australian energy projections report

7/31/2019 Australian Energy Projections Report

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December 2011

Australian energyprojections to

203435

Arif Syed and Kate Penney

bree.gov.au


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ii Australian energy projections 203435 December 2011

Commonwealth of Australia 2011

This work is copyright, the copyright being owned by the Commonwealth of Australia . The Commonwealth ofAustralia has, however, decided that, consistent with the need for f ree and open re-use and adaptation, public sectorinformation should be licensed by agencies under the Creative Commons BY standard as the default position. Thematerial in this publication is available for use according to the Creative Commons BY licensing protocol wherebywhen a work is copied or redistributed, the Commonwealth of Australia (and any other nominated parties) mustbe credited and the source linked to by the user. It is recommended that users wishing to make copies from BREEpublications contact the Chief Economist, Bureau of Resources and Energy Economics (BREE). This is especiallyimportant where a publication contains material in respect of which the copyright is held by a party other than theCommonwealth of Australia as the Creative Commons licence may not be acceptable to those copyright owners.

The Australian Government acting through BREE has exercised due care and sk ill in the preparation and compilationof the information and data set out in this publication. Notwithstanding, BREE, its employees and advisers disclaimall liability, including liability for negligence, for any loss, damage, injury, expense or cost incurred by any person as a

result of accessing, using or relying upon any of the information or data set out in this publication to the maximumextent permitted by law.

BREE 2011,Australian energy projections to 203435, BREE report prepared for the Department of Resources, Energy andTourism, Canberra, December.

ISBN 978-1-921812-79-8 (Print)

ISBN 978-1-921812-78-1 (Online)

Postal address:Bureau of Resources and Energy Economics

GPO Box 1564Canberra ACT 2601

Phone: +61 2 6276 1000

Email: [email protected]: www.bree.gov.au

From 1 July 2011, responsibility for resources and energy data and research was transferred f rom the AustralianBureau of Agricultural and Resource Economics and Sciences (ABARES) to the Bureau of Resources and EnergyEconomics (BREE).

AcknowledgementsThis report was undertaken with the support of the Australian Government

Department of Resources, Energy and Tourism.

The valuable contribution of BREE colleagues; Trish Gleeson and Sally Thorpe of ABARES;

Bruce Wilson, Shane Bush and Sarah Hill from the Department of Resources, Energy andTourism; Brendan Mckenna and Sebastian Wende of the Australian Treasury; and colleagues at

the Department of Climate Change and Energy Efficiency is appreciated.


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Australian energy projections 203435 December 2011 iii

Foreword

In this report the Bureau of Resources and Energy Economics (BREE) presents its inaugural setof long-term projections of Australian energy consumption, production and trade. The analysis

covers the period from 200809 to 203435 and is prepared using BREEs E4castmodel. It is

intended that this information will support decision-making by industry, government and the

broader community. The results suggest that the Australian energy sector is at an importantcrossroads as it adjusts to a carbon-constrained economy.

The dynamics of energy markets and uncertainties with respect to future energy costs makelong-term energy projections difficult. Nevertheless, projections are needed to guide decision

makers about investments and the impacts of energy policies and energy outcomes.

BREEs projections provide this guidance and will assist decision-makers to deliver an efficient,secure and sustainable energy future for Australia.

Quentin Grafton

Executive Director / Chief Economist

December 2011


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iv Australian energy projections 203435 December 2011

ContentsSummary 1

1 Introduction 42 The Australian energy context 6

Energy resources and markets 6

Energy policy 10Clean Energy Future Plan 12

Other initiatives 14

3 Methodology and key assumptions 16The E

4castmodel 16

E4castbase year data 20

Key assumptions 21

4 Energy Consumption 29Total primary energy consumption 29Primary energy consumption, by energy type 30

Primary energy consumption, by state and territory 31Primary energy consumption, by sector 32

Electricity generation 34

Final energy consumption, by energy type 42Final energy consumption, by sector 43

5 Energy production and trade 48Black coal production and exports 50

Natural gas production and LNG exports 52Crude oil production and net imports 54

6 Conclusions 57

References 58

Boxes

Box 1: Other Clean Energy Future initiatives 13Box 2: Key features ofE

4cast 17

Box 3: Australian energy statistics 21Box 4: Carbon capture and storage 37

Box 5: Uncertainty surrounding gas prices for electricity generation 41

Box 6: Energy use in the Australian transport sector 45Box 7: Australian uranium outlook 49


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Australian energy projections 203435 December 2011 v

Figures

Figure A: Australian energy production 7

Figure B: Energy intensity trends 8Figure C: Australian energy exports 10

Figure D: Energy forecasting model 16

Figure E: Index of world real energy prices, 200809 dollars 23Figure F: Index of real levelised cost of electricity generation technologies excluding

carbon costs 26Figure G: Australian uranium production 49

Figure H: Australian energy balance 50

Figure I: Australian black coal balance 52Figure J: Australian gas balance 54

Figure K: Australian oil and LPG balance 55

TablesTable 1: Fuel coverage in E

4cast 18

Table 2: Industry coverage ofE4cast 19

Table 3: Australian population assumptions 22

Table 4: Australian economic growth, by region 22Table 5: Carbon price assumptions, real, 200910 dollars 27

Table 6: LRET renewable electricity generation target (excluding existingrenewable generation) 27

Table 7: Primary energy consumption, by energy type 30Table 8: Primary energy consumption, by state and territory 32

Table 9: Primary energy consumption, by sector 33Table 10: Electricity generation, by state and territory 35Table 11: Electricity generation, by energy typea 36

Table 12: Electricity generation, with alternative gas price assumptions, by energy source 42Table 13: Final energy consumption, by energy type 43

Table 14: Final energy consumption, by sector 44

Table 15: Final energy consumption, by manufacturing subsector 46Table 16: Energy production, by source 48

Table 17: Net trade in energy 51Table 18: Australian gas production 53

Maps

Map 1: Distribution of Australias energy resources 6

Map 2: Advanced electricity generation projects, October 2011 38


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vi Australian energy projections 203435 December 2011

Glossary

Bagasse The fibrous residue of the sugar cane milling process that isused as a fuel (to raise steam) in sugar mills.

Biogas Landfill (garbage tips) gas and sewage gas.

Brown coal See lignite.

Coal by-products By-products such as coke oven gas, blast furnace gas

(collected from steelworks blast furnaces), coal tar andbenzene/toluene/xylene (BTX) feedstock. Coal tar and BTX

are both collected from the coke making process.

Conversion The process of transforming one form of energy into

another before use. Conversion consumes energy. Forexample, some gas and liquefied petroleum gas isconsumed during gas manufacturing, some petroleum

products are consumed during petroleum refining, and

various fuels, including electricity, are consumed whenelectricity is generated. The energy consumed during

conversion is calculated as the difference between theenergy content of the fuels consumed and that of the fuels

produced.

Crude oil Naturally occurring mixture of liquid hydrocarbons under

normal temperature and pressure.Condensate Hydrocarbons recovered from the natural gas stream that

are liquid under normal temperature and pressure.

Electricity generation

capacity

The maximum technically possible electricity output ofgenerators at a given hour. The maximum annual output

from generators is equal to generation capacity multipliedby the number of hours in a year.

Gas Gases including commercial quality sales gas, liquefied

natural gas, ethane, methane (including coal seam andmine mouth gas and gas from garbage tips and sewage

plants) and plant and field use of non-commercial quality

gas. In this report, gas also includes town gas (includingsynthetic gas, reformed gas, tempered liquid petroleum gas

and tempered natural gas).

Gas pipeline operation Gas used in pipeline compressors and losses and operationand leakage during transmission.

Levelised cost The total levelised cost of production represents the

revenue per unit of electricity generated that must be metto breakeven over the lifetime of a plant.


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Australian energy projections 203435 December 2011 vii

Lignite Non-agglomerating coals with a gross calorific value lessthan 17 435 kilojoules a kilogram, including brown coal

which is generally less than 11 000 kilojoules a kilogram.

Liquid fuels All liquid hydrocarbons, including crude oil, condensate,liquefied petroleum gas and other refined petroleum

products, and liquid biofuels.

Natural gas Methane that has been processed to remove impurities toa required standard for consumer use. It may contain small

amounts of ethane, propane, carbon dioxide and inert

gases such as nitrogen. Landfill and sewage gas are someother potential sources (also referred to as sales gas in some

sectors of the gas industry).

Petajoule The joule is the standard unit of energy in electronics and

general scientific applications. One joule is the equivalentof one watt of power radiated or dissipated for one second.One petajoule, or 278 gigawatt hours, is the heat energy

content of about 43 000 tonnes of black coal or 29 million

litres of petrol.

Petroleum Crude oil and natural gas condensate used directly as

fuel, liquefied petroleum gas, refined products used

as fuels (aviation gasoline, automotive gasoline, powerkerosene, aviation turbine fuel, lighting kerosene, heating

oil, automotive diesel oil, industrial diesel fuel, fuel oil,

refinery fuel and naphtha) and refined products used innonfuel applications (solvents, lubricants, bitumen, waxes,

petroleum coke for anode production and specialisedfeedstocks).

In this report, all petroleum products are defined as

primary fuels even though most petroleum products

are transformed (refined). The distinction between theconsumption of petroleum at the primary and final

end use stages relates only to where the petroleum is

consumed, not to the mix of different petroleum productsconsumed. The consumption of petroleum at the primary

energy use stage is referred to collectively as oil, while theconsumption of petroleum at the final end use stage is

referred to as petroleum products.

The one exception to this is liquefied petroleum gas

(LPG). LPG is not included in the definition of end useconsumption of petroleum because it is modelled

separately.


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viii Australian energy projections 203435 December 2011

Primary fuels The forms of energy obtained directly from nature.They include non-renewable fuels such as black coal,

brown coal, uranium, crude oil and condensate, naturally

occurring liquid petroleum gas, ethane and gas, andrenewable fuels such as wood, bagasse, hydroelectricity,

wind and solar energy.

Secondary fuels Fuels produced from primary or other secondary (orderived) fuels by conversion processes to provide the

energy forms commonly consumed. They include refinedpetroleum products, thermal electricity, coke, coke oven

gas, blast furnace gas and briquettes.

Total final energy

consumption

The total amount of energy consumed in the final or enduse sectors. It is equal to total primary energy consumption

less energy consumed or lost in conversion, transmissionand distribution.

Total primary energy The total of the consumption of each primary fuel (in

energy units) in both the conversion and end use sectors. It

includes the use of primary fuels in conversion activitiesnotably the consumption of fuels used to produce

petroleum products and electricity. It also includes own useand losses in the conversion sector.

UnitsMetric units Standard metric prefixes

J joule k kilo 103 (thousand)

L litre M mega 106 (million)

t tonne G giga 109 (1000 million)

g gram T tera 1012

Wh watt-hours P peta 1015

b billion (1000 million) E exa 1018

Standard conversions

1 barrel = 158.987 L

1 mtoe (million tonnes of oil equivalent) = 41.868 PJ

1 kWh = 3600 kJ

1 MBTU (million British thermal units) = 1055 MJ

1 m3 (cubic metre) = 35.515 f3 (cubic feet)

1 L LPG (liquefied petroleum gas) = 0.254 m3 natural gas

Conversion factors are at a temperature of 15C and pressure of 1 atmosphere.


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Australian energy projections 203435 December 2011 ix

Indicative energy content conversion factors

Black coal production 30 GJ/t

Brown coal 9.8 GJ/t

Crude oil production 37 MJ/L

Naturally occurring LPG 26.5 MJ/L

LNG exports 54.4 GJ/t

Natural gas (gaseous production equivalent) 40 MJ/kL

Biomass 11.9 GJ/t

Hydroelectricity, wind and solar energy 3.6 TJ/GWh

Conventions used in tables

Small discrepancies in totals are generally the result of the rounding of components.

AbbreviationsABARES Austra lian Bureau of Agricultural and Resource Economics and Sciences

AEMO Australian Energy Market Operator

BREE Bureau of Resources and Energy Economics

CCS Carbon Capture and Storage/Sequestration

COAG Council of Australian Governments

CSG Coal Seam Gas

GHG Greenhouse Gas

IEA International Energy Agency

LNG Liquefied Natural Gas

LRET Large-scale Renewable Energy Target

NFEE National Framework for Energy Efficiency

NGER National Greenhouse and Energy Reporting

NSEE National Strategy on Energy Efficiency

OECD Organisation for Economic Cooperation and Development

ORER Office of the Renewable Energy Regulator

PV PhotovoltaicRET Renewable Energy Target

SRES Small-scale Renewable Energy Scheme


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x Australian energy projections 203435 December 2011

BREE contacts

Executive Director/Chief Economist BREE Quentin Grafton [email protected]

02 6276 7483

General Manager Jane Melanie [email protected]

02 6243 7502

Micro & Industry Performance Analysis

Theme Leader Arif Syed [email protected]

02 6243 7504

Macro & Markets Analysis

Theme Leader Jin Liu [email protected]

02 6243 7513

Resources Program

Program Leader Alan Copeland [email protected]

02 6243 7501

Quantitative Economic Analysis

Theme Leader Nhu Che [email protected]

02 6243 7539

Energy Program

Program Leader Allison Ball [email protected]

02 6243 7500

Data & Statistics Program

Program Leader Geoff Armitage [email protected]

02 6243 7510


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Australian energy projections 203435 December 2011 1

Summary This report delivers BREEs inaugural long-term projections of Australian energy

consumption, production and trade over the period to 203435. These projections are notintended as predictions or forecasts, but as indicators of potential changes in Australianenergy consumption, production and trade patterns given the assumptions used in the

report.

Relevant government policies that have been introduced or enacted have been

incorporated into BREEs assumptions. This includes the Renewable Energy Target (RET)and the introduction of carbon pricing in 2012.

The assumptions around carbon emission reduction policies included in the E4castmodel

are based on the Australian Treasurys publication, Strong growth, low pollution: modellinga carbon price, released in 2011. The transitional arrangements and targeted investmentprograms included in the Clean Energy Future plan have not been included specifically

in the modelling assumptions. Given the uncertainty surrounding future domestic gasprices, a sensitivity analysis was undertaken to assess the effect of higher gas prices on the

electricity generation mix.

Energy consumption

Total primary energy consumption is projected to grow by around 29 per cent (1 per cent

a year) over the projection period (200809 to 203435). This moderate growth reflectsa long-term decline in the energy intensity of the Australian economy which has been

accelerated by a number of policy drivers.

The share of coal in total primary energy consumption is projected to decline, with oil and

gas projected to be the dominant energy sources used.

Gas is expected to exhibit the fastest growth among non-renewable energy sources,

increasing by an average 3 per cent a year to 2611 petajoules in 203435.

The share of renewable energy is projected to increase from 5 per cent of total primaryenergy consumption in 200809 to 9 per cent of total primary energy consumption

in 203435. This implies an average annual growth rate of 3.4 per cent, with the most

significant growth occurring in wind energy.

Western Australia, the Northern Territory and Queensland are expected to exhibit thehighest growth in primary energy consumption. These regions are expected to achieve

higher economic growth relative to other states, based on the large contribution of the

mining sector and the high degree of export orientation.

The electricity generation and transport sectors will remain the two main users of primaryenergy, together accounting for 63 per cent of projected primary energy consumption in

203435.

The share of primary energy consumed by the electricity generation sector is expected

to decline over the projection period as the effects of the RET and the implementation ofcarbon pricing are expected to encourage a change in the energy mix.


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2 Australian energy projections 203435 December 2011

The transport sector accounts for around one quarter of primary energy consumption, and

this share is projected to remain relatively constant out to 203435. Growth in transport is

coupled with improving end-use efficiency, which is expected to have a moderating effecton energy consumption.

The fastest growing consumer of primary energy will be the mining sector, with average

growth of 5.2 per cent a year expected over the projection period.

Electricity generation

Gross electricity generation is projected to grow by around 42 per cent (1.4 per cent a

year) from 245 terawatt hours in 200809 to 348 terawatt hours in 203435. This growthis expected to come from expansion of gas-fired electricity generation and renewable

sources.

A key change over the projection period is the expected shift from coal-fired to gas-fired

generation. As the proportion of coal-fired generation declines from 74 per cent to 38 percent of electricity generation over the projection period, the share of gas-fired generation

is expected to more than double from 16 per cent to 36 per cent.

The use of renewable energy resources in electricity generation is expected to grow

considerably at 6 per cent a year over the projection period. Wind energy is projectedto account for the majority of this growth, representing 14 per cent of total electricity

generation in 203435. Strong growth is also expected in other renewable energy sources,including solar energy, geothermal energy and bioenergy, although from a lower base.

Under assumed higher gas prices, total electricity generation is projected to grow at aslower rate of 1.3 per cent a year to 340 terawatt hours in 203435. The share of gas in the

generation mix is projected to be lower under this scenario (22 per cent), accompanied bya relatively smaller fall in the share of coal, and a slightly increased share for renewables

(25 per cent).


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Energy production and trade

Australian energy production (excluding uranium) is projected to grow at an average

annual rate of 3 per cent over the projection period. At this rate, total production of energy

is projected to more than double to 28 401 petajoules in 203435.

Coal and gas are projected to account for 96 per cent of Australias energy production in203435. Coal production is projected to increase by 96 per cent to 18 956 petajoules

(632 million tonnes), while gas is projected to increase fourfold to 8274 petajoules(330 960 gigalitres).

Production of black coal, which includes thermal and metallurgical coal, is projected to

grow at 2.8 per cent a year to 18 676 petajoules (623 million tonnes) in 203435. Despite

this growth, the share of black and brown coal in total energy production is projected todecline from 74 per cent in 200809 to 67 per cent in 203435.

Strong growth in domestic and global demand for gas has been driving the development

of new gas fields and LNG capacity in Australia. Gas production in the western market is

projected to grow at an average annual rate of 5.5 per cent to 4771 petajoules in 203435.In the eastern market, production is projected to grow at 5.0 per cent a year to

2492 petajoules.

Production of coal seam gas (CSG) is expected to maintain its strong growth trajectory

over the projection period, supported by the development of new projects and demandfor CSG-fired electricity generation.

The exportable surplus of Australias energy production is expected to increase over

the projection period, rising by approximately 4.1 per cent a year. The fastest growth is

expected in LNG exports, growing at 7.6 per cent a year. Projections of declining oil production and constraints around petroleum refining suggest

Australias net trade position for crude oil and refined petroleum products will weaken

over the projection period, with net imports projected to increase at an average rate of

3.1 per cent a year.


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1 Introduction

This report presents the results of BREEs inaugural energy projections for Australia. The releaseof these results will be part of an ongoing commitment by BREE to publish regular long-range

projections of Australian energy consumption, production and trade, with the support ofthe Australian Government Department of Resources, Energy and Tourism. The current set

of results provides an update to the projections published by ABARE in March 2010, with thefollowing amendments:

Updated base year to 200809;

Extension of the projection period to 203435;

Revisions to economic growth assumptions;

Revisions to carbon price assumptions; Revisions to long term energy price assumptions;

Changes to the Renewable Energy Target policy;

An analysis of the effect of different gas prices on the electricity generation mix; and

Inclusion of recently announced changes to Australian steel making and petroleumrefining capacity.

The report aims to encapsulate these recent developments by providing an assessment oflong-term projections of Australian energy consumption, production and trade for the period

200809 to 203435. These projections are derived using BREEs E4castmodel, which is a

dynamic partial equilibrium model of the Australian energy sector.

In undertaking these projections, BREE has included policies that have already been enacted.

As such, these projections incorporate the Renewable Energy Target and the introduction ofcarbon pricing in 2012. This scenario does not pre-empt any Australian Government decisions

that may affect the final target and policy design, or any specific outcomes that may beachieved by a global commitment to reduce emissions. Given the uncertainty surrounding

future gas prices, a sensitivity analysis was conducted to assess the effect of gas prices on

growth in energy use.


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The evolving dynamics of energy markets over the past few years have increased the

complexity of long-term energy projections. There is significant uncertainty about technology,

investment and government policies in the current environment. The current projectionsshould only be considered as indications of what the future could be given the assumptions

used, and not a forecast and what energy use will be into the future.

In this report, measures of energy consumption, production and net trade are expressed

in energy content terms (typically petajoules or gigawatt hours for electricity) to allow forcomparison across the energy commodities. The significance of a commodity in energy

content terms may differ to physical production units (such as tonnes, litres and barrels) andvalue.

The report is structured as follows. In chapter 2 the changing energy policy context in Australiais described, with a focus on key policies that are likely to affect long-term energy trends.

Chapter 3 presents the modelling framework used, as well as the key underlying assumptions.Chapter 4 provides the outlook for Australian energy consumption and electricity generation

covering the period 200809 to 203435, and chapter 5 provides the long-term outlook for

Australian energy production and trade. Chapter 6 of fers concluding remarks.


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2 The Australian energy context

Energy resources and markets

Australia is endowed with abundant, high quality and diverse energy resources (Map 1). Australiaholds an estimated 47 per cent of world uranium resources, 10 per cent of world coal resources,

and almost 2 per cent of world natural gas resources. In addition, Australia has large, widelydistributed wind, solar, geothermal, hydroelectricity, ocean energy and bioenergy resources.

Map 1: Distribution of Australias energy resources

Bonaparte Basin

Browse Basin

Carnarvon Basin

Galilee Basin Bowen Basin

Callide Basin

Tarong Basin

Arckaringa Basin Surat BasinIpswich Basin

Clarence-MoretonPerth Basin

BasinGunnedah

Collie Basin BasinMurray Basin

Sydney Basin

Gippsland Basin

DARWIN

Cooper-Eromanga Basin

BRISBANE

PERTH

ADELAIDE SYDNEY

MELBOURNE

HOBART

AERA 1.1

Tidal energy (total annual tidekinetic energy 1 GJ/m

2)

Wave energy (total annualwave energy 0.5 TJ/m)

Wind energy (average windspeed > 7 m/s) 0 750 km

Solar energy (> 14 MJ/m2

per day)

Geothermal energy (> 3 km of sedimentand/or hotter than 200

oC at 5 km)

Resource type

Black Coal

Brown Coal

Conventional Gas

Coal Seam Gas

Oil (crude, condensate,LPG)

Uranium

150140130120

10

20

30

40

Demonstrated resources (PJ)

2000 - 10 000

10 001- 25 000

25 001 - 50 000

50 001 - 100 000

100 001 - 250 000

250 001 - 500 000

>500 00050

Major energy basin

Basin type

Source: Geoscience Australia and ABARE (2010)

The development of these resources has contributed to low-cost energy, underpinned the

competitiveness of energy-intensive industries and provided considerable export income.

Australia is one of the few OECD economies that is a significant exporter of energy commodities,

with the major exports being coal, liquefied natural gas (LNG), uranium and petroleum.


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Australian energy production

Australia is the worlds ninth largest energy producer, accounting for around 2.5 per cent of theworlds energy production (IEA 2011). Energy production in Australia has been increasing over

the past decade, growing at an average annual rate of 3.2 per cent since 199900.

The main fuels produced in Australia are coal, uranium and gas (Figure A). Of these, coal

accounted for around 57 per cent of total energy production in energy content terms in200910, followed by uranium (20 per cent) and gas (12 per cent). Crude oil and LPG

represented 6 per cent of total production, and renewable energy 2 per cent.

Figure A: Australian energy production

4000

PJ

8000

12000

16000

20000

1973-74 1979-80 1985-86 1991-92 1997-98 2003-04 2009-10

Black coal Uranium Gas

Crude oil and natural gas liquids Brown coal Renewables

Sources: BREE calculations, and ABARES (2011)

Australian production of renewable energy has been dominated by bagasse, wood and woodwaste, and hydroelectricity, which together accounted for 83 per cent of renewable energy

production in 200910. Wind energy, solar energy and biofuels accounted for the remainder of

Australias renewable energy production.

Although energy production has been increasing over the past 10 years, reserves toproduction ratios have followed a rising trend. This reflects the addition of new discoveries

and the upgrading of resources meeting economic criteria. At current rates of production,Australias energy resources are expected to last for many more decades.


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Australian energy consumption

Australia is the worlds nineteenth largest primary energy consumer, and ranks fourteenthon a per person energy use basis (IEA 2011). Since 2000, growth in energy consumption has

averaged 1.6 per cent a year.

Although Australias energy consumption is growing, the rate of growth has been declining

over the past 50 years. Following annual growth of around 5 per cent during the 1960s, growthin energy consumption fell during the 1970s to an average of around 4 per cent a year, largely

as a result of the two major oil price shocks. During the 1980s, economic recession and sharplyrising energy prices resulted in the annual growth in energy consumption falling to an average

of 2.3 per cent. In the early 1990s, falling real energy prices and robust economic growth

contributed to rising energy consumption. Despite this, growth in energy consumption for thedecade as a whole also averaged around 2.3 per cent.

Figure B shows the long term decline in energy intensity of the Australian economy. This

can be attributed to two main factors. First, greater efficiency has been achieved through

technological improvement and fuel switching. Second, rapid growth has occurred in lessenergy-intensive sectors, such as the commercial and services sector, relative to the more

moderate growth of the energy-intensive manufacturing and processing sectors.

Figure B: Energy intensity trends

index 1989-90 =100

70

75

80

85

90

95

100

105

110

Australia Victoria

Western Australia New South Wales Queensland

1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2008-09

Sources: ABARE-BRS (2010), ABS (2010a)


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Australian primary energy consumption consists mainly of coal, petroleum and gas. In 200809

black and brown coal accounted for around 39 per cent of the primary energy mix, followed by

petroleum products (35 per cent), gas (22 per cent) and renewable energy sources (5 per cent).

The main users of energy in Australia are the electricity generation, transport andmanufacturing sectors. Together, these sectors accounted for more than 80 per cent of energy

consumed in 200809. The mining, residential and commercial and services sectors were the

next largest energy consuming sectors.

The electricity industry is one of Australias largest industries, contributing 1.1 per cent toAustralian industry value added in 200809 and generated 245 terawatt hours of electricity.

Most of Australias electricity is produced using coal, reflecting its abundance along the easternseaboard where the majority of electricity is generated and consumed. In 200809, coal-fired

electricity generation accounted for 74 per cent of total electricity generation and gas16 per cent.

Over the past 20 years, domestic energy consumption has increased at a slower rate thanenergy production. Rapid growth in global demand for Australian energy resources has driven

this growth in energy production. Consequently, the share of Australian energy productionthat is exported has continued to increase.

Australias energy exports

Australia is a net energy exporter, with domestic energy consumption representing onlyone-third of total energy production, including uranium.

Since 199091, the value of Australias energy exports (in 201112 Australian dollars) hasincreased at an average rate of 9.3 per cent a year. In 201011, energy export earnings increased

by 16 per cent to $71 billion (in 201112 dollars), reflecting increased export volumes and

higher export prices (Figure C). Energy exports accounted for 32 per cent of Australias totalcommodity exports in 201011.

Australias largest energy export earners are coal, crude oil and LNG. These exports are

significant contributors to the economy, and in 201011 export values (in 201112 Australian

dollars) were estimated at $44 billion for coal, $12 billion for crude oil and condensate and$11 billion for LNG, respectively.


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Figure C: Australian energy exports

10

2011-12

A$b

20

30

40

50

60

70

80

1981-82 1985-86 1989-90 1993-94 1997-98 2001-02 2005-06 2009-10

Coal Crude and ORF Petroleum products LPG Uranium

Source: BREE (2011)

While Australia is a net energy exporter, it is a net importer of crude oil and refined petroleum.In 201011, Australias imports of crude oil and refined products were valued at $33 billion

(in 201112 Australian dollars).

Any future expansion of Australias energy market, including access to new energy resources,

will require investment in energy infrastructure. Additional investment will be required toreplace ageing energy assets and also to allow for the integration of renewable energy into

existing energy supply chains.

Energy policy

Australias energy policy aims to balance the growing demand for energy with the promotionof a lower carbon economy, incorporating international commitments regarding climate

change. The policy also seeks the provision of a stable economic environment to encourage

investment in the energy sector, particularly renewable energy.


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Australian Government policies that will shape the energy market over the next 25 years

are the Renewable Energy Target (RET) and the introduction of carbon pricing. The RET and

carbon pricing are aimed at creating a fundamental shift in consumption, in addition toinvestment incentives in the energy sector, to induce Australian companies and households

to internalise the costs of climate change. These strategies are complemented by targetedinitiatives, such as the Energy Efficiency Initiative.

Renewable Energy Target

Introduced in 2010, the RET requires 45 000 gigawatt hours of electricity to be supplied from

renewable energy sources by 2020. This target corresponds to around 20 per cent of totalelectricity generation and is a substantial increase from the previous Mandatory Renewable

Energy Target (MRET) of 9500 gigawatt hours by 2020. The RET brought existing state based

RETs, such as the Victorian Renewable Energy Target, into a single national scheme.

Initially, retailers and large users of electricity were legally required to earn or obtain RenewableEnergy Certificates (RECs) equivalent to a set proportion of their electricity purchases.

Additionally, households and small businesses could earn RECs on a voluntary basis through

solar credits for small-scale renewable energy installations. RECs could then be traded toensure companies reached their legislated quota and to provide incentives for the adoption of

renewable energy sources.

From January 2011, the RET has been split into the voluntary Small-scale Renewable EnergyScheme (SRES) and the mandatory Large-scale Renewable Energy Target (LRET) to improve

certainty for all involved and to provide incentives targeted at each group. The LRET consistsof legislated annual targets for the amount of electricity to be sourced from renewable energyto ensure that 41 000 gigawatt hours is achieved by 2020. Because of the large number of

RECs generated by the end of 2010, the annual LRET targets for 2012 and 2013 were increasedto support advances in the adoption of renewable energy sources (ORER 2011). Households

and small businesses are anticipated to provide, and potentially exceed, the additional

4000 gigawatt hours required to meet the RET through the SRES. Accordingly, RECs havebeen separated into Large-scale Generation Certificates (LGCs) and Small-scale Technology

Certificates (STCs).

The Office of the Renewable Energy Regulator oversees the implementation of the RET and

the registration of subsequent LGCs and STCs (ORER 2011).

The objective of the RET is to advance the development and employment of renewableenergy resources over the medium term and to assist in moving Australia to a lower carbon

economy (Combet 2009).


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Clean Energy Future Plan

The Australian Government passed its Clean Energy Future plan through the Senate on

8 November 2011. The plan reflects the considerations of the Multi-Party Climate ChangeCommittee (MPCCC) that determined that a carbon price and a package of complementarymeasures would be the most cost-effective and economically responsible way of reducing

Australias carbon emissions. The emissions reduction targets that have been previously agreedto and were extended under the Clean Energy Future plan are:

To reduce emissions to 5 per cent below 2000 levels by 2020, which will require cutting net

expected emissions by at least 23 per cent in 2020

A long-term reduction in emissions to 80 per cent below 2000 levels by 2050.

The carbon price is to be introduced on 1 July 2012. It will be fixed for the first three years

before transitioning to an emissions trading scheme. From 1 July 2012, the carbon price willbe a nominal $23 a tonne of carbon dioxide equivalent (CO2-e

), increasing at a rate of 5 percent a year until 30 June 2015. From 2015, the carbon price will transition to a cap and trade

emissions trading scheme, open to the international market.

Introducing carbon pricing makes large emitters of carbon financially liable for their carbon

emissions. During the fixed price period, an unlimited number of permits will be availableat a fixed price, and these must be purchased and surrendered for each tonne of reported

emissions.

The carbon price will transition to an emissions trading scheme in 2015, where the number of

available permits will be capped and the permit price will be determined in the marketplace.However, there will be a price cap set at $20 above the expected international price for an

equivalent tonne of CO2-e,

and a price floor of $15 a tonne CO2-e

. At this point the carbon market

may also be opened up to international carbon trading.

The Governments Clean Energy Future plan, comprises of a number of institutionalarrangements. These include household and industry assistance, innovation and investment

programs and transitional measures. Some of the arrangements relevant to the Australian

energy projections are discussed in Box 1.


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Box 1: Other Clean Energy Future initiatives

A range of government initiatives and support programs are included in the Clean Energy Future

plan:

Energy Security and Transformation

An Energy Security Council that will collaborate with the Australian Energy Market Operator will be

established. Significant work occurring in this area will include the:

Negotiation and potential payment for closure of up to 2000 megawatts of emissions-intensive

generation capacity before 2020;

Free permit allocations and cash payments to emissions-intensive coal-fired electricity

generators, in return for adopting clean energy investment plans; and

Short-term loans to generators to help finance the purchase of carbon permits.

Clean Energy Finance Corporation

The Government intends to encourage investment in renewable energy, energy ef ficiency and low

emissions technologies by providing financial support. The Government will invest $10 billion over 5

years beginning 201314 through loans, loan guarantees and equity investments.

Australian Renewable Energy Agency

The Australian Renewable Energy Agency (ARENA) will provide grant funding to support research,

development and demonstration of new renewable technologies, investing $3.2 billion over 9 years

beginning 201112. It will also oversee existing government renewable energy programs.

The Jobs and Competitiveness Program

The Jobs and Competitiveness Program will assist emissions-intensive trade-exposed industries

with $9.2 billion transitional assistance between 201112 and 201415. These industries will receive

assistance to cover 94.5 per cent of industry average carbon costs in the first year of the carbon

price. Less emission-intensive trade-exposed industries will receive assistance to cover 66 per cent

of average industry carbon costs. Assistance will be reduced by 1.3 per cent each year.

Other programs

The Clean Technology Program will target energy efficiency in manufacturing industries and

support research and development in low emissions technologies. It will provide $1.2 billion over

7 years from 201112. There will also be funding to support jobs in food processing, metal forging

and foundry industries ($200 million) and funding for the Steel Transformation Plan ($300 million).

There will be $1.3 billion directed to the Coal Sector Jobs Package over 6 years from 201112, which

will provide transitional assistance to the coal industry to assist in the implementation of carbon

abatement technologies.


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Other initiatives

A wide range of policies exist at both the Australian and State Government levels that will

assist with creating a lower carbon economy. These include the National Strategy on EnergyEfficiency and other related energy efficiency initiatives, the New South Wales Greenhouse GasReduction Scheme, and the Queensland Gas Scheme.

Energy Efficiency

The National Framework for Energy Eff iciency (NFEE) is a multi-level government policy

announced by the Ministerial Council on Energy in 2004. The NFEE promotes improvementsin energy efficiency through encouraging a shift in households and companies consumption

behaviour by improving public information, providing financial incentives, and enforcing

standards for the energy efficiency of goods such as light bulbs and air conditioners. Toreinforce this desired behavioural shift or step change, the Prime Ministers Task Group

on Energy Efficiency has recommended establishing a national energy eff iciency target ofimproving energy intensity by 30 per cent by 2020 (PMTGEE 2010).

In 2009, the Council of Australian Governments (COAG) agreed on the 10 year National Strategy

on Energy Efficiency (NSEE). The NSEE seeks to support the NFEE in providing information

regarding methods of reducing energy use and improving efficiency, generating publicawareness, and facilitating innovations in energy efficient technologies and practices (COAG

2009). The NSEE also strives to remove regulatory obstacles which may prevent improvementsin energy efficiency, such as duplication of processes and inconsistent standards.

A number of NFEE and NSEE programs are already in place or currently in the process ofdevelopment in order to address energy efficiency opportunities (DCC 2010).

New South Wales Greenhouse Gas Reduction Scheme

The New South Wales (NSW) Greenhouse Gas Reduction Scheme (GGAS) commenced in NSWon 1 January 2003. On 1 January 2005, the Australian Capital Territory Government introduced

a corresponding scheme utilising the same regulatory bodies and structures. GGAS aims to

reduce the emissions associated with the production and use of electricity through imposingmandatory emission reduction targets.

The GGAS targets maintaining greenhouse gas emissions (from 2007 until the scheme

concludes) at a benchmark of 7.27 tonnes of carbon dioxide equivalent (CO2-e) per person,

which is equivalent to 5 per cent below the Kyoto-Protocol baseline year of 198990.The NSW government has committed to maintaining the program until the introduction of

carbon pricing. The proportion of the greenhouse gas reduction benchmark imposed on eachparticipant is equivalent to their share of electricity sales in NSW (Greenhouse Gas Reduction

Scheme Administrator 2007).


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On 1 July 2009, the NSW Government introduced the Energy Savings Scheme (ESS) to replace

the demand side abatement component of GGAS. Companies that supply electricity in NSW

are required to meet energy savings targets equivalent to their share of electricity sales in NSW.Participants may trade the Energy Savings Certificates (ESCs) generated through their activities.

This provides an incentive for companies to increase their energy savings and rewardscompanies that exceed their benchmark.

Queensland Gas Scheme

The Queensland Gas Scheme was implemented on 1 January 2005. The scheme requires

electricity retailers and other liable parties to source a minimum percentage of their electricityfrom eligible gas-fired generation. The initial requirement was set at 13 per cent and increased

to 15 per cent in 2010. There is the potential to increase the required percentage to 18 per cent

by 2020 (DME 2011). The objective is to diversify the energy mix, provide support for the states

gas industry and reduce greenhouse gas emissions. The Queensland Gas Scheme will concludewhen carbon pricing is introduced.

Data Collection

Recently, emphasis has been placed on the role that quality data collection plays in ensuringeffective development and evaluation of energy policy. Improving the accuracy of the data

collected and distributed also helps governments and companies understand the effect ofenergy policies on supply and demand so that they can adapt their behaviour accordingly. In

the NSEE, COAG includes measures for advancing the collection of energy efficiency data andidentifying those measures as critical to the effective implementation of energy efficiency

policy (COAG 2009). The development and distribution of data collection in Australia is

supported by existing legislation such as the National Greenhouse and Energy Reporting Act,as well as organisations such as the Australian Bureau of Statistics (ABS) and the Bureau of

Resources and Energy Economics (BREE).


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3 Methodology and key

assumptionsThe energy sector projections presented in this report were derived using the E

4castmodel.

E4castis a dynamic partial equilibrium model of the Australian energy sector that can project

energy consumption by fuel type, by industry and by state or territory, on a financial year

(JulyJune) basis. The model includes a large number of variables and parameters that are used

to approximate the interdependencies between production, conversion and consumption ofenergy.

TheE

4

castmodel

The E4castmodelling framework employs an integrated analysis of the electricity generation

and gas sectors within an Australian domestic energy use model. The model represents twosets of conditions: quantity and competitive price constraints. The competitive equilibrium

is achieved when all the constraints are satisfied. A simple schematic of the E4castmodel is

provided in Figure D.

Figure D: Energy forecasting model

Endogenous supply Exogenous supply

Fuel pricesInvestment capacity

ELECTRICITY DEMANDCURVES DEMAND CURVES

Electricity moduleDemand and supply

balance and prices

Energy moduleEquilibrium supply and

demand

Investment in newcapacity

Macroeconomicassumptions

ConstraintsTechnological advances Historical data

Government policies


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E4castincorporates long-term macroeconomic forecasts from the Australian Treasury and

ABARES and current assumptions on the costs and characteristics of energy conversion

technologies. A brief overview of the key features of the current version ofE4cast is provided in

Box 2. The model provides an outlook for the Australian energy sector that is feasible (where all

quantity constraints are satisfied) and satisfies the economic competitive price conditions(a competitive equilibrium is achieved).

Box 2: Key features ofE4cast

The first version of the model was documented in Dickson et al. (2001). Since then, the modelhas been enhanced and refined in a number of directions, providing a sound platform for thedevelopment and analysis of medium and long term energy projections. Key features of the 2011version ofE

4castare outlined below.

E4castis a dynamic partial equilibrium framework that provides a detailed treatment of the

Australian energy sector focusing on domestic energy use and supply.

The Australian energy system is divided into 24 conversion and end use sectors.

Fuel coverage comprises 19 primary and secondary fuels.

All states and territories (the Australian Capital Territory is included with New South Wales) arerepresented.

Detailed representation of energy demand is provided. The demand for each fuel is modelledas a function of income or activity, fuel prices (own and cross) and efficiency improvements.

Primary energy consumption is distinguished from final (or end use) energy consumption.This convention is consistent with the approach used by the International Energy Agency.

The current version ofE4castcovers the period from 200809 to 203435.

Demand parameters are established econometrically using historical Australian energy data.

Business activity is generally represented by gross state product (GSP).

Energy intensive industries are modelled explicitly, taking into account large and lumpycapacity expansions. The industries modelled in this way are:

Aluminium;

Other basic nonferrous metals (mainly alumina); and

Iron and steel.

The electricity generation module includes 17 generation technologies. Investment plans inthe power generation sector are forward looking, taking into account current and likely futureconditions affecting prices and costs of production.

Key policy measures modelled explicitly are:

The introduction of carbon pricing;

The Australian Governments Renewable Energy Target;

The New South Wales Governments Greenhouse Gas Reduction Scheme;

The Queensland Governments Gas Scheme; and

The Victorian Government Renewable Energy Target.

All fuel quantities are in petajoules.

Supply of gas is modelled at the state level.

All prices in the model are real, in constant dollars of the base year, and are expressed in dollars

per gigajoule. The base year is 200809.

The coverage of energy types and industries is shown in Table 1 and Table 2, respectively.


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The model includes 19 energy sources, five conversion sectors, 19 end use sectors and seven

regions (Table 1 and Table 2). The demand functions for each of the main types of fuel (such

as electricity, gas, coal and petroleum products) have been estimated econometrically andincorporate own price, cross price, income or activity, and technical change effects.

Table 1: Fuel coverage in E4cast

Black coal

Brown coal

Coal by-products

- coke oven gas

- blast furnace gas

Coke

Natural gas

Coal seam gas

Oil (crude oil and condensate)

Liquefied petroleum gas (LPG)

Other petroleum products

Electricity

Solar (solar hot water)

Solar electricity (solar photovoltaic and solar thermal)

Biomass (bagasse, wood and wood waste)

Biogas (sewage and landfill gas)

Hydroelectricity

Wind energyGeothermal energy

Ocean energy


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Table 2: Industry coverage ofE4cast

Sectors/sub-sectors ANZSIC code

ConversionCoke oven operations 2714

Blast furnace operations 2715

Petroleum refining 2510, 2512-2515

Petrochemicals na

Electricity generation 361

End use

Agriculture Division A

Mining Division B

Manufacturing and construction Division CWood, paper and printing 23-24

Basic chemicals 2520-2599

Nonmetallic mineral products 26

Iron and steel (excludes coke ovens and blast

furnaces)

2700-2713, 2716-2719

Basic nonferrous metals 272-273

Aluminium smelting 2722

Other basic nonferrous metals 2720-2721, 2723-2729

Other manufacturing and construction naTransport Div ision I (excludes sectors 66 and 67)

Road transport 61

Passenger motor vehicles na

Other road transport na

Railway transport 62

Water transport 63

Domestic water transport 6301

International water transport 6302

Air transport 64

Domestic air transport na

International air transport na

Pipeline transport 6501

Commercial and services Sectors 37, 66 and 67; Divisions F, G, H, J, K, L, M, N, O, P and Q

Residential na


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In E4cast, prices for energy sources used in electricity generation are determined within the

model based on demand and supply factors, with the exception of oil and coal where prices

are determined on the world market. In some simulations, exogenous gas prices have beenused.

The direction of interstate trade in gas and electricity is determined endogenously in E4cast,

accounting for variation in regional prices, transmission costs and capacities.

In E4cast, upper limits on interstate flows of electricity and gas are imposed over the medium

term to reflect existing constraints and known expansions that are at an advanced stage ofdevelopment. Beyond the medium term, it is assumed that any interstate imbalances in gas

supply and demand will be anticipated, resulting in infrastructure investment in gas pipelines

and electricity interconnector capacity sufficient to meet trade requirements.

For internationally traded energy commodities, crude oil, LNG and black coal of exportquality, production is exogenous to the model and is drawn from BREEs (previously ABARES)

commodity forecasting capability.

Although Australia is a significant producer of uranium oxide, it is not included in the

projections as it is not consumed in Australia and, therefore, does not affect the domesticenergy balance. A detailed assessment of Australias uranium resources is provided in the

Australian Energy Resource Assessment(Geoscience Australia and ABARE 2010).

E4castbase year data

The base year (200809) data in the model are drawn from ABARES Australian Energy Statistics(ABAREBRS 2010). These statistics are largely derived from ABARES former fuel and electricity

survey (FES). The 200809 data, as reported in the projections report, and the published

data (ABAREBRS 2010) may be classified differently. As a result, there may be differences inthe figures published. A brief description of the survey and ABARES energy balance data is

provided in Box 3.

From 2010, National Greenhouse and Energy Reporting (NGER) data, sourced from the

Australian Government Department of Climate Change and Energy Efficiency, has been

adopted as the main energy consumption data source for the Australian Energy Statistics.With the introduction of NGER, survey year 200809 became the final year that the FES wasconducted. Australian energy statistics using NGER data will be used in the next set of energy

projections.


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Box 3: Australian energy statistics

The Australian energy statistics for 200809 are based on ABARES fuel and electricity survey (FES),

which was a nationwide survey of around 1400 large energy users and producers. The energy userssurveyed accounted for around 60 per cent of total Australian energy consumption. Each year, in

around October/November, respondents were sent paper-based surveys, requesting information on

the quantity of fuels they produced and consumed as well as the electricity they generated. These

detailed energy statistics were integrated and reconciled with other databases and information

sources. Supplementary data were also collected f rom various sources, including:

Australian Bureau of Statistics international trade data;

ABARES farm surveys database for the broadacre and dairy farm sectors;

Department of Resources, Energy and Tourisms Australian Petroleum Statistics;

Energy Supply Association of Australia;

Geoscience Australia; state government departments; and

Australian Customs and Border Protection Service.

The detailed FES data on energy consumption provides a platform for estimating energy

consumption by region, industry and energy source. The consumption data are reconciled with

readily available production statistics to provide a national energy balance.

Key assumptions

There are a number of economic drivers that will shape the Australian energy sector over thenext two decades. These include:

Population growth;

Economic growth;

Energy prices;

Electricity generation technologies;

End use energy technologies; and

Government policies.

The assumptions relating to these key drivers are presented below.

Population growth

Population growth af fects the size and pattern of energy demand. Projections for Australianpopulation is drawn from the Australian Treasury carbon price modelling and presented in

Table 3.


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Table 3: Australian population assumptions

year population

million2009 21.97

2020 25.83

2035 31.19

Source:Treasury (2011)

Economic growth

The energy projections are highly sensitive to underlying assumptions about GDP growth

the main driver of energy demand. Energy demand for each sector within E4castis primarilydetermined by the value of the activity variable used and the price of fuel in each sectors

fuel demand equation. The activity variable used for all non energy-intensive sectors is grossstate product (GSP), which represents income or business activity at the state level. However,

for energy intensive industries (aluminium, other basic nonferrous metals, and iron and steel

manufacturing) projected industry output is considered as a more relevant indicator of activitythan GSP because of the lumpy nature of investment.

The GDP and GSP assumptions (Table 4) are drawn from the assumptions used by the

Australian Treasury carbon price modelling (Treasury 2011).

In 200809, Australias real GDP increased by 1.4 per cent, following growth of 3.8 per cent in

200708. Over the projection period, Australias real GDP is expected to grow at an averageannual growth rate of 2.8 per cent. A moderation in Australias population and labour supply

growth will contribute to a gradual reduction in GDP growth in the latter part of the projection

period.

Queensland and Western Australia are expected to have the highest GSP growth rates over theperiod to 203435, reflecting to a large extent their substantial minerals and energy resource

base, relatively high degree of export orientation, and higher relative population growth rates.

Table 4: Australian economic growth, by region

Average annual growth 200809 to 203435 %

New South Wales (and ACT) 2.5

Victoria 2.6

Queensland 2.9

South Australia 2.0

Western Australia 3.7

Tasmania 1.7

Northern Territory 2.5

Australia 2.8

Sources: BREE assumptions based on Treasury (2011)


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Real energy prices

Energy prices affect the demand for, and supply of, energy. The long term energy priceassumptions of BREE incorporated in E

4castare presented in Figure E. Long-term energy

price profiles will hinge on a number of factors, including demand, investment in newsupply capacity, costs of production, and technology. Although the long-run price paths

follow smooth trends, in reality, prices are likely to fluctuate in response to short-term market

developments.

Figure E: Index of world real energy prices, 200809 dollars

20

40

60

80

100

120

140

160

2008-09 2011-12 2014-15 2017-18 2020-21 2023-24 2026-27 2029-30 2032-33

2008-09

=100

Oil LNG Coal

Sources: BREE assumptions

Coal

In early 2011, coal prices for both thermal and metallurgical coal increased significantly

following heavy rain and f looding in Queensland. In the medium term, thermal coal pricesare expected to remain significantly above the long term average of the past two decades,

although decline in real terms relative to 201011. This reflects rising supply costs in China,

the worlds largest producer of thermal coal, and also in Australia and Indonesia, the largestexporters, as they develop coal deposits that are deeper underground and/or further away

from existing infrastructure.


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Beyond the medium term, global thermal coal prices are expected to stabilise above the

long-term historical average. The higher costs associated with developing new mines and

infrastructure is expected to be of fset to some extent by the adoption of more advancedtechnology.

Oil

In 2010, oil prices in WTI terms averaged around US$79 a barrel. World oil prices are projected

to remain around real US$9095 a barrel over the medium term, as oil demand increases in linewith assumed stronger economic growth. The availability of spare production capacity and

stocks in OPEC are expected to limit significant increases in oil prices over the medium term.

The long-term prospect for oil prices is much less certain. Key factors that are expected to

drive long-term oil prices are the cost of developing remaining oil reserves, the volume and

timing of investment in production and refining capacity, and technological development inrelation to alternative liquid fuels. The estimated capital and production costs for conventional

oil sources have increased in recent years because of rising materials, equipment and labourcosts. While a rise in the marginal cost of oil production is expected over time, technological

developments associated with non-conventional liquids, such as gas-to-liquids and secondgeneration biofuels, have the potential to play a major role in anchoring oil prices below what

would have been the case without these new technologies. However, it is not expected that

these technologies will be developed in Australia. The assumed development and entry ofthese technologies underpins the long-term price assumptions used in this report.

LNG

In the long term, international LNG prices are assumed to follow a similar trajectory to oil

prices, reflecting an assumed continuation of the established relationship between oil pricesand long-term gas supply contracts through indexation in the Asia Pacific market, and

substitution possibilities in electricity generation and end use sectors. While in recent years

gas prices have decoupled from oil prices in some markets (reflecting relatively abundantsupplies of unconventional gas in North America and increased availability of spot supplies of

cheaper LNG in Europe and the Asia Pacific), there is considerable uncertainty about whetherthis will also apply to the Asia Pacific market. Indexation is likely to remain the dominant pricing

mechanism in the Asia Pacific region, unless there is a significant convergence of the Atlantic

and Pacific markets through LNG exports from North America to the Asian region.

Domestic prices for coal and gas are drawn from ABARES/BREEs assumptions.


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Electricity generation technologies

Australia has access to a range of electricity generation technologies. This is likely to increaseover time as new technologies are developed and the costs of some technologies fall. While a

range of factors will af fect which technologies are used, the relative cost is the most important.

The Electric Power Research Institute (EPRI 2009) assessed the status of different electricity

technologies in 2015 and 2030. The EPRI technology status data enables the comparison oftechnologies at varying levels of maturity. However, market and system factors will have a

significant impact on the technology mix and electricity prices in an energy system. For thisreason, electricity market prices cannot be extrapolated from technology cost analysis. Market

modelling is required to project potential electricity prices arising from market and investment

outcomes. The levelised cost of technologies represents the revenue per unit of electricitygenerated that must be met to break even over the lifetime of a plant.

While EPRI cost estimates were developed on the basis of generic plant configurations

rather than on detailed plant designs or equipment and material costsand are subject to

uncertainty in relation to a number of factorsthey provide valuable and comprehensiveinformation on the relative costs of different electricity generation technologies in an

Australian setting, and how these costs might change over time. Importantly, these costs donot include the effects of any carbon price.

The relative costs of different technologies are more important than the absolute magnitudeof these costs in determining their relative prospects in the electricity generation sector (merit

order). The EPRI results show that, in the medium term, coal and gas without CCS will remain

among the lowest technology cost options. Of the renewable energy technologies, wind isone of the lowest cost options. Despite a significant decline in the costs of solar technologiesexpected in the future, the costs of these technologies are expected to remain relatively high

over the coming years. The costs of geothermal electricity are shown to be competitive with

those of other baseload technologies, although this technology is still at a demonstrationstage.

For technologies that are not covered in detail by the EPRI data (ocean energy, bioenergy and

the retrofitting of existing fossil-fuel plants with CCS technology), BREE has drawn on a range

of other sources (IEA 2008; Specker, Phillips and Dillon 2009; National Energy Technology

Laboratory 2009). There is considerable uncertainty regarding the absolute costs of thesetechnologies. Further, not all units of existing power plants are amenable to be retrofitted withCCS technology. Key considerations include the units age and size, available space and access

to geological storage.

In 2011, the Australian Treasury modified EPRI technology costs to account for exchange

rate movements since the 2009 EPRI report. In E4cast, the assumptions regarding the cost of

electricity generation technologies in Australia are drawn from the modified EPRI technology

costs, and are presented in Figure F. In addition, there are exogenous and endogenous factors

that can contribute to changing electricity generation costs over time. These include carbonprices, and thermal efficiencies, including assumptions regarding future technological changes

and learning rates.


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Figure F: Index of real levelised cost of electricity generation technologies excluding

carbon costs

0.5

index

1.0

1.5

2.0

2.5

3.0

3.5

4.0

hydroen

ergy

blackc

oal

brow

nco

alga

swin

d

geothe

rmalhs

a

gasc

cs

bioe

nergy

blackc

oalc

cs

brow

nco

alccs

geothe

rmaleg

a

solar

pv

solar

thermal

ocea

n

2008-09

2034-35

Sources: BREE calculations based on modified EPRI technology costs

End use energy technologies

End use energy technologies affect the efficiency of energy use. These technologies are

assumed to become more energy efficient over time through technological improvements.Further, the NSEE can also be expected to address non-market barriers to the uptake of energy

efficiency opportunities.

The rate of end use energy ef ficiency improvement is assumed to be 0.5 per cent a year over

the projection period for most fuels in non-energy intensive end-use sectors. For energyintensive industries, the low capital stock turnover relative to other sectors is assumed to result

in a lower rate of energy efficiency improvement of 0.2 per cent a year.

Government policies

In this set of projections, the following key policies have been modelled explicitly in E4cast:

The clean energy future carbon price;

The Australian Government Renewable Energy Target (RET);

The New South Wales Greenhouse Gas Reduction Scheme;

The Queensland Gas Scheme; and

The Victorian Government Renewable Energy Target.


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Emissions Reduction Target

The carbon price assumptions are set in reference to the Treasury modelling, Strong growth,low pollution: modelling a carbon price released in 2011. In 201213, a nominal carbon price of

$23 a tonne is used, growing at 5 per cent a year. From 2015, the carbon price will transitionto an emissions trading scheme, open to the international market. The price trajectory for thescheme is estimated to start at $29 a tonne in 2016, in nominal terms, growing at a rate of

5 per cent a year. In practice, the carbon price path post 2015 will be determined by the worlds

carbon market, within which Australia will trade permits. The projection path for the carbonprice assumptions (in real terms) is shown in Table 5.

Table 5: Carbon price assumptions, real, 200910 dollars

201213 21.05

201920 29.40

202930 52.60

203435 69.90

Source: BREE calculations based on Treasury (2011)

Renewable Energy Target (RET)

The Renewable Energy Target (RET) requires 45 000 gigawatt hours of electricity be sourcedfrom renewable energy sources by 2020. Legislation to implement the Renewable Energy

Target (RET) scheme was passed by the Parliament on 24 June 2010.

In January 2011, the RET was split into the voluntary Small-scale Renewable Energy Scheme(SRES) and the mandatory Large-scale Renewable Energy Target (LRET). The LRET consists oflegislated annual targets for the amount of electricity to be sourced from renewable sources

to ensure 41 000 gigawatt hours is achieved by 2020. Small businesses and households areanticipated to provide more than the additional 4000 gigawatt hours through the SRES. The

Office of the Renewable Energy Regulator (ORER) oversees the RET. The LRET targets arepresented in Table 6 (ORER 2011).

Table 6: LRET renewable electricity generation target (excluding existing renewable

generation)

Year ending TWh

2011 10.4

2012 16.3

2013 18.2

2014 16.1

2015 18.0

2016 20.6

2017 25.2

2018 29.8

2019 34.42020 and onwards 41.0

Source: ORER (2011)


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In E4cast, this policy intervention is modelled as a constraint on electricity generation

renewable energy must be greater than or equal to the interim target in any given year.

In the model, the LRET target is met by a subsidy to renewables that is funded by a tax onnon-renewable generators. This is endogenously modelled so that total renewable generation

meets the target.

New South Wales Greenhouse Gas Reduction Scheme

The New South Wales Greenhouse Gas Reduction Scheme requires electricity retailers andother liable parties to meet mandatory greenhouse gas reduction benchmarks. The scheme

is implemented in the model by requiring total emissions from state electricity generation to

be less than or equal to the product of targeted per person emissions and state population.In effect, the price of carbon is internalised in state electricity supply decisions. However, it is

assumed that the scheme will cease in 201213 upon the implementation of carbon pricing.

Queensland Gas Scheme

The Queensland Gas Scheme requires electricity retailers and other liable parties to source

at least 13 per cent of their electricity from natural gas-fired generation. On 1 July 2008, therequirement was increased to 15 per cent in 2010 and up to 18 per cent thereafter. The scheme

has been approximated in the model by requiring the share of natural gas-fired electricitygeneration in Queensland to be greater than or equal to 13 per cent in 2009 and 15 per cent in

2010. In ef fect, producers of gas-fired electricity receive a subsidy which is funded by all othergenerators. In the model, this scheme is terminated from 201213 with the implementation of

carbon pricing.

Victorian Renewable Energy Target

The Victorian Governments Renewable Energy Target (VRET), which requires that 10 per

cent of total electricity generation be sourced from renewable energy sources by 2016, wasimplemented in the model from 200708 to 200910 before the legislated transition in 2010

into the RET. In the model, generators of renewable electricity under the RET receive a subsidy

which is funded by all other non-renewable sources of power.


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4 Energy Consumption

This chapter presents the outlook for Australian energy consumption over the period to203435 under the assumptions and policy settings outlined in chapter 3. The projections

cover primary energy consumption by energy type and sector; final energy consumption by

energy type and end-use activity; and electricity generation. While the discussion focuses onAustralian trends, key trends at a state and territory level are also highlighted.

Total primary energy consumption

Growth in total primary energy consumption has demonstrated a downward trend since the

1960s as a result of changes to Australias economic structure, and the ef fect of technological

developments and government policies on energy ef ficiency in energy conversion andend-use. Growth in Australias total primary energy consumption declined from 5 per cent ayear in the 1960s to 2.3 per cent a year in the 1990s.

This trend is expected to continue, with growth in energy consumption moderating overthe projection period. Australias primary energy consumption is projected to increase at

an average annual rate of 1 per cent from 5784 petajoules in 200809 to 7481 petajoules in203435 (Table 7).

The moderate growth in energy consumption is largely driven by the implementation of new

policies. Between 200809 and 203435, the Australian Government will introduce a numberof measures, including the RET and carbon pricing, that are expected to increase energy pricesand dampen the demand for energy. This will be partly offset by assumed strong economic

growth over the projection period.

The largest decline in consumption growth is expected to occur in the last decade of the

projection period. This reflects the assumption of increasing carbon prices.

Aggregate intensity trends

Australias aggregate energy intensity (measured as total domestic energy consumptionper dollar of GDP) declined at an average rate of 1.2 per cent a year between 198990 and

200708 (Petchey 2010). Over the period to 203435, Australias aggregate energy intensityis projected to decline by around 1.7 per cent a year. This indicates a considerable shift

in Australias economic structure over this period. The major driver of this trend is strong

growth in less energy-intensive sectors, such as the commercial and services sector relative toenergy-intensive sectors, such as manufacturing. Improved efficiency through technological

development and fuel switching will also contribute to this trend.


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Primary energy consumption, by energy type

Over the projection period, the relative share of each energy type is expected to change

significantly in response to the changing policy environment.

Non-renewable energy accounted for around 95 per cent of the primary energy consumed in

Australia in 200809. Of this, coal accounted for 39 per cent of the primary energy consumed; oil35 per cent; and gas (including conventional and coal seam gas) 22 per cent. Over the projection

period, the share of coal in total primary energy consumption is projected to decline to 21 per

cent (Table 7). By contrast, the share of gas is projected to increase to 35 per cent.

Gas is expected to exhibit the fastest growth among non-renewable energy sources over theprojection period, increasing by around 3 per cent a year to 2611 petajoules in 203435 (Table

7). This growth is driven by increased use in electricity generation and in the mining sector,

and reflects the shift to less carbon-intensive energy sources. The majority of this growth is atthe expense of coal. The growth in gas consumption is expected to be greater in the period

to 2020, after which the uptake of technologies that are less carbon-intensive is expected toaccelerate.

Table 7: Primary energy consumption, by energy type

Level Share

Average

annual

growth

200809 to

200809 201920 203435 200809 203435 203435

Energy type PJ PJ PJ % % %

Non-renewables 5505 6431 6822 95 91 0.8

Coal 2240 2106 1541 39 21 -1.4

black coal 1593 1460 1260 28 17 -0.9

brown coal 647 647 281 11 4 -3.2

Oil 2021 2441 2670 35 36 1.1

Gas 1244 1884 2611 22 35 2.9Renewables 279 548 660 5 9 3.4

Hydro 45 47 47 1 1 0.2

Wind 14 131 175


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In 200809, around 5 per cent of Australias primary energy consumption was sourced from

renewable energy. The share of renewable energy is projected to increase by 3.4 per cent a

year following the introduction of the RET to account for around 9 per cent of primary energyconsumption in 203435 (Table 7). The bulk of this increase is expected to come from bioenergy

(mainly biomass) and wind energy. Growth is also expected to be strong in geothermal andsolar energy, albeit from a lower base.

Primary energy consumption, by state and territory

Primary energy consumption is projected to increase in all states and the Northern Territory over

the period to 203435. However, there is variation in the rates of growth reflecting economic

growth assumptions, energy resource endowments, economic structure and state-specificpolicy settings (Table 8).

The highest growth in primary energy consumption is projected to occur in Western Australia,

the Northern Territory and Queensland. This is underpinned by higher assumed economic

growth compared with the other states, the large contribution of the mining sector to economicoutput and the high degree of export orientation. The strongest growth in primary energy

consumption is expected to occur in Western Australia, increasing at a rate of 2 per cent a year,with its share of total primary energy consumption increasing from 16 per cent in 200809 to 21

per cent in 203435 (Table 8).

Growth in energy consumption is projected to be more moderate in South Australia and New

South Wales driven by assumed lower economic growth. Despite the slower growth, New

South Wales is projected to remain the largest consumer of energy. Its energy consumptionis projected to increase at around 0.6 per cent a year and increase from 1569 petajoules in200809 to 1851 petajoules in 203435 (Table 8).


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Table 8: Primary energy consumption, by state and territory

Level Share

Average

annual

growth

200809 to

200809 201920 203435 200809 203435 203435

State/territory PJ PJ PJ % % %

New South Walesa 1569 1758 1851 27 25 0.6

Victoria 1388 1608 1491 24 20 0.3

Queensland 1291 1626 1770 22 24 1.2

South Australia 344 394 420 6 6 0.8

Western Australia 953 1323 1607 16 21 2.0Tasmania 113 120 135 2 2 0.7

Northern Territory 127 150 207 2 3 1.9

Australia 5784 6979 7481 100 100 1.0

a includes the Australian Capital Territory.

Numbers in the table may not add up to their totals due to rounding.

The f igures for 200809 presented in this table may not be identical to actual historical data published in ABARES

Australian Energy Statistics. This is a reflection of the different classification systems.

Victoria is projected to exhibit the lowest growth in primary energy consumption. The effect ofgovernment policies on brown coal-fired electricity generation and other emission-intensive

industries such as petroleum refining and chemicals will contribute to the moderate growth.Energy consumption in Victoria is projected to increase by 0.3 per cent a year from 1388

petajoules in 200809 to 1491 petajoules in 203435 (Table 8).

Primary energy consumption, by sector

Electricity generation, transportation and manufacturing accounted for 89 per cent of

Australias total primary energy consumption in 200809. These sectors are projected toaccount for 81 per cent of projected primary energy consumption in 203435 (Table 9).

The electricity generation sector accounted for the largest share (44 per cent) of primary

energy consumption in 200809. Total primary energy consumption in electricity generationis projected to increase from 2557 petajoules in 200809 to 2803 petajoules in 203435 (Table

9). The combined effect of the RET and the implementation of carbon pricing on the relative

competitiveness of generation technologies is expected to encourage a change in the energymix, with a gradual shift away from coal to gas and renewable energy.


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In 200809, the transport sector (excluding electricity used in rail transport) accounted for

one-quarter of primary energy consumption, with a heavy reliance on oil and petroleum

products. Consumption in the transportation sector is projected

australian energy projections report

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