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Where to for energy policy under a Coalition government?

The Coalition has returned to government at a time of uncertainty and rapid change in almost every area of energy policy. With an energy policy released and a responsible minister named, what can we determine…

Electricity prices, renewable energy, climate change, uranium exports: what does the Coalition plan to do about our energy future? akeii/Flickr

The Coalition has returned to government at a time of uncertainty and rapid change in almost every area of energy policy. With an energy policy released and a responsible minister named, what can we determine about where this new government is headed?

The Coalition’s formal policy tries to address some of Australia’s outstanding energy issues. Emphasis will be on national energy security, energy market transparency and roles of alternative transport fuels.

The policies are mostly quite specific. They target key existing issues and agendas: resolving the coal seam methane controversy, developing infrastructure so interstate truck drivers can fill up with gas rather than diesel, selling uranium to India, and encouraging exploration and extraction of mineral resources.

The government proposes a new energy white paper within a year. This seems to be an alternative to announcing comprehensive policies. The previous government published a white paper only recently but there are strong grounds for revising this seriously deficient paper.

Changes to electricity and gas markets are long overdue. The recent Productivity Commission report on electricity can only be described as scathing. Lack of competition in gas markets seems to be driving uncertainty and unacceptably high prices, which will be exacerbated by export of gas from Queensland in coming years. The question is whether the policy focus will be on propping up the incumbent energy industries or supporting transformation.

Other proposals are outside the energy policy, but will affect the sector. There is a proposal to allow electricity from waste from native forest management to qualify under the Renewable Energy Target, decisions to focus on expanding road infrastructure but not rail, commitments for government to lead on e-service using the national broadband network, and cuts to a number of sustainable energy programs funded from carbon price revenue.

It is also interesting that in his new cabinet, Prime Minister Abbott has not appointed an energy minister. Former energy minister, and now industry minister, Ian Macfarlane will play this role. He may have his hands full.

More fuel exports, but is there demand?

The tone of the new government’s policy statement suggests that it wants to see increasing energy exports, stronger development and roll-out of alternative transport fuels. It also wants to review electricity and gas market models.

The focus on increasing exports seems to imply more coal, gas and uranium mining and export. But will there be sufficient demand and profitable prices on world markets?

The International Energy Agency, in its 2012 World Energy Outlook, estimated global demand for coal would decline by 30% by 2035. This is predicated on a scenario that limits atmospheric concentrations to 450 parts per million of CO2 equivalent.

China has recently taken steps to limit future demand for coal, while improving the economic efficiency of its own coal mines. Recent analysis suggests a peak in global coal demand for power generation by 2020.

Global uranium demand will be strongly influenced by the reactions to the Fukushima experience and the challenges of managing an ageing fleet of power stations. It will also depend on progress in renewable energy and energy efficiency; we may not need nuclear.

The picture for liquid natural gas exports may be rosier, but the situation is still challenging. Gas production is very capital intensive, and competition is increasing. Our Asian customers are increasingly critical of Australian pricing, compared to cheaper US prices.

The emergence of coal seam gas and shale gas development technologies also opens up new production possibilities around the world. The future level of demand for gas is also open to debate: it faces plenty of competition from other options.

Energy security is also an increasingly topical issue that now involves electricity and gas, as well as oil supply. Increasing and volatile international oil prices are certainly important when Australia is becoming more dependent on imports.

Increased use of gas for heavy road freight offers potential benefits. But the lack of rail freight infrastructure commitment is a major issue, and providing urban public transport and planning for easy access to services is critically important for many reasons beyond energy security.

Climate policy as a driver of energy policy

A new white paper also needs to explore the nature and implications of the sustainable energy revolution and climate response. These are transforming our whole approach to energy.

The new government’s climate policy is focused on “direct action”: paying businesses via auction to reduce emissions beyond their “business as usual” baseline emissions.

The government expects farming and forestry related projects to deliver most of the abatement to meet its 2020 target (5% below 2000 emissions). But other sectors will also be able to bid for the $2.9 billion allocated.

It seems likely that energy efficiency projects will deliver a substantial proportion of the abatement under this scheme. There is a large amount of energy efficiency potential available at low and even negative cost.

The Energy Efficiency Opportunities industry program is saving around 8 million tonnes of CO2 annually and over $800 million at an average carbon cost of minus $95 per tonne of CO2 avoided.

Our appliance energy efficiency scheme is also avoiding millions of tonnes of emissions annually at negative cost. This helps explain the recent unprecedented and ongoing decline in National Electricity Market electricity sales.

At an individual level, everyday decisions that used to drive an increase in energy use and emissions now lead to reductions. Buying a new TV or fridge saves energy; switching from a laptop to a tablet slashes energy use; new office buildings and renovated ones use less energy; new industrial equipment is much more energy efficient. We are now on a savings-multiplying path, despite our ignorance, and our reluctance to pursue effective policies.

For energy efficiency to capture its cost-effective share of Direct Action funding, energy efficiency proponents will have to prove Treasury and other economic modellers have dramatically underestimated the energy savings from efficiency.

There is scope to do that. But it will require redirection of business towards action and government policy towards energy efficiency and innovation. This will apply even more pressure to the existing electricity industry and fossil fuel industries.

It will certainly be interesting to watch energy policy evolve over the coming year.