<TITLE OF THE REPORT ALL IN CAPS> Response to the Energy White Paper Issues Paper PREPARED BY EMC ENGINEERING FOR THE AUSTRALIAN GOVERNMENT DEPARTMENT OF INDUSTRY i P a g e www.energym adeclean.com
CONTENTS Introduction... 1 The Energy White Paper Terms of Reference and Process... 1 The Security of Energy Supplies... 2 Regulatory Reform and Role of Government... 4 Growth and Investment... 5 Workforce Productivity... 5 Driving Energy Productivity... 5 Alternative and Emerging Energy Sources and Technology... 6 ii P a g e www.energym adeclean.com
Introduction EMC is a group of companies focused on delivering projects that improve the productivity of businesses, reduce Australia s reliance on fossil fuels and reduce the carbon intensity of our energy supplies. Our response to the Energy White Paper Issues Paper follows the structure of the issues paper and addresses our concerns with each section separately. Quotes from the Issues paper are formatted like this paragraph. Comments relating to those quotes will then follow immediately afterward. In general the document seems to follow existing Government policy rather than seeking to inform future policy. General observations and comments The energy sector is going through a period of transformation, improving efficiency, the strong uptake of solar energy both in PV and solar hot water and the decline of manufacturing in Australia have combined to reduce electricity demand. Despite this fall in demand, and in some ways because of it, electricity prices are increasing. The Issues Paper states that the increase has been 59% over the past four years and attributes the increase primarily to investment in network infrastructure required to meet peak demand. An alternative to network investment to meet increasing peak demand is now emerging. Competitively priced storage options will change the landscape again and enable consumers to smooth their electrical loads to avoid peak tariffs, store solar electricity to avoid low feed-in tariffs and potential drop off the grid altogether. Increasing electricity prices make energy efficiency and solar PV even more attractive, which will further reduce demand, particularly in the residential sector. Generating sources are becoming more distributed, which brings both challenges and benefits to the network. This is a trend that is unlikely to stop unless it is somehow prohibited by legislation or regulation. The way that electricity is generated, distributed and consumed in Australia is changing, particularly in the residential market. This is a threat to the current status quo, making it more difficult for existing large-scale generators and network providers. A quote from Section 8 of the Issue Paper is particularly telling....network costs will remain static and a significant component of electricity prices. This is to meet reliability standards and to provide a regulated rate of return on the existing asset base. The aim of providing a regulated rate of return on the existing asset base is a strong indication of the desire to support business as usual. If the Government were serious about putting downward pressure on prices it would consider addressing network costs by writing off some of the value of the existing transmission and distribution networks and reducing the regulated rate of return for these assets. The Energy White Paper Terms of Reference and Process Electricity Network Infrastructure The terms of reference call for efficiencies at all levels to overcome the challenges of a geographically dispersed population. This must include making efficient investment decisions for distribution and transmission infrastructure. This means identifying more cost effective methods of reducing the demand on the grid, particularly during peaks, and being prepared to write down the value of distribution networks to reduce price pressures on consumers. An efficient investment strategy would also consider alternatives to continuing to building more poles and wires to meet a demand that occurs for 40 hours per year. It would 1 P a g e www.energym adeclean.com
exhaustively examine alternatives, such as demand reduction and distributed generation, and would consider the other benefits of these options beyond just avoided or delayed investment in infrastructure. Energy Efficiency Opportunities As stated in terms of reference: Energy consumption in Australia is dominated by small numbers of large businesses. The 300 largest energy users consume 56 per cent of primary energy. These companies are among the 311 corporation registered to comply with the Energy Efficiency Opportunities Act 1. Abolishing funding for the EEO Office is a clear indication from Government that it does not support measures to improve the efficiency of these corporations. The Security of Energy Supplies Securing supplies of fossil fuels Placing this topic as the first section of the issues paper highlights its importance to Government and yet its focus is on securing supplies of fossil fuels. All fossil fuels are finite and subject to Hotelling 2 price increases where the price of a finite commodity increases as it becomes increasingly scarce. Long-term energy security can be achieved only through renewable energy sources. A transition to 100% renewable and sustainable sources of energy should be the focus of any long-term energy security strategy. Securing supplies of finite resources can be considered only a temporary measure at best. A similar attitude can be taken towards gas supplies. Australia can seek to increase supply or we can improve security by reducing demand to match existing supplies. This aligns strongly with the theme of improving energy productivity and with the current Government s position of living within our means. Price surety Ensuring consumers pay no more than necessary for reliable and secure energy supplies becomes more challenging against this background of declining energy consumption and growth in new sources. There are several components to the retail price of energy supplies, whether they are transport fuels, gas or electricity. There is the cost of energy component, supply costs to cover distribution infrastructure, retailer margin and other costs that include environmental programs. This is particularly relevant to electricity pricing. As demand falls, network costs are being leveraged across fewer units of energy. This increases the retail price for each unit, which leads to a further decrease in demand. This positive feedback causes upward pressure on electricity prices. Writing down the value of networks would reduce this pressure. The carbon tax and green energy schemes, such as the Renewable Energy Target and state feed-in tariffs, have also had significant impact [on house hold electricity prices]. This is a misleading statement. According to a recent IPART study, network and energy costs make up 83% of the retail price of electricity. The cost of electricity for households and small to medium sized business 1 http://energyefficiencyopportunities.gov.au/results-and-participants/participating-companies/ 2 Hotelling, H., The Economics of Exhaustible Resources. Journal of Political Economy, 1931. 39(2): p. 137-75. 2 P a g e www.energym adeclean.com
has increased significantly, but the carbon tax and green energy schemes, such as the Renewable Energy Target and state feed-in tariffs, account for a relatively small part of those increases. Gas pricing is also discussed in this section. Untapped CSG reserves in NSW could partially ease medium-term east coast gas pressures if current planning impediments are addressed urgently. Careful consideration needs to be given to the long-term effect and costs to farming land and water supplies. The risk to future agricultural production and food security should be given priority over the relatively short term needs of a gas supply. These concerns need to be given suitable weight as part of the cost benefit analysis when considering CSG. Given development of LNG export capability in Australia the real potential of CSG to reduce domestic prices needs to be examined, we may be putting food security at risk only to satisfy short term export demand. This will benefit the developers of the resource but without reducing domestic gas prices wouldn t deliver significant benefits to Australia. Increasing gas prices will also have an impact of electricity supply. According to Stanwell s chief executive officer, Richard Van Breda, With subdued market conditions and increasing gas prices expected to continue, Stanwell can earn more revenue from selling our gas rather than using it in electricity generation. 3 This is all the more reason to accelerate the development of renewable and sustainable sources of electricity. Transport fuels beyond 2035 The 2011 National Energy Security Assessment concluded there is sufficient global oil production and refining capacity to supply the Australian market to 2035, even with declining domestic refining capacity. Energy security would remain stable whether Australia imports finished products or crude oil, noting around 80 per cent of refinery feedstock is imported. Then what? 2035 is not that far away considering the time needed to develop and implement alternatives. In the mean time Australia needs to make real progress towards alternatives, such as electric vehicles, better public transport, biofuels (including biogas), hydrogen and, importantly, better city planning, to reduce the demand for private transport. What will happen to prices as we approach 2035? The Issues Paper takes the simple position that oil supplies will be available. As long as the global refining sector has surplus capacity, price movements will ensure refined products reach consumers. This simplistic position overlooks the fact that such a high reliance on imported oil is has a massive impact on Australia s balance of trade position. It also assumes that those refineries can secure sufficient supplies of crude oil. An imbalance between the supply and demand for crude will increase prices, which will flow through to the price of refined products independent of the availability of refining capacity. Australia s international obligations for oil stocks A secondary issue in this section is meeting Australia s obligations to the International Energy Agency (IEA) to hold stocks and contribute oil to the global market during a declared IEA emergency action. A build program for this significant level of stockholding via either Government-funded stockholding, Government-funded ticketing for overseas stocks, or legislated mandatory 3 http://www.businessspectator.com.au/article/2014/2/6/energy-markets/swanbank-shut-down-swansonggas?utm_source=exact&utm_medium=email&utm_content=575631&utm_campaign=cs_daily&modapt= 3 P a g e www.energym adeclean.com
industry stockholdings (funded by passing costs onto consumers) requires an estimated $6.8 billion investment to provide both stock and storage infrastructure. Reducing the demand for refined oils product in Australia will reduced the amount of the products that Australia is obliged to hold in reserve. So our commitments can be partially met by reducing demand and a portion of the required $6.8 billion should be used to reduce demand by switching to less fuel intensive transport methods, such as public transport, and beginning a transition to renewable and sustainable transport fuels. Regulatory Reform and Role of Government EMC supports efforts to reduce and streamline regulation. The section on regulatory reform focuses on the mechanism of gas and electricity markets. There is no mention of regulatory reform in relation to transport fuels, energy efficiency, ARENA, the CEFC or land access in relation to CSG development. EEO Act The Energy Efficiency Opportunities Act and its subsequent regulations may not fit well within this section, but the Act is critically important to Australian energy policy given that the approximately 300 participating corporations are responsible for over half of all energy consumption in Australia. The EEO office provides support and advice to companies required to comply with the Act and enforces compliance with the regulations through regular reviews of company s energy assessments. Given the Governments recent decision to cut funding for the EEO Office there are obvious questions about their ongoing support for the legislation. These issues should have been addressed here and must be addressed in the Energy White paper. The 300 largest energy using corporations in Australia are currently required to improve their understanding of the energy they use and the opportunities that exist to extract the most value from that energy. These actions help reduce energy waste and minimise the cost of energy across the business. As previously stated section 1 The Energy White Paper Terms of Reference, these companies consume 56% of primary energy in Australia. EMC strongly recommend retaining funding for the EEO office to ensure that the largest consumers of energy are being addressed. Distributed generation The connection of distributed generation electricity networks is covered under State based legislation and regulation. It could be argued that it is not relevant to a Federal Government white paper. However, delays and assessing connection applications and inconsistencies in the requirements for connection is a significant barrier to the development of distributed generation project. Distributed generation can reduce the necessary capacity of distribution systems to meet peak demand by reducing peak demand from the grid. COAG and the Australian Government have a role to play in the development of uniform and national legislation, regulation and guidelines for the connection of distributed generation. 4 P a g e www.energym adeclean.com
Growth and Investment The removal of carbon price legislation and speculation about the future of Australia s renewable energy target has led to uncertainty for investors considering an investment in renewable energy project in Australia. The introduction of uniform and national legislation, regulation and guidelines for the connection of distributed generation is needed. This will reduce the risk to the developer both in term of the cost of connection and the time taken to get connection approval and will stream line the development of these projects and make them more attractive to investors. Many distributed generation project are designed for the electricity to be used onsite rather than sold to the grid. This means they compete with the retail price of electricity rather than the wholesale and as a result are much more economically feasible. Workforce Productivity AWPA anticipates significant annual employment growth of 11 per cent in the Oil and Gas Operations sector from 2012 to 2017, as many of the major LNG projects currently under construction move into their production phase. This would take employment from 16,700 workers in 2012 to 28,100 in 2017. This may be the case but these gains will be offset by job losses from companies that provide engineering procurement and construction (EPC) services to develop these resource project. Renew Economy reported that in 2012 Australia s solar industry was estimated to have employed more than 23,500 Australians which was an increase of 51% compared to the previous year 4. In 2013, however, after the removal of state and federal incentives, the PV market declined 22 per cent and the solar hot water market declined 20 per cent, leading to the loss of 5,800 jobs from a peak of 23,500 direct and indirect jobs in 2012. Driving Energy Productivity Energy productivity appears to be a key area of interest to the Government and will underpins the Government direct action policy. It will be critical to define a method for calculating energy productivity that is robust, comprehensive and consistent across all for all companies and industry sectors. This is required so that base line energy productivity is reliable and so that improvements can be measured accurately. Simple methods such as output per GJ are not sufficient. Measures need to include upstream variables such as the generating source, transmission etc. The resulting method may split energy into activities inside the company s perimeter and those external to it in a similar way to the division of greenhouse gas emissions into Scop1, 2 and 3. All energy sources included transport fuels will need to be included. It is estimated that 25 per cent of retail electricity costs is accounted for by peak demand that occurs for less than 40 hours per year. Efforts to improve energy productivity must focus on peak demand reduction strategies first to address this issue. 4 http://reneweconomy.com.au/2014/axing-ret-would-cost-thousands-of-solar-jobs-study-46406 5 P a g e www.energym adeclean.com
Alternative and Emerging Energy Sources and Technology Fossil fuels are finite and so even without the pressures of reducing carbon emissions fossil fuels are not a viable long term option. A transition to renewable and sustainable energy sources is the only long term option. It has been shown in South Australia that the introduction of grid connected renewable energy, particularly wind in this case, reduces the wholesale price of electricity through the merit order effect. This is supported by a 2013 Australian Energy Regulator (AER) report that stated that wind generation is moderating wholesale electricity prices in South Australia, and when there is less wind, prices are higher. 5 Renewable electricity generation does not increase the wholesale price of electricity, and carbon pricing and the RET scheme have a small impact on the retail price of electricity. An assessment of retail electricity costs by the Independent Pricing and Regulatory Tribunal (IPART) 6 found that energy costs made up 31%, network costs 52%, retailer margins 11% and green schemes contributed only 6% 7. The Australian Energy Market Commissions (AEMC) found that the carbon price contributed 9% 8 to retail electricity pricing. Hardly significant compared to the 52% contribution of network costs. Clearly any strategy to apply downward pressure to retail prices should maximise renewable generation to reduce the wholesale price and seek to reduce network costs. EMC s recommendation is to retain and strengthen the RET, retain a price on carbon and streamline connection process to encourage distributed generation. 5 http://www.aer.gov.au/sites/default/files/20130801%20-%20special%20report%20- %20Market%20outcomes%20in%20South%20Australia%20April%20May%202013.pdf 6 www.ipart.nsw.gov.au 7 www.ipart.nsw.gov.au 8 http://www.aemc.gov.au/media/docs/2013-residential-electricity-price-trends-final-report-723596d1- fe66-43da-aeb6-1ee16770391e-0.pdf 6 P a g e www.energym adeclean.com