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.
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.”