The Greenhouse challenge for energy in Victoria
By Keith Orchison
(Written in mid-2004)
Driving investment and reducing emissions
- Greenhouse gas abatement measures from energy supply and use will increase energy prices to producers and consumers and hence impact on Victoria's competitiveness.
- Improving energy supply and energy use efficiency can reduce energy costs but such reductions are unlikely to offset the increased costs of reducing greenhouse gas emissions or the cost of adaptation measures.
- Victoria is possibly more vulnerable than other states with its heavy reliance on competitively-priced brown coal electricity generation and its large, but fragile, manufacturing base.
- Victoria will need to exercise superior skills in addressing its greenhouse footprint. Although the Victorian Greenhouse Strategy provides a sound basis for addressing greenhouse gas abatement, piecemeal and politically opportunistic measures will do little to instill business confidence, reduce longer-term emissions, or achieve abatement at least cost.
- Victoria needs a clear, precise and effective energy and greenhouse policy that addresses greenhouse gas abatement and energy needs as longer term issues. In order to achieve this, Victoria will need to develop its own sustainable development objectives that addresses Victoria's unique resource base and growth requirements.
- Of particular importance is the need to address brown coal use in electricity generation and its future developments. Failing to address electricity generation issues persuasively will lead to continuing electricity supply uncertainty, energy insecurity and loss of business and consumer confidence. There are few current indications that these issues are being addressed effectively.
- There is too much focus on the use of renewable energy sources for electricity generation and insufficient and inadequate focus on the more effective applications of renewable energy for water heating and space heating and cooling, despite some worthy programs such as the solar water heater rebate program and five star residential rating scheme. The state objective of 10% renewables-based electricity generation by 2010 is unrealistic, unachievable and impractical in terms of the appropriate and available renewable energy resource base, cost and price impacts, and system security and reliability.
- Victoria will need a long-term strategy for its brown coal development that significantly reduces its greenhouse impact over time in a manner that is cost-effective and deliverable. Current and planned activities will fail to meet such longer-term objectives and require significant re-thinking.
- Energy efficiency improvements, particularly on the energy demand side, offer real opportunities to reduce emissions in a cost-effective manner and deliver superior economic outcomes. While the new directions and objectives of SEAV are still to be realized, indications are that they will be insufficient to tackle all cost-effective energy efficiency opportunities in a timely manner. The National Framework for Energy Efficiency will assist, but only a national and state integrated and sustained program can deliver real longer-term outcomes. There is little indication or confidence that such outcomes will be achieved.
- Governments are failing to meet transport related emission reduction and energy efficiency requirements. Reality is that more people travel greater distances in larger and less efficient vehicles. Addressing transport issues through an effective price mechanism remains elusive, despite the comparatively high excise on transport fuels. Governments are reluctant to address vehicle transport issues effectively because motorists are consumers and voters. Current directions for transport are unsustainable, add to energy insecurity and will impact significantly on balance of trade in the longer term.
- Increasing vegetation cover will have a modest impact on emission reductions but a major impact on improving environmental quality - increasing biodiversity and individual well-being, reducing salinity and increasing water quality and maintaining soils. Current land management activities lack coordination and suffer from stop-start approaches and political expediency.
- Coming to grips with the above issues in a holistic manner with a longer term perspective and reduced political opportunism will do much to put Victoria on a sustainable energy pathway with a focus on reduced greenhouse gas emissions. Recognition of the above issues is paramount in addressing the key questions.
- The six classes of measures identified are essentially tools that will need to be assessed against a robust set of criteria, including: certainty, cost-effectiveness, long-term perspective, competitiveness, avoiding disadvantage, comprehensiveness and transparency.
Addressing the key questions:
1. What are the most cost-effective opportunities for reducing greenhouse emissions from energy supply and use in Victoria?
Providing incentives to improve energy supply efficiency and energy use efficiency by maximizing the efficiency of energy production, conversion, transmission, distribution and supply of electricity, gas and transport fuels, and, by maximizing end use efficiency. This will require a national focus on best-practice energy supply and use:
- Implement a national program for end-use efficiency as part of a National Framework for Energy Efficiency concentrating on all cost-effective measures with paybacks of 3 years or less, and facilitating such actions through loans and support programs.
- Maximise renewable energy use for water heating and space heating and cooling through regulation, loans and rebate programs. Reduce emphasis on renewables in electricity supply and abandon the 10% objective in the given timeframe, as it is unrealistic, unachievable and costly. Develop longer-term objectives for renewables in energy supply, including renewables-based electricity supply.
- Address brown coal based electricity generation and its greenhouse gas emissions in a coordinated, holistic and effective manner in order to ensure objective and achievable greenhouse gas reduction targets in electricity generation while creating and ensuring base-load certainty.
- Initially leave gas penetration in electricity generation to market forces, but in the longer term, beyond 2008, introduce an effective carbon price signal on a national and international basis that aims to achieve reduction objectives, while reducing the cost-impact of currently mandated inefficient greenhouse measures.
2. What level of reduction in energy greenhouse gas emissions should be sought and over what timeframe?
Within the Kyoto Protocol 2008-2012 timeframe, Victoria should focus on meeting its share of national emission reduction objectives, but without commitment to a state-based 108% or even lower target. Such targets are unachievable and unrealistic in the timeframe and will be severely damaging to the Victorian economy.
- Victoria should position itself to significantly reduce emissions beyond 2012, with say, meeting 1990 levels by 2015 and 20% reduction on 1990 levels by 2020. This will require major changes to Victoria's energy supply and energy use patterns. An appropriate price signal around 2008 can provide greater business focus to bring the cost of carbon onto business accounts. This will need to be supported by timely programs that will effectively address energy supply and use, while maintaining price competitiveness nationally and internationally.
3. What policies and programs should be considered to achieve reductions in energy-sector emissions while ensuring timely investment in new energy supplies and how the preferred policies might change over time?
Significant government and private sector investment in brown-coal related abatement measures, including zero coal-based emissions, is needed to ensure competitively priced electricity for the state's manufacturing sector, commerce and households. This must be coupled with the appropriate use of stationary energy with emphasis on renewables for water heating and space heating and cooling, gas for direct heating applications and electricity for higher added-value energy use applications.
- Appropriate investment in renewable energy resources where these are cost effective or of strategic importance, e.g. solar hot water and solar heating and cooling, and biofuel production and use.
- The cost of carbon will never be effectively internalised until it is priced and mechanisms to establish such pricing regimes should be developed over time, using an agreed assessment basis as allude to previously.
4. Should government play a direct role, beyond its current commitments, to develop and demonstrate new energy technologies?
Yes, governments must play a key role in continuing to implement cost-effective regulation, investing strategically in longer-term abatement technologies of unique importance to Victoria and moving to establish a carbon price signed over time. However, governments in general are notoriously bad in picking technology winners and such approaches should only be used for technologies related to state significance, such as securing the future for brown coal -- Victoria's only long-term viable fossil fuel resource, but using the private sector to deliver contracted outcomes.
5. Are there shortcomings in the current operation of the energy markets that would need to be overcome to reduce emissions from the energy sector while providing for energy security?
Current energy markets, and in particular the national electricity market, focus on energy as a pure commodity, bought and sold at the lowest price without valuing the underlying energy service values. This is particularly true for electricity. The national electricity market is unlikely to deliver cost-effective greenhouse abatement outcomes, even if the cost of carbon is partly or wholly internalised, without focussing on its underlying value and maximizing this through the efficient use in energy services.
Demand response for electricity (and gas and transport fuels) is essentially inelastic and greenhouse price signals are passed through to consumers without their ability to do much to influence electricity use unless opportunities exist for using energy more efficiently and effectively.
6. What would be the implications for Victoria's competitiveness of taking further action to reduce emissions from the energy sector, and how could the potential impacts be mitigated?
Comments made previously address much of this question. To reiterate: actions taken to reduce emissions from the energy sector will impact directly on the cost of energy supply and energy use and hence competitiveness, without similar actions elsewhere; cost impacts can be reduced by focussing on using the right energy source for the right energy service and providing energy services more efficiently, although this may also imply added costs initially; hence a nationally integrated approach concentrating on the longer term objectives (deep cuts in emissions), consistent with capital plant cycles and opportunities, remains imperative.
In particular, piecemeal, state-based measures should be avoided, as these will add to cost while achieving minimal outcomes and stripping industry, commerce and households of investment capital. State-based intervention can be justified if energy supply and use security are at risk. Underpinning the value of Victoria's energy resources, and in particular its brown coal resource, is a legitimate area for government intervention, as long as such activity leads to effective and efficient outcomes.
7. Are there particular policies and programs that the government should consider for implementation irrespective of the outcomes of national processes?
Refer to the previous question. Clearly a nationally consistent and effective program will deliver better energy and greenhouse outcomes than opportunistically based state programs. Victoria is particularly vulnerable if it followed NSW or Queensland mandated approaches that address, at best, only part of the challenge.