary supply.
However, the Australian Government recognises the ongoing pressures in these markets, particularly for large industrial users, and remains committed to ensuring that the market has access to adequate supplies of gas. The government will work with relevant jurisdictions to implement a gas market development program through the SCER to improve the operation of our markets, and will continue to monitor Australia's domestic gas development.
Important reforms that could improve market transparency and trading opportunities include developing an upstream trading hub and boosting market supply by resolving current impediments to the development of new unconventional gas reserves, particularly in New South Wales, which is exposed to transitional pressures. The government is also updating its offshore retention and production lease arrangements to continue to promote transparency and domestic supply outcomes and will engage with the gas supply industry as a priority to identify options to improve market liquidity.
Bringing new technologies to market
Because electricity generation accounts for just over a third of Australia's greenhouse gas emissions, our ability to commercially deploy clean energy technologies such as solar or carbon capture and storage at scale—and to integrate them into our networks—will be a significant determinant of our success in reducing domestic emissions.
The development of commercial clean energy technology could also generate national wealth and employment through the creation of new business opportunities as part of national and global supply chains and the capture of ideas and knowledge in the form of intellectual property and innovation.
Australia can build on its well-established and world-class research and development capacities in a range of clean energy technologies. Australian researchers have been recognised internationally for their groundbreaking work in solar photovoltaic energy research, and Australia is a world leader in a range of photovoltaic technologies. We are also among world leaders in the development of ocean energy, enhanced geothermal energy and carbon capture and storage technologies, their application, or both.
While clean energy has enormous potential, outcomes are not predetermined. The success of individual technologies that are not yet commercial hinges on developers overcoming current technical, social and cost barriers.
Our future success will in large part require research and development and the adaptation, demonstration and commercialisation of clean energy technologies. Initiatives such as the Australian Renewable Energy Agency, the Clean Energy Finance Corporation and the Clean Technology Innovation Program will be essential in supporting long term development and deployment outcomes.
Working to accelerate the commercialisation of key technologies is critical so that markets have earlier access to a wider set of options, reducing the potential future cost of technology lock-in. We will also benefit from an earlier understanding of key technologies so that policymakers and businesses can plan ahead and adjust if necessary.
Australia has relatively modest and open energy markets by world standards and will remain largely a technology taker. Given the commercial reality that many of the technologies that are likely to be deployed at scale in the future will be at least in part manufactured outside of Australia, we should also seek to make the best use of global technological developments so that Australian energy markets and consumers have access to a larger range of lower-cost products and services.
Ensuring our long-term liquid fuel security
Australia's liquid fuel supplies and markets are also undergoing structural changes. Our domestic crude oil production is declining while strong competition from larger and newer Asian refineries, which continue to lower the break-even benchmark that our refineries compete against, has led to reductions in our domestic refining capacity.
Coupled with rising demand for liquid fuels, this will make Australia more reliant on imports of crude oil and refined petroleum product. Australia is not the only country in this position: European nations and the United States are also undergoing similar structural adjustment in their refining industries.
These changes are not considered to reduce our liquid fuel security, which is assessed as high trending to moderate over the longer term. This is due to Australia's access to diverse and well-established supply chains and the planned replacement of lost refining capacity with import facilities to maintain market supply. The commercial development of alternative fuels could also help us meet our liquid fuel needs, although that is expected to take some time. Because of the commercial potential of unconventional sources of petroleum, the International Energy Agency (IEA) believes that there is a very low probability of reaching global supply limits (so-called 'peak oil') in the period to 2035 (IEA 2011a).
However, while these changes are unlikely to affect normal market supply, they raise questions about Australia's ongoing noncompliance with our IEA 90-day stockholding obligation. The collective stocks held by all IEA members form an important strategic reserve that can assist in managing major disruption in global oil markets.
The Australian Government does not maintain a physical stockholding and has traditionally relied on market responses to meet our obligation. While our market based stocks may not change substantially, the prospect of rising net imports suggests that we will be increasingly less compliant, and the government is currently considering its response to this matter, informed by the views of industry and other stakeholders.
Safely and sustainably developing our energy resources
Few countries can compete with Australia's attractiveness for energy resource development. We offer energy investors a stable and efficient regulatory environment, a highly skilled and diverse workforce, a culture of innovation, a stable economy with low inflation, and world-class industry capabilities-all positioned at the doorstep of the Asia-Pacific region. However, our energy extraction and development industries are confronted by a range of challenges.
While we have an impressive portfolio of energy resource investment proposals, around a third have yet to secure final approval by investors. In an increasingly competitive investment environment, our immediate focus must be to ensure that we deliver on committed projects and turn proposed investments into working projects.
Australia is a high-cost producer compared to many other potential energy suppliers. High global energy prices are stimulating growing competition from an increasing number of countries with lower costs and a higher perceived resource prospectivity than Australia.
Increasingly, resource developments are intersecting with other land or resource uses or critical conservation priorities. Striking an effective balance between competing interests is a key challenge for the energy industry, governments and communities in general. There is an important role for governments in ensuring that regulatory frameworks provide for transparent, sustainable and safe development, particularly where developments involve multiple resource use and co-development. There is also a need for industry to engage with local communities and other stakeholders to earn a 'social licence to operate', particularly for new technologies or developments.
The Australian Government is taking important steps to address these issues through its reforms to improve business regulation and its offshore and environmental regulatory frameworks, including measures to promote the safe development of our CSG resources. In addition, the government is working closely with the resources sector and the skills, education and vocational sectors to meet workforce needs through training, mobility and short-term worker migration initiatives.
The energy and resources sectors are also creating many opportunities for Indigenous Australians by creating jobs and income streams for local communities. This is particularly important in remote areas of Australia. Industry, government and Indigenous communities are working together to ensure that these opportunities create deep and durable benefits.
Promoting informed energy choices
Australia must have a mature, informed and ongoing public dialogue on our energy future, the transition to clean energy, and ways to reduce our greenhouse gas emissions.
As a society, we face potentially difficult decisions about the pace and strength of our efforts, the environmental, social and economic impacts, and the policies that will be needed to drive the transition.
This dialogue should include a continued and informed consideration of the technology and energy options available to meet our energy and environmental goals, and the trade-offs and costs of each.
The IEA has estimated that around 80% of global carbon dioxide emissions allowable under a scenario that keeps atmospheric greenhouse gas concentrations under 450 parts per million and global warming under 2°C is already locked in through existing capital stock (such as power plants, factories and buildings). The IEA emphasises that solutions must be found from a portfolio of technologies, fuels and energy efficiency measures, particularly those that can be retrofitted to existing capital stock, and that the world cannot afford to limit options if we are to meet increasingly urgent climate goals (IEA 2011a).
Similarly, much of Australia's energy infrastructure is locked in, but we are fortunate in having renewable, demand-side, gas, and carbon capture and storage options to aid us in the transition to a cleaner future. All credible analysis supports the need for a portfolio approach within a well- functioning market-based framework, drawing on the most effective options across the economy.
The more we limit these options, the higher will be the cost and the risks of meeting our clean energy and emissions reduction goals.
Dialogue about Australia's energy future will be informed by robust scientific and economic analysis to build a stronger social consensus about the directions we take and the tools we use to get there. This will underpin longer-lasting outcomes and promote investor and consumer confidence in future social and policy directions.