2017 will be a big year for Australia's energy system: here's what to look out for

2017 is the year when many long-festering energy policy problems must be addressed. Our outdated energy market model is falling apart. The gas industry is lining its pockets at the expense of Australian industry. Climate policy is urgent, but controversial among key decision-makers. Our fossil fuel exports are under threat from global forces.

The objectives are clear: provide reliable, affordable and low-carbon energy services to households and business, and build a sustainable energy export sector.

The problem is that there is little agreement on how we interpret and frame these goals, let alone how to achieve them. Some see threat where others see opportunity. Powerful interests are keen to protect their investments. Meanwhile diverse competitors are emerging from many directions and consumers clamour for equity, rights, affordability and choice.

These debates are set in a context of Chief Scientist Alan Finkel’s review of the sector, a federal review of climate policy, and debate about extending the Renewable Energy Target.

Australian business is calling for certainty in energy and climate policy: that’s one thing they can’t be certain they’ll get this year. But there will be some useful groundwork.

Into the jungle

The energy and environment minister, Josh Frydenberg, has criticised state governments for introducing uncoordinated and overly aggressive renewable energy policies.

He is seeking “harmonisation”, which is code for capping growth of renewable energy, as he and his prime minister struggle to satisfy the rampant extreme right within their party.

But state governments know supporting renewable energy is a vote winner. The economics and climate pressures are shifting in favour of renewable energy.

The ACT’s “contracts for difference” auction approach to renewables has reduced risk for project proponents while delivering low-cost renewable energy projects additional to the RET, and delivering ambitious climate targets. Others are copying.

The problem for the minister is that the nature of the energy sector has changed from a centralised, top-down, slowly changing system dominated by big businesses, governments and large investments to a chaotic, decentralised, diverse and rapidly changing jungle.

Even if state governments could be brought into line, local governments, the private sector, households and community groups will pursue their agendas. Competitive democracy is at work.

So we may see a rethink of the design and operation of energy markets in 2017. Governments will focus on reliability, energy security, consumer rights and providing fair access for emerging competitors balanced by higher expectations.

Reliable supply

Debates in the wake of the Basslink failure and South Australia’s blackout suggest that few politicians, industry participants and commentators have a comprehensive understanding of the fundamentals of delivering reliable and secure energy services in a modern world.

But it’s not just about having enough well-maintained energy supply. We can now manage demand by using energy more efficiently, actively managing demand, and storing energy.

We can then use a mix of supply-side options to satisfy this demand. For instance, we can install storage in regional pumped hydro dams and at solar thermal generators. We can transport electricity via batteries in electric vehicles instead of power lines.

We must face new challenges, such as increasingly extreme weather events and bushfire risks from power lines, without disrupting consumers. And consumer rights must be protected when they may have equipment and services provided by multiple energy businesses.

So appliance manufacturers, distributed energy and storage providers will need to incorporate new features into their products and meet tougher performance standards, to play their part in maintaining system reliability and security.

In return, governments will have to open up access to the electricity market and encourage investment in a smarter, distributed energy system.

2017 is the year when a new framework for our electricity service system must be designed.

Reducing demand

Australian policymakers seem to have a blind spot on energy efficiency. Energy efficiency plays a key role in managing electricity demand. For example, energy efficiency didn’t appear to rate a mention following the South Australian blackout. The draft Finkel Review focuses on supplying electricity, mentioning energy efficiency ten times, but only in passing.

Yet the International Energy Agency describes energy efficiency as “the first fuel” – cutting demand is the same as building more supply, and cheaper. It could make the biggest contribution to cutting fossil fuel carbon emissions out to 2030.

Research by many groups such as Climateworks and Beyond Zero Emissions has shown that many energy efficiency measures actually save money while cutting carbon emissions, so have a “negative” carbon cost.

Despite ongoing analysis and adjustment, energy efficiency and demand management have not captured significant roles in the National Electricity Market. The National Electricity Objective, which sets the overall focus of the electricity market, focuses on the price of electricity that consumers pay, not the total cost of delivering energy services (which should include carbon). This undermines focus on actions that reduce the amount of energy needed.

Among the original 1992 draft objectives in the National Grid Management Protocol was:

To provide a framework for long-term least-cost solutions to meet future power supply demands including appropriate use of demand management

Our electricity market could have been a very different creature.

The National Energy Productivity Plan is a positive step forward. But it is poorly funded (A$18 million was allocated by COAG) and has vague governance. Yet it is supposed to deliver a large chunk of our 2030 emissions reduction target.

As with renewable energy, states and territories are filling the vacuum.

There is also emerging support for the concept of energy productivity. This goes beyond energy efficiency and aims to deliver more economic value from each unit of energy consumed. The Australian Association for Energy Productivity and Climateworks have published major reports on doubling energy productivity by 2030, while A2EP has worked with business to develop sector roadmaps and an “innovation scan”.

A much stronger focus on improving energy productivity may well be an outcome of the climate review. If so, it will play a significant role in reshaping our energy future. But it will require strong leadership, cultural change and policy intervention beyond past levels.

Keeping prices under control

Energy markets are failing to deliver on their objective of low prices, reliability and protection of the “long-term interests of consumers”. It is increasingly clear that emerging nimble technologies and business models are outflanking traditional structures. 2017 seems to be the year it is coming to a head.

Gas prices have been driven up by failure to manage impacts of a tripling of east coast gas demand from three Queensland LNG export plants. Industrial gas users are struggling to secure reasonably priced, long-term contracts.

The high gas prices and shortages at winter peak times have driven up electricity prices. In the wholesale electricity market, the highest bidder sets the price for all power stations.

So if that’s an expensive gas generator, all generators are paid handsome prices, regardless of how much it costs them to generate electricity. Over time, these prices flow over into electricity bills.

The solution for gas is not necessarily more gas supply. Decades of low gas prices have meant that Australian industry and households use gas very inefficiently, so there is substantial scope to save gas.

There is increasing potential to switch from gas to electricity and renewable fuels. Regional gas storage (or electricity storage) could reduce peak gas demand, reducing price spikes.

In any case, our gas industry seems to lack a social licence to increase gas production from coal seams, and we will need to cut fossil gas demand to meet our medium-term climate targets.

2017 is looking like a busy and challenging year across the energy sector.