Energy White Paper - Australia's energy transformation

21 Nov 2012Archived News Climate Change Matters

The Energy White Paper is the culmination of the Federal Government’s national energy objectives.  It details the policy plans within a broad conceptual framework - dictated by the imperative to secure reliable and competitively priced energy supplies and to guide development of Australia’s energy sector over the next four years, based upon a 2035 horizon.

Essentially, the Energy White Paper identifies energy supply trends and seeks to detail the necessary energy market reforms, while outlining the priorities on the path to attaining our national energy objectives.  While much of the report is pitched at the high level policy development framework it does provide an insight into energy trends and lays out the case for policy reform.  As can be expected of a report of this nature, its coverage is extensive, and as such, this summary will focus on those themes that potentially hold relevance to commercial energy consumers, under the following subheadings.     

Electricity supply 

The report’s assertion that, “The electricity sector is perhaps the part of Australia’s energy system facing the greatest long-term change. ” is worthy of comment.  While fossil fuels will continue to provide most of our electricity supply for at least the next two decades overall, the market share of black and brown coal  generation will decline as they are displaced by the emerging technologies.  It is projected, that by 2035, clean energy generation will be supplying as much as 40% of our electricity needs.

It is the growth in clean energy generation, and specifically incorporating this growth into the existing grid, that will provide the challenge.  The intermittent nature of these technologies (wind and large-scale solar) further exacerbated by the forecasted take up of distributed photovoltaic systems, means “that grid and network balancing will increasingly be tested” .

The expanding deployment of clean energy generation is the result of the Federal Government’s deliberate policy drive to promote these alternatives, as evidenced by continuing support for the Renewable Energy Target (RET), the carbon pricing legislation and the funding of this R&D through the Clean Energy Finance Corporation. 

Electricity prices

“Global and Australian fuel and electricity prices are expected to rise in real terms to 2020 and beyond, reflecting rising costs of production and growing demand for energy”.   Although, this is somewhat predictable, it is the globalisation of energy costs that will most likely alter this status quo.

The report recognises that in the past Australia’s electricity prices have been insulated from international prices.  This is why, in part, Australia has been able to enjoy relatively low delivered energy prices compared to other OECD countries.   However, this disconnect is expected to decline, particularly as LNG and coal exports compete against domestic markets. Exports accounted for around 80% of Australia's total energy production (in energy content terms) in 2010-11.

This is likely to become a contentious issue, particularly in gas, with the Government at pains to resist calls for market interventions, such as a reservation policy.  The report identifies a potential tightening of gas supply, evident in the eastern markets, and higher prices in the short to medium-term, at least until project start-up risks subside.

Electricity network policy and regulation

It is becoming apparent that policy makers are heeding the calls for an overhaul of network pricing policies and a more efficient use of this infrastructure.  It has become clear that rising network costs are the leading contributor to escalating energy prices.  A number of reforms are proposed to remedy the situation.  

Some of the more relevant reforms include:

  • Reviewing network funding models to prevent over investment, such as applying benchmarking to network businesses in the assessment of regulatory pricing determinations.
  • Increasing the resourcing of the network regulator and reviewing network expenditures against revised demand forecasts. 
  • Pursuing measures that deliver demand side management initiatives, such as pricing structures that have the potential to shift demand times and reward end –users for their demand reductions.
  • There is a call on the states to ensure enhanced efficiency and transparency in their publicly owned energy businesses, even down to transparency around their dividend payment policy.
  • A proposal to establish a consumer advocacy group to have input into the decision making and price setting processes.

Perhaps one of the most striking findings of the report, from a network perspective, relates to the demands imposed upon the network created by growing peak consumption.  A number of examples are given that bear out these costs;

“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).”  and,

“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.”

Finding solutions to mitigate this expansion will be challenging, especially given the ‘spread’ of this usage across many small individual consumption points.

Given the long-term horizon of the review it is difficult to extract immediate impacts on business.  Perhaps the key ‘take-out’ is that policy makers are becoming aware of the recent growth in energy prices, particularly electricity, and public pressure is mounting to rein in escalating network costs.  It is clear that in the short to medium term this will most likely be the focus of reform. 

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