Chapter 5
Energy Use and Supply (Part c)
Promoting Renewable Energy
The potential for renewable energy
5.157 A large number of submissions argued that the development and further
uptake of renewable energy was essential, both for Australia to meet its
Kyoto commitments and to changing the structure of its energy economy.
For example, Pacific Power argued that:
If there is a fixed cap on emissions, the only way that electricity
needs can be fulfilled in the longer term is through generation that
does not produce emissions. The development of a renewables industry
is, in Pacific Power's view, essential in a greenhouse constrained world.
[1]
5.158 The Australia Institute argued that renewable energies were important
if Australia was to take advantage of the opportunities opened up by the
Kyoto Protocol:
What Kyoto did was to mark the start of an extraordinary revolution
in energy technologies. The more sensible companies around the world,
the big companies that can see the future, recognised that, so you now
have even the oil majors like BP and Shell investing in a very heavy
way in renewable energy technologies. [2]
5.159 However, they feared that complacency would see Australia left
behind:
The Australia clause was a `get out of jail' card, which the Australian
government is going to exploit for all it is worth. If I can mix my
metaphors, it is also a poisoned chalice. While the rest of the industrialised
world is making a transition to the next generation of energy technologies,
Australia is locking itself into fossil fuels. Instead of exporting
fossil fuels to Japan as we do now, we will end up importing renewable
energy technology. [3]
5.160 Many witnesses emphasised not only the opportunities for abatement
opened up by the development of renewable energy, but the commercial opportunities
as well. SEIA told the Committee that:
The sustainable energy industry is one of the future industries of
this world. The recent study done by SEDA, the Sustainable Energy Development
Authority of New South Wales, found that it was the fastest growing
industry sector, faster than either IT or tourism, in New South Wales.
[4]
5.161 SEIA also emphasised its export potential:
75 per cent of BP's Solarex photovoltaic cells are exported. There
is great export potential, especially where we are in this world. If
you look at our geographical location, you have South Africa and the
Indian subcontinent, and around to Asia-Pacific and Latin America and
that is where one billion people basically are located who have no energy
whatsoever - no electricity. There is an enormous export industry awaiting
us if we take advantage of it. [5]
5.162 The Managing Director of Energy Technology Investments and a former
adviser to the Clinton Administration, Cathy Zoi, emphasised the industry's
enormous global potential:
I think, fundamentally, we are in an energy transition globally that
will take some time. My biggest question when I have all three of those
hats on is: will Australia place itself at the cutting edge to capitalise
on the explosive market growth as part of this transition? The Economist,
which is not famous for its small `l' liberal views, has characterised
sustainable energy as the next trillion dollar global industry. Again,
I think that is extremely exciting for us here in Australia. [6]
5.163 In June 1999, the Prime Minister's Science, Engineering and Innovation
Council (PMSEIC) published a report, From Defence to Attack: Australia's
Response to the Greenhouse Effect, which made many similar arguments.
[7] They, for example, argued that Australia
needed to act before the Kyoto Protocol was ratified:
If we wait for ratification while other countries act, Australia runs
the risk of missing out on global opportunities , and may be left behind
in terms of greenhouse compliance. The working group considers this
to be a fundamental point… . Australia can now move from a defensive
position to one of attack, to take advantage of the opportunities created
by new markets, as its trading partners move towards greenhouse emission
targets and identify related opportunities enhancing sustainable development.
[8]
5.164 The PMSEIC estimated that the Australian market in greenhouse abatement
was US$7 billion, growing at 4.1 per cent annually, and that globally
abatement could be worth US$500 billion with a growth of 3.2 per cent.
Many of these opportunities will be in renewable energy. They advocated
a national goal to `capture and maintain at least 5 per cent of the world
greenhouse market using the Australian market as a prototype'. This, they
argued, was `unlikely to be achieved without a greater level of commitment
to commercialising Australian technology and nurturing the emerging firms
which will be the medium through which success is achieved'. [9]
Current renewable energy programs
5.165 The Commonwealth has a small number of programs with the aim of
developing renewable energy. They include:
- Renewable Energy Commercialisation Program (RECP) - a five year competitive
grants program that funds projects leading to the commercialisation
of innovative renewable energy equipment, technologies, systems and
processes. RECP grants are normally in the range of $100,000 - $1 million.
The total budget is $30 million. [10]
- Renewable Energy Equity Fund (REEF) - provides venture capital for
small innovative renewable energy companies. The Commonwealth will provide
up to $20 million, which will be supplemented by a private sector fund
manager which will arrange for matching funds to be provided on a 2:1
basis. The fund manager will make investments in accordance with guidelines
approved by the Industry Research and Development Board. [11]
- Renewable Energy Showcase - this Program supports and promotes a few
leading edge and strategically important renewable energy projects that
have strong commercial potential, are technically proven, demonstrate
the potential for large-scale widespread application, offer the prospect
of significant abatement of greenhouse gas emissions over the longer
term and make a substantial contribution to building the capacity of
Australia's renewable energy industry. The Program, funded to $10 million,
is now closed to new applications. [12]
- Ethanol Pilot Plant - the AGO is continuing negotiations with NSW
and private sector interests in relation to an ethanol pilot plant to
demonstrate new Australian and United States technologies for the production
of ethanol from feedstock. [13]
- the 2 per cent mandatory target for the further takeup of renewable
energy in electricity supplies, which will require electricity retailers
to gradually increase their purchases of renewable energy to a total
of 9500 GWh in 2010. Legislation for this measure was introduced into
the Parliament in June 2000. It is expected to boost the construction
of new renewable energy generation capacity, and provide for a modest
emissions reduction of 4-5.5 Mt CO2 in 2010. The AGO claims this measure
will generate at least $2 billion in renewable energy investment in
Australia and will be a significant driver of the industry's growth.
However, the slower than optimum take up program and marginal penalty
rate for non-compliance, cast some doubt on whether this will be the
case. It may also be the case that the inclusion of biomass as an eligible
renewable energy source results in a dominance of biomass over the more
expensive wind and solar energy sources; this would likely result in
higher greenhouse emissions. If it is passed, the legislation will not
come into effect until January 2001.
- initiatives worth $321 million under the 1999 Measures For A Better
Environment package - $264 million to support the replacement of
diesel-fuelled remote area power systems with renewable systems; a further
$26 million for the RECP; and $31 million for rebates for the installation
of solar photovoltaic generators (the Photovoltaic Rebate Program, PVRP)
in residential and community use buildings. [14]
5.166 The PVRP was introduced on 1 January 2000. Cash rebates are available
to householders and owners of community use buildings, such as schools,
who install grid-connected photovoltaic systems. The program has already
overspent its budget allocation and has had to be redesigned. Concern
was raised in previous Senate Estimates hearings regarding the basis for
funding allocation and whether it would be sufficient. However, the Government
has declined to provide additional or reallocate resources to this program.
5.167 In December 1997, the Government also announced an Action Agenda
for the Australian renewable energy industry. [15]
The Agenda was approved for implementation on 23 May 2000. Its objective
is to develop a policy framework to encourage growth in a commercially
viable and internationally competitive Australian renewable energy industry.
[16] Under the supervision of the Department
of Industry, Science and Resources, an `Industry Leadership Group' has
been formed, supported by a Strategic Planning Working Group, with participants
drawn from industry, academia and government. [17]
The scope of the Agenda includes sustainable transport fuels, solar, wind,
biomass, tidal, wave, hydropower and geo-thermal energy and renewable
hydrogen, value-added products, conversion technologies and associated
services.
5.168 The Agenda's declared vision is `to achieve a sustainable and internationally
competitive renewable energy industry which has annual sales of A$4 billion'.
Five strategies set out to deliver this target are: market development;
building community commitment; building industry capability; setting the
policy framework; and encouraging a culture of innovation. [18]
The Agenda has a complementary overlap with several other programs designed
to increase commitment, education and innovation in respect of greenhouse
issues.
5.169 The Committee notes that up to now the Agenda has failed to introduce
any new initiatives of any note that go beyond measures already underway.
5.170 Among the states, NSW is a leader with the establishment of the
Sustainable Energy Development Authority (SEDA) and Green Power programs.
Both Victoria and NSW have Energy Smart Business programs and Tasmania,
through its power company Hydro Tasmania, is actively developing new renewable
energy sources such as wind.
Green Power - Early attempts at market transformation
5.171 An initiative of SEDA, Green Power was an early attempt to build
a domestic renewable energy industry. SEDA characterises Green Power as
an attempt to stimulate `market transformation' through the accreditation
of renewable energy power suppliers which can sell `green' electricity
to consumers at a premium. This has been able to stimulate demand for
renewables, but its impact remains limited. By October 1999, 11 retailers
were offering Green Power to approximately 60,000 customers. [19]
5.172 While the bulk of these customers were in NSW, under the NGS, SEDA
has also been licensed to accredit green energy sources for retailers
around the country. SEDA's guidelines are strict and include consideration
of the collateral environmental impact of renewable sources. They are
consequently seen as benchmark for the definition of renewable power sources.
Biomass from forests is accredited on a case by case basis and non-plantation
native forests are not accredited. [20]
5.173 It is estimated that customers pay a premium of 35 per cent more
for Green Power than non-renewable electricity. Currently, only about
1.7 per cent of electricity consumers buy Green Power. SEDA's Mr Chris
Dunstan told the Committee that:
If we look at the rate of growth, we have a long way to go. There is
still quite a strong upward trend in the number of subscribers. I would
say that the average electricity consumer, certainly from my own experience,
does not understand Green Power as an option or I would say in the majority
of cases has not even heard of it, despite getting inserts in electricity
bills and so on. We get a lot of inserts in electricity bills, and it
is easy to miss something like that.
We conducted some surveys prior to establishing the Green Power accreditation
program, and in those surveys up to 60 per cent of the population said
they were prepared to pay more to source their electricity from renewable
sources. We suspect that, when push comes to shove, 60 per cent might
be a little high, but we would like to see it get up to at least 5 per
cent of consumers over the next few years. Currently, it is about 1
per cent. [21]
5.174 Mr Dunstan claimed that Green Power, in combination with other
SEDA programs, has helped to stimulate about $100 million of investment
in renewables, and was crucial to projects such as Pacific Power's wind
farms at Crookwell and Blayney. The former Chief Executive of SEDA, Cathy
Zoi, also told the Committee that Green Power had been able to leverage
$70 million of investment for about $2 million in government spending.
[22]
5.175 Great Southern Energy was very positive about the role of Green
Power in creating a positive context for the development of renewables:
Green Power is having a significant impact on the Australian electricity
market. In a short time power companies have demonstrated a strategic
shift in favour of renewable energy and Green Power has carved an important
niche for itself in the consumer and business psyche.
As part of their Green Power activities many power companies are promoting
renewable energy and greenhouse reduction which is raising the awareness
of the community of these issues. There are very significant long term
benefits in educating the public on these issues and Governments may
find Green Power to be an effective means of focusing the community
attention on reducing greenhouse emissions. [23]
5.176 Great Southern Energy hoped that `under current trends, 2-3 per
cent of the total customers base may join a Green Power scheme in the
medium term. Take-up rates of this level across Australia would result
in about 300-400 MW of new capacity and 1,000-1,500 GWh of new renewable
generation. This would be a small proportion of the 2 per cent renewable
energy targets and achieve about 1.0-1.5 million tonnes of greenhouse
gas reduction'. [24]
5.177 The Committee commends NSW and SEDA for their initiative in establishing
the Green Power program and its success in raising awareness and demonstrating
consumer demand for renewables. However, even with projected increases
in consumer uptake of the program, it is likely to remain of limited importance
in achieving large scale emissions reductions, partly because it involves
consumers choosing to pay a premium (which many may not be in a financial
position to do) and partly because the otherwise hostile conditions in
the NEM are putting such pressure on renewables.
5.178 For example, the future viability of schemes such as Green Power
has been questioned by Integral Energy, an accredited retailer of Green
Power. According to the Integral Energy 1997 Annual Report, competition
is driving energy prices down, and the viability of potential alternative
energy projects with it:
… the commercial viability of several alternative energy projects
diminished due to increased competition dramatically reducing wholesale
electricity prices. [25]
While Integral Energy remains committed to developing its alternative
energy portfolio, the viability of large and small projects will largely
depend upon the future cost of conventional energy sources. [26]
5.179 Commenting on the NSW Green Power program, Great Southern Energy
also highlighted the importance of reducing risks and uncertainties associated
with alternative energy schemes:
The NSW experience demonstrates that, to develop major greenhouse initiatives,
companies require a certain framework that is enforced in law. Such
a framework is necessary to enable sound commercial decisions to be
made.
The NSW greenhouse strategy process involves a 5 year program and individual
targets that are linked to many market factors such as State sales,
imports from other states and performance of individual power stations.
The result is that individual targets may vary considerably as a result
of factors outside the control of liable parties. It is very hard to
manage the achievement of annual targets in a framework which introduces
a great deal of uncertainty to the implementation of measures. [27]
5.180 It is currently uncertain exactly what effect the introduction
of the 2 per cent renewables legislation will have on Green Power. It
will stimulate more investment and higher levels of renewable generation.
However, the Committee considers Green Power of great value and urges
the states and territories, and electricity retailers, to continue and
expand their offerings of Green Power products over and above the mandated
2 per cent increase required by the new legislation. In its August 2000
inquiry into the 2 per cent legislation, the Committee recommended that
the Commonwealth ensure that retailers cannot count Green Power sales
towards their 2 per cent liability. [28]
Research and development
5.181 SEIA told the Committee that current research and development in
renewable energy was less than $8 million in 1996-97. They argued `the
ballpark for real R&D in a real, innovative large industry' would
need to be at least $200-300 million. Current efforts to stimulate research
and development in, and the commercialisation of, renewable energy technology
`is going to have to be ramped up':
I must say that a lot of people in the sustainable energy sector yearn
for the good old days of ERDC, the Energy Research and Development Corporation,
which they felt was quite an effective model. I think the other side
of it is that, as with many other industries, commercialisation is a
bit of a black hole for our industries. From my point of view, I see
a real need for stability of funding, particularly when you are looking
at tertiary institutions and some research organisations so that we
can begin to build up our young people's expertise. We do see a lot
of people turned off developing careers in research in this area because
it is so difficult to get steady funding. [29]
5.182 Citing cutting edge research at the ANU on solar cells and solar
thermochemical energy applications, SEIA argued that government as well
as the private sector could play a role in the commercialisation of promising
technologies:
In the case of ANU, I happen to know that they are looking to get some
commercial partners. They have a new photovoltaic cell that they have
been developing which they believe has a greater capacity than what
is on the market elsewhere, and they are looking for commercial partners.
I think there is a role for government funding in that too. After all,
governments, both state and Federal, have notoriously involved themselves
in industry development over the last two or three decades, at least
to my knowledge… . There is a role for both government funding
and commercial funding. [30]
5.183 Dr Muriel Watt of the Australian CRC for Renewable Energy, also
felt that R&D needed more effective stimulus:
We do not focus much on R&D in Australia. In fact, the Commonwealth
Government no longer has an energy R&D arm like ERDC that it had
before. It has the CRCs, but they have their specific tasks. There is
not anything generic for R&D. But we need the sorts of R&D that
are going to make the renewable energy products more accessible, more
easily used as well as cheaper.
For instance, almost all the solar water heaters manufactured in Australia
are manufactured single handedly, one at a time. There is no automation
in the industry. There is no development of new products that are going
to capture the public's imagination and get them to use them. We need
the development of products that are going to be user friendly. The
technology itself is almost there, but we just cannot get it to that
next stage. We certainly need the market support in the short term and
some of the AGO programs deal with that. Although, as I said, they are
very short term so they may not be as successful as we would like them
to be. [31]
5.184 Dr Watt argued that longer term market certainty was needed:
Long term purchase contracts from government agencies and others are
an excellent way of providing that sort of level of security that short
term subsidy programs do not. For instance, if you look at what happens
in other countries, the most successful development of renewable energy
industry has been where there have been the options of 20-year purchase
contracts. Four-year subsidy schemes have the boom and bust; with long-term,
20-year purchase contracts, you can sell your electricity for 20 years.
They are the sorts of things that get industry in. [32]
5.185 The Committee notes that the 2 per cent renewable electricity target
could have a beneficial effect in this regard. Given that it will increase
the purchase and renewable electricity to 9500 GWh in 2010, and maintain
that figure to 2020, it is hoped the long term market certainty provided
by the measure will be a significant stimulus to new investment. [33]
5.186 The measure was widely thought to have promising potential to spur
the further development of renewable energy in Australia. Although the
impact of the measure on Australian greenhouse emissions from energy will
be low (4-5.5 MT CO2 less in 2010), it is hoped it will stimulate some
$1.8 billion in investment in the years to 2010. [34]
5.187 The Committee was supportive of the 2 per cent renewables legislation
introduced into the Parliament in June 2000 but, in response to concerns
that the measure may not stimulate investment in higher-cost renewables
such as wind and solar, also recommended a number of small amendments
to the legislation, including a steeper phasing path for the takeup of
renewables and a tighter system of penalties. [35]
5.188 In its paper on emissions trading and business taxation, the Australia
Institute advocated the retention of accelerated depreciation (slated
for abolishment under the Ralph proposals) using revenue from the auction
of emissions permits. In response to a question from the Committee about
this proposal, SEIA said:
A key point on accelerated depreciation is that where businesses have
a culture of fairly short term thinking and they are confronting moving
into areas that involve greater capital expenditure and lower rates
of return than they are used to, accelerated depreciation would have
some value in reducing the size of the barrier to them moving into those
areas. Given that sustainable energy is about light manufacturing and
services industries to a great extent, they are people who are not used
to really big capital investments with very long term returns, so accelerated
depreciation may be valuable to them. [36]
5.189 Mr Rob Clarke, the Manager of the wind turbine manufacturer Pheonix
Windpower, also argued that accelerated depreciation was important to
new investment in renewables:
Allowing accelerated depreciation of wind equipment (for example, allowing
100 per cent depreciation of a wind turbine in the first year of operation)
will significantly lower the amount of income taxes paid during the
initial stage of the project. This helps alleviate the extra burden
wind developers experience due to the higher initial capital costs of
a wind plant. [37]
5.190 Ms Cathy Zoi, whose company Energy Technology Investments (ETI)
Limited was seeking to raise venture capital for sustainable energy, told
the Committee that there was strong potential in this area but that progress
was currently slow:
What I hear when I go around and talk to institutional investors about
prospects of investing in ETI is that they are getting pressure from
their members about member choice. It will, over probably the next 12
to 18 months, gradually be introduced in more areas, but it is taking
a long time. My guess is that, as soon as it is available, people will
take it up. There is an example I heard about of a listed company in
the UK that does renewable energy investments. They offer no dividend
for the first few years and then only modest returns compared with the
stock market average, and they were oversubscribed when they listed.
People want to do this. They are interested in putting their money into
these areas. Interestingly, though, when we go around and pitch the
institutions we do not push the ethical bit first and foremost because,
frankly, the financial returns are substantial and quite competitive
in normal venture capital terms. There is no financial sacrifice because
this happens to be good for the environment. [38]
5.191 SEIA also commented that new government initiatives, such as the
Greenhouse Gas Abatement Program (GGAP) and the rebates for household
solar electricity systems, were promising. Of the solar rebate scheme
they commented:
The rebate scheme which is being introduced for PV systems has certainly
generated an enormous amount of interest. SEIA accredits designers and
installers of stand-alone power schemes and so on, and it would be fair
to say that basically since early January we have been getting from
12 to 20 calls a day from people seeking accreditation. This indicates
that there is some stimulation happening from that rebate system. [39]
5.192 They also thought that the GGAP may have a small impact on changing
energy markets for the better:
What is starting to happen with GGAP and the recognition that a response
to greenhouse could drive the agenda more is that these companies are
starting to redo their sums. To be quite honest, it looks as though
the kind of funding coming from things like GGAP is just enough to tilt
the balance for them to think they can make some money. [40]
5.193 The wind turbine manufacturer Pheonix Windpower advocates the establishment
of a small electricity levy that could generate revenues which could be
applied to stimulate research, development and investment in a domestic
renewable energy manufacturing sector:
Many Government documents issued by the Australian Government purport
to a local content in the emerging renewable energy marketplace of up
to 85 per cent, it is our belief that this is a totally unrealistic
figure as at this present time there are no manufacturers of large scale
wind turbines in Australia and indeed only a handful of struggling small
Wind Generator Manufacturers may be found. It requires significant positive
direction and seeding by the Government of Australia in order to achieve
its advertised indigenous content in this new renewable energy push.
What figures are being published are largely made up of the labour
component with essentially no embedded technology. Without the injection
of local technology into the mix a viable Australian industry cannot
be created. [41]
5.194 Pheonix suggests that revenues from the levy be applied to R&D
funding, testing and accreditation facilities, soft loans, installation
grants or tax write-offs such as accelerated depreciation. They also argued
that attention needed to be paid to reducing barriers to distributed generation
and to establishing net metering programs so that domestic producers of
renewable electricity could sell their energy into the grid. In particular,
Pheonix emphasise that R&D, particularly in wind, is needed if Australia
is not to become a net importer of renewable energy technology:
Currently nearly all wind turbines used for large scale renewable energy
generating come from a mere handful of large (relatively) European and
Japanese firms with the Europeans claiming 90 per cent plus of all wind
generators currently being sold worldwide. It is interesting to note
that America which has the second largest installed generating base
has no indigenous manufacturer capable of competing with the European
products and this has been a direct result of the lack of any government
promoted policies in this regard. …
Australia is an isolated country with geographic and social variations
when compared to the European model and coupled with this is significant
export potential for equipment which fits the Australian requirement.
Asia and many third world countries can be targeted hence the more pressing
need for local research and development programs. [42]
5.195 While the Government does have existing programs in place relating
to commercialisation and capital markets, such as the Renewable Energy
Equity Fund (REEF) and the Renewable Energy Commercialisation Program
(RECP), the AGO told the Committee that the venture capital equity fund
established under REEF (known as CVC Reef) still had not commenced operation
as of June 2000, due to delays in capitalising the fund. The Government
has committed $20 million as its share of REEF, with the private sector
expected to commit funds on a 2:1 basis. Better progress is being made
with the RECP, with $22 million having been committed to date and a total
pool of $56 million being available following the Measures for a Better
Environment Package. The $10 million allocated to the Renewable Energy
Showcase Program has been fully committed. [43]
5.196 These figures compare to the approximately $300 million which SEIA
argues needs to be devoted to R&D alone over the next few years. Another
renewable energy firm, Sustainable Technologies Australia Ltd, argued
that AGO programs were not substantial enough and were being spread too
thinly:
Australia has no chance of such broad success, (our spend on each area
is minuscule compared to our international competitors) and by limiting
investment in potential winners, we risk succeeding in none. The current
Renewable Energy Commercialisation Program has made offers to a limit
of $1 million to projects within the technologies listed above. The
cap should be much higher, the projects much larger and the investment
targeted to sectors of the industry with a track record and technologies
with existing international acclaim.
STA submits that the full current Australian renewable energy commercialisation
budget should be applied to the areas where Australia's international
leadership is already acknowledged, where we have a manufacturing base
and market experience ie in solar photovoltaics. We also propose that
a similar but even larger programme be set up for building energy-efficient
product commercialisation - where the potential GHG savings are enormous
and the export opportunities for tropical areas of Asia unlimited. [44]
5.197 The Committee heard a diversity of opinion in regards to the fundamental
problems facing the renewable energy industry - some witnesses argued
that commercialisation was a problem, others R&D, and others market
certainty and longevity. It may be that these are all significant issues
affecting different sources and technologies differently. However, a large
number of witnesses emphasised the enormous potential for Australia in
the development of renewable energy, in terms both of greenhouse abatement
and in the ability to capture a slice of huge potential global markets.
5.198 The Committee notes the recommendation of the Prime Minister's
Science Engineering and Innovation Council that Australia seek to capture
5 per cent of a potential US$500 billion market in renewable energy. [45]
The Committee recommends that the Government commit to such a target and
designate renewable energy as a strategic industry.
Recommendation 41
The Committee recommends that the Government set a target for the
Australian renewable energy industry to capture 5 per cent of the global
renewable energy market by 2015, and designate renewable energy as a strategic
industry.
Recommendation 42
The Committee recommends that the Commonwealth Government in consultation
with the industry develop an aggressive industry development program for
the Australian renewable energy industry.
Recommendation 43
The Committee recommends consideration of a range of options for the
renewable energy industry including tax incentives, R&D grants, market
and regulatory reforms, and continuing assistance with commercialisation.
Australian Democrats Recommendation 4
The Australian Democrats recommend that carbon levy revenues also
be considered as a source of funds for renewable energy programs.
Recommendation 44
The Committee recommends that the Commonwealth set up specific programs
under Austrade and Ausaid to promote the export and transfer of Australian
and sustainable energy technology to developing countries.
Australian Democrats Recommendation 5
The Australian Democrats recommend that the Commonwealth Government
conduct studies to identify the full costs of energy supply on a regional
and time basis and that, where prices are below those costs, make compensating
subsidies available to sustainable energy alternatives in those areas
or satisfying loads at those times.
Turning the Ship
Can current energy market structures achieve emissions savings?
Potential reductions
5.199 Current policies which are expected to reduce emissions from energy
use and supply, and particularly from electricity generation, are limited.
Most do not go substantially beyond a `no-regrets', low cost approach.
It is hoped that energy market reforms will have a beneficial medium-to
long-term impact, through the removal of structural barriers to cogeneration
and renewables and the reduction of gas prices (making it more competitive
as a fuel for base load power generation). However, new projections estimate
these savings as very modest (only 3 Mt by 2010). Other current measures
which are expected to produce emissions savings are the 2 per cent renewable
energy initiative (the costs of which exceed `no-regrets' but will be
capped), and the Generator Efficiency Standards.
5.200 The Generator Efficiency Standards will apply to fossil fuel generators
over 30 MW capacity, with 50 GWh annual output and a capacity factor of
5 per cent over the last 3 years, whether or not they are grid-connected.
Their aim is encourage efficiency improvements to the level of best practice
performance. [46]
5.201 The AGO estimates savings from the 2 per cent measure of between
4-5.5 Mt CO2 by 2010, and savings of 4 Mt from the efficiency standards.
[47] This would add a saving of up to 10 Mt
by 2010.
5.202 The Committee accepts that the 2 per cent measure is primarily
aimed at developing the renewable energy industry and that expectations
of large short term savings are unrealistic. However, the generator efficiency
standards, while encouraging electricity generators to reduce their greenhouse
intensity of generation, do not achieve the full potential for efficiency
savings in generation. The AGO explained that:
A key element in the methodology is that the costs that we would ask
an individual plant to incur through this measure would be limited to
possibly a little beyond a `no regrets' level or zero dollars per tonne
abated, perhaps up to a maximum of $10 per tonne, but on a plant specific
basis. Those levels of costs would not be sufficient to put anybody
out of business. It is quite likely to be the case that in a certain
plant no improvement in efficiency will be possible at all - at least
not within that sort of cost envelope, in which case that plant will
not be modified as a result of this measure alone. [48]
5.203 While policies such as the Generator Efficiency Standards are obviously
worthwhile in themselves, in a context in which policy is reluctant to
move beyond no-regrets measures they will also have a limited impact.
Electricity emissions trends - modelling and projections
5.204 Research on the emissions impacts of energy market reform was commissioned
by the Department of Industry, Science and Resources as part of a March
1999 Report by Allen Consulting. The model developed by McLennan Maganasik
simulated the path of greenhouse emissions assuming the steady implementation
of current energy reforms and no further policy change, in comparison
with a base model that assumed the continuation of the pre-reform industry
structure. In their conclusions, Allens stated that delays in reform would
cause the greenhouse outlook to deteriorate, as would any failure to establish
new gas supplies by pipeline from Papua New Guinea or the Timor Sea.
5.205 In the short-to medium-term, the model predicted that emissions
would continue to increase as a result of reform, and be higher by around
6 Mt per annum (almost 50 Mt CO2-e in total, 20 per cent of 1996 levels)
between 1998 and 2005 than under a pre-reform scenario. [49]
5.206 Between 2006 and 2010 the model predicted lower emissions by up
to 11 Mt CO2-e per year. This prediction assumes the absorption of current
oversupply and the expiry of transitional arrangements (such as fixed
price contracts). This would have the result that less emissions-intensive
generation, mainly gas-fired cogeneration and some expansion in renewable
energy, can enter the market. [50]
5.207 In total, the model predicted that the net cumulative impact of
current reform measures, incorporating both the initial increases and
longer run falls in emissions, will be a net increase in emissions
of around 15 Mt CO2-e between 1998 and 2010. The Report suggests that:
`current reform measures may not contribute a positive cumulative decrease
in GHG emissions until around 2012'. [51]
5.208 These projections are sensitive to the future performance of gas
as a replacement fuel for more emissions-intensive fuels such as black
and brown coal. The Report argued that if gas prices in a more competitive
market remained high, or if the gas pipelines from PNG or the Timor Sea
do not eventuate, emissions could be 4-5 Mt CO2-e higher per annum than
projected by 2010. [52]
5.209 The AGO admitted that the annual savings after 2006, predicted
by the Allens Report, were unlikely to be fully realised. They told the
Committee:
AGO has commissioned some more recent work than the Allen Report…
that has scaled back the projections of savings. For example, the Allen
report was, I think, looking at about a 11 million tonnes saving. More
recent work we have commissioned would suggest that something in the
order of a three million tonne saving by 2010 is in prospect. The reasons
for the change are fairly complex. One of the factors I think you have
put your finger on is that the expected penetration of gas into the
power generation sector is a key determinant of greenhouse gas emissions.
I think there is a general consensus which is reflected in more recent
modelling that the extent to which that is expected to occur in the
short term is being wound back. [53]
5.210 The analysis commissioned by the AGO was again by McLennan Maganasik
(MMA), which modified its reform scenario assumptions by including:
- new coal, petroleum and gas-based power stations in Queensland;
- lower coal prices;
- higher levels of demand; and
- a slower take-up of gas. [54]
5.211 The new MMA study modelled trends in electricity emissions from
1990 to 2020, assuming energy market reforms plus the 2 per cent target
and generator efficiency standards (`Reform++').
5.212 It projected emissions levels of 171 Mt in 2000 (the 1998 Inventory
figure was 168.6 Mt), 190 Mt in 2010 and 226 Mt in 2020. By 2010, this
Reform++ scenario was 12 Mt lower than a no-reform scenario, and 18 Mt
lower by 2020. However, until the middle of the decade the no-reform scenario
was actually producing lower emissions. [55]
5.213 MMA's 2010 Reform++ projection - that is, in the middle of the
first Kyoto commitment period - is still 147 per cent of 1990 levels.
They state that even if demand growth were substantially lower than recently
recorded, emissions were likely to be at least 130 per cent of 1990 levels.
Their projections are also vulnerable to a number of potential adverse
developments. These include:
- that lower prices for gas do not eventuate from gas reforms, or are
not adequate to ensure the greater takeup of gas as a fuel;
- that the gas pipeline from PNG is not built;
- that low demand growth slows the commissioning of new gas-fired plant,
which would increase the proportion of coal-fired generation. If no
new gas-fired plants are commissioned, they anticipate emissions will
be higher by between 1 Mt in 2006 and 18 Mt by 2020. Conversely, if
only new gas-fired plants are commissioned, emissions would be lower
by between 1 Mt in 2006 and 25 Mt in 2020; and
- that large new loads enter the market, in particular, a planned new
aluminium smelter for NSW and several magnesium smelters. The aluminium
smelter alone would add about 6 Mt to annual CO2 emissions (if supplied
with coal-fired power) and 2.6 Mt (if supplied with gas-based power).
[56]
5.214 An alternative, perhaps worst case scenario, is that electricity
emissions could continue increasing at the rate they did between 1997
and 1998 (15 Mt a year). In such a case we would be facing a phenomenal
statistic of 323 Mt in 2010, even after the effect of the 2 per cent target
and generator efficiencies (-10 Mt) was taken into account. This would
be 250 per cent of 1990 levels.
Making a greater impact
5.215 It is clear to this Committee that, whichever projections are more
accurate, trends in the growth and intensity of energy supply and use
in Australia have outstripped the ability of current policies to control
them. The fast upward trend in energy emissions will make it very difficult
for Australia to meet its 108 per cent target for 2008-12, even when considering
that the additional flexibility created within the Kyoto Protocol will
work to Australia's advantage. The same trend will certainly make it impossible
to meet the more stringent targets Australia will be likely to face in
the second and subsequent commitment periods. In such an event, Australia
will be faced with the very expensive option of buying emissions credits
on the world market. Dr Clive Hamilton pointed out the potential absurdities
facing Australians if this occurs:
I note [AGO Chief Executive] Gwen Andrews said yesterday that, if domestic
emission measures fail, we can simply purchase credits on the world
market. Who will purchase those credits? At the moment the major polluters
in Australia have no obligation to do anything. Is she saying that the
Australian Government, courtesy of the Australian taxpayer, will purchase
those credits in order to bail out the polluters who fail to meet targets?
[57]
5.216 Thus, in the event that emissions permits need to be purchased
from overseas, this cost will be faced by over-emitting industries (and
thus by consumers), or in the case that there are no regulatory obligations
placed on emitters, by taxpayers. The message of this is that deferring
action will do nothing to reduce or eliminate costs. It is more likely
to increase those costs and see them distributed more inequitably and
inefficiently. In the Committee's view, it is preferable to plan how those
costs will be borne and distributed, while producing optimum greenhouse,
adjustment and industry development outcomes, rather than have them occur
in an unplanned, inefficient and inevitably inequitable way.
5.217 The Committee supports the view that the best policy perspective
on energy is a long term one. This is the optimum way of achieving sustained
greenhouse reductions, while also providing long term market certainty,
so that investment decisions will be both sound in greenhouse terms and
be rewarded by future market conditions.
5.218 The ability of industries to manage the increased costs associated
with action, must be balanced against the imperative to turn energy emissions
around and achieve a long term restructuring of the national energy economy.
It must be borne in mind that while bringing costs it will also create
great opportunities for new industries in energy efficiency and management,
and renewable technology and innovation. If the global climate system
can be stabilised through international efforts, it will also contribute
to reducing the costs and trauma of damage from (and adaptation to) adverse
climate change in Australasia.
5.219 The need to pursue early abatement action in order to pursue an
`optimum' path towards reaching our Kyoto targets was a strong theme of
the June 1999 report, Early Greenhouse Action, prepared for the
AGO by the Centre for International Economics. It suggests that:
Without some abatement taking place before 2008-12, the rapid adjustment
that may ultimately be required will impose significant costs on the
economy. It would be preferable to have a smooth ` glide path' to the
Kyoto Protocol target. Supporters of the Protocol are concerned that,
without early action, the adjustments required will ultimately make
the Protocol politically and economically infeasible. [58]
5.220 With the long term goal of a sustainable energy economy in mind,
the Committee suggests that short-to medium-term policy have the following
aims:
- to accelerate energy market reforms to remove derogations, biases
and barriers to entry for cogeneration and renewables;
- to make lower emission fuels sources such as gas more price competitive
with coal, either through the reform of gas markets or by pricing carbon;
- to increase consumer awareness of the greenhouse implications of their
energy use, and to accelerate energy efficiency and demand management
measures, through compulsory standards where appropriate;
- to prevent the construction of new coal-fired generation capacity
within Australia. Rather new power stations and the augmentation of
existing plant should be gas, renewable, or a mandated combination of
the two;
- to accelerate the generation and takeup of renewable energy, through
the implementation and extension of the 2 per cent renewables measure,
possibly with an increase in the annual targets after 2010, along with
a strategic approach to developing a strong renewable energy industry
with a successful performance in export markets; and
- to introduce a domestic mechanism for pricing carbon, preferably through
a capped system of tradeable emissions permits, so that the greenhouse
intensity of energy supply is recognised in market signals and increasingly
directs market behaviour.
5.221 A large number of witnesses argued that only by pricing carbon,
and thus encouraging energy markets to internalise the costs of greenhouse
emissions, would serious progress be made on reducing the greenhouse intensity
of energy generation in Australia. Mrs Leith Wood, Manager of Government
and Public Affairs for AGL, argued that the poor greenhouse performance
of energy markets was exacerbated by the fact that the pollution from
electricity production was not costed. This was at odds with the situation
faced by other polluting industries:
Things that come at the lowest price usually come at another cost…
in an economic sense, one of the reasons that electricity from coal-fired
power is very cheap at the moment is because the amount of emissions
that are generated in that production are not costed. There is no cost
attached to those. Whereas in other industries that need to dispose
of waste water from an industrial process or other solid waste in some
form have to pay for that waste to be removed or disposed of, these
emissions are generated with no cost attached. That, in turn, reflects
on the cost of electricity. [59]
Australian Democrats Recommendation 6
The Australian Democrats recommend that Australian governments prepare
to set time frames to replace coal-fired power with a mixture of gas and
renewables, with the proportion of renewable energy steadily increasing
until the Australian economy is predominantly based on renewable sources
some time after 2050.
Footnotes
[1] Pacific Power, Submission 98, p 801.
[2] Dr Clive Hamilton, Proof Committee Hansard,
Canberra, 10 March 2000, p 61.
[3] Dr Clive Hamilton, Proof Committee Hansard,
Canberra, 10 March 2000, p 58.
[4] Mr David Abba, Proof Committee Hansard,
Melbourne, 21 March 2000, p 234.
[5] Mr David Abba, Proof Committee Hansard,
Melbourne, 21 March 2000, p 234.
[6] Proof Committee Hansard, Sydney,
22 March 2000, p 298.
[7] The paper was prepared by an independent
working group for PMSEIC. Its members were Professor Don Nicklin (Chair),
Dr Tom Connor (Kinhill Pty Ltd), Dr John White (Systems Engineering Consortium),
and Dr John Wright (CSIRO Energy Technology).
[8] Prime Minister's Science, Engineering and
Innovation Council, From Defence to Attack: Australia's Response to
the Greenhouse Effect, 25 June 1999, pp 3, 7.
[9] Prime Minister's Science, Engineering and
Innovation Council, From Defence to Attack: Australia's Response to
the Greenhouse Effect, 25 June 1999, p 9.
[10] Australian Greenhouse Office, Submission
169, p 1693.
[11] Australian Greenhouse Office, Submission
169, p 1694.
[12] Australian Greenhouse Office, Submission
169, p 1693.
[13] Australian Greenhouse Office, Submission
169, p 1694.
[14] Australian Greenhouse Office, Submission
169, pp 1694-5.
[15] On 23 May 2000, the Government approved
implementation of the Renewable Energy Action Agenda (REAA), and established
an Industry CEO group to provide high level support, and a Renewable Energy
Implementation Group to implement REAA strategies and actions (Industry
Science Resources, New Era, New Energy – Renewable Energy Action
Agenda, Executive Summary, May 2000).
[16] Department of Industry, Science and Resources,
Action Agendas - Renewable Energy, Website: isr.gov.au/agendas/Sectors/energy.html
(19/07/00), p 2.
[17] Department of Industry, Science and Resources,
Action Agendas – Renewable Energy, Website: isr.gov.au/agendas/Sectors/energy.html
(19/07/00), p 3.
[18] Department of Industry, Science and Resources,
Action Agendas - Renewable Energy, Website: isr.gov.au/agendas/Sectors/energy.html
(19/07/00), pp 3-4.
[19] Mr Chris Dunstan, Official Committee
Hansard, Sydney, 22 March 2000, p 269.
[20] Sustainable Energy Development Authority,
Green Power Briefing: Green Power and Wood Wastes; Sustainable
Energy Development Authority, National Green Power Accreditation Program:
Accreditation Document, Version 1, January 2000, Appendix A, p 14.
[21] Official Committee Hansard,, Sydney,
22 March 2000, p 271.
[22] Official Committee Hansard,, Sydney,
22 March 2000, pp 269, 299.
[23] Great Southern Energy, Submission 150,
p 1558.
[24] Great Southern Energy, Submission 150,
p 1558.
[25] Integral Energy, Annual Report,
1997, p 16.
[26] Integral Energy, Annual Report,
1997, p 19.
[27] Great Southern Energy, Submission 150,
p 1560.
[28] Senate Environment, Communications, Information
Technology and the Arts References Committee, Report on the Renewable
Energy (Electricity) Bill 2000, August 2000, p 41.
[29] Mr Alan Pears, Proof Committee Hansard,
Melbourne, 21 March 2000, p 234.
[30] Mr David Abba, Proof Committee Hansard,
Melbourne, 21 March 2000, p 236.
[31] Proof Committee Hansard, Sydney,
23 March 2000, p 411.
[32] Proof Committee Hansard, Sydney,
23 March 2000, p 411.
[33] Senate Environment, Communications, Information
Technology and the Arts References Committee, Report on the Renewable
Energy (Electricity) Bill 2000, August 2000, p 34.
[34] Combined Explanatory Memorandum, Renewable
Energy (Electricity) Bill 2000/Renewable Energy (Electricity) (Charge)
Bill 2000, pp 20, 45.
[35] Senate Environment, Communications, Information
Technology and the Arts References Committee, Report on the Renewable
Energy (Electricity) Bill 2000, August 2000.
[36] Mr Alan Pears, Proof Committee Hansard,
Melbourne, 21 March 2000, p 245.
[37] Pheonix Windpower, Submission 226, p 2957.
[38] Proof Committee Hansard, Sydney,
22 March 2000, p 301.
[39] Mr David Abba, Proof Committee Hansard,
Melbourne, 21 March 2000, p 236.
[40] Mr Alan Pears, Proof Committee Hansard,
Melbourne, 21 March 2000, p 235.
[41] Pheonix Windpower, Submission 226, p 2954.
[42] Pheonix Windpower, Submission 226, pp
2954-60.
[43] Mr Philip Harrington, Proof Committee
Hansard, Canberra, 22 June 2000, p 694.
[44] Sustainable Technologies Australia Ltd,
Submission 154, p 1574.
[45] Prime Minister's Science, Engineering
and Innovation Council, From Defence to Attack: Australia's Response
to the Greenhouse Effect, 25 June 1999, p 9.
[46] Australian Greenhouse Office, Fact
Sheet: Generator Efficiency Standards - Powering into the New Millennium,
http://www.greenhouse.gov.au/markets/gen_eff/qa.html (14/07/00).
[47] Combined Explanatory Memorandum, Renewable
Energy (Electricity) Bill 2000/Renewable Energy (Electricity) (Charge)
Bill 2000, p 20; and Mr Philip Harrington, Proof Committee Hansard,
Canberra, 22 June 2000, p 696.
[48] Mr Philip Harrington, Proof Committee
Hansard, Canberra, 22 June 2000, p 697.
[49] Allen Consulting and McLennan Magasanik
Associates, Energy Market Reform and Greenhouse Gas Emissions Reductions:
A Report to the Department of Industry, Science and Resources, March
1999, p xiii.
[50] Allen Consulting and McLennan Magasanik
Associates, Energy Market Reform and Greenhouse Gas Emissions Reductions:
A Report to the Department of Industry, Science and Resources, March
1999, p xiii.
[51] Allen Consulting and McLennan Magasanik
Associates, Energy Market Reform and Greenhouse Gas Emissions Reductions:
A Report to the Department of Industry, Science and Resources, March
1999, p xiii.
[52] Allen Consulting and McLennan Magasanik
Associates, Energy Market Reform and Greenhouse Gas Emissions Reductions:
A Report to the Department of Industry, Science and Resources, March
1999, p xiii.
[53] Proof Committee Hansard, Canberra,
22 June 2000, p 698.
[54] McLennan Maganasik Associates, Greenhouse
Gas Emission Projections: Australian Electricity Generation and Natural
Gas Combustion, Report to Australian Greenhouse Office, 5 June 2000,
p 34.
[55] McLennan Maganasik Associates, Greenhouse
Gas Emission Projections: Australian Electricity Generation and Natural
Gas Combustion, Report to Australian Greenhouse Office, 5 June 2000,
p vi.
[56] McLennan Maganasik Associates, Greenhouse
Gas Emission Projections: Australian Electricity Generation and Natural
Gas Combustion, Report to Australian Greenhouse Office, 5 June 2000,
pp 36-39.
[57] Proof Committee Hansard, Canberra,
10 March 2000, p 58.
[58] Centre for International Economics, Early
Greenhouse Action, Report prepared for the Australian Greenhouse Office,
June 1999, p 20.
[59] Proof Committee Hansard, Sydney,
23 March 2000, p 392.
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