Alan Pears on Australia’s energy market mess
Alan Pears | 12 October 2016
Alan Pears takes a closer look at the interesting energy picture post the election.
The energy picture is now fascinating. Energy (and environment) minister Frydenberg faces some short-term challenges. He must sort out the electricity and gas market messes. Strongly critical senate inquiries and a scathing Productivity Commission report look even more credible after problems with Basslink and South Australian electricity prices and supply, and high and volatile gas prices that have also driven up electricity prices.
The new Liquefied Natural Gas export plants in Queensland face serious financial problems, while creating traumas for industrial gas and electricity users. Powerful energy companies are using their market power to block competition. And greenhouse gas emissions from energy are increasing.
These challenges are compounded by the government’s weak post-2020 energy and climate policies that contrast with its international commitment to cut emissions by 26-28 per cent by 2030.
One change that may help the minister is the separation of the resources sector from energy and environment. This may reduce the influence of some powerful interest groups on management of our energy future – and about time, too.
When industries decline
The financial sector has noticed that the fossil fuel industry is in decline and has responded by reassessing the value of fossil fuel assets – downwards. Once decline is clearly locked in, a number of forces emerge.
First, as “higher cost” mining facilities are sold off at bargain prices, their new owners can cut prices, driving a “death spiral” as lower cost mining facilities face tougher competition.
In the past, large businesses stopped the spiral by buying up smaller, higher cost producers then ‘managing’ their production, so that the demand-supply balance was restored at reasonable prices. Low cost producers might even flood the market with cheap product, to kill off their higher cost competitors, as has been happening in the global oil and iron ore markets.
But a combination of global economic problems and growth of competing solutions is blocking a return to “normality” in the fossil fuel and mining sectors. In our world of disruptive solutions, these competing solutions include energy efficiency, renewable energy, shifts to high efficiency electric technologies, “virtual” solutions replacing physical ones and radically different business models.
This highlights the failure of industries and policymakers to grasp a fundamental that US energy expert Amory Lovins was pointing out in the 1970s. People do not want materials, infrastructure, products or energy: they want services that provide “perceived value”, regardless of how they are delivered.
Another major outcome of an industry’s decline is that it loses many of the hidden benefits communities and governments have been providing it. Indeed, demands for more accountability and better performance build, just when the industry’s capacity to deliver them is declining.
As people realise that fly-in-fly-out, highly mechanised mines and power stations don’t create many local jobs – so there won’t be jobs for their kids – and that they pollute and undermine other economic activity, they are much less tolerant of mining and fossil fuels. At the same time, coal seam gas and mega-mines have much more visible impact.
Concerns about mine rehabilitation are not being addressed, resources companies are cutting corners and government regulators are failing to hold them to account. Communities are realising they will be left holding the ticking bombs.
At a government level, community pressure and the need to maintain revenues while finding money for mine rehabilitation and decommissioning of old power stations are driving efforts to capture more revenue from fossil fuel and resources industries. In the past, policymakers simply discounted these future costs to negligible levels, but that doesn’t work now. Governments now realise that if the mining industry doesn’t pay, it will hit their budget bottom lines – soon.
Industry advertising campaigns, misuse of statistics and “behind closed door” lobbying have successfully blocked higher taxes and stronger controls in the past. But as an industry’s influence declines, these strategies don’t work as well.
At the same time, it is possible for an industry, governments and communities to maintain denial about unstoppable trends for a surprisingly long time. Indeed, there will be bargains for buyers of some mines, and smart owners can use new technology and creative business models to cut costs, out-compete others and shift risk.
It is also in the interests of existing businesses to try to maintain confidence: not only does each extra month of production produce a lot of money, but it gives them more time to sell off assets to poorly-informed buyers, and to move into new areas of activity.
As they say, change is a time of threat and opportunity.
Where to for industrial, business and home heat?
In Australia, the focus of climate and energy policy has been electricity. It’s a core input to essential energy services, it’s expensive, and it’s responsible for a third of Australia’s greenhouse gas emissions. But provision of heat is responsible for half as much climate impact as electricity, or as much as transport. And often the equipment that uses gas or oil uses a lot of electricity as well. Recent rapid increases in gas prices and price volatility have focused attention on reducing dependence on gas, much of which provides heat.
Australia’s emissions from burning fuels for heat production are broken down in the pie chart above. There is exciting potential to cut these emissions by measures including improved energy efficiency, rethinking industrial processes to reduce the need for heat, and switching from gas and oil to high efficiency electric technologies driven by renewable electricity.
Many households are already moving away from gas to high efficiency reverse-cycle?airconditioners, heat pump water heaters and induction cooking. But we need better-insulated hot water tanks and ovens, as well as thermally efficient buildings and smart electricity management systems, to minimise costs and maximise benefits.
In the commercial sector, gas use, mainly for space heating, hot water and cooking,?is often appallingly inefficient. Inefficient (often old and poorly maintained) boilers, large losses from pipes and ducts, poor control systems, thermally poor buildings, and inefficient gas cooking provide very large potential for savings. Past low gas prices have led many to be sloppy in their use of gas.
Gas use in industry is often surprisingly inefficient, too. When losses from poorly insulated steam pipes and leaky fittings, ancient and inefficient boilers up to 50 years old and inefficient process equipment are considered, the waste is staggering. Under the Energy Efficiency Opportunities program (shut down by the Abbott government, despite outstanding cost-effectiveness and global recognition), companies were required to develop computer models of the energy and material flows through their processes and to benchmark efficiency against theoretical optimums. Many firms, and their experienced engineers, were very surprised by the scale of inefficiency and the scope for cost-effective efficiency improvement.
Industrial-scale electric heat pumps can now efficiently provide steam using renewable electricity. Improved catalysts are reducing the temperatures of processes. Green chemistry and advanced metallurgy are creating more productive processes, higher quality products and lower process temperatures. Smart controls and monitoring systems reduce reject rates (and the energy wasted producing items that can’t be sold). Improved heat recovery and heat/cool storage increase flexibility and allow previously wasted energy to be utilised.
At the point of use of products, “virtual” solutions are replacing physical products and movement. These include weight reduction and shifting to lower emission impact materials (e.g. engineered timber replacing steel and concrete, and cement made from geopolymers). Increased recycling means lower temperature, less energy-intensive processes replace production of virgin materials.
We are also seeing exciting potential to replace fossil fuels with renewable energy across all combustion activities: ARENA recently funded a study that explored these possibilities.
Across all elements in the supply chain, the multiple benefits of new solutions, ranging from cooler commercial kitchens to lower reject rates and improved staff productivity, amplify the energy benefits.
The big question is whether Australians will capture these opportunities or continue to see themselves as victims of change. Maybe the emerging focus on energy productivity and innovation can help.
Alan Pears, AM, is one of Australia’s best-regarded sustainability experts. He is a senior industry fellow at RMIT University, advises a number of industry and community organisations and works as a consultant.
This article was first published in ReNew Magazine.
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