A turning point in Australian energy policy

April 24, 2018
Editor(s): Gavin Cheng
Writer(s): Abrar Samen, James Lee, Kaavya Jha

Energy woes have taken to new heights as surges in prices and a fall in reliability raise major concerns, with South Australia sticking out like a sore thumb. A Grattan Institute report believes the national electricity market is at ‘crisis point’ (Wood, 2017). But what has led the situation today? We look to see how circumstances have developed to warrant this description.

Historical issues

Currently, 73 percent of Australia’s energy sources come from coal and represents the cheapest form of energy production. However, Australia produces 550 million tonnes of carbon dioxide a year, or about 1.4% of the world emissions. Energy generation makes up a large proportion of those emissions. The issue has been further exacerbated given old power plants that use ‘dirty’ coal are reluctant to shut down despite going past its useful life. So is a move to renewables the answer to our environmental troubles? Not quite.

For the month of July 2016, South Australia’s wholesale energy prices soared to an average of $230 per megawatt hour compared with other states which paid just $50 per megawatt hour. At one point, the price even skyrocketed to about $9000 per megawatt hour.

So what exactly happened? Initial finger-pointing suggests South Australia’s reliance on wind to produce 40% of the state’s electricity was the primary cause. After all, no wind means no power. However, a study by the Grattan Institute’s Tony Wood and David Blowers have identified other factors which played a role in the disruption, including maintenance works on the interconnector between South Australia and Victoria designed to transmit power in case of supply shortages, and a reduction in the overall sources of energy in the state in part due to closure of coal plants. These factors all contributed to the energy crisis in South Australia. So what’s the solution?

Implementing renewable energy takes time. Having little historical data to help forecast supply shortages and a lack of experience in general dealing with potential issues means that any rushed initiative will create more harm than good. With that in mind, what is the approach the government has elected to take?

National Energy Guarantee

The National Energy Guarantee aims to deliver reliable and affordable energy while keeping in mind the impact of emissions in a bid to tackle the decade-long uncertainty in the market as a result of ineffective energy and climate policy.

The government aims to achieve their goal without subsidies, taxes, carbon pricing or emissions trading schemes. Instead, they are implementing a range of reforms, which include securing agreements from energy retailers. This aims to provide greater reliability and reduce price volatility for households and businesses, ensuring there is enough gas for domestic use at reasonable prices before it is shipped overseas. The government has increased funding to the Australian Energy Regulator and Australian Competition and Consumer Commission to further ensure consumers get a fair and honest deal. In the meantime, the government has initiated a one-off cash payment of $75 for singles and $125 for couples to offset the current rising power bills for those most affected.

Further Government Initiatives

The government aims to reduce emissions to 26-28% below the 2005 levels by 2030. The government is already on the way to achieving this with renewable energy consumption increasing over the past few years.

To date, the government’s ‘Clean Energy Finance Corporation’ has committed $4.3 billion into financing clean energy projects. In addition, the government has set up a $2.5 billion Emissions Reductions Fund to provide incentives for individuals and organisations to adopt new technology and practices to reduce emissions.

The government has already taken a range of actions to ensure energy is more reliable, affordable, and environmentally friendly. The policy doesn’t involve drastic measures to catch the media’s attention. Instead, it is a long-term plan for the future, with energy agreements designed to introduce some stability in prices. In the meantime, investments in renewable sources of energy are slowly carried out and implemented. Although implementation is costly and returns are far off in the future, it is nevertheless leading Australia in the correct direction by moving to cleaner energy sources and upholding Australia’s responsibility as a global nation.

Although the policy has a good ring to it, things may be transpiring differently on the ground.

Progress in renewables

A United Nations report that Australia increased its renewable investment by 147% to $8.5 billion in 2017. The report further indicated that the price per watt of solar photovoltaics in Australia is $1.40, a significantly smaller amount than its 2010 price of $6.40. As solar energy technology becomes drastically cheaper, investors and business owners will be greater incentivised to make the shift towards renewable energy.

Another rapidly expanding source of renewable energy within Australia is wind, with the NSW government signing off on a $643 million wind farm, becoming Australia’s biggest wind farm. Based on a 2018 report released by the Australian Wind Alliance, economic activity from wind farms currently under construction created 6000 new jobs in the regional economy. Furthermore, when considering existing Australian wind farms and their approximate 25-year life spans, there is a total of $10.5 billion contributed to host communities.

Renewable energy is an industry with great growth potential within Australia, with plenty of potential sites for both wind and solar farms, as shown below:

A possible consideration

An alternative energy source, albeit slightly more controversial than renewable energy, is uranium. While Australia currently has no nuclear power plants, there exist three operational uranium mines with potential for many more as Australia contains seven of the world’s twenty largest uranium deposits. Nuclear energy has the big advantage of reducing greenhouse gas emissions, but it presents its own set of problems such as incredibly expensive setup costs. Furthermore, the process of mining uranium itself has harmful environmental effects by contributing to the contamination and acidification of groundwater sources, which supplies over 5% of drinking water in South Australia. Although there are major challenges at present, future developments may result in greater viability.

Conclusion

The government is currently taking incremental and reasonable steps to ensure stability within the energy market. However, implementation remains difficult, as evidenced by South Australia’s recent dilemma. Despite the challenges faced, it is likely the principled approach by the government will produce results.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.