Committee for the Economic Development of Australia
Sydney
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Introduction
Ladies and Gentlemen.
Thank you for the opportunity to address you today as part of CEDA’s second energy series.
Last year CEDA celebrated its 50th anniversary – an impressive milestone that celebrated a lot of good work which continues today.
Energy – and the important role that it plays in our society – has been a feature of this work particularly in recent times.
Today I will be talking about the question of Australia’s Energy Future, and the role the Government’s Energy White Paper can play in setting our energy agenda from here.
Energy is something that is more and more the subject of public debate.
Public discussion is very much focussed on increases in electricity prices and the pressures these place on household budgets.
What is often missing from this picture however is the immense changes we have seen in electricity usage – both at an industry and household level.
The history of demand
In terms of households, increased energy usage has been very much a symptom of our changing lifestyle.
Let me illustrate this in the context of my own lifetime.
I was born in 1953.
Two years later in 1955, Australia's population was around 9 million and the median house cost approximately $8,000.
At this time average household energy consumption in New South Wales and Queensland was 2 megawatt hours per annum.
This was an era when outside toilets and laundries were still very common, before clothes dryers and before television - which came in 1956.
Jump forward fifteen years to 1970 and Australia's population had grown to around 12.5 million and the average house price had increased to around $12,000.
Average household energy consumption had doubled to 4 megawatt hours per annum.
Oil was still quite commonly used for heating. This was still before the introduction of microwaves, however it was an era where people were buying more appliances – electric kettles replaced kettles that were heated on the stove, hair dryers and hair curlers were common and people were starting to add a second bathroom to their homes.
Jump forward 38 years from to 2008 where hair straighteners have replaced hair rollers, and a living room is not complete without a six appliance power board.
Multiple televisions and DVD players are to be found throughout the house, along with computers, printers, playstations, mobile phone chargers and a myriad of other electrical gadgets.
Air conditioner use has grown almost exponentially.
In this same period car use has grown significantly and air travel has gone from being the domain of the rich to being accessible to almost everyone.
By 2008 we had reached a point where the population had grown to almost 22 million, median house prices were around $450,000 and all these people were using more electricity than ever before with an average household energy consumption of 7.9 megawatt hours per annum.
Our standard of living – as evidenced by the many electrical appliances filling our homes – has gone up.
Clearly therefore, higher electricity bills reflect not just increased prices but also increased energy use.
Energy Prices
Yet in a global context, despite sharp price increases, Australians still enjoy some of the lowest electricity and gas prices in the developed world.
In addition to increased household consumption, it is peak demand that is really growing at an extraordinary rate and putting pressure on our electricity grid and prices.
Over the period 1998 to 2010 Brisbane saw a 35% increase in the number of households.
At the same time peak electricity demand increased by 104%, and the number of households with an air conditioner installed increased from 23% to 72%, with 34% of homes running two or more air conditioners.
Reducing or moderating the increase in peak demand is an important objective.
One measure to achieve this – and Victoria is leading the nation in this respect – is the deployment of smart-meters.
If the functionality is enabled smart-meters can allow time of use pricing so that consumers see higher costs at times of higher demand.
State governments retain responsibility for approving the operation of this functionality and governments at all levels are naturally cautious in allowing the introduction of such pricing structures.
But the potential is there and the Commonwealth is also supporting a trial of this technology through the $100 million Smart Grid, Smart City project.
In an environment where we are at near full employment and our economy, our population and our energy exports are all growing, there is no quick fix to artificially hold electricity prices below where they need to be to maintain reliability.
Tempting as it may be, suppressing prices through regulation or market barriers creates even more pain in the longer term by delivering inefficient investment outcomes which, in turn, will either mean higher bills for consumers or reduced reliability.
Our community will not tolerate brownouts or blackouts because there has been insufficient investment in energy infrastructure.
We are currently living through an extremely strong pick up in global demand for energy and commodities.
Australia's terms of trade have soared, and over time, this flows through to our broader economy, including energy costs.
The simple fact is that the era of cheap energy is over.
There is no one single reason for this.
Government policies such as the bipartisan Renewable Energy Target do come at a cost, however they are not the only, and indeed not the principal driver.
As I touched on before, we must recognise that it is our appetite for multiple televisions, air conditioners, computers and range of electrical appliances that is also driving demand growth and the need for new energy infrastructure.
As a country with significant energy resources and as a net energy exporter, rising energy and electricity costs reflect our growing prosperity, driven by economic growth, increasing population and global demand for our energy resources.
In the long run, the most effective way to minimise price rises is to make energy markets as efficient as possible and to have well targeted policies that assist in managing the growth in demand.
Regulatory and market developments
Reform is key to delivering this efficiency and the last 20 years have been a period of continuous bipartisan micro-economic reform in our domestic energy markets.
We have seen the creation of the national electricity market and over time previously state owned assets have been privatised.
Australia has the world's longest interconnected power grid, covering a distance of more than 5,000 kilometres – from Port Douglas to Port Lincoln and linking to Tasmania on the way.
Our electricity market leads the world in terms of efficiency, reliability and in facilitating competition – a fact acknowledged by the International Energy Agency.
Australia's Broader Energy Context
Our modern economy relies more than ever on access to secure, reliable and accessible energy.
Energy related industries in Australia – covering fuel production, and electricity and gas supply - directly added around $87 billion in value, or 7.3 per cent of total gross value added to the economy in 2008. If you include end use and supply chain activities this becomes even more significant – these are benefits we all share. We are the world’s largest exporter of coal – it ranked as our number one export in 2009-10 and generated over $36 billion in export earnings. Our proven resources of black coal are enough to support production for around 90 years at current rates.
We hold around 25 per cent of the world's recoverable economic demonstrated resource or brown coal, enough to support production for around 500 years at current rates.
We are one of the largest uranium producers and exporters, with 38 per cent of global uranium reserves found in Australia.
And we are an increasingly important player in the global LNG market.
The emergence of a huge new coal seam gas to LNG industry on Australia’s east coast, along with other major projects off the coasts of the Northern Territory and Western Australia have the potential to see us become the second biggest LNG exporter in the world in the years ahead.
Publications such as the Australian Energy Resource Assessment (AERA) have made it clear just how rich our energy resources are.
The AERA paints a clear picture of our potential, especially in developing our gas resources and over time our solar, geothermal and bio-energy resources.
Mobilising these significant energy resources requires significant investment.
Meeting the growing energy needs of rapidly industrialising economies such as China and India, in addition to our traditional trading partners of Korea and Japan is driving record investment in our mineral and energy resources.
In a competitive post-GFC climate, investment capital is increasingly expensive and globally footloose.
So providing attractive, stable investment frameworks is imperative.
Australia's Energy Future
Despite our resource endowment and stable regulatory framework we cannot afford to be complacent as the pace of change has not slowed, rather, it has accelerated.
We are fast approaching what I see as period of major reform for energy in Australia.
As I have spoken about, peak demand is growing quickly and total demand is also increasing, while much of our stationary energy infrastructure was built decades ago.
This means we need upgrades, expansions and new capacity.
The investment challenge is significant.
The Australian Energy Market Operator last year forecast that between $72 billion and $82 billion for new electricity generation and transmission will be needed by 2030.
Add to this further investment in distribution networks, gas pipelines and associated infrastructure which could exceed $140 billion to 2030, meaning that overall investment in the sector could exceed $220 billion.
Such investments have long lead times and even longer asset lives.
There has been recent media attention on network spending. Our regulators have an unenviable task in striking the right balance between reliability and cost to the community – and we are right to monitor this closely.
But regardless of the final quantum, the investment challenge is enormous. And the clock is ticking.
That's why the Government is focussed on providing policy certainty and putting in place the frameworks to enable investment decisions to go ahead sooner rather than later.
And we also want to see that investment directed toward an energy mix that will help reduce our greenhouse gas emissions.
But this must occur in a way that stacks up commercially, in a way determined by market forces.
Government policies – such as the expanded Renewable Energy Target and a carbon price – fit with this market-based approach.
It means new technologies will be market tested and only the best and most viable will be deployed at scale.
In the context of increasing prices, the efficiencies the market drives are critical to managing cost pressures.
But the Government also has a role in terms of supporting research and development, addressing market gaps and bringing on innovation.
Through our $5 billion Clean Energy Initiative we are making those investments, testing the full range of new technologies and leveraging private/public partnerships to make sure that Australia remains at the forefront of clean energy innovation.
Major reform requires proper planning and that's why my Department is continuing work on an Energy White Paper, which will be an important tool in mapping Australia's energy future.
There have been major changes in energy policy dynamics at home and abroad since the last Energy White Paper was released in 2004.
These include:
- sustained high oil prices;
- the massive expansion of our mineral and energy industries driven by unprecedented demand from Asia;
- ongoing reforms to the national electricity market;
- climate change policy;
- resource taxation reforms;
- and the development of new energy sources and technologies.
The vision for 2030
For the White Paper to be a robust assessment of long- term challenges, we need to look at a range of plausible future energy and greenhouse gas-related scenarios.
That means looking to 2030 and, in some cases, beyond.
Modelling from Treasury and the Australian Energy Market Operator will provide much of the data.
While we don't yet have all that information, in looking out to 2030 there are some outcomes we can be pretty confident about.
For one, energy supply and use will be more efficient and lower in emissions.
In the electricity sector the technology base and fuel mix will be more diverse than today's largely coal-fired power generation.
"Smart" technology over time has the potential to help us manage energy supply and usage more efficiently.
We can also expect more electric and hybrid vehicles, with the potential for new generation biofuels alongside conventional fuels.
But even as we get more efficient, Australia will have a larger energy sector as our population and economy grow.
ABARES energy projections suggest that Australia’s total energy consumption may grow by around 35 per cent between now and 2030.
While the White Paper will help us understand and plan for the future it is not about predicting or mandating certain future outcomes.
That means sensible interaction between market forces, social choices and sound policy and regulation will continue to shape economic development.
In my view an effective energy policy framework should provide accessible, reliable and competitively priced energy for all Australians. At the same time it should maximise opportunities for economic and social growth and encourage ongoing investment and development, including in sustainable and clean energy.
Core elements of the Energy White Paper
To achieve this, the Energy White Paper will focus on six core elements.
Maintaining energy security and reliability is paramount.
This involves protecting the physical security of our infrastructure as well as building resilient and efficient domestic markets and reliable international supply chains.
Australia has strong international engagement and bilateral relationships with major trading partners, and the White Paper will explore how strategic engagement can further cement these efforts.
Closer to home, I want to get a clearer picture on potential long term vulnerabilities such as Australia's liquid fuels security and our refining capacity.
A crucial input to this aspect of the White Paper that I will release later this year is the second National Energy Security Assessment currently being undertaken by my Department.
The second priority is to ensure we continue to maximise opportunities from the development of our energy resources.
I am an optimist by nature but I know we can't take our current success for granted.
The White Paper will outline a strategy to foster the sustainable development of our energy resources.
It will look at ways to nurture a pipeline of future projects through pre-competitive exploration.
We will also examine how we ensure the development of our gas resources occurs in a manner that optimises economic growth, revenue and infrastructure, as well as supporting community and regional development priorities.
The White Paper will build on work currently underway between and Commonwealth and the States and Territories to further explore barriers to onshore exploration and the development of conventional and renewable energy resources.
We will also undertake work to examine barriers to the development and uptake of alternative transport fuels.
Infrastructure and skills constraints on the energy and resources sector will be another core consideration.
We are already investing in infrastructure to ease bottlenecks, such as through the ARTC in the Hunter, with plans to do more through for example the $6 billion Regional Infrastructure Fund.
Our response to the National Resource Sector Employment Taskforce Report is an important first step in addressing skills shortages.
My fourth focus is building efficient and resilient energy markets and networks.
Without them, least-cost and reliable energy will be elusive.
As I say, we have achieved a lot over the past two decades.
We have built a truly national energy market with mature governance arrangements and independent operation and regulation.
The most recent achievement in this agenda was the passage of the National Energy Customer Framework through the South Australian Parliament.
However, reform does not end there, and the White Paper will take stock of the challenges.
It will look at how we manage and regulate our energy networks to ensure we are developing and operating these assets efficiently to strike the right balance between reliability and cost to the community.
The White Paper will also examine how we efficiently integrate greater uptake of new technologies without imposing undue costs or compromising system reliability and security.
The gas industry also faces rapid expansion and structural change in the way conventional and non-conventional supplies are consumed and traded.
We will look for opportunities to improve gas market transparency and efficiency.
Focus number five is transforming to a clean energy economy over time.
This will look at how we ensure a smooth transition in introducing a carbon price.
Specifically, in the context of the introduction of a price on carbon the Government is conscious of the need to ensure existing electricity generation assets are not impaired to an extent that threatens energy market stability or energy security and reliability.
The sixth and final focus area for the Energy White Paper is energy efficiency, which makes both economic and environmental sense.
The Australian economy, like others, has become more energy efficient over time.
This will continue with "smart" technologies, efficient energy pricing and internalising the cost of emitting greenhouse gas emissions.
The White Paper will include a response to the recommendations of the Prime Minister’s Task Group on Energy Efficiency released last year on accelerating energy efficiency across areas of the economy.
Next Steps
Good principles foster good process.
I hope all sides of the energy debate can embrace the principles guiding the Energy White Paper's development, including that:
- All current and future generations of Australians have the right to secure, reliable and competitively priced energy;
- Policies and actions should promote economic efficiency and enhance national welfare;
- Market-based responses are generally more efficient than other approaches;
- Government interventions should be transparent, cost-effective and restrict themselves to addressing market failures or social priorities, and
- Australia must meet its international commitments.
I intend to release a draft Energy White Paper by the end of this year before finalisation next year.
Carbon pricing and other issues may affect the final timing of release but this is the goal we are working towards.
I would like to acknowledge the hard work and contributions many have made on the Government’s energy policy work since 2008. This will provide the basis for a whole-of-government process led by my Department.
Consultation is important.
We will be drawing on an Energy White Paper Reference Group with expertise from business and other groups.
My Department will also engage directly with stakeholders to make sure specific proposals are fully tested and I will be working with my State and Territory colleagues in the new Ministerial Standing Council on Energy and Resources.
I want to make one thing absolutely clear, the White Paper will not spawn a raft of new spending.
Instead, it will provide a long-term strategic framework intended to give investors, consumers and planners a clear sense of direction and confidence in our energy future.
Australia's energy future is not something that we can afford to get wrong, and our energy policy direction needs to position us for the future and transcend short term thinking. This is what I am intending to achieve in the development of an Energy White Paper.
Conclusion
The Energy White Paper gives us a great opportunity to manage change in a sector that touches every Australian.
Your insights, engagement and support will help transform our energy landscape in a way that benefits us all.
Thank you