Energy State of the Nation 2014 Harry Kenyon-Slaney, chief executive, Rio Tinto Energy Australia s energy opportunity 21 March 2014, Sydney Introduction Good morning everyone, it s a pleasure to be here today. I would like to acknowledge the Traditional Owners of the land on which we are gathered, the Gadigal people, and pay my respects to their Elders past and present. I also want to thank the Energy Policy Institute for encouraging what will be a very important discussion today on the future of the energy sector in Australia. Energy is rapidly becoming an increasingly contentious topic, both globally and domestically. And there is good reason for this. The debate about how the world s growing energy needs will be met is not simple and there are no easy solutions. There are trade-offs involved and compromises required. But there is also great opportunity. That s why it is absolutely critical that Australia gets the Energy White Paper right. This is a valuable opportunity for a reality check on Australia s approach to the future of its energy sector. It is an opportunity to address the creeping energy costs which are putting financial pressure on Australian businesses and households and eroding the country s competitive advantage. It is an opportunity to sharpen the drive we are starting to see from all levels of government to get the right policies in place to put Australia on a more even playing field with its international competitors. It is an opportunity to recognize the important role coal will play in the global energy mix in the immediate future and for many decades to come. And it is an opportunity to formally acknowledge that Australia must be an active participant in finding the solutions that will ultimately address climate change. Energy the powerhouse of development We are living in a time of global transformational change. Asia s developed and developing economies are converging which over the long term will create the largest middle class in the world. The United Nations defines middle class as those who have enough disposable income to buy fridges, computers and cars - things often taken for granted here in Australia. Today, there are 525 million people in Asia s middle class 1 by 2030, there will be 3.2 billion a six-fold increase within a generation. 1 Ernst and Young 2013, Hitting the Sweet Spot; The growth of the middle class in emerging markets, http://www.ey.com/publication/vwluassets/hitting_the_sweet_spot/$file/hitting_the_sweet_spot.pdf Page 1
This super middle class is shifting the global economy s centre of gravity away from Europe and America and towards Asia. Electricity will be fundamental to powering the development of this surging middle class, by lighting their homes, running their fridges and televisions, and most importantly powering the jobs to which they aspire. It is predicted that global electricity demand will grow by 69 per cent by 2035. This surge in demand creates a tremendous opportunity for Australia given its rich endowment of gas, uranium and coal, its skilled workforce, and its proximity to the burgeoning Asian market. And let s be clear, all of these commodities will be part of the future energy mix despite many premature projections of the demise of both coal and nuclear power, for different reasons. Coal an important player in the global energy mix Frankly, to paraphrase Mark Twain, News of coal s death has been greatly exaggerated. Since 2000, coal has accounted for almost half of the growth in global energy demand. Put another way, the growth in coal is almost equal to the combined growth of renewables, gas, oil and nuclear energy. And the main reason for this is that coal is cost effective and abundant. In China and India alone during the first decade of this century, coal-fired power output increased by 2,500 terawatt-hours that s ten times as much power as Australia currently produces. Every year China builds the equivalent of Australia s entire fleet of coal-fired power generators and is now importing more than twice as much thermal coal as Japan. The International Energy Agency forecasts that coal-fired power generation will increase by 70 per cent by 2035 2, with China using coal to generate almost 60 per cent of its total electricity needs. Other energy sources are also making a significant contribution. China is working hard to diversify its power grid using everything from renewables to nuclear energy. With 17 nuclear power plants in operation and another five expected to come on line this year, China aims to more than triple its nuclear capacity to 40 gigawatts in the next three years. 3 Even allowing for some delays, China s nuclear ambitions are clear. And without a doubt, renewables also have an important role to play in the long term global energy mix. The reality is, given the extraordinary scale of expected demand growth, we will need as much energy as possible from all sources. And coal will continue to do the lion s share of the heavy lifting for the foreseeable future. 2 IEA new policy scenario 3 China pollution action plan - 2013 (http://english.mep.gov.cn/news_service/infocus/201309/t20130924_260707.htm) Page 2
Climate Change is Not a Philosophical Question of Either/Or As things stand today, around 1.3 billion people still have no access to electricity or the basic quality of life that many of us in Australia have long taken for granted. Knowing that coal is here to stay, it is fruitless to keep indulging in idealistic discussions about climate change. It is clear we can t just wish away fossil fuels. Any solution to climate change must recognise the ongoing significant role of fossil fuels in the global energy mix. It would simply be impractical and unrealistic not to do so. We have an obligation to take real action on climate change, but we must at the same time also avoid; - Turning the lights out on hundreds of millions of people in Asia, - Ignoring the 1.3 billion people in the world still living without power, - And letting four million people die needlessly every year due to toxic methods of cooking. So, providing for future energy demand and living with climate change is complex a dilemma. On the one hand, we know that two-thirds of global greenhouse gas emissions are produced by the energy sector and we know that climate change is real. On the other hand, we know that by fueling the rise of nations like India and China the energy sector is helping to power the greatest single poverty-eradication program in the history of mankind. Aside from the obvious need to encourage behavioural change to reduce energy wastage, I believe that the answer will come from technological advances and innovative solutions. Raising the efficiency of power stations from the lamentable average of 33 per cent 4 will be one key step and advancing carbon capture and storage will be another. Lifting the average efficiency of the world s coal-fired power plants to 42 per cent, would deliver a 25 per cent reduction in carbon dioxide emissions from coal generation. Rio Tinto has to date spent in excess of 100 million dollars on activities directed towards the development of carbon capture and storage technology. We have committed six million dollars to support the Otway Project in Victoria Australia s first demonstration of geological carbon dioxide storage. This is important work. The International Energy Agency estimates CCS can achieve 22 per cent of the global greenhouse gas emission reductions needed by 2050 to limit global warming to two degrees. This is broadly comparable with the contribution that could be made by renewables. Renewables have received massive and sustained support to boost their share of the energy mix. We understand the constraints governments are under. However we believe ongoing support for CCS is also essential this is a real-world response to climate change. 4 IEA (CIAB) Insights Series 2013, 21 st Century Coal Advance Technology and global energy solution Page 3
We support the full range of technologies aimed at reducing emissions from burning coal, and believe priority should be given to whichever technology is the most affordable first. However, ultimately the world will need to be using them all. Make or break time getting the policy settings right As we speak, Australia is facing a make or break moment. Less than a decade ago, Australia boasted some of the lowest energy costs in the developed world a significant competitive advantage against our international trading partners. And now, due to its policy settings, Australia s industrial electricity prices are about 50 per cent higher than both China and the United States. We ve all seen the recent reports of a looming gas crisis in the eastern states this is of great concern. Customers, both domestic and industrial, willing to pay international parity prices cannot and should not be left without a gas supply. Given the abundance and high quality of Australia s energy resources, how did the competitive advantage slip away? Is there a risk it could be eroded even further? There s no doubt that the strong Australian dollar, high taxes and increasing regulations, delays in government approvals and community opposition to mining have held back productivity in the nation s energy sector. It s an industry that last year contributed more than 70 billion dollars in export revenue. With the coal sector alone directly employing almost 50- thousand people, paying around $5 billion in wages and salaries, over $4 billion in royalties, and enjoying - if that s the right word - at 48 per cent one of the highest effective tax rates of any industry in the country. A shining example of this challenge is the situation at Rio Tinto s Mount Thorley Warkworth mine in the Hunter Valley, which can only be seen as a red flag against investing in this country. This is a mine that has been part of the local community for more than 30 years, and for which we re trying to secure approval to continue operating on land we own and within our existing lease. It s now been more than four years and counting, with still no long-term security for the mine and its 1300 workers. Indeed, just this week we have had to commence a new planning application process. This is despite the real efforts being made by the NSW Government to improve the efficiency of the planning system, to deliver major projects and jobs for the state. Clearly, still more needs to be done by all levels of government. This does not mean less scrutiny, nor should it mean lower environmental standards, it means more efficient and effective oversight. Business must also do its bit to improve Australia s competitive footing, by increasing productivity and reducing costs. At Rio Tinto, in our Energy Product Group, we have set ourselves a target to deliver one billion dollars in cost savings by the end of 2014. We ve established a war room to tackle costs focusing on streamlining maintenance procedures, consolidating contractors, and improving procurement practices and cutting wastage. Page 4
The result is that our unit cost of coal production in Australia has reduced by approximately 25 percent in a little over 12 months and we still managed to increase coal production by 10 per cent. This is a truly significant step-change in the competitiveness of our business and we re not done yet. With the exception of the health and safety of our people nothing is off limits. And yet the truth is the energy industry remains challenged, times are tough, and we must continue to improve our business to remain viable. So, in closing No one be they in government or industry can afford to be complacent. Australia s future prosperity depends on the adoption of a make-or-break attitude to economic progress. - The carbon tax was not the answer, - The Resource Super Profits Tax and the Minerals Resource Rent Tax were not the answer, - And increasing royalties is not the answer. Business and governments need to work together. Let s acknowledge that fossil fuels have a key role to play in meeting future energy demand and let s also acknowledge the importance of emission reductions and of finding innovative solutions to address self-evident environmental challenges. But let s also acknowledge that Australia has a great opportunity in front of it. An opportunity that we are in danger of squandering. These are the trade-offs we must make and compromises we must find. Governments need to provide the right structures and incentives, not penalties and burdens, so that businesses can play their role in driving productivity improvements, finding ways to reduce climate impacts, creating prosperity and jobs and incentivizing the development of Australia s rich energy endowment. As I mentioned, I m pleased the Government has taken some important first steps such as the decision to review the Renewable Energy Target and a Productivity Commission review of workplace laws but it needs to keep going. Much also depends on how bold the outcomes from the Energy White Paper that is currently under development prove to be. Some of the key opportunities I ve highlighted are: relieving the pressure creeping energy costs are putting on households and businesses simplifying regulatory frameworks such as planning approvals, which are a handicap against our international competitors supporting the important role Australia s energy sector can play in powering development for decades to come; and continuing to participate in finding real world solutions that address climate change such as CCS. Page 5
Energy policy and climate policy must be integrated, so that they complement each other and Australia regains its competitive advantage. Just as importantly, any national policy needs to be aligned with global action to ensure Australia s competitive position is maintained. Let me leave you with this thought. The Treasurer was right when he called for an end to the age of entitlement and the beginning of an age of personal responsibility. This will require some tough decisions and personal sacrifices. Australia is not the national equivalent of a gated community. This is an open economy, blessed with magnificent energy resources that must earn its living in a global marketplace. Prosperity is not an entitlement. It has to be earned by us all. Thank you. Page 6