Executive summary

The Australia Federal Government released its 2012 Energy White Paper on 8 November 2012 (the Energy White Paper). The Energy White Paper, the first since 2004, sets out a non-binding strategic policy framework to guide the development of the energy sector in Australia.

Since 2004, Australia has seen a dramatic change in energy exports, with natural gas and thermal coal increasing by at least 3-fold. In the same period solar and wind generating capacity has increased 10-fold. By 2035 global energy demand is projected to grow by around 40%, with 90% of that growth occurring in developing economies.

The Energy White Paper highlights the importance of Australia securing it’s share of the ongoing investment into energy. Due to it’s stable economic and regulatory environment, and proximity to Asia, it is said that Australia is well placed to do so. But the Energy White Paper also notes increasing competition from Asia for that investment. The Energy White Paper suggests that the continuing growth of supply chains to Asia, and improvements in production efficiency, are the way to maintain investment levels.

The Energy White Paper also emphasises the need to improve inefficiencies in the electricity network. The use of co-location of generation and use in order to reduce transmission infrastructure, and the need to broaden the electricity consumption peak through time-of-use pricing and smart metering are among the specific recommendations. The Energy White Paper also recommends the deregulation of electricity pricing in markets where adequate competition exists.

More specifically the Energy White Paper recognises the criticality of natural gas production to Australia’s strategic objectives. The Energy White Paper recommends initiatives to enhance competition and efficiency in the gas market, through the development of gas supply hub trading and the introduction of pipeline capacity trading. The government is also looking to review offshore retention lease arrangements, and at the harmonisation of coal seam gas regulations.

The Energy White Paper confirms the government’s continued support for renewable and low emission energy projects. The 2020 renewable energy target of a 20% emissions reduction against 2000 levels is likely to maintained, and funding has been announced to encourage the innovation and commercialisation of new technology. At the same time the Energy White Paper advocates for continued non-reliance on Uranium resources for domestic consumption, and also for continued investment in carbon capture and storage research despite the technical challenges. However managing the electricity grid with variable utility scale renewable energy generators represents a future challenge.

Overall, and importantly, the document confirms an emphasis on efficient markets and competition. The Energy White Paper does not support policies reserving gas supplies for domestic consumption, as recently discussed by some State Governments. The Energy White Paper indicates that such policies should only be considered in cases of clear market failure.

Background

Since 2004 Australia has seen a dramatic change in energy exports. Natural gas has increased fourfold to more that $12 billion per year. Thermal coal exports have tripled to $17 billion per year. Solar and wind generation capacity has increased 10-fold. By 2035 the International Energy Agency projects global energy demand to grow by around 40%, with 90% of that growth occurring in developing economies; particularly China (30%) and India (16%).

The Australia Federal Government’s 2012 Energy White Paper sets out a non-binding strategic policy framework to guide the development of the energy sector in Australia.

Securing Investment

Energy resource development is a key cornerstone of Australian economy. Australia currently has a pipeline of $290 billion in advanced projects. It is projected that $30 billion in export infrastructure investment is required in order to service the projected resource developments.

However, the Energy White Paper notes that a third of the overall investment figure is not yet fully committed, and securing this investment is not a given. While Australia enjoys competitive advantages due to its stable economic and regulatory conditions, there is growing competition from Asian nations for energy investment. Australia remains a high cost producer compared to many other potential suppliers.

The Energy White Paper suggests that future Australian investment can be secured through the further expansion of exports into Asia. However investment will depend on a range of factors, including the extent to which electricity demand rebounds in coming years. In the interim, managing development costs through maintained competition, and ensuring optimised regulation, will ensure Australia projects are viewed favourably by risk averse financial markets.

Minimising price pressures

The growth of the Australian economy, population and wealth continues to increase energy pricing pressures. The growth of energy exports is also contributing to domestic price increases. Retail electricity pricing has increased by approximately 40% over the past three years.

The Energy White Paper emphasises market efficiency. With energy intensive industries accounting for 33% of end-use demand, the Energy White Paper cites the potential for the future co-location of electricity consumers and generators as a means of ensuring efficient transmission. Gladstone, the Kimberley and Darwin particularly are cited as potential locations to exploit this opportunity.

The Energy White Paper also supports the continued deregulation of electricity price controls where effective competition exists.

Ageing infrastructure

Ageing and inefficient infrastructure represents a particular challenge in the Australian market, where the grid is required to stretch to remote locations. Distribution network and wholesale generation costs will continue to be the main driver of price increases in the market, with renewable and feed-in tariff schemes minor contributors.

These pressures appear set to increase with economic development expected to drive significant line and grid extension into regional areas in South Australia, Western Australia and western Queensland.

In the short to medium term however, the only projected relief to the contribution of infrastructure costs to energy pricing is the potential growth of distributed generation and storage which may reduce the need for network investment.

Peak demand

The Energy White Paper notes the continued strong growth in peak electricity demand as a significant contributor to rises in electricity costs, and a point of inefficiency in the market. Peak demand results in an estimated 10-20% of infrastructure capacity only being utilised for 1% of the time. Spreading electricity demand more efficiently is cited as a key objective in minimising infrastructure, and generation costs.

In addressing this objective, the Energy White Paper emphasises the desire for improved information to consumers so that they can better monitor and manage their energy usage. However the fact that current pricing does not reflect the true cost of supply at any particular time period means there is no market signal to drive efficient behaviour.

The Energy White Paper sees time-of-use pricing, coupled with technology such as smart metering as critical to achieving these goals, and so a more efficient market.

Clean Energy

A continued commitment to renewable energy development is also evident in the Energy White Paper. The 2020 renewable energy target of 20% is continually cited as a key policy. Further it suggests that by 2035 the contribution of renewable production to the market could be around 40% and potentially up to 85% by 2050.

Regarding new technology, the Energy White Paper notes government funding of up to $17 billion for clean energy and clean technology support. Of particular note is $10 billion for the Clean Energy Finance Corporation to support renewable energy commercialisation, and $3.2 billion to the Australian Renewable Energy Agency (ARENA) to support renewable energy innovation. However, overall it is noted that as a relatively modest and open energy market by world standards, Australia will largely remain a technology taker.

The projected long term increase in intermittent supply (large scale wind and solar) as well as more variable demand load (caused by distributed PV systems) means that grid and network balancing will be increasingly tested. Continued investment to enable the electricity grid to respond to variable generation is seen as necessary.

Overall the Energy White Paper can be seen as providing additional certainty to renewable energy projects.

Natural Gas

A further four-fold increase in natural gas production is projected by 2035. However it is noted that the transitional tightness in the east coast gas market will continue to exist until the new coal seam and associated LNG projects some online. In assisting in east coast supply, a short-and-closing window to develop the Gunnedah coal seam gas basin is said to exist.

On the west coast, the high development costs of Australia’s gas resources means that domestic supply has been highly dependent on large scale LNG projects, although this dependency will ease as prices move higher.

The Energy White Paper outlines quite significant reforms in the context of natural gas. An updating of offshore retention lease arrangements, in order to promote timely development is foreshadowed. The Energy White Paper suggests that as a priority, the evaluation of retention lease applications should consider the potential for projects to supply the domestic market and so ease local pricing pressures.

Regarding coal seam gas, a nationally harmonised regulatory environment is proposed. The Energy White Paper highlights that the linking of the east and west natural gas markets remains uneconomical, and unnecessary. However, exploring the trading of pipeline capacity to utilise contracted, but unused capacity is recommended.

The Energy White Paper also identifies a desire to trial a gas supply hub trading model. The concept is that trading between buyers and sellers be moved higher upstream, so as to allow for better matching of gas and capacity. Such a model, as has been used in some areas of the United States, improves the efficiently of take-or-pay clauses.

Importantly, the Energy White Paper does not support reservation policies to lock away domestic supply. While such policies have gained some support with State Governments, the Energy White Paper notes that policies which force non-commercial outcomes are more likely to constrain, rather than increase, exploration and new supply. The Energy White Paper indicates that such policies should only be used in cases of clear market failure. Further evidence of a preference towards a less interventionist regulatory regime is the statement that the balance between export and domestic markets is thought to be best managed by the gas industry itself.

Declining and controversial fuels

Liquid fuels

The Energy White Paper notes that the liquid fuel market in Australia is undergoing ongoing structural change. Domestic crude oil production continues to decline; and with recent refinery closures, domestic facilities will supply only half of Australia’s refined fuel needs. Domestic refineries will remain under pressure from large scale refineries in Asia.

However, it is important to note that the remaining domestic refineries already import 80% of their feedstocks, and so this is not a question of energy security. Australia continues, and will continue to have access to diverse and well-established supply chains.

Correspondingly the Energy White Paper identifies the main requirement in respect of liquid fuels as being the need to ensure the timely investment in import infrastructure, but goes on to indicate that currently these needs are adequately satisfied by the market.

Carbon capture and storage

The Energy White Paper confirms the current Australian government’s commitment to carbon capture and storage research. It is anticipated that despite the technical difficulties, investment in this area is expected to continue.

Uranium

The Energy White Paper indicates that it is not currently part of Australia’s strategic energy policy to utilise nuclear energy domestically, but makes little comment on the potential expansion of uranium mining in Australia.

Information and regulation

Streamlining regulation

In the context of regulation the Energy White Paper considers the need to streamline both environmental and other regulatory approvals in order to maintain Australia’s competitive advantages. The need for improved regulation is also to be considered in the context of the increasing intersections between energy resource developments are other land uses, with an emphasis on promoting co-existence rather than exclusion. It is intended that such initiatives are best progressed through the Council of Australian Governments’ Standing Council on Energy and Resources (SCER).

Improvement of information

The Energy White Paper also suggests the improvement resource and reserve disclosure by unlisted companies, with companies currently only bound through the ASX listing rules. Furthermore it is recommended that strategic reviews such as the while Energy White Paper should be increased to a 4-yearly basis.

Private ownership

The Energy White Paper does not suggest a wholesale movement away from government ownership of assets, but does suggest increased privatisation where competition in a market is sufficient. The need to remove conflicts of interest where they arise from ongoing public ownership and governance of energy businesses is also necessary.