Australia's Energy Transformation - Energy White Paper launch speech

This is a transcript of the full speech delivered by Martin Ferguson today, launching the much-awaited Energy White Paper.

Introduction

Good afternoon ladies and gentlemen.

Thank you all for coming and thank you to our hosts CEDA.

Today I will launch an important document for Australia’s future, and for the future of our region as a whole—the Energy White Paper.

It has been almost a year since I launched the draft Energy White Paper. This follows an extensive process of public consultation, including public forums in every capital city and consideration of almost 300 written submissions. I would like to thank all of those individuals, businesses, organisations and government agencies who contributed to this process. You have helped create an invaluable policy framework for developing and transforming our energy sector and its resources for the next decade and beyond.

Building on this feedback, I am very pleased to present to you today the 2012 Energy White Paper.

Australia and energy

Energy provides an essential service to our people and underpins the economic competitiveness of our economy.

We should never forget that Australia is an energy economy.

Australia draws on an enviable natural endowment of fossil fuels, uranium and renewable energy resources that have underpinned our wealth for generations.

Additionally, nearly two decades of cooperative reform have built a world-class energy sector that is the envy of, and model for many other nations.

The Energy White Paper builds on these strengths.

It provides a roadmap for how we can further transform our energy sector to improve the prosperity of all Australians.

The Energy White Paper seeks to do this by clearly outlining the Australian Government's principles and objectives for developing Australia's energy future.

Central to this is a continued commitment to the Labor Government's traditions since Hawke and Keating – to open and transparent markets.

Markets that allow competitive pricing, efficient resource allocation and innovation.

This is what will drive Australia's economic and income growth, while ensuring we protect those most vulnerable in our society.

Australia’s energy transformation

The title of the Energy White Paper is – Australia's Energy Transformation.

The change our energy and energy resource sectors are embarking on is profound. Domestically, we are facing pressure to move to cleaner fuel sources and at the same time the cost of delivering this energy is increasing. For our energy resource sector, the pipeline of investment is phenomenal but again keeping the costs down remains a continuing challenge.

There are three key pressures driving this:

  • The growth of our population, economy and wealth;
  • The growth of our energy exports, particularly to key Asian markets; and
  • The need to dramatically reduce our carbon emissions to create a clean energy economy.

Ongoing changes in international markets are also playing a role. This includes long-lasting shifts in trade balances, the emergence of new energy sources and technologies and the effects of sustained turmoil in key economies. These forces are further increasing Australia’s integration into international energy markets.

That is why the Asia Century White Paper is so important to ensure Australia is well positioned to capture these new opportunities emerging out of Asia. Opportunities we are already seeing in our resources sector, with unprecedented flows of investment in our coal and gas sectors to meet growing demand.

The dramatic changes in our energy sector can be quantified by comparing the situation today with 2004, when the last Energy White Paper was released. Since that time, trade in our liquefied natural gas has increased almost fourfold to more than $12 billion per annum. The value of our annual thermal coal exports has tripled to about $17 billion. Wind and solar energy generation capacity has multiplied ten fold. And we are now sourcing close to 20 per cent of our domestic gas from coal seam gas; up to 90 per cent in Queensland.

The pace of change confronting the energy sector is further evidenced in a number of key updates to the Final Energy White paper since the draft was released.

These include:

  • downward revisions of forecasts in average electricity demand;
  • changes in expectations across various electricity generation technology costs;
  • updates of our known gas resources and gas market outlook; and
  • the decline in our domestic refining capacity.

We must get our energy policy settings right, if we are to manage these dynamics effectively.

Positive outcomes can only be assured through policy frameworks that shape effective market outcomes, manage uncertainty and attract investment in energy resources and infrastructure.

These are the clear goals of the Energy White Paper.

Thankfully, Australia has many competitive advantages that provide a head start in this respect. We have a huge natural resource endowment. We have one of the most competitive electricity markets in the world. We have a well educated and skilled workforce. We have well established links to international markets, particularly on the doorstep of Asia and a competitive energy export industry.

In my five years as Minister for Resources and Energy, I have developed a clear vision of how we can build on these strengths and create an even more positive energy future.

Vision for Australia's energy future

This vision has four essential elements.

Firstly, developing a truly national approach to our energy markets. Markets underpinned by consistent regulation across the country that create a level playing field that stimulates  competition, innovation and consumer choice. Markets that are an attractive place to invest and maintain a reliable and affordable supply of electricity to all consumers.

Secondly, an Australia that is the number one investment destination for resource development. Where production costs are highly competitive, approval processes are best practice, fast and efficient and where our labour force is internationally regarded for its expertise.

Thirdly, developing Australia's natural gas reserves to become one of the world’s largest LNG exporters, while effectively servicing the domestic market. This growth in gas would increase Australia’s pipeline infrastructure and gas trading hubs to service a mature and transparent domestic gas market.

And lastly, an Australia that transitions to cleaner forms of energy over time in a way that does not impede our economic competitiveness. In a way that is driven by the market, so as not to lock in Australia to higher cost technologies than would otherwise be the case. And where we nurture Australian research and development and foster innovation in partnership with the private sector.

At the heart of this vision and the policy framework set out in the Energy White Paper is a commitment to competitive and well-regulated markets that operate in the long-term interests of consumers and the entire nation.

Realising the vision

Whether we realise the potential of our energy future depends on how well governments, businesses and consumers respond to the significant challenges we face.

The role of this Energy White Paper is not about spending measures in response to the immediate political debate.

Rather, it is a long term, strategic policy document that articulates the Australian Government position on the full gamut of energy policy issues.

It provides assurance that we are heading in the right direction in helping to transform our energy sector, while refocusing our attention on key areas.

The Energy White Paper sets out four priority areas that require action in this respect:

  • delivering better energy market outcomes for consumers;
  • accelerating our clean energy transformation;
  • developing our critical energy resources, particularly natural gas; and
  • strengthening the resilience of our energy policy framework.

Addressing the key challenges

I would like to go through the headline challenges identified in these areas, and how the Government proposes to respond.

The Energy White Paper highlights a number of challenges but today I want to focus on six I think are most significant. They include:

  • minimising energy price pressures and growth in peak demand;
  • tightening in our east coast gas market;
  • ensuring our liquid fuel security;
  • transitioning to clean energy;
  • retaining our competitive energy resource development; and
  • informing a constructive energy debate.

Energy prices and peak demand

I think we can all agree on the prominence of rising prices within the current energy debate.

Australia’s strong dollar has to some extent sheltered local petrol and diesel prices from rising global oil prices.

But the same can’t be said for electricity, which has seen average retail price rises of about 40 per cent nationally over the past four years and well above 50 per cent in some states. This is hurting households and businesses and it is simply not sustainable.

There is unfortunately no quick or easy fix to this issue.

High prices result from a range of complex factors, many of which lie outside the control of any single government or regulator. They include higher production costs and the need to replace or upgrade ageing infrastructure which tends to come in investment cycles. Just like the one we have experienced in networks – said to of peaked this year.

Electricity costs have also been driven up by the fact that the rising demands of our small, and geographically dispersed consumer base must be served by a large and growing network. The need to meet high reliability standards in the face of projected continued growth in peak demand complicates matters.

Energy policy is after all a seesaw between cost and reliability.

And as Energy Minister I recognise the high value that consumers place on a reliable electricity supply, and I do not underestimate the immediate and devastating impacts from loss of supply. Recent incidents such as the dislocation in New York and the electrical storm in South Australia remind us of the value of reliability.

It must also be acknowledged that the transition to a clean energy economy, including the carbon price, adds marginally to costs. But in the Labor Government tradition, generous compensation and adjustment measures are in place to ease the impacts of this on the most vulnerable.

I believe it is time to minimise future pressures by ensuring markets, regulatory frameworks and their institutions operate in the long-term interests of consumers.

The good news is that sound policy can make a difference.

Governments at all levels must embrace key reforms to improve regulatory efficiency and stimulate market competition and innovation. And many of the key reforms that may ease future electricity price pressures are already well underway, such as improvements to network rules and a review of the appeals mechanism. But there are many reforms needed to drive greater efficiency in our energy system.

Another is renewing our focus on how consumers manage their demand for energy. Pricing structures are resulting in inefficient peak demand. This means that additional capacity is required to be built that might only be used for one per cent of the year.

Current market arrangements are distributing the costs of this across the entire consumer base. The Productivity Commission estimates consumers who don’t use the additional capacity are subsidising others by as much as $330 per year. This is clearly an unfair cost, particularly on those less able to afford it.

Rectifying the situation requires an integrated approach: consumers must be given the right signals, through flexible time-of-use pricing to make decisions about their energy use. If we are to provide consumers with more choice then we also need to promote better information through tools, like smart meters, to assist consumer decisions. These must be supported by strong consumer protections.

The Energy White Paper contains an ambitious reform agenda targeting these issues. This includes strengthening market institutions and governance—we need to ensure the Australian Energy Regulator has the resources to do the job required of it. It also involves improving network efficiencies and providing for a strong consumer voice in market outcomes.

If I could highlight one area of critical reform needed to improve competition and deliver innovative solutions to consumers it would be retail price deregulation.

The key to delivering on this reform agenda – and locking in the benefits to consumers – will depend on the agreement that can be reached by the Standing Council on Energy and Resources and then COAG in December.

Victoria in many respects has led the way.

The willingness of other state Governments to take on these hard reforms will be essential. It will take political courage where others have failed. But the Australian Government will continue to strongly advocate for, and where appropriate, lead the reform process.

Short term fixes, such as intervening to hold down prices for temporary relief might be tempting, but it is not in the long-term interests of consumers. It inevitably lowers investment, competition and standards of services. Most critically, as we have recently seen in Western Australia, it creates a larger shock to consumers when the price inevitably catches up with the real cost.

Gas market pressures

The second major challenge the Energy White Paper identifies is the changing dynamic of domestic gas markets.

This has resulted from increasing overseas demand for Australian gas.

The Government acknowledges that there will be tightness in the east-coast gas market as new coal seam gas and LNG projects ramp up to full production. While Geoscience Australia and the Bureau of Resources and Energy Economics analysis indicates we have sufficient gas to meet projected export and domestic needs until at least 2035 – this is not a call for complacency. Transitional pressures on the east coast are emerging, creating price pressures and tightening supply conditions.

Once again, it is the Government’s view that this is best achieved by open and efficient markets, where price is allowed to balance the market and provide incentives for developing new supply. Interventions such as reservation policies to force price or supply outcomes are more likely to impede than promote supply. Let’s not forget that the boom in American domestic shale gas was preceded by high prices that drove significant new investment. The current low Henry Hub prices is in part a reflection of the supply that high prices brought on.

In terms of adding to domestic supply, the Energy White Paper sets out a cooperative agenda. The Government is committed to working through SCER to improve gas market development, transparency and trading opportunities. The National Harmonised Framework for Coal Seam Gas is an example of this.

All jurisdictions must work to remove impediments to the timely development of domestic gas supply. The consequences of avoiding these hard decisions will be far greater. It is also incumbent on the gas industry itself to maintain a balanced supply for both the domestic and export markets.

Liquid Fuel Security

The third challenge will be to ensure our future fuel needs continue to be met.

Our refining industry is re-structuring, faced with economic pressure from new Asian mega-refineries. The announced closure of the Clyde and Kurnell refineries will see domestic refining capacity decline by about 28 per cent in 2014 from 2012 levels. From that time Australian refineries will supply only around half of our refined fuel needs.

But it is important to recognise that over 80 per cent of our crude oil and other refinery feedstock is already imported. And in turn we export about 80 per cent of Australia’s crude oil and condensate production, because its proximity to Asia and quality makes for higher value products – maximising the return to Australia.

To suggest that recent refinery closures imperils our energy security is to miss the point that most of the crude oil previously refined in the domestic market already comes from overseas. Domestic oil production is expected to further decline over the next decade in the absence of new discoveries. This decline, coupled with continued growth in demand for fuel, means Australia will have a growing reliance on imports of crude oil and refined product.

And regardless of our refinery capacity, Australia will continue to pay world market prices for oil.

Our ongoing liquid fuel security will be supported through the introduction of equivalent importing capacity from well-established international supply chains and ready access to regional fuel supplies. The Government acknowledges these changes are of concern to many downstream industries that depend on petroleum refining. We will continue to work closely with the industry, and respective state and territory governments to ensure the timely construction of import receiving facilities.

A two-yearly National Energy Security Assessment from 2014 will continue to assess our energy security risks. As part of the National Energy Security Assessment, the Government intends to also undertake the National Energy Risk Preparedness Audit to map risks and response measures.

The availability of secure, adequate and competitively priced petroleum supplies, either as fuel or feed stock, is of paramount importance given the jobs and economic returns involved.

Clean energy

The fourth challenge is managing the transition to cleaner energy.

While rightly focused on cost and efficiency outcomes, government and industry must also look to move to cleaner forms of energy. Energy generation, supply and use accounts for about three quarters of Australia’s greenhouse gas emissions.

To meet our long-term emission reduction targets we need to significantly reduce our CO2 output by the middle of this century. This requires development of a diverse range of new cleaner technologies and processes, including renewables, low emissions fossil fuels, hybrid systems and new generation distributed energy. Energy storage and smart network capacities will also be critical in managing any intermittency issues.

This task is significant but ultimately achievable.

Modelling within the Energy White Paper shows that, while fossil fuels will underpin our energy security for many years to come, clean energy generation could grow to provide over 40 per cent of our electricity needs by 2035 and potentially up to 85 per cent by 2050. If this clean energy transformation were to be realised it will require more than $200 billion in new generation investment between now and 2050, including around $50–60 billion in gas and $100 billion in renewables.

But these results are far from guaranteed, and a range of technologies included in the projected energy mix are yet to become commercially available.

This is evidenced by a new website to be released today by CSIRO called “eFuture”. The website allows the user to choose a range of variables and show how these impact on Australia’s electricity costs, technology mix and carbon emissions, through to 2050.

Flattening average electricity demand is one such variable currently minimising the need for new investment. While there will undoubtedly be calls from some interest groups for a faster or slower rate of deployment of their favoured technologies, the principal policy aim is to meet Australia’s greenhouse gas emissions targets at the least cost while maintaining energy security.

To deliver on this, the Government has established key reforms like carbon pricing, the Renewable Energy Target and a further $17 in billion funding for technology development and commercialisation to drive the transformation. This includes the $10 billion Clean Energy Finance Corporation to begin on 1 July next year.

And the new $3.2 billion Australian Renewable Energy Agency, or ARENA, which began on 1 July this year. Delivering on one of the clean energy policy action of the Energy White Paper, ARENA will release its much awaited General Funding Strategy next week outlining how it intends to further support Australia's renewable energy innovation.

These initiatives will help harness Australia's world-class clean technology research and development capabilities and pull new technologies through to commercialisation.

This is all part of the Australian Government's framework for a clean energy future that overtime will reshape our energy sector and create new economic opportunities.

Retaining competitive energy resource development

The fifth challenge is to improve on our energy resource project delivery.

In many ways, Australia is a high-cost producer compared to many other potential energy suppliers. The prospects for establishing new projects are becoming more challenging due to declining commodity prices, the emergence of new suppliers, rising production costs and more intense competition for the investment dollar. Simply put, we must work harder than ever to lock-in robust investment across the energy supply chain. The Government is working to improve our skills base and address labour market constraints through major reforms in education, training and worker migration.

Realising the potential of our energy future will require significant levels of investment in domestic infrastructure and further development of our resource base. Almost all of it will come through private domestic and international financial markets. We currently have a pipeline of $270 billion in advanced projects on our books, with a second tranche of $230 billion in less advanced projects not yet committed.

If we are to secure this second pipeline we must reduce the costs of production in Australia. We must continue to actively work through COAG to reduce business red-tape and streamline best-practice environmental approvals for major projects.

In doing so, industry and government also need to promote additional opportunities for local businesses and Indigenous communities to participate in new resource projects.

Constructive debate

One final challenge will be to promote an informed debate on Australia’s energy future.

Australia must have a mature, candid and on-going public dialogue about our energy future. This is the best means of ensuring sound policy underpins decision making. We simply cannot afford to miss opportunities through a lack of understanding or a failure to retain a social licence to operate.

The energy industry – both upstream and downstream – needs to step up its engagement with the community, because without their support your business will face increasing challenges. Governments too have a role to play in public education and in setting transparent, safe and effective standards for energy resource development.

National energy policy too must not be ad hoc. In an energy economy such as Australia, it must be a routine analytical process, so that governments and industry are forced to regularly review actual outcomes, changed circumstances and challenge their assumptions.

The Energy White Paper released today seeks to change the way Australia makes national energy policy.

Locking in four-yearly strategic reviews of energy policy, from 2016 onwards – backed by two-yearly security and technology assessments – provides a predictable and robust framework for ongoing policy development and informed debate.

Conclusion

The overview of the Energy White Paper I have outlined today provides a hard-headed policy assessment of the opportunities and challenges facing our energy future.

I believe it provides an honest account of the reality facing the sector.

It seeks to provide clarity regarding the Australian Government's energy ambitions.

And central to this is a continued commitment to market-based solutions.

Now it is released we must ensure it is acted on.

The Australian Government will be seeking to work cooperatively with our state counterparts to deliver on much of this agenda through the SCER and COAG meetings later this year.

This will require making some hard decisions and sometimes overcoming populism for what is in the long-term interests of consumers.

But where bi-partisan support can be achieved, I am confident we can achieve this ambitious agenda.

Thank you.

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