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It's a pleasure to be here today to discuss energy markets with you.
These are not simple times to be involved in energy supply - either for business or Governments.
Australia's electricity generation is projected to grow by nearly 50 per cent between now and 2030 to meet demand growth.
The creation of the National Energy Market (NEM) occurred at a time when surplus capacity existed, arising from previous government ownership.
Over time this capacity has been absorbed and in 2010 we now stand at a point where demand and supply are finely balanced.
Our ultimate challenge is to ensure we get the investment we need in networks and generation over the next decade to guarantee the high supply reliability the Australian community rightly expects.
At the same time, we need to invest in energy efficiency and clean energy technologies to respond to climate change.
That means a considered refocussing of the energy market policy agenda because the investment hurdles are many.
Carbon pricing
Climate change has been a policy issue for nearly two decades now, but there is still no certainty about carbon pricing going forward.
That means no breakthrough on new baseload investment in the foreseeable future.
We are fortunate at the moment that the coal seam methane producers are investing in gas baseload in the Surat - not as a result of electricity market forces - but as they ramp up gas production in anticipation of LNG export needs in 5 or 6 years time.
This is not a NEM-wide solution and may in fact create issues for long-term Queensland baseload when this ramp up gas comes out of the market.
If the Coalition will not come to the table and pass the CPRS, one thing is certain - the next Parliament must solve this problem once and for all or we will have real supply reliability issues and the electorate will punish those responsible.
Integrating renewables
We have a new Renewable Energy Target (RET) obligation as of January this year and there is still a long way to go to bed the market arrangements down.
In February we announced changes to separate small and large scale projects under the RET to take effect from January 2011.
This will provide greater certainty for large scale projects such as wind, biomass, commercial solar and geothermal to move forward with investment.
Renewable generation is invariably location-constrained because it can only go where the wind, solar, ocean, biomass or geothermal resources are available.
That means that already high network costs will be under further pressure as we confront the need to connect new renewable generation regions into the existing electricity market.
At the direction of the Ministerial Council on Energy (MCE), the Australian Energy Market Commission (AEMC) is currently developing rule change proposals to address this issue.
The AEMC's solution is to identify and establish hubs for future generation, say around known wind resources, and to implement a regulatory regime for subsequent investment.
The zones - Scale Efficient Network Extensions - are to be identified using the Australian Energy Market Operator's (AEMO) national transmission planning capabilities.
Transmission companies would propose the optimum size of the connection and individual generation projects would then be liable to pay for the connection cost of their share of capacity.
Network regulation
Network costs make up about half the final electricity bill for households and small businesses in Australia.
Network costs are also the biggest contributor to electricity price increases because of the high capital cost of increased investment in electricity networks - investment that is critical to guarantee supply reliability and meet higher peak demand.
Peak demand growth is outstripping average demand growth by 3 to 1 in most jurisdictions reflecting modern consumer expectations to keep the air conditioners on in the middle of summer and to run - on demand - all the modern appliances we enjoy in the 21st century.
Network regulation decisions have historically protected against overinvestment and higher costs for consumers, but it is not clear that we are guarding against the potential for underinvestment at the expense of longer-term supply reliability.
In addition to the new network costs for renewables as discussed earlier, network costs will also face increasing pressure as we respond to more demanding technical, and health and safety specifications - for example, to improve safety following the Victorian bushfires.
The reality is that all of these costs will have to be reflected in consumer prices in the future.
There is already more than $42 billion of approved capital expenditure in the pipeline for the next five years.
Retail price regulation
AEMC retail competition reviews and implementation of their findings have been slower than industry would like.
However, this only causes me concern if retail price caps are being used to disguise market signals and dampen investment.
Price regulation is necessary in the absence of competitive markets and the fact is State and Territory Governments and regulators are now fronting up to necessary price increases - most recently, IPART in New South Wales, and earlier in Western Australia.
However, the underlying issue of creating competitive retail markets still remains in most jurisdictions - Victoria is the notable exception.
And there is still a reluctance to tell the truth about electricity prices.
Over the last three years, prices have risen by about 35 per cent.
These price rises have nothing to do with the CPRS.
As I said earlier, the biggest cause of higher electricity prices is the high capital cost of increased investment in electricity networks - investment that is critical to guarantee supply reliability.
While there is room for increased energy efficiency at home and at work, no-one wants brown-outs or other restrictions on supply, such as those we have faced with water for many years.
That's why there must be investment in electricity supply infrastructure before reliability becomes an issue.
We cannot afford to repeat historical failures to invest in water supply infrastructure when it comes to energy.
State and Territory Governments of all political persuasions have sought from time to time to hold back necessary price increases and those decisions are now coming home to roost.
Whilst the Australian Government is concerned about the impact of these price increases on families and businesses, in many cases they are now unavoidable if we are to guarantee supply reliability.
I am pleased to see State and Territory Governments increasingly recognising the need to lift energy rebates for pensioners and low income earners to offset the impacts of higher electricity prices.
Through the Ministerial Council on Energy, which I chair, Australian Governments will also legislate this year a National Energy Customer Framework to improve protections for vulnerable customers.
I am determined to make this happen.
The legislation, to be introduced through the South Australian Parliament, will require retailers to have in place hardship policies for vulnerable customers that are approved by the Australian Energy Regulator, including provisions for payment plans.
The framework will also help facilitate informed decision making by consumers, requiring retailers to include certain model terms and conditions in contracts, more information in customer bills on energy pricing, and to obtain the explicit and informed consent of customers when entering into an energy supply contract.
These protection measures are important because investment must continue and there is no backing away from cost-reflective pricing.
Australia now needs to invest at least $100 billion in electricity networks and generation over the next decade just to meet growing demand and replace ageing infrastructure.
And the community also expects us to invest in response to climate change - in energy efficiency measures, renewables and other clean energy technologies.
The Australian Government alone is investing $4.5 billion in its Clean Energy Initiative.
While our objective is to drive down the costs of clean energy technologies for consumers over time, they are not cost-free today.
Privatisation
Unresolved privatisation issues in New South Wales continue to create uncertainty for investors considering new baseload generation.
Gas
Gas supply infrastructure and the gas market still lag the electricity market, holding back gas penetration.
Still, the MCE, in partnership with the Gas Market Leaders Group, has made a lot of progress over the last 6 years with the development of national gas laws, the establishment of the Gas Market Bulletin Board, and an annual Gas Statement of Opportunities to provide greater transparency to this market.
Following system testing, the Gas Short Term Trading Market will go live on 4 June 2010 and will provide more transparent price signals for the trading of natural gas.
I am pleased to say the Queensland Government has advised that the initial trading hubs in Adelaide and Sydney will soon be followed by hubs in Queensland, starting with Brisbane.
Capital costs
The costs of investing in new infrastructure have also been affected by the global financial crisis.
Some reports indicate the debt risk premium has more than tripled over the past five years.
There is no doubt that financing this sector costs more, but just as importantly, it is harder to source.
The rapid and significant recovery of the Australian resources sector also means a competition for contractors and equipment, and technical and engineering skills in an increasingly tight labour market.
The MCE has been doing its part in this regard.
In December 2009, Energy Ministers agreed in principle to the Energy Technical and Safety Harmonisation Plan.
This reform is designed to allow greater mobility of electricity workers between jurisdictions and builds upon the MoU agreed last September to enable mobility of workers in emergency situations like the Victorian bushfires.
Through the MCE, we need to look at what more can be done in skills and labour.
Smart meters
With the roll-out of smart meters in Victoria now well under way, we know more about implementation risks and costs than we did a year ago.
These lessons - including the need for consumer education - must be taken into account in pursuing a national roll-out.
The number one guiding principle has to be that the roll-out of smart meters delivers greater benefits than the costs.
The Australian Government's Smart Grid, Smart City project will be a demonstration project of sufficient size to enable the collection of robust data to inform the business case for various smart grid technologies.
While the focus of this program is not smart meters it has an important role to play in assisting work by the MCE and its National Stakeholder Steering Committee to identify and address risks for future smart meter roll-outs.
It will demonstrate the potential role of integrating network management, demand side response and technologies such as distributed generation, electricity storage devices, and even electric cars.
Energy Efficiency
My Department has responsibility to work with Australia's biggest energy consumers to identify and implement energy efficiency opportunities.
The 200 businesses included in this program account for nearly one-third of Australia's energy consumption.
The First Opportunities report I released in early March shows Australia's largest energy users have committed to energy savings that will reduce Australia's annual CO2 emissions by 0.7% of 2006-07 levels.
This means businesses have committed to implementing energy savings that will save them more than $500 million every year.
Additional efficiency opportunities still being investigated could see the program reduce Australia's annual greenhouse gas emissions by more than 1%.
The efficiencies already committed to will deliver emissions reductions equivalent to taking more than a million cars off Australian roads.
Energy White Paper
I also released a core component of the Energy White Paper in early March - Australia's first ever comprehensive national assessment of Australia's energy resources.
The Australian Energy Resource Assessment, compiled by ABARE and Geoscience Australia, examines Australia's identified and potential energy resources ranging from fossil fuels and uranium to renewables.
The two big findings are the extraordinary potential of coal seam methane and unconventional gas resources, and for the first time, we can see just how extensive Australia's renewable energy resources are.
The assessment forecasts the share of coal in our domestic electricity mix will fall from three-quarters today to less than half in 2030.
At the same time, the proportion of energy from gas and wind will rise with gas accounting for more than one-third of Australia's electricity generation in 2030.
This study is just part of the very significant work done, in partnership with industry, over the last two years, towards a national energy policy blueprint for Australia - the Energy White Paper.
While this work will continue, the fact is it would not be sensible to finalise an energy green or white paper while the Coalition continues to create uncertainty about the future of carbon pricing.
The reform agenda
The fact is we have collectively kept reform moving well over the first two years of the Rudd Labor Government, despite the difficult reform issues remaining to be completed under the National Reform Agenda.
We should reflect on our achievements:
- The establishment of the Australian Energy Market Operator on 1st July 2009 to integrate electricity and gas market operation completed more than a decade of major institutional reforms in our energy markets;
- The creation of AEMO has also made available new planning capabilities, including the National Transmission Planner function and the new Gas Statement of Opportunities;
- The national gas laws to provide a consistent national regulatory framework for electricity and gas;
- Non-economic regulation such as the Energy Technical and Safety Harmonisation Plan;
- The new national Gas Bulletin Board and the Gas Short Term Trading Market from 4 June 2010;
- The National Energy Customer Framework to be legislated this year; and
- Continuing progress on the National Strategy on Energy Efficiency for appliances.
e should acknowledge that there are going to be new policy priorities:
- Integrating new renewable generation into the grid;
- Market arrangements to ensure infrastructure investment occurs to meet demand and maintain supply reliability; and
- Energy efficiency initiatives.
We need to collectively reaffirm a commitment to national standards.
In too many areas, jurisdictions are out of step as collectively we have not moved fast enough to solve their specific problems - for example, air conditioner standards are understandably a high priority in Queensland and South Australia.
And we should recognise that, despite the difficulties for State and Territory Governments, we are making significant progress on cost-reflective pricing, despite continuing retail price regulation.
The national roll-out of smart meters may well be more successful - delivering greater benefits at lower cost - if we take the time to learn the lessons from the Victorian roll-out and the Smart Grid, Smart City project.
The delivery of the national retail policy package is a priority and I am committed to working with the MCE and the South Australian Government to get the National Energy Customer Framework legislated before the end of 2010.
My interest is not confined to the physical market.
In the current environment it is all the more critical to have a supportive prudential framework for market participants.
The MCE currently has the AEMC and AEMO looking at ways to make these requirements more manageable, at the same time ensuring market security.
COAG is maintaining an ongoing commitment to energy market reform and it is the job of the MCE, working with industry, to deliver it.
Conclusion
In conclusion, the next decade will bring a real transformation of Australia's energy sector.
The cost of that will be enormous to replace ageing infrastructure, to meet growing demand, to deliver renewables and cleaner fossil energy.
It is high time we started telling the truth about electricity prices.
We simply cannot maintain supply reliability for households and businesses if we don't invest in electricity supply infrastructure.
That investment can only be paid for with higher electricity prices.
We need to remember the water supply restrictions of the last decade.
We didn't like them, but we learnt a lot from them and the Australian community is now very aware of the need to use water wisely.
Water use per capita declined significantly over the last two decades in a number of major cities.
While I believe we can - and we should - make the same efforts to improve energy efficiency, I am certain that no Australian community would be prepared to live with electricity supply restrictions in the 21st century.
Thank you.