Acknowledgments. Australian Energy Projections to , BREE, Canberra, November. Commonwealth of Australia 2014

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2 Australian Energy Projections to, BREE, Canberra, November. Commonwealth of Australia 2014 This work is copyright, the copyright being owned by the Commonwealth of Australia. The Commonwealth of Australia has, however, decided that, consistent with the need for free and open re-use and adaptation, public sector information should be licensed by agencies under the Creative Commons BY standard as the default position. The material in this publication is available for use according to the Creative Commons BY licensing protocol whereby when a work is copied or redistributed, the Commonwealth of Australia (and any other nominated parties) must be credited and the source linked to by the user. It is recommended that users wishing to make copies from BREE publications contact the Deputy Executive Director, Bureau of Resources and Energy Economics (BREE). This is especially important where a publication contains material in respect of which the copyright is held by a party other than the Commonwealth of Australia as the Creative Commons licence may not be acceptable to those copyright owners. The Australian Government acting through BREE has exercised due care and skill in the preparation and compilation of the information and data set out in this publication. Notwithstanding, BREE, its employees and advisers disclaim all liability, including liability for negligence, for any loss, damage, injury, expense or cost incurred by any person as a result of accessing, using or relying upon any of the information or data set out in this publication to the maximum extent permitted by law. Australian Energy Projections to 2050 Postal address: Bureau of Resources and Energy Economics GPO Box 1564 Canberra ACT 2601 Phone: , or info@bree.gov.au, or arif.syed@bree.gov.au Web: Acknowledgments This report was prepared by Arif Syed. The author gratefully acknowledges the assistance of BREE colleagues for their assistance in data provision and helpful comments on drafts of this report. A special thanks goes to Peta Nicholson for her help in improving the graphic design in the report. Valuable input and comments were also received from Rhys Hunt, Richard Miles, and Dr Cally Brennan of the Department of Industry. The preparation of this report also benefited from valuable insights and information provided by a range of agencies that participated in the consultation program. These included the Australian Treasury, the Clean Energy Regulator, the Australian Energy Market Operator (AEMO), the Commonwealth Scientific and Industrial Research organization (CSIRO), the New South Wales Department of Water and Energy, Bloomberg and ACIL Allen consultancies, and the Department of Environment. 2

3 Foreword The Australian Energy Projections to 2050 provides long-term projections of Australian energy consumption, production and trade. This report assists in providing the basis for informed decision making for the Australian energy sector by government, industry and the community. This report aims to encapsulate the recent developments such as the repeal of carbon pricing and changes in electricity generation technology costs in providing long-term projections of Australian energy consumption, production and trade. Coal and oil are projected to continue to supply the bulk of Australia s energy needs, although their share in the energy mix is projected to decline. Electricity generation is projected to grow at the rate of 0.8 per cent a year from to, and black coal is projected to remain Australia s dominant energy export, while the liquid natural gas exports are also projected to increase significantly. Wayne Calder Deputy Executive Director Bureau of Resources and Energy Economics November

4 Contents Acknowledgments 2 Foreword 3 Contents 4 Glossary 5 Units 7 Executive Summary 8 1 Introduction 11 2 The Australian energy context 12 Energy resources 12 Energy consumption 13 Energy production 15 Electricity generation 15 Energy trade 16 Energy policy 17 Renewable Energy Target 17 Energy efficiency 19 3 Methodology and key assumptions 20 E4cast overview 20 Key assumptions 25 4 Energy Consumption 28 Total primary energy consumption 28 Aggregate energy intensity trends 28 Primary energy consumption, by state 30 Primary energy consumption, by sector 31 Electricity generation 33 Final energy consumption, by sector 37 5 Energy Production and Trade 41 Black coal production and exports 42 Natural gas production and LNG exports 44 Crude oil production and net imports 45 6 Conclusions 48 References 49 4

5 Glossary Bagasse Biogas Coal by-products Conversion Gas The fibrous residue of the sugar cane milling process that is used as a fuel (to raise steam) in sugar mills. Landfill (garbage tips) gas and sewage gas. By-products such as coke oven gas, blast furnace gas (collected from steelworks blast furnaces), coal tar and benzene/toluene/xylene (BTX) feedstock. Coal tar and BTX are both collected from the coke-making process. The process of transforming one form of energy into another before use. Conversion itself consumes energy. For example, some natural gas and liquefied petroleum gas is consumed during gas manufacturing, some petroleum products are consumed during petroleum refining, and various fuels, including electricity itself, are consumed when electricity is generated. The energy consumed during conversion is calculated as the difference between the energy content of the fuels consumed and that of the fuels produced. Gases that include commercial quality sales gas, liquefied natural gas, ethane, methane (including coal seam and mine-mouth methane and gas from garbage tips and sewage plants) and plant and field use of non-commercial quality gas. In this report, natural gas also includes town gas (including synthetic natural gas, reformed gas, tempered liquid petroleum gas and tempered natural gas). Gas pipeline operation Natural gas used in pipeline compressors, and losses, operation and leakage during transmission. Levelised cost Petajoule Petroleum Primary fuels The total levelised cost of production represents the revenue per unit of electricity generated that must be met to break even over the lifetime of a plant. The joule is the standard unit of energy in electronics and general scientific applications. One joule is the equivalent of one watt of power radiated or dissipated for one second. One petajoule, or 278 gigawatt hours, is the heat energy content of about tonnes of black coal or 29 million litres of petrol. Crude oil and natural gas condensate used directly as fuel, liquefied petroleum gas, refined products used as fuels (aviation gasoline, automotive gasoline, power kerosene, aviation turbine fuel, lighting kerosene, heating oil, automotive diesel oil, industrial diesel fuel, fuel oil, refinery fuel and naphtha) and refined products used in non-fuel applications (solvents, lubricants, bitumen, waxes, petroleum coke for anode production and specialised feedstocks). The distinction between the consumption of petroleum at the primary and final end use stages relates only to where the petroleum is consumed, not to the mix of different petroleum products consumed. The consumption of petroleum at the primary energy use stage is referred to collectively as oil, while the consumption of petroleum at the final end use stage is referred to as petroleum products. The one exception to this is liquefied petroleum gas (LPG). LPG is not included in the definition of end use consumption of petroleum because it is modelled separately. The forms of energy obtained directly from nature. They include nonrenewable fuels such as black coal, brown coal, uranium, crude oil and condensate, naturally occurring liquid petroleum gas, ethane and natural gas, and renewable fuels such as wood, bagasse, hydroelectricity, wind and solar energy. 5

6 Secondary fuels Total final energy Fuels produced from primary or other secondary (or derived) fuels by conversion processes to provide the energy forms commonly consumed. They include refined petroleum products, electricity, coke, coke oven gas, blast furnace gas and briquettes. The total amount of energy consumed in the final or end-use sectors. It is equal to total primary energy consumption less energy consumed or lost in conversion, transmission and distribution. Total primary energy Also known as total domestic availability. The total of the consumption of each fuel (in energy units) in both the conversion and end use sectors. It includes the use of primary fuels in conversion activities, notably the consumption of fuels used to produce petroleum products and electricity. It also includes own use and losses in the conversion sector. 6

7 Units Metric units Standard metric prefixes J Joules K kilo 10 3 (thousand) L Litres M mega 10 6 (million) t Tonnes G giga 10 9 (1000 million) g Grams T tera Wh watt-hours P peta b billion (or 1000 million) E exa Standard conversions 1 barrel = L 1 kwh = 3600 kj Indicative energy content conversion factors Black coal production Brown coal Crude oil production Naturally occurring LPG LNG exports Natural gas (gaseous production equivalent) Biomass Hydroelectricity, wind and solar energy 28.5 GJ/t 9.7 GJ/t 37 MJ/L 26.5 MJ/L 54.4 GJ/t 40 MJ/kL 11.9 GJ/t 3.6 TJ/GWh Conventions used in tables Small discrepancies in totals are generally the result of the rounding of components. 7

8 Executive Summary This report contains BREE s long-term projections of Australian energy consumption, production and trade for the period to. These projections are not intended as predictions or forecasts, but as indicators of potential changes in Australian energy consumption, production and trade patterns given the assumptions used in the report. In undertaking these projections, BREE has incorporated government policies already enacted and those that can reasonably be expected to be adopted over the projection timeframe. Noting that the Government policy is to introduce the direct action plan to mitigate carbon emissions, there is no direct or indirect pricing of carbon emissions in the projections. As the Renewable Energy Target (RET) review is in progress, the existing RET target has been retained. Energy consumption Total primary energy consumption is projected to grow by nearly 42 per cent (or 1 per cent a year) over the projection period. This compares with the average annual growth in primary energy consumption in Australia of 1.5 per cent a year from to Coal and gas will continue to supply Australia s energy needs, although their share in the energy mix is expected to decline. The use of gas (conventional and unconventional natural gas) in industries is expected to grow over the outlook period with projected falls in gas-fired electricity generation offset by growth in the consumption of gas in LNG production. Renewable energy consumption is projected to increase moderately at the rate of 0.9 per cent a year over the projection period. The growth in renewable energy is mainly driven by strong growth in wind and solar energy, at 2 and 1.7 per cent, respectively. The higher growth rates in energy consumption projected in Queensland, Northern Territory, and Western Australia, compared with other states, are underpinned by relatively higher gross state product assumptions, combined with the high share of mining in economic output and the significant projected expansion of the gas sector, in particular LNG. The electricity generation sector and the transport sector are expected to remain the two main users of primary energy over the outlook period. While the mining sector accounts for 8.7 per cent of primary energy consumption in , it is projected to have the highest energy consumption growth rate over the outlook period. This reflects the expected ongoing moderate global demand for energy and mineral commodities and the large number of mineral and energy projects (including LNG and coal seam gas) assumed to come on stream over the next few years. Oil consumption in the transport sector is expected to grow steadily over the projection period at an average rate of 1.3 per cent a year, driven largely by economic growth. Within the transport sector, road transport is the largest contributor to energy consumption. 8

9 Energy use in the road transport sector is projected to grow by 0.65 per cent a year on average over the period to. Electricity generation Gross electricity generation is projected to grow by nearly 30 per cent (or 0.8 per cent a year) from 255 terawatt hours in to 332 terawatt hours in. Coal is expected to remain the dominant source of electricity generation. The share of coal in electricity generation is projected to remain broadly constant (64 per cent in and 65 per cent in ), growing at 0.8 per cent a year. Due to the declining cost of renewable generation (mostly wind and solar) over the projection period as shown in the latest BREE s Australian Energy Technology Assessment (BREE 2013a), electricity production from renewables is expected to grow by 1.5 per cent a year, with wind and solar growing at a rate of 2 and 3 per cent respectively over the projection period. The share of renewables is expected to increase from 15.3 per cent in to 22 per cent in 2020, and then falling slightly to 20.1 per cent by. Energy production and trade Total production of non-uranium energy in Australia is projected to grow by 59 per cent (or 1.3 per cent a year) over the projection period, driven by strong growth in gas, to reach petajoules in. While coal production is expected to continue to increase, with a projected growth of 1.2 per cent a year, its share in total energy production is expected to fall from the 75 per cent in to 71 per cent by the end of the projection period. The production of gas (conventional and unconventional natural gas) is expected to grow at a rate of 2.5 per cent a year over the projection period, while its share in total Australian energy production increases from 18 per cent to 27 per cent from the beginning to the end of the projection period. Australia s exports of energy are projected to grow over the projection period. In , the ratio of Australia s primary energy consumption to energy production (excluding uranium) is estimated to be 35 per cent. By, this ratio is projected to fall to 31 per cent. Black coal, which includes both thermal and metallurgical coal, is projected to remain Australia s dominant energy export. The projected average annual growth rate of 1.2 per cent is based on expectations that global demand for coal will continue to increase in the period to as a result of increased demand for electricity and steel-making raw materials, particularly in emerging market economies in Asia. LNG exports are also projected to increase significantly. By, LNG exports from the western market have the potential to reach 44 million tonnes (2 838 petajoules), which reflects an average annual growth rate over the projection period of 2.6 per cent. LNG growth is higher in Eastern Gas Market and Northern Gas Market exports at 6.7 and 4 per cent a year, respectively, over the projection period. It may be noted that LNG exports are included as exogenous variables, using the data to 2020 from BREE s internal 9

10 database. IEA projections for growth in LNG supply in Australia are used (IEA 2012) as well. With declining oil production and limited prospects for an expansion of refinery capacity, coupled with recent refinery closures, Australia s net trade position for crude oil and refined petroleum products is expected to deteriorate over the outlook period. Australia s net imports of liquid fuels are projected to increase by 2.4 per cent a year on average. 10

11 1 Introduction The current set of results provides an update to the Australian energy consumption, production and trade projections published by BREE in December 2012 (BREE 2012a), with the following amendments: revisions to the base year data; revisions to economic growth assumptions; revisions to long-term energy price and electricity generation technology costs assumptions; and removing carbon pricing. The report aims to encapsulate these recent developments by providing an assessment of long-term projections of Australian energy consumption, production and trade for the period to These projections are derived using the E4cast model, a dynamic partial equilibrium model of the Australian energy sector. In undertaking these projections, government policies that have already been enacted are included, in particular, the Renewable Energy Target and the repeal of carbon pricing. There is always some degree of uncertainty about technology, investment and also government policies in the area of energy. The projections should only be considered as a scenario of future energy use, and not a forecast of energy use. In this report, measures of energy consumption, production and net trade are expressed in energy content terms (typically petajoules or gigawatt hours for electricity) to allow for comparison across the energy commodities. The report is organised as follows. In section 2 the energy context in Australia is described, with a view to highlighting the historical trends in the data and their likely effect on the long-term energy trends in the next sections. Section 3 briefly presents the modelling framework used, as well as the key underlying assumptions. Section 4 provides the outlook for Australian energy consumption and electricity generation covering the period to , and Section 5 provides the long-term outlook for Australian energy production and trade. Section 6 offers concluding remarks. 11

12 2 The Australian energy context Energy resources Australia is endowed with abundant, high quality and diverse energy resources (Map 1). Australia has around 34 per cent of the world s uranium resources, 14 per cent of the world s black coal resources, and almost 2 per cent of world gas resources. Australia has only a small proportion of world resources of crude oil. Australia also has large, widely distributed wind, solar, geothermal, hydroelectricity, ocean energy and bioenergy resources. Geoscience Australia (GA) and BREE published Australian Energy Resource Assessment (AERA) in June 2014 (GA and BREE 2014), which has informed the present section of this report. Australia's energy resources are a key contributor to Australia's economic prosperity. Australia's estimated total demonstrated non-renewable energy resources, with the exception of oil, have increased since Australia s diverse energy resource base includes substantial coal resources that support domestic consumption and sizeable energy exports around the world. Australia has substantial uranium resources that support world-leading exports. Gas resources rank as Australia's third largest energy resource, supporting domestic consumption and a growing export market. Australia has limited crude oil resources and is increasingly reliant on imports for its transport fuels. Australia is endowed with renewable energy resources (wind, solar, geothermal, ocean and bioenergy). Wind and solar energy resources are being increasingly exploited, while geothermal and ocean energy remain largely undeveloped. Overall, it is expected that domestic and international demand for Australia's energy resources will continue to rise over the next few decades; however the rate of this growth is expected to slow, and the types of energy used are likely to change as new technologies become more competitive. The development of these resources has contributed to the competitiveness of energyintensive industries and provided considerable export income. Australia is one of the few OECD economies that is a significant net exporter of energy commodities, with the major exports being coal, liquefied natural gas (LNG), uranium and petroleum. Since uranium is not consumed domestically, it is not included in the energy balance projections presented in the following sections. In this section, uranium is included in production and exports to provide a historical description of Australian energy. Therefore, the numbers in this section are not strictly comparable to the numbers in the following sections that exclude uranium. 12

13 Map 1: Distribution of Australia s energy resources Source: GA and BREE 2014 Energy consumption Primary energy consumption measures the total amount of energy used within the Australian economy. It is the total of the consumption of each fuel in both the conversion and end-use sectors. Over the past three decades, growth in energy consumption has generally remained below the rate of economic growth. This indicates a longer term decline in the ratio of primary energy use to GDP, or energy intensity (Figure 1) in the Australian economy. This can be attributed to two key factors: improvements in energy efficiency associated with technological advancement; and a shift in industry structure towards less energy-intensive sectors such as the commercial and services sectors. 13

14 Figure 1: Australian energy intensity Index Source: BREE 2014a, Table B In black and brown coal together accounted for 33 per cent of total energy consumption, its lowest share since the early 1970s. Coal consumption fell by 6 per cent in , underpinned by falling coal use in the electricity generation and iron and steel sectors. Figure 2: Australian energy consumption, by fuel type Source: BREE 2014a, Table C. The share of natural gas in Australia s energy mix has increased in recent years, supported by greater uptake in the electricity generation sector and growth in industrial use, particularly in the non-ferrous metals sector. Gas consumption rose by 2 per cent in , supported by an expansion in alumina output and additional gas-fired electricity generation capacity. Hydro energy has been another significant contributor to energy consumption in Australia, with other renewables (solar, wind, and bioenergy) representing a much lower proportion of the total primary energy consumption. 14

15 Energy production Primary production Energy production is defined as the total amount of primary energy produced in the Australian economy, as measured before consumption or transformation. Australia is the world s ninth largest energy producer, accounting for around 2.4 per cent of the world s energy production (IEA 2012a). The main fuels produced in Australia are coal, uranium and gas (Figure 3). While Australia produces uranium, it is not consumed domestically and all output is exported. Coal accounted for around 59.3 per cent of total energy production in energy content terms in , followed by uranium (22 per cent) and gas (12.7 per cent). Crude oil, condensate and naturally occurring LPG represented 4.6 per cent of total energy production in that year, and renewable energy the remaining 1.7 per cent. Australian production of renewable energy is dominated by bagasse, wood and wood waste, and hydroelectricity, which together accounted for around 80 per cent of renewable energy production in Wind and solar energy accounted for the remainder of Australia s renewable energy production, and their production has been increasing strongly. Figure 3: Australian energy production, by fuel type Source: BREE 2014a, Table J. Electricity generation Electricity generation has grown at an average annual rate of 3.5 per cent a year from to However, there has been a gradual decline in generation over the past few years (Figure 4), from 253 terawatt hours (around 911 petajoules) in to 249 terawatt hours (897 petajoules) in Electricity generation grew at an average rate of 1.2 per cent from to (Figure 4). Coal continues to be the major fuel source for electricity generation, although its share in total production fell from 77 per cent to around 66 per cent in In contrast, natural gas-fired generation continued to rise in , supported by new capacity coming on line in Victoria. 15

16 Figure 4: Australian electricity generation, by fuel type GWh Black coal Brown coal Natural gas Oil Renewables Source: BREE 2014a, Table O. The share of renewables in Australian electricity generation has risen from approximately 8 per cent in to around 13 per cent in Energy trade Australia s energy exports grew by 14 per cent in in energy content terms, to reach petajoules, which is equal to around 80 per cent of total energy production. This strong growth was led by Australia s three largest energy exports: black coal, uranium oxide and liquefied natural gas (LNG) (Figure 5). Figure 5: Australian energy exports, by fuel type Source: BREE 2014a, Table J. Total export earnings for mineral and energy commodities for are forecast to be around $196 billion, supported by robust growth in both mineral and energy commodity export volumes. These predictions are in spite of tighter international commodity market conditions and lower margins for domestic producers, 16

17 Black coal exports amounted to petajoules (around 336 million tonnes) in (AES 2014), as production rebounded at existing mines and ramped up at a number of new projects completed in Coal exports have grown at 5 per cent a year over the past decade as strong global demand (particularly from China) has stimulated investment in numerous expansions and new mine and infrastructure capacity. In LNG exports reached petajoules (around 23.9 million tonnes). Over the past decade, two new LNG trains built at NWS (in 2004 and 2008), and the start-up of Darwin LNG in 2006 and Pluto in 2012 have been responsible for sustained LNG export growth of 13 per cent a year (BREE 2014 a). Australia is a net importer of liquid hydrocarbons, including crude oil and most petroleum products. Imports of crude oil and refined products have been growing strongly in recent years. Expansion in international refining capacity, particularly in Singapore, combined with growth in the mining and transport sectors has seen Australian imports of automotive gasoline, diesel fuel and aviation turbine fuel all grow strongly. The ageing domestic refineries are finding it difficult to compete with vast and more modern refineries in Asia that hold significant technological and economies-of-scale benefits over Australian refineries. Any future expansion of Australia s energy market, including access to new energy resources, will require investment in energy infrastructure. Additional investment will be required to replace ageing energy assets and also to allow for the integration of renewable energy sources into existing energy supply chains. Energy policy Energy related policy responsibilities are shared across the different levels of government in Australia. Much of Australia s energy policy is developed and implemented through cooperative action between the Australian and state and territory governments. The Government has prioritised a new Energy White Paper to address the challenges facing Australia s energy sector and to provide industry and consumers with certainty in government policy. The Energy White Paper will articulate a coherent and integrated national energy policy, addressing the issues of reliable and competitively priced energy supply, streamlining regulation, and driving a commercially driven energy market that provides transparent prices and investment signals across all sources of energy and proven energy technologies. Further information is available on the Energy White Paper website Renewable Energy Target The objective of the RET is to advance the development and employment of renewable energy resources over the medium term and to assist in moving Australia to a lower carbon economy. The Renewable Energy Target legislation requires that the scheme is reviewed every two years. The Australian Government released the Terms of Reference (ToR) for the review and appointed an expert panel to undertake the review in February The ToR 17

18 specifies the examination of the operation and costs and benefits of the Renewable Energy (Electricity) Act 2000 ("the Act") and related legislation and regulations, and the RET scheme constituted by these instruments. This included considering: the economic, environmental and social impacts of the RET scheme, in particular the impacts on electricity prices, energy markets, the renewable energy sector, the manufacturing sector and Australian households; the extent to which the formal objects of the Act are being met; and the interaction of the RET scheme with other Commonwealth and State/Territory policies and regulations. On 15 August 2014 the Expert Panel provided its report to the Australian Government. The Government is currently considering the RET Review report. Introduced in 2010, the RET requires gigawatt hours of electricity to be supplied from renewable energy sources by This target corresponds to around 20 per cent of total electricity generation at the time the RET was introduced. The RET brought existing state based RETs, such as the Victorian Renewable Energy Target, into a single national scheme. Initially, retailers and large users of electricity were legally required to earn or obtain Renewable Energy Certificates (RECs) equivalent to a set proportion of their electricity purchases. Additionally, households and small businesses could earn RECs on a voluntary basis through solar credits for small-scale renewable energy installations. RECs could then be traded to ensure companies reached their legislated quota and to provide incentives for the adoption of renewable energy sources. From 1 January 2011, the RET has operated as two parts: 1. Large-scale Renewable Energy Target (LRET), and 2. Small-scale Renewable Energy Scheme (SRES). The LRET encourages the deployment of large-scale renewable energy projects such as wind farms, while the SRES supports the installation of small-scale systems, including roof-top solar panels and solar water heaters. The LRET is set in annual gigawatt hour targets, rising to GWh in The LRET target remains at GWh from 2021 to Small businesses and households are anticipated to provide more than the additional 4000 gigawatt hours through the SRES. The Clean Energy Regulator (CER) oversees the RET. The LRET targets are presented in Table 1 (CER 2014). Table 1: LRET renewable electricity generation target (excluding existing renewable generation) Year ending TWh and onwards 41 Source: CER (2014) 18

19 In E4cast, the renewable energy target is modelled as a constraint on electricity generation renewable energy must be greater than or equal to the interim target in any given year. In the model, the large scale grid renewable generation is modelled by a subsidy to renewables that is funded by a charge on non-renewable generators. This is endogenously modelled so that total renewable generation meets the target. The RET includes compulsory targets such as 41 TWh LRET by 2020 that is maintained to 2030, and 15 TWh existing renewable generation below baseline. Thus, the compulsory RET target equates to a total of 56 TWh renewable electricity generation from large grid based plants. In addition, RET also includes 4 TWh by 2020 and maintained to 2030 under SRES, greenpower and desalination plant demand (2.8 TWh), and the ACT renewable energy target 91.5 TWh). However, all these latter requirements are voluntary, and expected to be met through small-scale non-grid generation. In E4cast, only grid generation is modelled (excluding roof-top solar, or non-grid small generation plants). Energy efficiency Over the last two decades there has been a significant coordinated effort between Australian Commonwealth and state and territory governments to ensure that energy efficiency opportunities are recognised and realised. In particular, governments have sought to act where market failures have limited the take up of cost-effective energy efficiency activities. In 2009, Australian governments entered into a partnership agreement and developed a National Strategy on Energy Efficiency (NSEE) to accelerate energy efficiency efforts. These activities in particular, improved efficiency of refrigeration, air conditioning and electronics, minimum performance standards for a range of common household appliances and energy efficiency requirements in the Building Code are beginning to show up in Australia s energy use trends. Together with the growth in rooftop solar PV and a decline in some energy intensive industries, improved energy efficiency has reduced demand in the national electricity market, although this trend may be reversing since the repeal of the carbon price (Sadler 2014). In addition, energy efficiency measures can also reduce the need for costly upgrades to electricity infrastructure, if they are targeted at reducing peak demand. 19

20 3 Methodology and key assumptions E4cast overview The energy sector projections presented in this report are derived using the E4cast model. E4cast is a dynamic partial equilibrium model of the Australian energy sector. It is used to project energy consumption by fuel type, by industry and by state or territory, on an annual basis. Trends in economic growth and industry production, fuel prices and energy efficiency improvements are some of the parameters used to approximate the principal interdependencies between energy production, conversion and consumption. E4cast modelling framework incorporates domestic as well as international trade in energy sources. It provides a complete treatment of the Australian energy sector, representing energy production, trade and consumption at a detailed level. As a result, the model can be used to produce a full range of results, including Australian energy balance tables. E4cast modelling framework employs an integrated analysis of the electricity generation and gas sectors within an Australian domestic energy use model. The model represents two sets of conditions: quantity and competitive price constraints. The competitive equilibrium is achieved when all the constraints are satisfied. A simple schematic of the E4cast model is provided in Figure 6. Figure 6: Energy forecasting model Activity variable and growth assumptions Sector level energy demand within E4cast is primarily determined by the value of the 4 activity variable used in each sector s fuel demand equation, along with direct, cross 20

21 price, and income elasticities, as well as energy efficiency improvements. The activity variable used for all non-energy intensive sectors is gross state product (GSP), which represents income or business activity at the state level. Energy efficiency In the base year, the model uses empirically estimated energy efficiency parameters for end use sectors of the Australian economy. In addition, the E4cast model incorporates energy efficiency improvements over time. End-use energy efficiency improvements are represented by a decline in the demand for each fuel in a sector per unit of its output. The rate of end-use energy efficiency improvement is assumed to be 0.8 per cent a year (consistent with the Treasury suggested autonomous efficiency improvement rate for the RET Review in 2014) over the projection period for all fuels in non-energy intensive sectors. In sectors containing energy intensive industries, the low capital stock turnover relative to other sectors is expected to result in a lower rate of energy efficiency improvement of 0.2 per cent a year. Also, the rate of energy efficiency improvement is slightly different than mentioned above in some sectors, based on the sector level information drawn from the results from the previous Energy Efficiency Program, and other energy efficiency improvements in residential and commercial sectors due to the specific efficiency programs in these sectors (labelling, minimum standards, energy management system, capacity building and demonstration programs, etc.). To incorporate such effects, a higher rate of energy efficiency improvement is assumed for energy use. E4cast also incorporates energy efficiency and cost efficiency improvements in the electricity generation sector, reflecting expected technological developments over time (BREE 2013a). Energy production and trade In E4cast, it is assumed 4 that Australia s supply of black coal and oil will meet demand (for net export and domestic use) at a given price level. The outlook for black coal and LNG exports is based on BREE s Resources and Energy Quarterly. In the case of oil and naturally occurring LPG, domestic production is treated as exogenous, leaving the net trade in crude oil to be determined endogenously in the model. The supply of brown coal and non-traded black coal (that is, black coal produced in states other than New South Wales and Queensland) is approximated using state-specific price assumptions and an autonomous productivity improvement as the key determinants. Biogas and biomass prices are taken from BREE s publication (BREE 2013a). The direction of interstate trade in natural gas and electricity is determined endogenously in E4cast, accounting for variation in regional prices, transmission costs and capacities. In E4cast, over the medium term, upper limits on interstate flows of electricity and natural gas are imposed to reflect existing constraints. Beyond the medium term, it is assumed that any interstate imbalances in gas supply and demand will be anticipated, which will result in infrastructure investment in gas pipelines and electricity interconnector capacity sufficient to meet trade requirements. E4cast incorporates long-term macroeconomic forecasts from the Australian Treasury and current assumptions on the costs and characteristics of electricity generation technologies from BREE's Australian Energy Technology Assessment publication (BREE 2013a). A brief overview of the key features of the current version of E4cast is provided in Box 1. The model provides an outlook for the Australian energy sector that is feasible (where all quantity constraints are satisfied) and satisfies the economic competitive price conditions 21

22 (a competitive equilibrium is achieved). Box 1: Key features of E4cast The first version of the model was documented in ABARE (2001). Since its inception, the model has been enhanced and refined in a number of ways to provide a sound platform for the development and analysis of medium and long term energy projections. Key features of the 2014 version of E4cast include: E4cast is a dynamic partial equilibrium framework that provides a detailed treatment of the Australian energy sector focusing on domestic energy use and supply; the Australian energy system is divided into 24 conversion and end use sectors; fuel coverage comprises 19 primary and secondary fuels; all states and territories (the Australian Capital Territory is included with New South Wales) are represented; detailed representation of energy demand is provided. The demand for each fuel is modelled as a function of income or activity, fuel prices (own and cross) and efficiency improvements; primary energy consumption is distinguished from final (or end use) energy consumption. This convention is consistent with the approach used by the International Energy Agency; the current version of E4cast projects over the period from to ; demand parameters are established econometrically using historical Australian energy data from BREE s Australian Energy Statistics; business activity is generally represented by gross state product (GSP); energy intensive industries are modelled explicitly, taking into account large and lumpy capacity expansions. The industries modelled in this way are: Aluminium; Other basic nonferrous metals (mainly alumina); and Iron and steel. the electricity generation module includes 45 generation technologies. Investment plans in the power generation sector are forward looking, taking into account current and likely future conditions affecting prices and costs of production; key policy measure modelled explicitly is the Australian Government Renewable Energy Target; all fuel quantities are in petajoules; supply of gas is modelled at the state level; and all prices in the model are real, in constant dollars of the base year, and are expressed in dollars per gigajoule. The model includes 19 energy sources, 45 electricity generation technologies, 5 conversion sectors, 19 end-use sectors (Tables 2 and 3), and covers all Australian states (Australian Capital Territory is included in New South Wales). The demand functions for each of the main types of fuel (such as electricity, gas, coal and petroleum products) have been estimated econometrically and incorporate own price, cross price, income or activity, and technical change effects. 22

23 Table 2: Fuel coverage in E4cast Black coal Brown coal Coal by-products Coke coke oven gas blast furnace gas Natural gas Coal seam gas Oil (crude oil and condensate) Liquefied petroleum gas (LPG) Other petroleum products Electricity Solar (solar hot water) Solar electricity (solar photovoltaic and solar thermal) Biomass (bagasse, wood and wood waste) Biogas (sewage and landfill gas) Hydroelectricity Wind energy Geothermal energy Ocean energy 23

24 Table 3: Industry coverage in E4cast Sectors/sub-sectors Conversion industries Coke oven operations 2714 Blast furnace operations 2715 ANZSIC code Petroleum refining 2510, Petrochemicals Electricity generation 361 End use industries Agriculture Mining Manufacturing and construction na Division A Division B (includes LNG) Division C Wood, paper and printing Basic chemicals Nonmetallic mineral products 26 Iron and steel (excludes coke ovens and blast furnaces) Basic nonferrous metals Aluminium smelting , Other basic nonferrous metals , Other manufacturing and construction Transport Division I (excludes sectors 66 and 67) na Road transport 61 Passenger motor vehicles Other road transport Railway transport 62 Water transport 63 Domestic water transport 6301 International water transport 6302 Air transport 64 Domestic air transport International air transport Pipeline transport 6501 Commercial and services Sectors 37, 66 and 67; Divisions F, G, H, J, K, L, M, N, O, P and Q Residential Although Australia is a significant producer of uranium oxide, it is not included in the projections as it is not consumed in Australia and, therefore, does not affect the domestic energy balance. na na na na na 24

25 E4cast base year data The underlying year in the model is which is drawn from BREE s Australian Energy Statistics (AES) (BREE 2013b and BREE 2014a). These statistics are largely derived from the National Greenhouse and Energy Reporting (NGER) data, sourced from the Australian Government Department of Environment. Information from other Australian Government agencies, state based agencies, industry associations and publicly available company reports is also used to supplement and/or validate NGER data. These sources include the Australian Bureau of Statistics, BREE s commodity database and the Australian Petroleum Statistics. The industry classifications in the AES may be slightly different to the classifications used in this report. Key assumptions There are a number of economic drivers that will shape the Australian energy sector over the next two decades. These include: Population growth; Economic growth; Energy prices; Electricity generation technologies; End use energy technologies; and Government policies. The assumptions relating to these key drivers are presented below. Population growth Population growth affects the size and pattern of energy demand. Projections for the Australian population are taken from the Australian Bureau of Statistics publication (ABS 2013) and are presented in Table 4. Table 4: Australian population assumptions year population millions Source: ABS (2013) Economic growth The energy projections are highly sensitive to underlying assumptions about GDP growth the main driver of energy demand. Sector level energy demand within E4cast is primarily determined by the value of the activity variable used in each sector s fuel demand equation, along with fuel prices; that is, direct and cross price, and income elasticities, as well as energy efficiency improvements. Since E4cast is a bottom up model, the activity variable used for all non-energy-intensive sectors is gross state product (GSP), which represents income or business activity at the state level. However, for energy intensive industries (aluminium, other basic nonferrous metals, and iron and steel manufacturing) projected industry output is considered as a more relevant indicator of activity than GSP because of the lumpy nature of investment. 25

26 The long-term projections of the GDP and GSP assumptions (Table 5) are provided by the Australian Treasury. In , Australia s real GDP increased by 2.6 per cent, following growth of 3.6 per cent in Over the projection period, Australia s real GDP is expected to grow at an average annual growth rate of 2.7 per cent. A moderation in Australia s population and labour supply growth will contribute to a gradual reduction in GDP growth in the latter part of the projection period. Queensland and Western Australia are expected to have the highest GSP growth rates over the period to , as a result of their substantial minerals and energy resource base, relatively high degree of export orientation, and higher relative population growth rates. Table 5: Australian economic growth, by region Annual growth rate to Per cent New South Wales 2.6 Victoria 2.5 Queensland 3.2 South Australia 1.5 Western Australia 3.3 Tasmania 1.8 Northern Territory 2.6 Australia 2.7 Sources: Australian Treasury provided assumptions on GSP and GDP Real energy prices Energy prices affect the demand for, and supply of, energy. The long term world energy price assumptions incorporated in E4cast are presented in Figure 7, and are drawn from the International Energy Agency (IEA) 2013 World Energy Outlook New Policies Scenario (IEA 2013), extended to Long-term energy price profiles will depend on a number of factors, including demand, investment in new supply capacity, costs of production, and technology. Although the long-run price paths follow smooth trends, in reality, prices are likely to fluctuate in response to short-term market developments. Domestic fuel costs, such as gas, black and brown coal, biomass and biogas are based on the fuel price projections to 2050 used in BREE 2013a. These fuel prices were provided by Acil Allen consulting. 26

27 Figure 7: Index of real world energy prices, 2012 dollars Price Index Crude oil LNG Coal Source: IEA 2013 Electricity generation technologies The Australian Energy Technology Assessment (AETA) provides insights on 40 market-ready and prospective electricity generation technologies in Australia (BREE 2012c). AETA provides latest levelised cost of energy (LCOE) estimates and projections to While other similar cost estimates have been conducted internationally, these studies are not directly applicable to Australian conditions due to differences in domestic costs (e.g. labour), differences in the quality of domestic energy resources, technology performance, and other local conditions. The LCOE estimates provided in BREE 2013a were used in the present projections. Government policies The key policies that have been modelled explicitly in E4cast included the repeal of carbon tax and the Minerals Resource Rent. Noting that the Government policy is to introduce the direct action plan to mitigate carbon emissions, there is no direct or indirect pricing of carbon emissions in the projections. Since the Renewable Energy Target (RET) review is in progress, the existing RET target has been retained. Direct action plan was not modelled directly given the capacity of the model. 27

28 4 Energy Consumption This chapter presents the outlook for Australian energy consumption for the period to under the economic assumptions and policy settings outlined in chapter 3. The projections cover primary energy consumption by energy type and sector; final energy consumption by energy type and end-use activity; and electricity generation. While the discussion focuses on Australian trends, key trends at a state and territory level are also highlighted. Total primary energy consumption Total primary energy consumption growth has shown a downward trend since the 1970s, reflecting changes to Australia s economic structure and the effect of technological developments and government policies on energy efficiency in energy conversion and end-use sectors. In the 1990s, energy consumption grew by an average annual rate of 2.3 per cent, followed by growth of 1.5 per cent a year in the 10 years to Over the outlook period, growth in energy consumption is expected to continue to be moderate, with an average annual growth rate of 1 per cent from petajoules in to petajoules in (table 6). The decline in the growth rate of energy consumption reflects the net outcome of countervailing downward and upward pressures on energy consumption growth. Assumptions about energy demand management, weak manufacturing energy demand, a shift away from more energy-intensive sectors in the economy, and existence of the RET target are some of the factors expected to provide a dampening effect on energy demand. Partly offsetting this trend are the increased energy demand in LNG production and mining, as well as economic growth in Australia returning to its long-term potential as world economic performance improves. A decline in the cost of renewable electricity generation technologies also dampens energy consumption by enhancing the share of renewable electricity generation in total generation. This is because the fossil fuels (black and brown coal, gas and oil) use about three times more energy in producing one unit of electricity generation compared with renewable fuels (wind, solar, geothermal and water). Hence as renewable electricity generation increases from 15 per cent in 2015 to above 20 per cent in 2050, less overall energy is used in the economy. Aggregate energy intensity trends Australia s aggregate energy intensity (measured as total domestic energy consumption per dollar of GDP) declined at an average rate of 1.3 per cent a year between and (BREE 2012b). Over the study period, the primary energy consumption is expected to grow at the rate of 1 per cent a year, and GDP is expected to grow at 2.7 per cent a year. Over the period to, Australia s aggregate energy intensity is projected to decline by around 1.7 per cent a year. Compared to the past trends, this indicates a considerable de-coupling of energy-gdp nexus, and a shift in Australia s economic structure over this period. The major drivers of this trend are a growth in renewable electricity generation costs and electricity generation over the projection period, and strong growth in less 28