Australia's great big energy challenge

The biggest weakness of the draft energy white paper released this morning by the federal government is not immediately obvious – it's found on page 269 of the 291-page report. It reveals that the data used by the Department of Resources and Energy for its energy modelling is already out of date.

In a world that is preparing for a dramatic shift in energy sources, a transformation to renewables, smart grids and electric cars – scenarios not invented by green-spinning NGOs, but by the International Energy Agency and the world's leading industrial groups – Australia's energy bodies cling grimly to the belief that not much will change, that fossil fuel and its attendees (carbon capture and storage) will continue to dominate.

The white paper acknowledges the existence of the IEA and other international reports, but relies on modeling provided by the likes of Treasury, the Australian Energy Market Operator and its own Bureau of Resource and Energy Economics, which predicts that Australia will have between 20.5 per cent and 22.2 per cent of renewables by the year 2030, barely more than its 20 per cent target in 2020.

How does it get this so wrong? By relying on modeling that predicts technologies such as solar PV will fall to a cost of around $220/MWh by 2035. Little wonder, then, that it thinks that solar will account for just 1.3 per cent of generation by 2030. The IEA, however, notes that the cost of solar PV has already fallen to between $160-$230/MWh, and will fall to $50-$100 by 2035, when it expects solar to be producing one fifth of the world's energy. China thinks solar PV will be as cheap as coal by 2021 and its growth will boom. Australia's white paper predicts small-scale solar PV will cease to grow after 2030.

This is important, because the inability to get a grip on the rapidly changing price of technology and their developments has been at the core of some of the lousiest energy policy decisions in this country in recent years – notably the NSW solar feed-in tariff, and the structure of the solar multiplier by the federal government. Given that these cost declines are accelerating, and now reaching a point where they compete with other technologies, it seems that there is a huge risk of more blunders when planning for the future. Given that minister Martin Ferguson says that more than $200 billion will be spent in the next two decades on Australia's energy needs, there is much at stake.

That's the negative part of the white paper – so just ignore their forecasts. However, it's the assessment of the current state of the energy industry which is more interesting, and has the potential to change the nature of the energy debate in this country, which it clearly seeks to do: for the first time the government has put together a significant document that underlines some of the home truths about the energy industry that many in the sector try to hide and many in the media choose to ignore.

The most significant of these statements, particularly in the context of the current popular debate, is that the cost of cleaner energy will impose only “marginally” higher energy costs on consumers in the short to medium term. And, it says, the industry will create jobs, offer commercial opportunities for Australian researchers and support our export industries. As Ferguson repeated on several occasions, Australia will never compete in clean energy manufacturing, but it has the potential to be among the world leaders in developing new technology and exporting that knowledge and IP.

The second important point is that the cost of network upgrades are underpinning the rise in retail costs, particularly in meeting peak demand, and Ferguson made a point of emphasising the cost of Australia's growing dependence on air conditioning. He noted that for each $1,500 air conditioner (2kW) that was installed, a cost of $7,000 is imposed on to the electricity system which has to be cross-subsidised by other users. This subsidy is at a scale far beyond anything that exists for renewables, yet it is rarely mentioned.

The white paper also recognises the growing importance of distributed generation – such as solar PV – that is located close to demand and will have an impact on the local grid management and require greater flexibility in the distribution network. And Ferguson says demand management, the ability to shave the tops off peak load, will be a critical component of future energy requirements.

Indeed, one of the big themes of this paper, and a welcome one, is the attempt to switch the focus from energy supply to energy demand. That will require much greater focus on energy efficiency, and customer education and engagement, particularly as network upgrades impose significantly higher costs, and consumers have greater exposure to rooftop solar, smart meters, and even electric vehicles.

The white paper talks of the “significant long-term transformation” that needs to occur in the way Australia produces and consumes energy. “This transformation will be a massive challenge,” it writes, and adds that this transformation could also be dramatic. Although it relies on forecasts a coal and gas based future, it canvasses the potential for significant changes to the way energy is produced and the fundamental building blocks of the grid. “We cannot predict with any certainty future cost reductions and technical breakthroughs, or even how the market may ultimately deploy technologies,” the paper says. But it emphasises that this uncertainty needs to be managed with a flexible approach

Included in this flexibility, Ferguson argues, is nuclear. He argues Australia should export uranium to other countries so that they can deploy nuclear if they have no alternative, and he suggests that Australia also needs to stand ready to deploy nuclear should renewable technologies fail to deliver. On this point, he is right, but it is essential that renewables be given the opportunity to prove their worth. Ferguson should not be tempted to pre-judge, or even prejudice that outcome.