Issues Paper on Australia s Energy Options and Strategies

Transcription

1 Issues Paper on Australia s Energy Options and Strategies Executive Summary This paper provides a broad review and statement of Australia s current energy status and options for future evolution of the energy sector. The primary policy drivers assumed are those oriented towards reduction in CO 2 emissions from Australian energy usage. Energy is a vital input to the Australian economy, which in all sectors of the economy has considerable dependence on low cost, secure and reliable energy. To maintain this advantage while transitioning to a low-carbon energy sector, the energy strategy needs to encompass all elements of the energy cycle from tapping of energy resources, through transport and conversion processes to the final energy use and usage processes in the country. In achieving these outcomes, the strategy needs to be closely linked with a complementary industrial and commercial development strategy. This paper concludes that initiatives complementary to the current clean energy policy position will be necessary if Australia is to meet its targets for reduction of Australian emissions by The complementary actions will need to be directed to reducing emissions across all sectors, particularly transportation, and across diffuse sources of emissions. The scenarios analysed show that attention needs to be given to reducing demands for energy, and to strategically targeting transition of energy usage to lower emission sources (e.g. in transport, from fossil fuels to electricity produced from low emission sources). These complementary actions would need to be predominantly regulatory and support based, rather than purely market driven. The transition to a low CO 2 emission economy will require a transition from an energy production sector based on low-to-moderate capital cost with higher marginal fuel and operating costs, to a sector with high capital costs and low marginal costs. This will mean that the transition will be driven by long term investment decisions rather than simply decisions taken on market pricing. In this high capital cost regime the key issue is gaining access to investment capital of a magnitude which requires accessing international capital, where the Australian requirements will be balanced against the risk-reward profiles of other investment opportunities in other countries. Australian policy and market consistency will be a critical determinant of the capacity for Australia to access these investment funds, and the cost of those funds. The high capital cost of new production facilities will also mean that investment will need to be on a long-term basis generally in excess of 30 years. Thus the profile of the production fleet of facilities in 2050 will be predominantly determined by investment and strategies established in the next decade. To provide an economic framework which maximises the return to Australia from commitment to a low CO 2 emission energy sector, strategies need to be implemented to ensure that Australia has the necessary skills to develop and deploy the appropriate technologies. January 2012 Page 1

2 Draft Discussion Paper on Australia s Energy Options and Strategy Introduction This paper provides a broad review and statement of Australia s current energy status and options for future evolution. The primary policy drivers assumed are those oriented towards reduction in CO 2 emissions from Australian energy usage. It identifies Australian-specific issues and differentiates Australian needs, opportunities and solutions from global issues. As well as identifying current and future opportunities, it identifies transition constraints and options, skills needs to facilitate these transitions, and policy needs to support the transitions. The effectiveness of policy interventions is related to the target to reduce Australian emissions by 80% (compared with present levels) by The paper is based on current data and trends for the Australian energy sector, and uses scenarios to provide indicative outcomes for various strategies and policy frameworks. Energy in Australia Energy is a vital input to the Australian economy, which in all sectors of the economy has considerable dependence on low cost, secure and reliable energy. This economic importance is underpinned by the need for reliable supply to ensure that key industrial and commercial processes are not undermined by the unavailability of energy causing disruption to the processes of the business, be it banking or mining. Additionally the processes of commerce and industry generally require that energy must be supplied on demand that is, when required by the business process, not when supply is available. Low cost energy has been an important foundation for Australian economic sectors, particularly in sectors associated with export of resources and for which transport and processing energy is a considerable cost factor. There is a diversity of energy consumption intensity between business and commerce sectors, and a diversity of energy sources across various industrial processes in some cases the opportunity for energy source substitution is limited by the industrial process itself. Of strategic importance to Australia is security of energy supply, to ensure that primary energy inputs are adequate for needs and that the indigenous cost of accessing indigenous resources sets a cap on prices. The energy dependence of the economy by sector (Chart 1) shows that industry (37%) and transportation (38%) together account for about 75% of the energy consumed in Australia. Strategies aligned with these main consumption sectors need to ensure the key requirements for cost, security and reliability are sustained. January 2012 Page 2

3 Other 0% 5% Residential 12% Commercial 0% 8% Residential Transport 38% Manuf& Constn 28% 0% Mining Mining 9% Final Energy 0% Consumption by Sector Chart 1: Final Energy Consumption by Sector 1 0% Commercial Manuf& Constn Also noteworthy is the dependence of end-use energy on direct fossil fuel usage (Chart 2) with only 20% of final end-use consumption being electricity. This dependency is to some extent driven by the energy form needed for industrial processes, but to a great extent driven by a century of technology selection and evolution in transportation vehicles. Electricity 20% Renewable s 4% Gas 20% Coal 4% Coal Gas Oil Oil 52% Electricity Renewables Final Energy Consumption by Type Chart 2: Final Energy Consumption by Energy Type 1 Most importantly over 50% of final use consumption is represented by oil, mainly (about twothirds) used in transportation. This dependence on oil products represents the most serious security risk for Australian energy, as indigenous production is declining and dependence on imported oil increasing (Chart 3). This provides a strong incentive to transition transportation to alternative local sources of energy 1 ABARE Energy Update 2011 January 2012 Page 3

4 2500 Oil Production and Imports PJ Import Production Chart 3: Production and Imports of Oil 2 The profile of primary energy sources for electricity production (Chart 4) is different to the whole-of-sector profile, with a higher dependence on indigenous resources, which has led to a reliable, high security, low cost energy sector in comparison with the rest of the world. Biomass 3% Oil 1% Wind 1% Hydro 2% Solar 0% Black Coal Gas Brown Coal 15% Black Gas Coal Oil 49% Biomass Brown Coal 29% Wind Primary Energy Souce in Electricity Production Chart 4: Primary Energy Input Source in Electricity Production 3 Electricity has become an increasingly important energy source in the modern Australian economy, particularly driven by the growth in the services sector, contraction in the manufacturing sector, and rapid development in the mining and minerals sector. As a result growth rates in electricity usage have been consistently higher than growth rates across the energy sector as a whole. The consequent whole-of-sector profile (Chart 5) indicates a high dependence on fossil fuels as an energy source 2 ABARE Australian Energy Projections to ABARE Energy Update 2011 January 2012 Page 4

5 Biomass 1% Oil 37% Gas 21% Renewable s 1% Coal 40% Coal Gas Oil Biomass Renewables Primary Energy Source Chart 5: Whole of Sector Primary Energy Source 4 Energy Resources of Australia Australia has an abundance and diversity of energy resources 5, with more than one third of the world s known economic uranium resources, extensive coal and gas resources capable of meeting domestic and export demands for many decades, and a rich diversity of renewable energy resources, encompassing wind, solar, geothermal, wave, tidal and biomass, which can contribute significantly to meeting Australia s future energy needs. The key constraint is the resources of liquid fossil fuels, which do not meet Australia s needs. Key Drivers of Effective Energy Strategy An effective Australian energy strategy needs to deliver a secure and reliable supply of energy to the Australian economy, while addressing external drivers such as reducing CO 2 emissions. It also needs to ensure that these energy services are provided at minimum cost to preserve Australia s international competitiveness. To achieve these objectives the energy strategy needs to encompass all elements of the energy cycle from tapping of energy resources, through transport and conversion processes to the final energy use and usage processes in the country. It needs to look for opportunities to take advantage of synergies between energy sources and energy usage, to facilitate transitions between the current energy structure and the strategically desired outcomes, and to facilitate the evolution of targeted energy conversion and usage technologies. It also needs to recognise that the evolution of control and information technologies is making alternative solutions to energy production, conversion and utilisation feasible. In achieving these outcomes, the strategy needs to minimise negative economic impacts of change (including to export markets) for Australia while maximising the economic opportunities for change. The energy strategy therefore needs to be closely linked with a complementary industrial and commercial development strategy. 4 ABARE Energy Update Australian Energy Resource Assessment, Geosciences Australia 2010 (ISBN ) January 2012 Page 5

6 Many of the elements of the Australian energy strategy will be inextricably linked with global strategies, experiences and markets. The Australian strategy needs to be developed pragmatically in the context of those global activities to ensure that Australia gains maximum leverage and benefit from its strategic positioning. There is a need for the energy strategy to provide an environment which will maintain the capacity for Australian energy businesses, and more broadly industry and commerce, to access international finance markets. Key considerations Australia, while a strong economy, is still a relatively small economy by world standards (ranked 18, behind Canada, Turkey and Indonesia). Strategic considerations need to recognise that as a relatively small economy Australia does not have the economies of scale in domestic markets to underpin its economy, and will depend on maintaining its competitive positions in the global markets to create economic growth. Given the distance from major markets, the competitive advantages that Australia has are built around resources (both mining and primary industry), services and educational standards (including research). Central to these is the foundation of low cost and reliable energy for production, transport and services industries. This foundation is built on not just access to plentiful and low cost energy resources, but on an innovative application of technology and techniques to provide energy to the economy on the required reliable and stable basis. The key considerations for an Australian energy strategy are: Long-term stability of strategy: The transition from the present energy profile to a different profile will involve changes to the existing pattern of production, transformation, transport and utilisation across all sectors of the economy that is changes to the fleet of current infrastructure and investments. (For example, the current fleet of buildings has an average age in excess of 25 years, and changes to this current infrastructure will be more difficult and expensive than implementing performance standards for new investments.) This means that the strategy needs to be seen in terms of decades rather than years, and that the energy strategy must be linked with long-term industry and social strategies. Energy efficiency: As the major component of energy costs is related to capital and financing costs (particularly for renewable energy technologies), efficient usage of energy is of prime importance. This was identified by the Prime Minister s Task Group on Energy Efficiency 6 which saw the need to [building] an energy efficiency culture in Australia through a longterm, nationally integrated strategy. Strategies for improving energy efficiency will differ markedly across various sectors, and the Australian energy strategy needs to recognise the specific issues and opportunities that the various sectors present. Demand Management: Energy is an important input to societal and economic activities, and the nature of the underlying processes means that energy must meet the demands of the process as required that is, a demand-pull, rather than a supply-push. Thus efficient 6 Report of the Prime Minister s Task Group on Energy Efficiency 2010 January 2012 Page 6

7 investment in, and use of, energy production and supply requires attention to management of demand, and strategic attention to market signals and technologies which will facilitate this. Identify and support technology pathways: Achievement of the defined goals will require adoption of new technologies some of which are commercially mature, and others which are highly prospective for utilisation over coming decades and will require ongoing development support. Manage transitions: As noted, achievement of energy goals will require changing not only the energy sector, but all sectors of the Australian society and economy. To be effective the Australian energy strategy must not only set goals and pathways, but manage the transitions that will need to take place, including: Transition to alternate energy sources Risk mitigation against external shocks, both financial and physical Transition to alternate fuels, technologies and processes Regulatory stability and capital predictability: The transitions contemplated in the strategy will require significant investment in new technologies and systems. This will require access to international finance markets, and thus the strategy needs to ensure both regulatory stability and capital predictability Recognise the unique aspects of energy markets and systems: The Australian energy markets and systems are unique in the world for a developed country, as a consequence of the patterns of development, the historical political structure of the country, sparse population densities, and the structure of the economy. The strategy needs to be based on a real analysis of the needs and forces acting in the energy system and its structure, rather than imitate experience in Europe and the USA. For example, the configuration and size of the EU and USA grids allow greater capability and flexibility to introduce intermittent generation. Integration of the smart-grid potential with the energy strategy: The distributed nature of the Australian grid, the differences in technical characteristics of alternate energy production and utilisation technologies (compared with current technologies), and the potential for a more distributed energy production system pose many technical and reliability challenges for future energy supply systems. The potential for smart grid technologies to address these issues makes it essential that the energy strategy encompasses the use and evolution of these technologies. Integration of industry and skill strategies with energy strategy: The implementation of a comprehensive energy strategy will have a profound effect on Australian industry and society, transforming the sourcing, production and use of energy in industry and commerce, as well as in the every-day lives of Australians. In order to maximise the benefits of this transformation, the energy strategy must be complemented by industry and skills strategies which ensure that Australian businesses and citizens can participate in the changed economy, and ensure that Australia maximises its return on its technological and resource advantages January 2012 Page 7

8 Technology Options The consideration of technology options in a strategic context needs to move beyond the debate of one-for-one substitutions (e.g. renewables - fossil fuels) to consider the advantages and disadvantages of various technologies within the whole framework of energy markets and energy uses, the opportunities for substitutions at the final use end of the spectrum (as well as the production/conversion end), the potential for synergies between alternate energy technologies, and feasible transition pathways. In this context the levelised cost of energy (LCOE) 7., which has been traditionally calculated at the production/conversion point, has limited usefulness in comparisons of economic benefits and potential if the comparisons between costs of technologies is made in isolation from the costs of transferring the energy from production points to end use locations, without recognising the demand profile of the end use, and in isolation from synergies available or required from other energy technologies. In the following sections the LCOE levels are derived from the various reports prepared for the Australian Government, and are used merely to indicate relative positioning at the present time. The following section outlines the status and trends of technology options, categorised as: Primary conversion technologies Enabling technologies System technologies Hybrid technologies End-use technologies (including energy efficiency Primary Conversion Technologies Coal-based Production of Electricity Coal-based electricity production is the dominant form of electricity production at the present time. This technology is commercially mature, with construction and operating costs, reliability and lifecycle parameters well established. In Australia the average fleet efficiency of conversion is 30+ %. LCOE is assessed (for Australia) as $40-$60/MWh. The technology trends for this technology are: Ultra-critical pulverised fuel conversion, with conversion efficiencies of 45+% Integrated gasification combined cycle, with conversion efficiencies of 50+% Carbon capture and storage (see enabling technologies section) Cost trends for the technology are stable, with decreases in capital costs in real terms and increases in coal costs in line with general economic trends 8 notwithstanding risks around domestic and higher global price convergence. 7 LCOE is the price electricity must be generated to break even over its life cycle. It includes the cost of capital, fuel and operating costs. It is used to compare the relative total lifecycle cost of different forms of electricity production. 8 Fuel resource, new entry and generation costs in the NEM, ACIL Tasman April 2009 January 2012 Page 8

9 Advantages of the technology are the capacity to be scheduled to meet demand, the capacity to load follow, and the capacity to access a local supply of coal to provide a lower exposure to international energy prices for coal. Disadvantages of the technology are long construction times, CO 2 emissions (see following section on carbon capture and storage), and water demands during operation, although these water demands can be reduced by technologies such as dry-cooling. Gas-based Production of Electricity Gas-based electricity production is a common form of electricity production globally at the present time. This technology is commercially mature, with construction and operating costs, reliability and lifecycle parameters well established. In Australia the average fleet efficiency of conversion is 20+ % (open cycle applications) and 45% (combined cycle applications). LCOE is assessed (for Australia) as $60-$100/MWh (combined cycle) and $120-$200/MWh (open cycle). The technology trends for this technology are improved gas turbine efficiencies and reliability, with best available technologies providing conversion efficiencies of 55+% in a combined cycle format. Cost trends for the technology are stable, with decreases in capital costs in real terms and increases in gas costs in line with export price trends 9. Advantages of the technology are the capacity to be scheduled to meet demand, and the capacity to load follow, lower capital costs than coal-fuelled power stations, and shorter construction times. Disadvantages of the technology are CO 2 emissions (see following section on carbon capture and storage), and exposure to international pricing for gas (creating some uncertainty as to price levels over the long term). Hydro-electricity Hydro-electricity is the most common form of renewable generation of electricity at the present time. This technology is commercially mature, with construction and operating costs, reliability and lifecycle parameters well established. The major types of hydro-electric power stations are stored-water, pumped storage and run-ofriver. Pumped storage offers the opportunity for providing energy storage for a range of other electricity producing technologies, including wind and solar. The run-of-river technology provides opportunities for small scale implementation, with lesser environmental impact. 9 ACIL Tasman Fuel resource, new entry and generation costs in the NEM, April 2009 January 2012 Page 9

10 Advantages of the technology are (depending on the type of implementation) the capacity to be scheduled, the capacity to provide voltage and frequency support to the grid, low operating costs and no CO 2 emissions Disadvantages are limited sites available for development (in Australia), possible large environmental impact in site development (with long approval and construction times), and high capital costs. Wind Wind production of electricity is a commercially mature technology, with construction and operating costs and reliability well understood. LCOE is assessed as $120-$220/MWh. Technology trends are towards larger turbines, improved confidence in lifecycle costs and reliability, and greater controllability. Cost trends are decreasing at a steady rate. Advantages of this technology are currently that it provides the lowest LCOE of renewables, and that there is extensive knowledge of wind resources in Australia. Disadvantages are that while predictable as an energy source, production is intermittent and experience (in Australia) indicates that only a small proportion of wind capacity is available at times of peak demands- which requires additional investment/capacity to supplement the wind generation capacity at times of peak demand. There are also a relatively constrained number of sites available for extensive development near the established grid. Solar The three broad categories of solar energy utilisation: Solar-thermal (use of solar energy to produce low-temperature heat) Solar photovoltaic (conversion of solar energy directly to electricity) Concentrating solar thermal (use of solar energy to produce steam and then to convert to electricity) are at various stages of commercial maturity. Solar-Thermal Solar-thermal is a commercially mature technology broadly used in the residential and commercial sectors for water heating (see also section on hybrid systems). It is generally cost competitive against electricity and gas at the retail level Solar Photovoltaic This technology is commercially mature, with construction and operating cost known with reasonable certainty, and confidence about reliability lifecycle parameters. LCOE is assessed as $200-$350/MWh. January 2012 Page 10

11 Nuclear The technology trends for this technology are improvements in cell efficiency, improved electronics for enhanced controllability, and new cell structures. With balance of plant costs and project costs a major proportion of large scale projects, trends are to whole of supply solutions and improved logistics and balance of plant designs. Development of organic and other thin film photovoltaics, while still predominantly at the research or demonstration stage, appears to offer broad and low cost applications in building and residential applications in the longer term. Cost trends for this technology are significant reductions through increased scale of production and deployment. Advantages of this technology are scalability from kilowatt to megawatt range (from retail, through commercial, to grid-scale), providing the broadest range of applications of any renewable technology, a broad spectrum of potential development sites across most of Australia, including many near the established grid, and low operating cost. Disadvantages are that while energy production is predictable, production can be variable. Without storage (see also section on storage) only a small proportion of solar capacity is available at times of peak demands - which requires additional investment to supplement the solar generation capacity at times of peak demand. Concentrating Solar Thermal Concentrating solar thermal covers a number of different collector and power production technologies. Typically the technology is close to being commercial, but currently constrained by higher cost, with an LCOE of $250-$400/MWh. Technology trends are to improve economics of the technology by improved conversion efficiency and reduced material costs. Advantages of this technology are some capacity to reduce variability through innate storage capacity for energy (note that supplementing solar energy with say gas-fuelled steam production is more accurately termed a hybrid technology) and the availability of a broad spectrum of potential development sites across most of Australia, including many near the established grid. Disadvantages are that while energy production is predictable, production can be variable. Without storage (see also section on storage) or energy supplementation only a proportion of solar capacity is available at times of peak demands - which requires additional investment to supplement the solar generation capacity. Nuclear-based electricity production is globally a major form of electricity production at the present time. This technology is commercially mature (about one-quarter of electricity production in the OECD countries is provided by nuclear energy), with construction and January 2012 Page 11

12 operating costs, reliability and lifecycle parameters well established. LCOE is assessed as $100- $140/MWh. Technology trends include advanced cycles and improvements to fuel efficiency. Cost trends for the technology are stable, with increases in line with general economic trends. The advantages of nuclear power plants are the capability to operate at high capacity factors and availability with low marginal cost (which makes them important for low cost base-load power) and an excellent safety record 10 when compared against other forms of electricity generation.. Disadvantages are constraints imposed by the spent fuel lifecycle and social and political perceptions in Australia, which reflects into higher costs and longer times for project execution, and decommissioning issues. Geothermal 11 Geothermal technology has a number of different manifestations: Low-grade heat for heating and cooling buildings Tapping underground steam sources in thermally active areas Tapping heat from deep hot rocks or hot sedimentary aquifers. In Australia, most attention is being given to the third category, although there are many examples of the use of geothermal energy in the first category in Australia. The current status of this technology is pre-commercial, with critical elements of the technology in the development and proving stage. LCOE is assessed as $120-$220/MWh. Cost trends are decreasing, but at a slow rate while technology proving is the focus.. Advantages of the technology are the capacity to be scheduled to meet demand, the capacity to load follow, and a lower exposure to international energy prices. Disadvantages of the technology are long construction times, and water demands (or production from sedimentary aquifers) during operation. Biofuels 1213 Biofuels are a broad spectrum of fuels produced from renewable biomass material. They include biomass (often by-product waste) which is burnt in power-stations to produce heat or electricity, and bio-liquids such as biodiesel and bioethanol, used as supplements for fossil fuels such as petroleum and oil. 10 International Atomic Energy Agency 11 Australian Geothermal Energy Technology Roadmap, Australian Government Advanced Biofuels Study L.E.K Consulting, December Australian Bioenergy Roadmap, Clean Energy Council 2008 January 2012 Page 12

13 Biofuels can be considered as renewables, as the CO 2 emissions on combustion are balanced by CO 2 absorption in production. Advanced biofuel feedstock such as algae are still in the research stage, but offer potential. Fuel Cells 14 There are many types of fuel cells, the main difference being the electrolyte; fuel cells are classified by the type of electrolyte they use. The energy efficiency of a fuel cell is generally between 40-60%. In addition to electricity, fuel cells produce heat and may reach efficiencies up to 85% if this waste heat is captured for use. Enabling Technologies Storage Energy storage provides the capability to allow energy to be scheduled for delivery at a later time than when it is produced, or to a different location, and is an important enabling technology for many forms of renewable energy. (Fossil fuels have this characteristic inherently). The major forms of energy storage are heat, chemical energy (e.g. batteries), kinetic energy (e.g. flywheels) and gravitational potential energy (e.g. pumped storage hydro) Carbon Capture and Storage (CCS) Technically, the individual components of CCS are well understood through international and domestic experience. However, capture at a large scale, and geological storage of CCS streams over the long term, have not been fully and commercially demonstrated. As with any large scale industrial process, there are environmental and health and safety issues (both occupational and public safety) associated with CCS. However, experience to date of CCS technology indicates these risks can be managed with appropriate safeguards. CCS has the potential to reduce to very low levels the CO 2 emissions from coal-fired and gasfired power stations. However CCS will increase capital costs of the power stations by about 50% and reduce station efficiencies by about 30%. 15 System Technologies Smart Grids Many energy production technologies provide the option for economic implementation at small scale, resulting in a future energy sector which is much more distributed. Within the electricity 14 Comparison of Fuel Cell Technologies US Department of Energy, February SKM MMA: Carbon Pricing and the Australian Electricity Market July 2011 January 2012 Page 13

14 network, generators and generation facilities are becoming smaller in capacity, and are often located remote from the main grid, or embedded within the distribution network. This trend to smaller distributed generation is creating a power system with much lower stabilizing rotational inertia than had previously been the case, with consequent impact on system stability, and have reduced capability to contribute to voltage and frequency control. The more distributed nature of new generation facilities, particularly wind generation, results in more numerous but less strong connections to the main grid. There are also significant changes occurring in the utilisation of electricity which are creating greater uncertainty in forecasting both short-term and long-term energy demands. Energy scheduled in the market is influenced by embedded generation (such as solar panels) the extent and location of which are often not accurately known, and whose production patterns are variable and unpredictable. The impact of demand side management actions, either technical or voluntary, is changing usage patterns, as are customer usage preferences. Seasonal and temperature-dependent changes to past patterns are evident. The feasibility of moving to a more distributed energy production network is enhanced by developments in information and communications technologies generically termed Smart Grids. Hybrid Technologies Trigeneration, also called CCHP (combined cooling, heat and power), refers to the simultaneous generation of electricity, useful heating and useful cooling from the same original heat source such as fuel or solar energy. Waste heat as a byproduct of electricity generation is harnessed for thermal management in buildings. Similar to cogeneration, trigeneration differs in that some of the waste heat is used for cooling. CCHP systems can attain higher efficiencies per unit fuel reportedly up to 80% - than cogeneration or traditional power plants. Solar Thermal - Transport A number of possibilities exist to combine solar technologies with fossil fuel technologies to improve efficiency of production, increase market returns and reduce CO 2 emissions. Examples include gas supplementation of solar-thermal power stations, solar preheating of water in fossil fuel power stations, and hybrid vehicles. End-use Technologies Rapid development of technologies that improve efficiency of energy use, enable control of demands for energy, and enhance possibilities for energy substitutions make end-use technologies an important element of energy strategies. Some examples are: Electric Cars: the evolution of battery and electric motor technology affords the possibility of transferring much of the transport fleet to electric vehicles, with consequent large reductions in January 2012 Page 14

15 CO 2 emissions. Smart grid technology also promises to facilitate the integration of the significant storage capacity of the vehicle fleet into the energy network. Energy Efficiency: Control and management technologies, as well as new materials and processes, are supporting trends towards greater energy efficiency. Demand Management: The changes to the energy production fleet over the next decades will increase the need to manage demands, both at time of peak demand and during the day, to create an efficient match between the available production capability and the end-use demand. Energy storage, most likely through batteries associated with electric vehicles and Smart Grids (information and control technologies and systems) will likely be critical facilitators of this. Transitions and Scenarios A number of scenarios are examined to provide an indication of the outcomes from various strategic decisions. Each scenario takes as its base the energy profile of Australia in 2010, and estimates the outcome of these various strategies in These outcomes are indicative results to provide an estimate of the 2050 outcomes, and to identify the policy needs for each strategy considered. These scenarios draw upon data used in other modelling and publically available, and are selected to compare various interventions in the market that will contribute to meeting emission reduction targets. Scenario 1: Current policy position This scenario is based on the current Australian policy position related to: Mandatory renewable energy target of 20% of electrical energy sourced from renewables by 2020 Carbon tax/emission trading scheme in accord with the Clean Energy Future legislative package Planned buy-out of 2000MW of coal-fired power stations Scenario Parameters The parameters for this scenario relate to the parameters involved in the core policy scenario of the Australian modelling scenario 16 and data from modelling of the National Electricity Market 17 Renewable energy target policy will not be extended beyond 2020 Energy demand will continue to grow at current rates Energy source-utilisation linkage (that is, the energy sources used for various utilisations) will not change markedly 16 Australian Government, Strong growth, low pollution: modelling a carbon price 2011; 17 SKM MMA: Carbon Pricing and the Australian Electricity Market July 2011 January 2012 Page 15

16 Global stabilisation target for emissions: 550ppm CO 2 priced at $29/tonne in 2016, at 2010 prices Best available and lowest market-based cost technology (after allowing for emissions costs) will be used for new electricity generation investments Electricity generation stations retired when market prices causes them to be uncompetitive or at end of productive life Scenario Issues The transitions from 2010 to 2050 are significantly constrained by the market in which the particular sector operates, and the capacity to change the structure of the existing infrastructure and systems in the sector. In the electricity production sector the economic life (25+ years) of most of the existing coal-fired power stations will not be markedly impacted under the CO 2 emissions trading regime, as in the energy market these power stations have low marginal cost. Modelling indicates that such retirements will predominantly be from 2040 onwards 11. The renewable energy target will mainly drive penetration of wind energy to supply the wholesale electricity market. The variability of this generation will drive increased investment in gas-fired generation, but the fast start needs for this will push the majority of investment into open-cycle plant, with lower efficiency and higher emissions. CO 2 pricing will tend to make the open-cycle gas-fired plant operate at a lower capacity factor. However, over the period to 2050, the investment in gas-fired plant driven by the renewable energy target will create a fleet of generation which will continue to operate through this period. Solar energy is expected to grow rapidly in the latter part of the scenario period, as it occupies niche segments in the residential, commercial and industrial sectors. The need for base-load generation and stability/reliability maintenance in the grid will drive new investment in advanced, efficient coal-fired generation, geothermal or nuclear power stations, as the lowest cost, bankable sources (even with the assumed CO 2 pricing), in the final decades of the scenario. Scenario Outcomes Fossil fuels still remain the dominant source of energy in the sector, driven by industrial and transport demands. Renewables increase significantly due to large increases in electricity generation. In electricity production the proportion of fossil fuel decreases from over 90% in 2010 to less than 70% in In 2050 the CO 2 emissions will be approximately the same as in 2010 for the electricity sector and marginally higher than 2010 levels for the energy sector as a whole. (This is consistent with the results of Treasury 10 and SKM MMA 11 modelling). The level of CO 2 emissions is mainly driven by the need for gas-fired generation to support renewable energy, and by the demand for liquid fuels used in transport. January 2012 Page 16

17 Scenario 2: Energy efficiency This scenario explores the impact of a widespread energy efficiency initiative on future energy sector structure and CO 2 emissions levels. This scenario is based on the current Australian policy position related to: Mandatory renewable energy target of 20% of electrical energy sourced from renewables by 2020 Carbon tax/emission trading scheme in accord with the Clean Energy Future legislative package Planned buy-out of 2000MW of coal-fired power stations In addition this scenario assumes a policy initiative is introduced from 2015 to drive energy efficiency at the utilisation level, across all economic sectors. Scenario Parameters The parameters for this scenario relate to the parameters involved in the core policy scenario of the Australian modelling scenario 18 and data from modelling of the National Electricity Market 19 Renewable energy target policy will not be extended beyond 2020 Energy demand will continue to grow at reduced rates such that the 2050 demand is equivalent to the 2020 demand in Scenario l (approximately a 40% reduction from Scenario 1) Energy utilisation patterns (that is, the energy sources used for various utilisations) will not change markedly CO 2 priced at $29/tonne in 2016, at 2010 prices Best available and lowest market-based cost technology (after allowing for emissions costs) will be used for new electricity generation investments Electricity generation stations retired when market prices causes them to be uncompetitive or at end of productive life New policy instruments introduced Incentives to invest in energy efficiency at consumption end and at production ( including mandatory efficiency standards) Scenario Issues 18 Australian Government, Strong growth, low pollution: modelling a carbon price 2011; 19 SKM MMA: Carbon Pricing and the Australian Electricity Market July 2011 January 2012 Page 17

18 As all projects have to meet financial targets in business, energy saving projects can find it difficult to compete with others such as a simple expansion of capacity. Also as energy costs are finite and measurable, companies generally have already carried through energy saving projects that have a significant positive NPV. Thus the achievement of a 40% reduction in forecast 2050 energy consumption (as inferred in this scenario) is an aggressive target. The transitions from 2010 to 2050 are significantly constrained by the market in which the particular sector operates and the capacity to change the structure of the existing infrastructure and systems in the sector. In the electricity production sector the economic life (25+ years) of most of the existing coal-fired power stations will not be markedly impacted under the CO 2 emissions trading regime, as in the energy market these power stations have low marginal cost. Modelling indicates that such retirements will predominantly be from 2040 onwards 11 Energy efficiency, through reduction in demand growth, will provide fewer opportunities for new entrants at the production end of the energy sector to access the growth element of the market. As a consequence, renewables, while maintaining a similar proportion of the electricity market to Scenario 1, will represent a lower absolute capacity installed in a smaller market. The renewable energy target will mainly drive penetration of wind energy to supply the wholesale electricity market. The intermittency of this generation will drive increased investment in gas-fired generation, but the fast start needs for this will push the majority of investment into open-cycle plant, with lower efficiency and higher emissions. The CO 2 pricing will tend to make the open-cycle gas-fired plant operate at a lower capacity factor. However, over the period to 2050, the investment in gas-fired plant driven by the renewable energy target, will create a fleet of generation which will continue to operate through this period. However, due to a smaller market (in 2050) as a result of energy efficiency policies, the absolute level of gas-fired capacity will be less than in Scenario 1. Solar energy is expected to grow in the latter part of the scenario period, as it occupies niche segments in the residential, commercial and industrial sectors. The need for base-load generation and stability/reliability maintenance in the grid will drive new investment in advanced, efficient coal-fired generation, geothermal or nuclear generation plants, as the lowest cost, bankable source (even with the assumed CO 2 pricing), in the final decades of the scenario. Scenario Outcomes Fossil fuels still remain the dominant source of energy in the sector, driven by industrial and transport demands. Renewables increase due to large increases in the use of renewables in electricity generation. In electricity production the proportion of fossil fuel decreases from over 90% in 2010 to about 75% in January 2012 Page 18

19 In 2050 the CO 2 emissions will be about 40% below 2010 levels for the electricity sector and about 30% below 2010 levels for the energy sector. The level of CO 2 emissions is mainly driven by the need for gas-fired generation to support renewable energy and by the demand for liquid fuels. Scenario 3: The Electricity Economy One of the basic issues with the more market-ready renewables, such as wind and solar, is the capability of these technologies to meet the as-demanded requirement for energy in modern economies. Energy storage can be used to provide this capability, but may not be economic. A number of countries are exploring the opportunities to shift demands of high security risk energy sources (such as liquid fuels) to alternative energy sources, and the opportunities to match the profile of those sources to the demand profile of niche demand areas. Two such opportunities are explored in this scenario: Transition the light vehicle fleet to electric vehicles, with the vehicle storage batteries charged during high-production/low-use periods from renewable (and other) electricity generation, and integrate this stored energy with residential consumption to reduce peak demands Integrate evolving solar technology with matching profile demands in the commercial sector This scenario is based on the current policy position related to: Mandatory renewable energy target of 20% of electrical energy sourced from renewables by 2020 Carbon tax/emission trading scheme in accord with the Clean Energy Future legislative package Planned buy-out of 2000MW of coal-fired power stations New policy instruments introduced This scenario assumes policy initiatives are implemented to convert the light vehicle fleet to electric, and to maximise use of solar energy in the commercial sector Scenario Parameters The parameters for this scenario relate to the parameters involved in the core policy scenario of the Australian modelling scenario 20 and data from modelling of the National Electricity Market 21 Renewable energy target policy will not be extended beyond 2020 Energy demand will continue to grow at current rates Global stabilisation target for emissions: 550ppm 20 Australian Government, Strong growth, low pollution: modelling a carbon price 2011; 21 SKM MMA: Carbon Pricing and the Australian Electricity Market July 2011 January 2012 Page 19

20 CO 2 priced at $29/tonne in 2016, at 2010 prices Best available and lowest market-based cost technology (after allowing for emissions costs) will be used for new electricity generation investments Electricity generation stations retired when market prices cause them to be uncompetitive or at end of productive life Transition short-haul transport fleet to electricity (25% by 2030, 80% by 2050) Building codes encourage solar Scenario Issues The transitions from 2010 to 2050 are significantly constrained by the market in which the particular sector operates and the capacity to change the structure of the existing infrastructure and systems in the sector. In the electricity production sector the economic life (25+ years) of most of the existing coal-fired power stations will not be markedly impacted under the CO 2 emissions trading regime, as in the energy market these power stations have low marginal cost. Modelling indicates that such retirements will predominantly be from 2040 onwards 11 The transition of the light vehicle fleet to electricity and the integration of this change with changes to battery recharge timing and sourcing, and with residential demand management, will increase demand for base-load generation and enhance solar energy opportunities. This, along with the need for base-load generation and stability/reliability maintenance in the grid will drive new investment in advanced, low-emission coal-fired generation, geothermal or nuclear generation plants, as the lowest cost, bankable source (even with the assumed CO 2 pricing), in the final decades of the scenario. The renewable energy target will mainly drive penetration of wind energy to supply the wholesale electricity market. The intermittency of this generation will drive increased investment in gas-fired generation, but the fast start needs for this will push the majority of investment into open-cycle plant, with lower efficiency and higher emissions. The CO 2 pricing will tend to make the open-cycle gas-fired plant operate at a lower capacity factor. However, over the period to 2050, the investment in gas-fired plant driven by the renewable energy target will create a fleet of generation which will continue to operate through this period. Solar energy is expected to grow rapidly in this scenario, as it occupies niche segments in the residential, commercial and industrial sectors and contributes to the electric vehicle energy demands. Scenario Outcomes The main outcome is the increased use of electricity provided by indigenous resources, with a much lower reliance (and therefore improved security) on imported liquid fuels. The higher capacity factor for electricity generators provides more efficient investment in generation facilities and advantages low marginal-cost base-load generation. This scenario therefore indicates a rapid growth of advanced, efficient coal-fired generation, geothermal or nuclear generation plants. January 2012 Page 20

21 Gas grows to 2020, driven by the need to support renewables installed as a consequence of the renewable energy target. However, as the capacity factor of electricity demands increases, the higher marginal cost of gas-fired generation reduces growth. Solar grows rapidly as a consequence of specific applications (e.g., buildings, transport) In 2050 the CO 2 emissions will be about 75% less than 2010 levels for the electricity sector and 60% less than 2010 levels for the energy sector. The level of CO 2 emissions is mainly driven by the need for gas-fired generation to support renewable energy. Key Factors Arising from Scenarios In none of the scenarios modelled has the policy objective of an 80% reduction in Australian energy emissions by 2050 (compared with present levels) been achieved. Thus, the scenarios demonstrate that initiatives complementary to the current policy position will be necessary if Australia is to meet its targets for reduction of Australian emissions by The complementary actions will need to be directed to reducing emissions across all sectors, particularly transportation, and across diffuse smaller sources of emissions beyond the current large polluters focus. The scenarios analysed show that attention needs to be given to reducing demands for energy, and to strategically targeting transition of energy usage to lower emission sources (e.g. in transport, from fossil fuels to electricity produced from low emission sources). These complementary actions would need to be predominantly regulatory and support based, rather than purely market driven. The high capital cost of new production facilities will also mean that investment will need to be on a long-term basis generally in excess of 30 years. Thus the profile of the production fleet of facilities in 2050 will be predominantly determined by investment and strategies established in the next decade. In the context of the current policy position, the structure of the electricity generation fleet of 2050 is being driven by the regulatory initiative of the Renewable Energy Target and the support policy for retirement of older power stations (similar to policies in China) with facilities constructed as a consequence of these policies planned to operate until the late 2040 s. The transition to a low CO 2 emission economy will require also a transition from an energy production sector based on low-to-moderate capital cost with higher marginal costs, to a sector with high capital costs and low marginal costs. This will mean that the transition will be driven by investment decisions rather than simply decisions taken on market pricing. In this high capital cost regime the key issue is gaining access to investment capital of a magnitude which requires accessing international capital, where the Australian requirements will be balanced against the risk-reward profiles of other investment opportunities in other countries. Australian policy and market consistency will be a critical determinant of the capacity for Australia to access these investment funds, and the cost of those funds. January 2012 Page 21