As we look to 2017 and the upcoming climate policy review, one policy measure that’s likely to be at forefront is the National Energy Productivity Plan. In Energetics’ analysis conducted for the Department of the Environment in May 2016, we identified significant emissions reduction potential that could be delivered through improvements in Australia’s energy productivity – 44% of all available emissions reduction opportunities available across the economy can fall under this policy umbrella. Furthermore, the attractiveness of energy productivity targets and measures is enhanced as it is relatively low cost and delivers significant co-benefits for business including reduced exposure to volatile electricity and gas markets.
However, what is perhaps not well understood is the relationship between the better, more productive use of each unit of energy and the impact that has on energy demand nationally. When demand for energy falls, the outlook for different forms of generation changes. A key influencing factor is that utility scale renewable energy is supported by the national Renewable Energy Target - it will grow in order to meet the 2020 RET of 33 TWh. As such, the various forms of renewable energy generation have very low marginal costs of generation and are preferenced in the ‘merit order’ of bidding within the National Electricity Market (and the Western Electricity Market). With a nationwide energy productivity drive, the resultant fall in overall demand for energy would see renewable energy generation grow in the market, leaving traditional fossil fuel generation assets operating well below capacity.
Impacts of different energy productivity targets
• Economic outlook: the anticipated growth in Australia’s GDP through to 2030 is 54%. This is a key consideration in understanding the outlook for energy demand
• Climate targets: our National Determined Commitment for 2030 is a 28% reduction in emissions on 2005 levels. This is not in line with the Paris Climate Agreement of containing warming to within 2 degrees on pre-industrial temperature levels, or the aspirational target of 1.5 degrees
• Comparative position on energy productivity: Australia lags other developed economies.
Energetics assessed three energy productivity improvement scenarios. With each scenario we assume that the nation is working to meet its national 2030 emissions reduction target.
Scenario 1: Little change on ‘business as usual’
Target: 40% improvement in energy productivity relative to 2015 by 2030
On its own, the 40% energy productivity target delivers very little. In fact it creates problems. Energetics’ modelling shows that national emissions are only reduced by 21% on 2005 levels by 2030 and therefore we miss our national target. Also with the forecast expansion in the economy through to 2030 in the order of a 54% increase in GDP, demand for energy will actually rise by an estimated 9%.
Also, if the 40% energy productivity target is maintained and we assume that as a nation we push through other policy measures to deliver emissions reductions to meet our 28% goal, the use of renewables will expand and therefore the volume of coal fired generation must reduce - especially brown coal fired generation.
Scenario 2: Bridging to decarbonisation
Target: 76% improvement in energy productivity relative to 2010 by 2030
Energetics has considered a 76% target because, under this scenario, national demand for energy is held largely constant through to 2030. The result is the national emissions reduction target is achieved without requiring the Government to take specific disruptive measures to force changes to the generator mix.
However, market forces will see 25% of brown coal fired generation being retired and 50% of gas fired generation may also be forced out of the market.
A 76% uplift in energy productivity is a significant increase over business as usual and it is reasonable to expect that a range of policy interventions will be needed.
Scenario 3: Commitment to a low carbon future
Target: 100% improvement in energy productivity relative to 2010 by 2030
The 100% increase in energy productivity allows the nation to achieve the deeper cuts in emissions required by the 2 degree world objective. Our modelling indicates that this will be accompanied with extensive displacement of coal fired generation, which could extend through to the complete elimination of coal fired generation. We could then see either additional natural gas fired generation (leading to pressure on already constrained east coast gas supplies) or more renewable generation.
Improving energy productivity is critical for climate goals and the nation’s prosperity
Our analysis shows that increasing energy productivity is essential if the national emissions reduction target is to be achieved, with the additional, significant advantage of offering a relatively low cost way of driving down energy demand.
• Lifting the energy productivity target: Our analysis shows that the current 40% target is barely above business as usual and is inadequate for meeting the current Nationally Determined Commitment (NDC)
• Funding the National Energy Productivity Plan: Any increase in energy productivity that is consistent with the emissions reduction target will be well beyond ‘business as usual’, and therefore policy interventions will be required to drive the necessary improvements. The 2017 Review should discuss the potential policy interventions required to drive increases in energy productivity and the level of funding necessary to implement these policies
• Finally, as decarbonisation of Australia’s energy generation is well underway, the 2017 Climate Policy Review will need to consider the levels of support required for a managed transition to an energy mix with a high level of renewables penetration.