It is a pleasure to be here with you today.
It is a busy and challenging time to be involved in energy markets at the moment.
Today's forum provides an important opportunity to take stock of where we are, and discuss the challenges ahead.
The AEMC discussion paper being released today provides the opportunity for stakeholders and interested parties to engage in discussion around priorities for the energy sector in the coming years.
The NEM – A Strong Legacy of Microeconomic Reform
In looking to the challenges and opportunities of the future we first need to understand how we got to the present.
It is now eighteen years since the Hilmer Report was presented to first ministers.
This report underpins Australia's broad competition focussed microeconomic reform agenda of the last two decades. Reform in the energy sector has been a very important element in that broader reform programme.
Since the Hilmer Report's release, we have seen the National Electricity Law enacted in 1996, the establishment of the Ministerial Council on Energy in 2001, the completion of the Parer Report in 2002, and the delivery of the Energy Reform Implementation Group report to COAG in early 2007.
The energy market reform agenda over this period has largely been bipartisan in nature and has delivered significant benefits to the Australian community.
The last of the big COAG energy sector reforms is well on track with the National Energy Customer Framework legislation recently becoming law in South Australia. This now provides the legislative basis for jurisdictions to apply this in the period ahead.
However, there remains much to be done, and we need to remain vigilant to ensure that the good work of the last two decades is not undone.
This is particularly important when Governments continue to intervene in the operation of the NEM to achieve other policy objectives, such as increasing the deployment of renewable energy or increasing energy efficiency. There is nothing wrong with these objectives – but some of these policies can challenge the operation of the NEM.
Today I will discuss a number of interrelated challenges including:
- Questions around the appropriate level of investment in networks;
- Consumer concern about prices;
- Introduction of a carbon price;
- Ensuring sufficient investment in generation capacity is delivered; and
- Managing peak demand growth.
Networks
As the AEMC paper recognises, networks have a critical role in our integrated energy system.
It is important to understand that the NEM is the world’s longest interconnected power grid, covering a distance of more than 5,000 kilometres – from Port Douglas to Port Lincoln. Double the distance from London to Moscow.
We know that we have seen significant increases in distribution regulatory determinations in recent years. Part of this reflects the need to strengthen the network to cope with rising peak demand. However, this investment also reflects the age of our network.
Getting the “right” level of network investment is extraordinarily complex. There is always a balance between maintaining reliability and cost to the community.
We must remember that lack of reliability imposes significant costs on the community as a whole.
The establishment of the regulatory regime for the network sector is deliberately at arms length to government in order to maintain investor confidence.
We have seen discussion in the media this week following the release of Professor Garnaut's eighth update paper which included discussion about the state of the regulatory regime applicable to network businesses.
While Professor Garnaut has a role to play in advising the Multi Party Climate Change Committee, he does not speak for the Government, nor for the Ministerial Council on Energy.
The regulatory framework for Australia's energy sector is leading edge, and as such the Ministerial Council on Energy and the energy market bodies often review different aspects of our regulatory environment to ensure it delivers optimal outcomes for the community.
In undertaking its long term policy work, the Ministerial Council on Energy – which consists of nine energy ministers – seeks to operate away from the spotlight of the daily media cycle.
It is not in the public interest to trivialise these matters in a high level public debate over the network regulatory regime.
The market bodies and institutions already exist and have responsibility for finding the appropriate balance between reliability and value to the community.
Prices
Electricity prices are currently a topical issue in the community.
Residential electricity prices have increased by about 40 per cent over the last three years and are forecast to increase in the order of 30 per cent in the three years to June 2013.
As those who study these issues will know, there is no quick-fix to rising prices.
Trying to suppress prices ultimately leads to pain in the future when catch-up is required, as some jurisdictions are now finding.
Prices reflect the cost of investment to maintain and replace ageing assets to ensure the community gets the reliability it has come to expect.
Carbon Pricing
Another topical issue in the community at the moment is carbon pricing.
I mentioned the history in establishing the NEM because protecting this achievement is front of mind for me as the Government seeks to introduce a price on carbon.
We need an outcome whereby we resolve a price on carbon in a manner that does not undo or threaten the good work of the last two decades in co-operative energy reform.
We must ensure investment occurs to reduce emissions and meet demand, while importantly, maintaining sufficient competition and avoiding concentration in the sector.
This is a massive task.
In any transition to reduce emissions from the stationary energy sector by introducing a price on carbon, we need to be very mindful of the issue of impairment.
This is not simply a financial issue. Through the impact on the contract market it can have real energy security and market stability implications.
We must avoid impairment that would see generation assets go into administration. Administration could see existing financial market contracts re-opened and difficulty in entering into future contracts, with consequent impacts on market stability.
These issues would be compounded if impairment occurred on a scale that challenged the ability for existing asset owners to invest.
Investors will only willingly step forward to finance and build the transformational new generation assets we will need for the future if they have the capacity to do so.
To better understand these issues the Government has established the Business Roundtable and the Energy Sector Working Group. I have also appointed market participants to the Investment Reference Group to report to me on investment issues in the electricity sector.
In the months ahead, within Government, and through the Multi Party Climate Change Committee, we will be developing policy, and in doing so I will be seeking an outcome that maintains energy security and reliability.
Investment
Investment is a key theme in the AEMC discussion paper, and bringing on sufficient investment remains a challenge.
The energy sector is extremely capital intensive and involves long lived assets – 30 years plus expected life for a baseload power station.
The years ahead will be particularly challenging, with Australia's energy sector requiring $94 billion in capital in the next five years.
I am also conscious of the imminent refinancing requirements of the generation sector, with an estimated $6.4 billion needed to be refinanced prior to the end of 2012.
The expanded Renewable Energy Target, through supporting wind capacity, has delivered significant new investment over the last fifteen months. As we know, wind also requires investment in gas generation capacity as back up.
At the moment the expanded Renewable Energy Target is effective in displacing generation investment that would otherwise come from non-renewable technologies; however it is doing this at a cost to the community.
At some point in the future we will need additional investment in baseload capacity.
The fact remains that if we are hoping to achieve abatement from the electricity sector we will need to see significant investment in new generation capacity in the years ahead.
Peak Demand Growth
It is also important to recognise the complications that arise from peak demand growth which is rising faster than underlying demand.
As the AEMC paper notes, since 2005 peak demand in the NEM has grown by 3.5 per cent per annum, compared to growth of 1.2 per cent in energy demand over this period.
Rising peak demand means that we are spending billions of dollars on capital that will be utilised on a handful of occasions per annum.
For instance, work done in Queensland shows that 12.5 per cent of the capacity in the $8 billion south east Queensland distribution network – that is $900 million of capital – is used on only three and a half days per annum.
Recognising the importance of maximising demand side opportunities, the Ministerial Council on Energy has agreed the terms of reference for the Stage III Review of Demand Side Participation. This will enable the AEMC to extend and broaden its work to identify further opportunities for demand side participation.
Energy White Paper
In addition to the AEMC's work we are discussing today, the Commonwealth Government is continuing to progress its Energy White Paper.
This process has been restarted following last year's election, and I remain committed to finalising an Energy White Paper by the end of 2012.
Work such as this AEMC discussion paper will feed into the development of the Energy White Paper, and feed into the thinking of the Ministerial Council on Energy, which from June this year is merging with the Ministerial Council on Minerals and Petroleum Resources to become the Standing Committee on Energy and Resources.
Conclusion
As we have discussed, there is a lot happening in our sector at the moment and the release of the AEMC's discussion paper is an important contribution to help shape the development of the market in coming years.
Energy remains critically important in underpinning our prosperity and standard of living.
We stand at the beginning of what will be a transformation in our energy sector as a price on carbon is introduced.
This transformation will require significant investment in the decades ahead, and we need to ensure that we have the market settings that will bring on this investment.
I am pleased to launch the AEMC's discussion paper.
Thank you