The future of Australia’s energy sector [opinion]

There has never been a more exciting time to be talking about energy. Indeed, few policy areas will attract more attention during the next seven weeks than energy.

Australia’s energy sector faces some of the most significant changes in its history.

Energy underpins our modern economy. It is one of the fundamental building blocks of growth and jobs.

That is why we are focused on managing this change in a way that delivers the services that consumers want and expect, while maintaining an affordable and reliable energy system that is successfully making the transition to a lower emissions energy mix.

It’s these consumer-led changes and the energy mix transition that I want to focus on today.

Specifically, I want to cover three areas:

  1. mutual interest that the Government and industry share in navigating smoothly through the changes unfolding in the energy sector;
  1. reforms the Government has delivered to support energy sector transition; and
  1. a re-elected Turnbull Government’s plans to build a flexible and resilient energy system equipped to meet the challenges that lie ahead.

 Managing Rapid Change

The energy sector is undergoing enormous change – driven by a number of supply and demand-side forces.

On the supply side, Australia, like the rest of the world, is transitioning towards a lower emissions energy future.   As part of this transition we are seeing a reduction in the use of coal and an increase in the use of renewables.

South Australians know this better than most. Just last week we saw the end of coal-fired generation in this state with Northern and Playford B power stations shutting down.

In considering how best to manage this transition, it’s important to understand that every country is starting this transition from a different point and with a different set of circumstances.

Simplistic comparisons with other countries are typically ill-informed and risk the adoption of misguided policies which jeopardise our own energy security.

Comparisons with Europe, in particular, need to be carefully assessed.  In transitioning to a lower emissions energy system here, we have to acknowledge that there are three key characteristics that jurisdictions across Europe have which we do not.

The first is a greater reliance on nuclear power with France producing 77 per cent and Sweden producing 41 per cent from nuclear sources.

The second is a greater reliance on hydro: 98 percent in Norway, 57 per cent in Austria compared to around 7 per cent in Australia.  In fact, in 2014 only 11 per cent of the European Union’s electricity came from intermittent solar and wind.

Importantly, there is also a far greater interconnection between countries.

These differences have a material impact on the choices and costs we face when transitioning to a lower emissions energy system.

Indeed, countries like Denmark will soon be able to meet more than their entire peak load from generators outside the country. This puts a very different complexion on their high levels of intermittent renewable generation.

Countries at the edge of the grid, like the UK, are so concerned about a lack of balancing generation as their energy mix transitions that they have agreed to massively subsidise nuclear power.

Our circumstances should not be used as an excuse for inaction. But nor can they be ignored. They need to be dealt with in a considered and methodical manner.

That is why, for example, in South Australia we supported the upgrade to the Heywood interconnector from 460 megawatts to 650 megawatts.

That is why as chair of the COAG Energy Council, I have asked the Australian Energy Market Operator (AEMO) for advice on what steps need to be taken to maintain system security as we make this energy mix transition.

While these issues are currently most acute in South Australia, all states will face them as the rest of the national electricity market transitions to a higher proportion of renewable generation.

This is why continuing to work closely with all state and territory governments to ensure that we collectively overcome any technical and operational challenges to energy system security is a key priority.

Turning to the demand side, we have seen enormous changes in consumption patterns across the economy.

According to AEMO, residential and commercial electricity grid consumption across the National Electricity Market has declined by 19 per cent per capita over the decade to 2016.

But despite falling demand, peak demand persists. We have seen a huge increase in the number of air conditioners installed since the early 2000s, leading to three quarters of homes having at least one.

This was followed by an increase in rooftop solar which saw Australia become the world leader in under a decade. Today, some 15 per cent of households have installed rooftop solar – double that of the next best country Belgium.

These rapid changes have come on top of improvements to appliance and building standards. For example:

  • the most efficient air conditioners sold in 2003 would no longer meet the minimum standard today
  • houses built after 2010 use around 30 per cent less electricity than houses built before 2007.

Building on these improvements, we have also set a target of increasing our energy productivity by 40 per cent by 2030 through the National Energy Productivity Plan.

The plan outlines 34 actions which seek to improve energy productivity in the vehicles, building and appliance sectors.

Without doubt, the development and rapid uptake of new technology is also heavily impacting on the energy sector.  These technologies are changing the way consumers interact with the energy sector and are also altering the economics of the industry.

By way of example, CSIRO research forecasts that in the next 10 years, battery storage costs are expected to fall by about 60 per cent and solar panel costs to fall another 35 per cent.

Recent estimates put the total installed capacity of solar PV at 4.8 gigawatts. AEMO projects that this will grow to 21 gigawatts over the next 20 years. This will become the second largest source of installed capacity by 2030.

Some have suggested that the continuation and acceleration of these changes will threaten the existence of energy networks.

While there is no doubt these changes will force energy networks to adapt, it’s important to remember that even the most optimistic models show the vast majority of customers will remain connected to the grid.

As a result, facilitating network businesses to adapt and innovate so they can continue to provide efficient, reliable and cost-effective services to consumers will remain a key priority for the Turnbull government.

  1. Our record of reform

The Turnbull Government is focused on reforms that will allow consumers and the energy sector to best take advantage of the changes that are taking place.

To illustrate the approach we have taken and will continue to take, I want to highlight three reforms which demonstrate our commitment to these objectives.

 Tariff reform

Tariff reform represents one of the most significant reforms to the energy sector in recent times.

I am proud to be the Chair of the COAG Energy Council that has seen these cost-reflective pricing rules come into effect.

As you know, the objective of these tariff reforms is to lower system costs for consumers over the long run while at the same time allowing consumers to better manage their own energy costs.

Analysis conducted for the Energy Networks Association suggests the adoption of cost reflective pricing could save consumers $17-23 billion over the next 20 years through avoidance of unnecessary and costly network investment and more efficient investment and integration of new technologies.

Consumers stand to benefit from an energy system that is more efficient and will be able to access energy plans that enable them to most effectively manage their energy consumption.

Tariff reform is at an early stage and more work is needed to ensure the reforms are a success and that consumers are receiving and responding appropriately to price signals.

As this transition to cost reflective tariffs takes place across Australia, I encourage you to continue to work with the Government to ensure that consumers have the information and tools they need to make the right choices for them. It is also important that the market offers them the choices that actually meet their needs.

 Consumer engagement in network regulation

Another Government-led reform is the requirement for network businesses to engage with consumers when developing their revenue proposals.

As you know, energy systems of the past were centralised, demand only ever increased, behaviour was easy to predict, and networks were easier to plan.

With growing levels of customer engagement and distributed generation it is increasingly important to understand what customers want from the electricity system.

This initiative ensures that network companies put the long term interest of consumers at the centre of their revenue proposals by engaging with consumers and articulating how they have addressed their concerns.

I commend your recent consumer engagement efforts during this round of revenue determinations and I note that part of the Energy Network Association’s collaboration with the CSIRO through the Network Transformation Roadmap has been to deliver a customer engagement handbook.

I encourage you to use this handbook in developing a closer relationship with energy consumers which will not only help you to better understand each other’s needs and expectations, but also deliver a better energy system.

Preparing for emerging technologies

The third reform I want to discuss is the Government’s “emerging technologies” work plan.

With our strong focus on innovation, the Turnbull Government strongly supports the early adoption of new technologies.  We want consumers to be able to benefit from new and innovative services that are coming into the market.

That’s why our “emerging technologies” work plan is critical as it will enable consumers to take advantage of these developments without being placed at risk.

Specifically, through this work plan we aim to:

  • remove any barriers to emerging technologies and new service delivery models, such as battery storage, and smart products for households;
  • provide flexibility and the right balance of incentives to drive appropriate investment decisions;
  • put practical measures in place to maintain system security; and
  • mitigate any risks that may result from the uptake of new technologies through appropriate standards, training and accreditation programs, and where appropriate, additional customer protections.

Only last week we formally established a partnership between Standards Australia and the COAG Energy Council to chart a path for energy storage standards in consultation with industry, government, consumers and academia.

This work will ensure regulatory frameworks can support the adoption and safe application of emerging energy storage technologies by either revising existing standards or – where needed – introducing new standards.

 The Turnbull Government’s plans to build a flexible and resilient energy system

 I now want to turn to talk about the Turnbull Government’s plans to build a flexible and resilient energy system.

A re-elected Turnbull Government will continue to drive critical market reforms both at the Australian Government level, and in partnership with my Energy Council colleagues.

These reforms are even more important as our energy sector transitions.

We know renewables will continue to play an increasing role.  With the high penetration of rooftop solar, it’s clear that battery technology will play an important role in the future and we are also likely to see more widespread adoption of electric vehicles as part of the next wave of consumer-led changes in the market.

At a generation level, change is already playing out.  Already 8 of our 12 most emissions intensive power stations have been retired. Indeed, around 20 per cent of Australia’s coal fired power stations are scheduled to close by 2022.

This transition has seen coal-fired generation already come down from 77 per cent in 2004 to around 60 per cent as a proportion of our overall electricity mix.

Renewable energy now makes up 100 per cent of all major investment in grid-connected electricity generation.  There are already a total of 482 large-scale renewable power stations accredited under the Renewable Energy Target.

As you know, this will double between now and 2020, as we meet our RET and deliver at least 23 per cent of Australia’s energy from renewable sources.

The transition underway in our energy sector continues to support our 26-28 per cent emissions reduction target by 2030.

As I highlighted earlier, Australia faces a different set of challenges when managing the transition compared to other countries. That is why we need to find our own path.

Low Emissions Technology Roadmap

To help navigate our own way through this transition and the uptake of new technologies, I’m announcing today that we will be commencing work on a Low Emissions Technology Roadmap to be led by the CSIRO.  This roadmap will:

  • inform the deployment of our existing policies like the Emissions Reduction Fund, the national energy productivity plan, the Ministerial Forum on Vehicles, and our Cities Agenda;
  • support industry (particularly the energy sector) to make better decisions as they transition to a less emissions intensive future;
  • inform the work of the recently announced $1 billion Clean Energy Innovation Fund which is designed to support emerging technologies to make the leap from demonstration to commercial deployment; and
  • build on work underway within CSIRO in collaboration with the energy sector including the Network Transformation Roadmap and the Energy Use Data Model).

Through this work, CSIRO will highlight areas of potential growth in Australia’s clean technology sector, map the development of new emissions reduction technologies, and identify opportunities to be part of future global energy supply chains.

CSIRO will consult with key stakeholders including governments, industry leaders, and experts in technology, finance and energy markets.

We aim to deliver this Roadmap by the end of this year.

Comparing our policies to Labor’s policies

It would be remiss of me, in the middle of an election campaign, not to compare our approach with that of Labor.

The Turnbull Government has consistently said that the key role for government is to look for the least cost approach to transitioning our energy sector.  That is exactly why we are funding initiatives like the Low Emissions Technology Roadmap.

Instead, Labor is inappropriately transplanting policies that don’t account for Australia’s position.  These policies will dislocate energy markets and unnecessarily drive up the cost of electricity.

We all remember Labor’s carbon tax and the $15.4 billion in higher costs it imposed on the economy over the two years it was in operation.  We now know they plan to do it all over again – a Carbon Tax 2.0.

They’ve also set a 50 per cent renewable energy target by 2030 without even modelling the cost of such a target.  Bloomberg New Energy Finance estimated that it will require an additional $48.2 billion in generation investment before you even consider the increased system costs needed to support a large injection of intermittent generation over such a short space of time.

The question has to be asked – who is going to pay for this? Just as they did under the carbon tax, in the end it will be consumers who have to foot the bill.

The Turnbull Government supports renewables as a growing part of the energy mix, but we understand that it is our role to ensure there is a responsible transition.

We have a strong emissions reductions target. Our plan is clear, it’s part of a global agreement reached in Paris with more than 170 nations from around the world.  We support a measured and sensible transition that does not impose unnecessary costs on Australian families and businesses.

We are adopting a technology neutral approach and that is why I have announced today that we are building a roadmap to guide future decisions of government and industry rather than announcing simplistic targets without being upfront about what they will cost.

This is the responsible path to transitioning our energy system.

 Gas Markets

We should not overlook the important role gas plays in our energy sector.

The Australian gas market is also undergoing significant structural change.  This is highlighted in the findings from the recent ACCC inquiry into the east coast gas market.

The ACCC report confirms the importance of securing new gas supply and gas suppliers by addressing regulatory barriers and uncertainty that currently limits the ability of companies to develop new sources of gas supply for the benefit of the Australian economy.

Incredibly, just this week the Labor party announced that, if elected, they would introduce a disastrous gas reservation policy masquerading as a national interest test.

Make no mistake, this policy will kill investment, destroy jobs and ultimately lead to less gas supply.

This approach has been ridiculed by the last two Labor energy ministers with Martin

Ferguson describing it as an “investment killer” and Gary Gray explicitly stating that “a reservation policy could not lead to lower gas prices or more gas.”

Labor’s policy flies in the face of the ACCCs explicit recommendation that gas reservation policies should not be introduced, given their likely detrimental effect on already uncertain supply.

No one should be fooled by the Shadow Treasurer when he tries to differentiate between a national interest test and a gas reservation policy. The ACCC couldn’t have been clearer when it stated in its report that gas reservation policies include “export controls…such as a national interest test”.

As you know, the ACCC report also talks in depth about facilitating access to gas pipelines by making the negotiation of pricing and access to pipelines easier, and improving market operation and transparency by providing additional and more consistent information on market drivers to gas market participants.

I’m mindful of the range of views on these matters – across households, industry as well as upstream and downstream gas suppliers.  For this reason I will consult closely with all stakeholders before settling my views on the important issues raised by the ACCC.

As chair of the Energy Council, I will also work closely with my state colleagues to ensure the ACCC and the AEMC recommendations are carefully considered at our July meeting.

Concluding remarks

I want to conclude by re-emphasising that we recognise the rapid transformation occurring in Australia’s energy sector.  Business, consumers and government all have a role to play in making this transformation a success for Australia.

The Turnbull government will continue to support transitioning from the old to the new economy responsibly – protecting jobs, promoting growth and innovation with a suite of smart policies and actions that meet our Paris commitments whilst providing investment certainty.

I look forward to working with you in the months and years ahead as we continue to implement our energy market reform plans.

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