On October 17, Australia’s federal government announced the bones of a new energy policy – the National Energy Guarantee – which seeks to (i) ensure reliability in the National Electricity Market and (ii) provide a credible approach to reducing greenhouse gas emissions.
Part of the goal is about reaching a solution both major political parties can live with and giving investors sufficient confidence to kick-start investment in eastern Australia’s electricity sector with the aim of building new generation capacity and reducing rising power prices.
However, Australia has committed to work towards keeping global temperatures to well below 2°C, suggesting current measures should take account of how Australia’s future emission reduction commitments could evolve beyond 2030, as well as the costs and benefits associated with achieving such targets.
Given the lower cost of abatement in the power sector relative to other sectors, and that decarbonising electricity can enable further abatement across the economy, a credible and cost effective path for cutting emissions may involve the electricity sector making a greater-than-proportionate contribution to achieving Australia’s 2030 targets. Should this be the case, any truce in the climate wars may be short-lived.
In announcing the National Energy Guarantee (NEG) the Australian government is hoping investors will gain sufficient confidence to build new generation capacity, leading to a reliable low emissions system that reduces household electricity bills to the tune of A$100 to $115 per year. While many details have yet to be announced, the NEG is structured around:
– A Reliability Guarantee to ensure sufficient general on capacity to meet peak demand;
– An Emissions Guarantee to reduce greenhouse (GHG) emissions in the electricity sector.
RELIABILITY GUARANTEE
The proposed Reliability Guarantee will require retailers to contract with owners of dispatchable resources to cover a predetermined percentage of their forecast peak load. Such an arrangement could work like a capacity mechanism or it could foster the development of what Bloomberg New Energy Finance (BNEF) founder Michael Liebreich calls the firm spread, which is the difference between the price of power from variable low-cost renewables and the price of power from flexible dispatchable energy resources.
Liebriech, along with others such as the Australian Energy Market Operator (AEMO), has talked about how baseload is becoming increasingly obsolete – as it is too inflexible to adjust to changes in demand and the output from low marginal cost variable renewables. Instead flexible dispatchable energy resources are needed to ramp up and down to ensure supply meets demand, such as gas-fired units, batteries, pumped hydro storage and demand response.
The firm spread Liebreich defines as the difference between the price for (i) base cost renewables and (ii) flexible dispatchable power, can be thought of as the value of dispatchability. Liebreich also suggests that as the markets for these types of power develop, the firm spread might be seen across the forward curve, from a few minutes to years ahead, which could become an important metric in investment decisions.
EMISSIONS GUARANTEE
The Energy Security Board’s advice to federal energy minister Josh Frydenberg on the Emissions Guarantee is that the government sets an emissions target in line with Australia’s international emission reduction commitments, and requires retailers and large users to meet their load requirements at a certain emissions level.
While the details have yet to be spelt out, the discussion implies that the targets will be set such that the electricity sector makes a proportionate contribution towards Australia meetings its current 2030 obligations of a 26-28% reduction in emissions from 2005 levels.
A cost efficient approach to reducing emissions might also consider the:
– Extent to which it drives early action;
– Implications for later emissions reduction on targets, such as those for 2050;
– Cost of reducing emissions in the electricity sector, relative to other sectors;
– Opportunities that arise from decarbonising the electricity sector for further abatement.
Early action to reduce emissions has profound implications for future effort required and insufficient action, to date, has already led to an almost 20 per cent increase in the effort required to reach the 2030 target.
When the government announced its 2030 commitments in August 2015, the gap between business-as-usual (BaU) emissions and the trajectory to the target was between 830 and 900 Mt CO2-e, which rose to between 990 and 1,055 MtCO2-e just over a year later when the government released its Australian Emissions Projections in December 2016. This is illustrated in Figure 1 below.
As it is not credible to project BaU emission beyond 2030, quantifying the effort required to achieve later targets requires a different approach. One option is to compare the historical trends in energy productivity and emissions intensity with the rate of change needed to achieve these targets.
Energy productivity is the rate of GDP to total energy consumed (PJ), so can be thought of as energy efficiency across the entire economy. Figure 2 shows an upward trend in energy productivity, indicating that GDP has increased at a higher rate than energy used.
The black line in Figure 2 is the trend, while the others are lines best effort over varying periods. The steeper slopes for shorter duration indicate an acceleration in the rate at which energy productivity has improves.
The emissions intensity of energy is the rate of GHG emissions to total energy consumed. Figure 3 shows that the rate at which carbon intensity in Australia has declined since 1990 has been stable.
While these trends are in the direction needed to reduce emissions, at these levels they only slow the rate at which emissions increase.
This is demonstrated in Figure 4, which shows the impact on emissions of a number of scenarios of different rates of change in energy productivity and the emissions intensity of energy. This analysis assumes GDP growth is a constant 2.7% per annum, which is below the long-term average, so the following may underestimate the true effort required.
The salient points from Figure 4 are:
- There needs to be a doubling of the long-term historical rate of change of either energy productivity or the emissions intensity of energy for emissions to remain constant;
- An increase of 2.5 mes the rate of change in both energy productivity and the emissions intensity in energy reduces emissions in line with a continuation on of the trajectory to the current 2030 emission reduction targets;
- Reducing emissions to zero by 2050 requires a four-fold increase in the rate at which emissions intensity of energy declines;
- While improving energy productivity is an important driver for reducing energy use, and therefore emissions, there are limits to the extent to which it can reduce emissions in the absence of a significant reduction on in the emissions intensity of energy.
These findings have profound implications for Australia’s climate policy – especially seeing a credible 2030 emissions target for the electricity sector.
Without early action to significantly reduce the emissions intensity of energy, the rate at which it will have to fall will be even higher than the rates shown in Figure 4 for Australia to fulfill its international commitment to work towards keeping global temperature rises well below 2°C.
This transition may happen faster than expected, as some inflexible units may close earlier, as they struggle to cope with greater output from variable energy sources such as rooftop solar. However, managing this transition will require planning and regulatory changes to ensure that it is orderly and yields a resilient system.
The falling cost of renewable generation and battery storage solutions means that the cost of reducing emissions in the electricity sector will be lower than many other abatement options that exist in other parts of the economy.
Australia is developing strong expertise in integrating renewables into the power system, such as peer-to-peer trading, facilitating end users participating in the wholesale market, as well as developing off-grid, micro-grid and demand response solutions. These will be global growth industries in the future in which Australia could become an important player.
Finally, as the electricity sector is decarbonised, greater use of electricity can enable further decarbonisation across the economy. The most obvious example is electric transport, but other options exist in the industry and the residential sectors, such as for heating.
The factors discussed above suggest that pressure could mount to set a significantly tighter emissions target for the electricity sector than a proportionate contribution to Australia’s current 2030 emission reductions targets – which does not bode well for any climate peace.
Barry Ladbrook is a Perth-based energy economist
