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Cheap and dirty grid may be our biggest liability

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For decades Australia has boasted of its cheap and reliable electricity grid as the most potent sign of its economic competitiveness. But two new studies highlight the folly of resting on past laurels, and how Australia’s cheap and dirty grid has left our economy exposed and poorly prepared for the inevitable change to a low-carbon economy.

One study, by the University of Queensland and the Global Change Institute, suggests that Australia’s power system is among the least resilient in the world – even compared to other resource-rich nations such as Canada and Brazil – and presents a risk for consumers and investors alike.

The second report, prepared by The Climate Institute in conjunction with US industrial giant General Electric, finds that Australia is now ranked 16th among G20 countries in terms of the ability to prosper in a low-carbon economy, and is the only country to have gone backwards since 1995, as this alarming graph below suggests.

“What we have seen,” says the TCI/GE report, “is that the economic blessing of the past – such as cheap and polluting energy, have become the economic curses of the future.”

But why should that be so? The UQ/GCI report suggests it is because Australia – blinded by its own propaganda about the “lucky country”, and assuming it could continue to profit from its cheap and abundant source of coal – did not learn how to compete, or boost its efficiency and productivity. It is now being left behind.

“Competing countries with scarce energy resources and vulnerable to international energy markets have had to adapt by investing in efficiency, technology and diversification throughout the energy transformation chain to meet demand,” the report notes. “These investments have prepared them for a future where fossil-fuel based primary energy supply may be constrained and/or global environmental policies may constrain or force adaptation of the power system and power intensive industries.”

According to the UQ/GCI report, Australia’s inability to compete has already been clear to see. Much of its energy infrastructure, subsidised by the state and consumers, was built to attract energy intensive industries to the country. But since 1990, Australia has 53,000 jobs from the metals processing and fabrication sector and lost global market share in metals processing, to countries with more resilient power economies.

“Australia has one of the least resilient power economies of any of its global competitors and the step-changes required to improve this are not in evidence,” it says. “It risks continuing to lose market share and shed jobs to resource rich competitors, and electricity users could experience large increases in price as a result of a lack of resilience. To avoid these consequences, transformation of the power economy is not merely a desired, but a necessary, condition for the continued economic and social prosperity of this country.”

But it says there is not much evidence that this is occurring, and the current proposed measures, such as the carbon price and the renewable energy target, are not sufficient. “These policies will not influence the quality and efficiency of the transmission and distribution systems nor do they take into account the optimal mix required to balance loads and manage demand. A full range of policies should be introduced that lead to optimal infrastructure investments rather than just deploy single measures like a carbon price or a renewable energy target.”

The conclusions of the two reports are hardly surprising. The ability to compete in a low-carbon world underline the rhetoric of the Clean Energy Future legislation of the Federal Government, and the famous speech by BHP’s Marius Klopper’s – “to remain competitive in a future carbon-constrained world, Australia will need to turn into a lower carbon economy” – that acted as a powerful political trigger for the legislation after the hung parliament in 2010.

Despite this, there seems little understanding, among investors or consumers, business commentators or even government, of the real risks of focusing on short-term costs rather than long-term benefits. This continues to be reflected in decisions and reports as diverse as the government’s energy white paper, to the NSW government’s take on feed in tariffs, or some of the analysis conducted by statutory bodies such as the Productivity Commission and IPART. They continue to obsess over the costs of energy now, rather than how to ensure they can deliver the lowest costs in the future.

The UQ/GCI report noted that in 1990, Australian electricity was relatively more expensive than it is today and yet it still attracted energy intensive industry investment. Was it preferential tariffs negotiated by State Governments to boost employment, or was it the prospect of a secure power supply that brought them to Australia? Possibly a combination of both but nearly two decades of carefully managed electricity pricing have resulted in relatively less expensive electricity, and yet Australia has lost market share in metals processing to China and India.

“It is generally accepted that price should never be the unique selling feature of a sale and, in this context, consideration needs to be given to balancing cost concerns with resilience requirements, to attract energy intensive firms that adopt a long view in making investment decisions especially since Australia can offer many other benefits like stable Government and protection of rights.”

As the AGL economist Paul Simshauser noted in a 2001 analysis, Australia justified the public subsidy (through excess capacity and subsidized tariffs) of coal-fired generation in Victoria, NSW and Queensland in the 1970s and 1980s because of the benefits in employment, investment and the provision of base-load energy.

Australia, the UQ/GCI economists note, now needs to take a similar approach as it meets the demand of a carbon constrained world of the future. “With an ageing fleet of base-load generators, Australia has a golden opportunity to make the leap to a resilient power economy by diversifying instead of shuffling forward based on business as usual. “

The TCI/GE report comes to a similar conclusion. “Australia can’t turn its back on the global shift from dirty to clean energy, from non-renewable to renewable, and from inefficient to efficient. It can’t do this anymore than it could resist the information technology age or the rise of China – and it is not in our national interest to do so.”  

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  • Tim Buckley

    If only Australia was resting on its past laurels, that would mean future governments could then instigate the necessary power industry reforms needed to move to an efficient, non-polluting clean energy future unencumbered.
    However, decisions like NSW labor government’s actions over the 2011 Cobbora Coal contract – i.e. to supply the NSW electricity sector coal at cost – locks Australia into a massively subsidised fossil fuel based future for decades to come. We tax payers and consumers of electricity will be subsidising the fossil fuel sector for decades – at a time when grid parity for solar is only a matter of a couple of years away at best. “Free market” Liberal politicians like Abbott claim we shouldn’t be subsidising the adoption of renewable energy. I for one don’t want to be subsidising fossil fuel usage for the next 20 years. Too late, we already are, again!!
    The Climate Institute chart says it all – Australia is going backwards while China, Germany, South Korea, India and even America move ahead.

  • D. John Hunwick

    I wonder if Mr Abbott and colleagues can be given free subscriptions to this web-site? Perhaps their advisors too. HOw is it possible for any intelligent person to maintain the persent Liberal policy as ir relates to the need t changeover to moer renewable sources of energy? But then again Labor has Martin Ferguson – are we really doomed to take no effective action during the narrowing wondow of opportunity to avoid drastic climate change?

  • Beat Odermatt

    Get rid of the Grid!
    This sounds extreme, but in the end the current electricity grid is an extremely expensive, ugly and unreliable outdated tourniquet which is strangling an emerging low carbon economy. Spending a few more Billions of Dollars to “safeguard’ against potential power losses during a few days a year may be good for some of our construction companies, but is very bad news for the rest of our economy. We have both the technology and opportunity to freeze the expansion of our grid. We can have “smarter” grids and “smarter” meters; we can have more micro-co-generation using ceramic fuel cells and it may be beneficial for some industries to avoid (for credit) power use during some events. Whilst cavemen mentality remains a strong reason for many to continue on the old path, Governments may also be guilty in helping to destroy an emerging low carbon economy. Low carbon economy means also to conserve the use of power, which means less power is sold and fewer taxes are collected

  • We have talked a lot about renewable sources of energy, but one of the problems is that their manufacture leaves a fairly substantial carbon footprint and in terms of power output they are somewhat lightweight (which does not matter too much for localised domestic distribution and so forth). We can find a use for old-style power generation (or even nuclear power) in industrial estates adjacent to (or even containing) the power source. For instance, if we are going to dig a big hole to get at coal in a remote area, why not specify that power-hungry industries should be located close by. The on-costs to the manufacturers would be offset by there being only one transport cost instead of two or more.Tax breaks could also be offered. Ancillary benefits would include cleaner cities, better water supply and more competitive prices for Australian goods.

  • Richard Simpson

    Beat Odermatt, can you tell me the cost of the Ceramic Fuel Cell, and the expected life?

  • Winston Smith

    Its interesting to see that The Australian describes the TCI /GE report as from the “left leaning” TCI and pretty much ignores GE. Yeah, we’d better be careful of them lefties at GE too! Well written article again Giles.

  • I love Giles ability to tell it like it is. For years I have tried to impart my ideas to multiple managers & executives of several energy retailers, most have listened, some have even been interested, none have acted. The same can be said of the plethora of local, state & federal pollies who’s ears I have bent over the years. My family, friends & colleagues have a standing joke that I have made a career out of being ignored by politicians. As representative of the truth that it is, this is no reason to give up though.
    I noticed that one of the comments left on the RenewEconomy Post recommended that we should provide a free subscription to RenewEconomy to Tony Abbott & friends. I suggest that we each prompt our local MP’s (State & Federal), regardless of Party, to subscribe. Keep up the great work Giles.

  • Richard Simpson

    Along with some other publication to balance the equation?