the energy and resources agenda

in context

where does australia’s electricity come from?

coal77%

gas8%

hydroelectric8%

wind6%

other1%

Source: Australian Energy Regulator, for 2016/2017 financial year (YTD data to 31 March)

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Coal still provides 77 per cent of Australia’s electricity generation output, while only 15 per cent comes from renewables (including hydro, wind and other sources).

Gas is becoming an increasingly important fuel for electricity generation, replacing capacity from coal-fired generators that are being retired.

where does eastern australia’s gas come from?

70%1158PJSurat-Bowen

>1%5PJNSW Basins

19%314PJGippsland

4%71PJ

Otway

1%17PJBass

6%97PJ

Cooper

2 Source: Australian Energy Regulator, State of the Energy Market, May 2017.

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how is our energy used?

Australian energy and fuel consumption by industryOutside of the transport sector, the largest energy using sector is Australia is Manufacturing and Construction, which

uses 25 per cent of Australia’s energy. This compares to only 11 per cent of energy which is used by households.

Source: Australian Government, Department of Industry Innovation and Science, Australian Energy Statistics, 2016

manufacturing and construction

residential25%11%

commercial8%

agriculture3%

other1%

mining13%

transport39%

What is happening to prices?

Victorian Retail Electricity and Gas Price Trends

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CPIGasElectricity

100 = June 2007, ABS, Consumer Price Index

increase in retail electricity and gas prices over the past decade

increase in the CPI over the last decade

>100% 27%

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While retail electricity and gas prices have more than doubled over the past 10 years, the CPI has only increased by 27 per cent.

Rising gas prices are being driven by significant exports of liquefied natural gas out of Queensland that is placing pressure on the supply of gas for local markets.

After being shielded from world prices for gas, the emergence of

an export industry means that Australian businesses are now exposed to world gas prices. This has seen Victorian wholesale gas prices increase from $2-3 per Gj prior to 2012 to almost $10 per Gj now.

It is common for industrial gas users to report a threefold increase in the unit price of gas prices from around $6 to around $18 per gigajoule. Following the emergence of a gas export industry, Australia now

exports 68 per cent of total gas production.

The chart below highlights the short-term transformation of the sector expected during the ramp-up of the gas export facilities in Queensland, the forecast domination of LNG export demand, and the projected growth in Gas Powered Generation in the 2020s.

Total annual gas consumption by sector

Gas powered generation Residential and commercialIndustrialExports

Meanwhile, electricity prices are being pushed up by:

> The lack of investment in new electricity supply. New capacity is not coming online fast enough to replace the generators that are closing.

> The closure of a number of large coal fired generators including SA’s Northern (546mw) and Playford (240mw) plants and Victoria’s Hazlewood Power Station (1760mw). NSW’s Lidell may close in 2022.

> The high price of gas being used to generate electricity to make up the shortfall.

Increases in wholesale energy prices, which make up around 25 per cent of bills, are driving the bill shock being experienced by many businesses.

Commercial and industrial users have experienced much higher increases as wholesale prices have a bigger impact on their bills.

Wholesale electricity prices have increased from a long term average of around $40 per megawatt hour to around $100 per megawatt hour now. Wholesale Victorian gas prices have increased from around $3 per gigajoule in 2014 to close to $9 per gigajoule now.

Also contributing to bill shock is the fact that businesses tend to enter into multi-year contracts for energy. Coming off three or five year contracts, which were negotiated when wholesale prices were much lower, and seeking a new contract in the current market where prices are much higher, is resulting in businesses experiencing several years of price increases in one hit.

approximate increase in the long term average wholesale price of a megawatt hour of electricity

150%

wholesale price of a gigajoule of gas in December 2014

$3.33

wholesale price of a gigajoule of gas in September 2017

$8.57

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what businesses are telling us

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the impact of significant energy price rises on victorian businesses

Which sectors are impacted the most?

How are businesses planning to manage significant energy price rises?

What do Victorian businesses want the government to prioritise in their energy policy?

Metropolitan vs regional

building / construction42%

offset costs elsewhere

18%

manufacturing49%

absorb costs into profit margin

PRIORITY 1security of supply

PRIORITY 2keep prices low

PRIORITY 3reduce environmental impact

40%

37% 37% 21%

metropolitan35%

change energy provider

15%

tourism49%

pass cost on to consumer

21%

regional40%

close down

1%

Source: Victorian Chamber of Commerce and Industry, March Quarter Survey of Business Trends and Prospects

energy issues

across the

states

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Northern Territory > New moratorium on

unconventional gas exploration

> Proposed northern gas pipeline to connect NT to QLD markets

Queensland > Large unconventional

gas reserves > Gas exporters drawing

on domestic market to meet export contracts

Tasmania > Primarily hydroelectric

generation > Basslink outage caused

2016 energy crisis > Fracking banned until 2020

New South Wales > Case-by-case approach

to allowing coal seam gas > AGL-owned Liddell coal

fired power station (2000MW capacity) to close in 2022

Western Australia > Gas and electricity networks

not connected to east coast > Gas reservation policy

requires 15 per cent of gas from export projects to be reserved for domestic market

Victoria > Moratorium on conventional

onshore gas exploration legislated until 2020

> Permanent ban on unconventional gas

> Hazelwood power station (1600MW capacity) closed in March 2017

> Doubling of wholesale gas prices

> State Government renewable energy generation target of 40 per cent by 2025

South Australia > September 2016 blackouts > State Government $500

million commitment to new peaking gas plant and solar battery storage

> Reliant on electricity from Victorian interconnector

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players in the victorian energy market

Transmission network and pipeline operatorsElectricity distributors own and manage the power poles and wires which deliver power to homes and businesses. The total length of Victoria’s electricity distribution lines is around 200,000 km. There are five electricity distributors in Victoria: Powercor Australia, Ausnet Services, United Energy Distribution, Citipower and Jemena.

Gas distributors own and manage the pipelines which deliver gas to homes and businesses across Victoria. The gas reticulation pipeline network is around 25,000 km in length. There are three gas distributors in Victoria: Envestra, Multinet and SP AusNet Gas.

Electricity generators and gas producers More than 50 electricity generators in Victoria produce electricity and sell it on the wholesale market. The majority of Victoria’s electricity requirements are supplied by brown coal generators in the Latrobe Valley. Other electricity supply comes from gas-fired generators and renewable| energy sources including hydro-electric, wind power, solar and biomass.

The majority of Victoria’s natural gas is sourced from the Gippsland Basin and is processed at Esso Australia’s Longford plant. A growing amount of gas is supplied from other gas fields in the Gippsland and Otway Basins, offshore from the Bass Coast area and interstate.

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Retailers

Victoria’s energy retailers provide customers with their energy services. The retailers deal with energy producers, transmission and distribution companies, and provide a “bundled” service to end consumers.

Since the introduction of Full Retail Contestability in electricity and gas in 2002, all Victorian energy consumers have been able to choose their own retailer.

Businesses and householdsThere are approximately 2.2 million residential and small business customers that use electricity and around 1.5 million that use gas in Victoria.

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what makes up your electricity bill?

3%victorian energy efficiency target

1%solar feed-in tariffs

4%federal renewable

energy target

9%gst

24%wholesale

electricity costs

26%retail services

25%distribution

5%smart meters

4%transmission

Composition of the annual bill of a residential electricity customer in Victoria using 4,000 kWh.Source: Victorian Electricity Distribution Businesses, Submission to the Review of Electricity and Gas Retail Markets.

What can business do to manage the impact

of rising prices?

> Know when current energy supply contracts expire

> Seek quotes and advice well in advance of current contracts expiring, to strengthen their negotiating position

> Seek multiple quotes at the same time, as they may only be valid for a few days

> Look at ways to cut energy use by auditing usage

> Consider investing in subsidised energy efficiency upgrades through the Victorian Energy Upgrades program

> Develop a plan to manage higher energy prices

> Explore Victorian Government support for businesses impacted by rising energy prices.

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what are governments doing?

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federal governmentIndependent Review into the Future Security of the National Electricity Market

The Federal Independent Review into the Future Security of the National Electricity Market was led by Australia’s Chief Scientist, Dr Alan Finkel AO. The review was initiated in the wake of the South Australian blackout in September 2016 and explored the challenges of balancing the competing needs of energy security and reliability, lowering carbon emissions and affordability.

The review made 50 recommendations aimed at increasing the security and stability of the electricity system, incentivising consumers to manage their electricity demand and lower emissions.

The Domestic Gas Security Mechanism

The Federal government has established the Australian Domestic Gas Security Mechanism (ADGSM).

The objective of the ADGSM is to ensure there is a sufficient supply of natural gas to meet the forecast needs of Australian consumers by requiring, if necessary, LNG projects which are drawing gas from the domestic market to limit exports or find offsetting sources of new gas.

In October 2017, the Federal Government announced that it will not limit exports in 2018, following an agreement with gas producers to supply additional gas to the domestic market to meet a projected shortfall in supply.

National Energy Guarantee

The Federal Government has proposed an emissions reduction and energy reliability mechanism called the National Energy Guarantee. The Guarantee is made up of two parts that would require energy retailers across the National Electricity Market to deliver reliable and lower emissions generation each year.

> A reliability guarantee would be set to deliver an amount of dispatchable energy (from ready-to-use sources such as coal, gas, pumped hydro and batteries) needed in each state. It will be set by the Australian Energy Market Commission (AEMC) and Australian Energy Market Operator (AEMO).

> An emissions guarantee would be set to contribute to Australia’s international commitments. This will provide each retailer with an emissions target which will be determined by the Federal Government and enforced by the Australian Energy Regulator (AER).

It is expected that lower long-term prices would result from the stability and reduction in risk for the electricity sector that commitment to a stable emissions reduction mechanism would bring.

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what are governments doing?

victorian governmentVictorian Renewable Energy Target

The Victorian Government is putting in place Victorian Renewable Energy Targets for generation of 25 per cent by 2020 and 40 per cent by 2025 (VRET).

The Renewable Energy (Jobs and Investment) Bill 2017 will legislate the Victorian Renewable Energy Targets.

Meeting the targets is expected to bring forward significant investment in new renewable energy projects in Victoria, create jobs, put downward pressure on electricity prices and secure Victoria’s electricity supply.

To support the achievement of the initial target the Government is establishing an auction scheme that will provide a guaranteed price for energy from selected renewable projects.

The initial 25 per cent target will be relatively easy to meet, given 17 per cent of electricity currently comes from renewable sources. The 40 per cent target by 2025 represents a more ambitious goal and the Government is yet to articulate a pathway for reaching this target.

Independent review of electricity and gas retail markets in Victoria

An independent review of electricity and gas retail markets in Victoria, led by John Thwaites, Terry Mulder and Patricia Faulkner, was recently completed.

The review looked at whether the electricity and gas retail markets are operating in the best interests of Victorians, and provides 11 recommendations relating to making prices more easily comparable and introducing a basic standing offer with a regulated price.

of Victoria’s energy needs must be met from renewable sources by 2020, to meet the Victorian Renewable Energy Target (VRET)

25%

of Victoria’s energy needs must be met from renewable sources by 2025, to meet the VRET

40%

funding provided for a detailed study to better understand Victoria’s gas supplies

$42M

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Victorian Gas Program

The 2017-18 Victorian Budget provides $42 million over four years to fund a detailed geoscientific, environmental and economic study to better understand Victoria’s gas supplies.

The study will be undertaken concurrently with the extended moratorium on onshore conventional gas exploration and development which will prevent private sector exploration until 2020.

Victorian Energy Upgrades

Previously known as the Victorian Energy Efficiency Target (VEET) scheme, this program is providing households and businesses with access to discounts on energy-efficient products and services.Increasingly, this program is providing benefits to businesses rather than households as it is more efficient to achieve emissions savings through larger scale commercial upgrades than through individual household upgrades.

Energy Assessment Grants

The energy assessment grants program, through Sustainability Victoria is open to businesses spending over $20,000 a year on energy.

Two grants types are available to cover 50 per cent of the cost of an energy assessment for businesses:

> Basic energy assessment grant: up to $2000 towards the cost of the assessment. This is recommended for businesses spending between $20,000 and $50,000 on energy per annum

> Detailed energy assessment grant: up to $15,000 towards the cost of the assessment. This is recommended for businesses spending more than $50,000 on energy per annum.

A $3000 implementation bonus is also available for businesses that carry out one or more assessment recommendations.

Invest Victoria Support

As part of the $90 million Investing for More Victorian Jobs initiative, funding has been made available to provide support to businesses that are particularly vulnerable to energy market volatility.

This is available to businesses that:

> are major energy users> have experienced a large increase

in the price of their energy contract(s)

> employ a significant number of workers.

Support and funding packages will be tailored and may include support for managing and reducing energy costs by increasing energy efficiency, implementing alternative sources of energy and/or purchasing new equipment that enhances productivity to offset energy costs.

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WATER Water is vital to Victoria’s economy. Many productive businesses and industries, including manufacturing, agriculture, food processing, energy, and mining, rely on safe, secure and affordable water supplies.

Water is a critical input to Victoria’s important food and fibre sector which employs more than 190,000 people and contributes almost $13 billion in exports to the state economy.

The Victorian water sector, comprising water corporations and

catchment management authorities, is also an important sector in its own right, particularly for many regional communities, employing almost 5700 Victorians and investing about $1.2 billion in 2014-15.

Clean, secure and efficiently managed water supplies are essential to keep agribusiness competitive as the sector continues to adapt to new technologies, changing costs and international forces. Secure water supplies are also vital to maintain the liveability we enjoy in Victoria.

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Climate change and extreme events like drought, flood and bushfire have shown how vulnerable the quantity and quality of Victoria’s water supplies can be.

With Victoria’s population forecast to almost double by 2051, pressure on our water supplies will only intensify.

Secure rights to water are especially important to regional Victoria, so steps to simplify regulation, clarify responsibilities and strengthen water entitlements

will give communities and other stakeholders, including tourism and recreational operators, more certainty in how surface and groundwater resources are used.

All Victorian households and businesses will benefit from the reinvigoration of water efficiency programs and resilience will be strengthened by new plans to improve wastewater management and find the best ways to use recycled water that is safe and suitable for our needs.

amount invested by the Victorian water sector in 2014–15

$1.2B

Victorians employed in the sector

5700

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melbourne’s water sources and use

water sources water use (annual)

Source: Melbourne Water, October 2017

current water storage in melbourne’s dams

1276 glresidential: 166 litres per person per day

272 gl

north-south pipeline annual capacity

75 glnon revenue: Water not paid for by customers, e.g. firefighting or lost through water main bursts

48 gl

desalinisation plant annual capacity

150 glnon residential: Factories, businesses, schools, hospitals and parks

106 gl

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Water use

Melbourne’s water use has varied over the years, from the high consumption in the 1980s to the water-saving efforts during the 1997-2009 drought. In 2015-16 Melbourne’s total water use was 426 gigalitres. A quarter, or 106 gigalitres, was used in the non-residential sector.

A changing climate

Victorians learned many hard lessons during the millennium drought, which began in 1997 and ran through to 2009. This was the most severe drought experienced in Victoria in more than 200 years.

To industry and communities, it sparked increased interest in water conservation and the use of alternative sources of water. The Victorian Desalination Project was built and now provides water security for Melbourne.

Water restrictions tested cities and towns and impacted livability with parks drying up and sporting grounds becoming unusable. The drought also led to a transformation of industries and management practices to place a much greater focus on preserving water.

Agribusiness

Water is a vital input for both the production and processing of food and fibre products and Victoria’s irrigated agricultural sector uses 75 per cent of Victoria’s water resources.1

Unfortunately, supply across Victoria has been impacted by changing environmental conditions which have reduced seasonal allocations for irrigators and reduced the availability of stock and domestic water supplies. The demand structure for water has also changed significantly in recent years, exacerbating competition between industries for water use, increasing allocation prices in dry periods.

Water infrastructure improvements and allied measures to improve the reliability, pricing and management of water are therefore key to ensuring the industry can successfully adapt to different water availability and use scenarios and remain competitive.

For example, recognising that urban growth is taking over many existing farmland areas and new food production areas will be needed.

Melbourne’s total water use in 2015–16, in gigalitres

426

of Melbourne’s total water used in 2015–16 in the non-residential sector

25%

number of years Victoria was in drought, from 1997–2009

12

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For example, local governments and water authorities in Bunyip Food Belt region south east of Melbourne are working hard to protect and support the growth of the Bunyip Food Belt as a key food producing area for metropolitan Melbourne and Victoria. The Eastern Treatment Plant is currently producing recycled water to a ‘Class A’ standard, which could be utilised by agricultural producers in the surrounding region. However, a pipeline is required to transport the recycled water to agricultural producers in the region. Industry

Water is a key input to Victorian industry.

Water and wastewater services are fundamental requirements for processing food and fibre. The mining and extractive industries rely on water availability and security for ore processing, mine stability, dust control, drilling and rehabilitation. Energy production depends on water, which is used in power generation and in the extraction, transport and processing of fuels.

Non-residential customers account for about 25 per cent of total demand for water in Melbourne. Victoria’s non-residential sector – which includes industrial, commercial and institutional customers – is becoming increasingly water efficient.

Melbourne’s non-residential customers have made significant water savings, reducing their per capita daily water consumption by about 49 per cent in 2011-12 compared to 1999-2000. This is in line with Melbourne’s overall reduction of around 43 per cent over the same period.

Reducing water use can be economically beneficial for industry. Benefits include:

> Lower water bills. This includes water supplied to the site and discharged to the sewer as waste.

> Lower energy bills due to decreased pumping, heating, cooling and treatment requirements.

> Lower capital cost of equipment. As less water is used, the required capacity of pumping, storage and transport is reduced.

> Savings in chemical use, as recycling water can recover chemicals for reuse.

> Lower environmental risks from spills, leaks and effluent discharges.

> More efficient processes. Examining procedures for water savings may identify other opportunities for improved efficiency.

> Better quality products. In some cases, efficiency improvements will increase the performance of production processes and the quality of the product.

Water use (continued)

1 Victorian Government, Regional Economic Development and Services Review - Final Report, 2015

Water for Victoria is the Victorian Government’s plan to respond to the water management

challenges and opportunities facing the state, now, and into the future.

The plan recognises the significant role that secure, reliable and high quality water supplies

play in supporting Victoria’s economic, social and environmental health.

The actions contained in Water for Victoria, such as further investment in waterway and

catchment health and new ways to use existing water resources more efficiently, are intended

to ensure Victorians are well placed to continue to enjoy reliable and safe water resources.

What the Victorian Government is doing

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annual turnover of Victoria’s waste and resource recovery system

$2.2B

tonnes of solid waste managed by the system in 2015–16

12.7M

of this waste was recycled

66%

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Waste

Victorian households and businesses discard materials and wastes, which if not managed properly, can be harmful to human health, damage the natural environment and have negative economic impacts.

Victoria’s waste and resource recovery system provides an essential service in managing this waste. This system is a network of more than 640 pieces of infrastructure, run by over 590 businesses and local governments employing around 8,000 people with an annual turnover of more than $2.2 billion.4

In 2015–16, the system managed approximately 12.7 million tonnes

of solid waste. About two-thirds of this waste was recycled, with the remaining third going to landfill.

The recovery and waste sector encompasses many activities, including collecting, sorting, transport, reprocessing (extracting both materials and energy) and exporting recoverable materials, as well as safely managing and disposing of residual waste.

As Victoria’s population continues to grow, so too will the amount of materials and waste discarded. By 2043, Victoria’s annual waste generation is projected to exceed 20 million tonnes – an increase of 60 per cent on 2015–16 figures.

Municipal wastes are typically collected from households by local councils through kerbside collections. Commercial and industrial wastes arise from commercial, industrial or trade activities and include construction and demolition wastes. Wastes generated from commercial or industrial sources that are potentially hazardous to humans or the environment require a higher level of control and are called prescribed industrial wastes.

The chart below shows that over the past decade, while total waste generation has increased, waste going to landfill actually declined.

Recovery

Landfill

Generation

4 Sustainability Victoria, Statewide Waste and Resource Recovery Infrastructure Plan, 20165 Source: Sustainability Victoria, Victorian Recycling Industry Annual Report 2014-15, Dataset

Waste generation, Victoria 2005-06 to 2014-15 (tonnes)

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Resource efficiency is about deriving the most value from material and energy inputs by efficiently converting them into finished products or services, while minimising environmental impacts. Material resources refer to everything a business purchases to produce its products or services, including raw materials, stock, stationary, produce and chemicals.

In many cases, energy and materials can be managed to achieve a greater output from the resources used. Achieving greater productivity from resources will reduce costs and the environmental impact associated with the extraction, use and disposal of materials and fuels. Increasing resource efficiency will contribute to improving productivity, reducing costs and increasing the competitiveness of Victoria’s businesses.

What are the benefits to business?

Resource efficiency can result in savings to an organisation by reducing the amount of materials or

energy that needs to be purchased, or reducing waste disposal costs. The savings come from direct actions such as capital investment in efficiencies e.g. purchase of more efficient machinery or appliances, or indirectly as a result of more efficient processes.

Waste and resource assessments

Waste and resource assessments allow a business to understand the outputs from particular processes and activities, and how this could be minimised through internal efficiencies and better waste management or re-use and recycling practices.

Waste is often ignored or treated as an unavoidable cost. Understanding what type and how much “waste” is being created will present opportunities for more cost-effective management. For example, the cost of sending waste to landfill is in many cases more expensive than sending it to recycling so if all recyclables are kept out of waste bins and separated there can be a

reduction in landfill pickups and costs. It may even be possible to sell recyclable waste materials.

A waste assessment can enable an organisation to:

> Better determine the type and amount of waste being generated

> Measure the effectiveness of existing waste management systems

> Potentially reduce the numbers of waste bins and waste collections through source separation and recycling

> Identify opportunities for improving waste management systems and strategies

> Collect baseline data for measuring the effectiveness of waste minimisation strategies.

Resource Efficiency

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Written and authorised by the Victorian Chamber of Commerce and Industry

For further information, please contact Mark Stone AM, Chief ExecutiveVictorian Chamber of Commerce and Industry150 Collins Street, Melbourne, Victoria, 3000

© Victorian Chamber of Commerce and Industry 2017This document was prepared by the Victorian Chamber of Commerce and Industry. From time to time, and on the basis of new information and research, the Victorian Chamber will update its policies and recommendations. While the Victorian Chamber has endeavoured to provide accurate, reliable research and analysis, it will not be held liable for any claim by any party utilising this information.