Australia's energy options: policy choice not economic inevitability

Executive summary A reliable and affordable supply of energy is a fundamental component to a vibrant economy. As a major source of commodities, including significant known reserves of low carbon emission energy sources, Australia is well positioned to supply the world’s future energy needs. In order for that to occur, Australia needs to examine all its energy options. The Government released a Draft Energy White paper in November 2011. CEDA considers this an opportunity that the Government should not miss in ensuring that Australia not only develops its energy resources for national economic gain but also to guarantee access to reasonably priced energy for Australian consumers. CEDA determined it would contribute to this significant debate by undertaking a year-long research project that examined Australia’s future energy options. As part of this research project CEDA published three policy perspectives that addressed Australia’s nuclear, renewables and efficiency and unconventional energy options. Recommendations in each of these perspectives were made with the specific aim of providing policy-makers with evidence-based research on the various energy sources either currently available or being actively explored and researched, often funded through the public purse. Fundamental governance decisions underpinned by strong economic policy arguments were at the centre of these recommendations. This final research report canvasses one of the more significant current debates associated with the availability of energy – the Australian electricity market. It puts forward a series of recommendations designed to enhance this element of the energy sector’s efficiency, security and effectiveness by placing consumers at the centre of the energy market and a reform agenda is proposed. Related identifier: ISBN 0 85801 284

Australian Residential Solar Feed-in Tariffs: Industry Stimulus or Regressive Form of Taxation?

Feed-in Tariffs (FiT) for residential photovoltaic solar technologies are available in most Australian jurisdictions. Financial incentives under FiT are in addition to those provided by the Small-Scale Renewable Energy Scheme which forms part of the national 20% Renewable Energy Target. Little attention has been paid to the welfare impacts of FiT on retail electricity prices and social policy objectives. Our analysis indicates that current FiT are a regressive form of taxation. By providing estimates of household impact by income groupings, we conclude that wealthier households are beneficiaries and the effective taxation rate for low income households is three times higher than that paid by the wealthiest households.Feed-in Tariffs, Electricity Prices

General equilibrium impact evaluation of food top-up induced by households’ renewable power self-supply in 141 regions

This article employs a global computable general equilibrium economic model (GTAP-E-PowerS) to examine the impact on the world economy if households in every country self-supply power to meet 30–100% of residential demand, with subsequent monetary savings diverted to consuming more food. Results show the power generation sector reduces output levels by 14%–42% across various countries if households 100% self-supply. Coal mining sectors are adversely affected in numerous countries with contractions of 9%–28% ($6,086-$18,935 million) in the United States and 4%–13% ($2,505–$8,143 million) in Australia. Improved outcomes for the world environment are found with reductions of CO2e emission levels of 2.24%–7.38% (or 924–3,042 MtCO2 equivalent). The agriculture and food-processing sectors expand significantly in many countries but also cause major increases in land prices, particularly in land-scarce countries in Middle East, Europe, Japan, and Taiwan. Results also show the security of food and energy supply are improved along with environmental gains from lower emission levels. However, the energy sector is adversely affected and those countries with a heavy reliance on fossil fuel extraction and mining activities experience significant reductions in real GDP

Renewable Energy Zones in Australia's National Electricity Market

Australia's National Electricity Market (NEM) operates in one of the world's longest and stringiest transmission networks. The 2016–2020 investment supercycle, in which 13,000 MW of renewables were committed, produced a series of adverse side-effects for various new entrants including connection lags, deteriorating system strength and associated remediation costs, and rising levels of generation curtailment. The NEM's Energy Security Board considered a key source of the problem to be market design and consequential geographic congestion of investments. This implies inadequate locational investment signals exist within the NEMs multi-zonal market design. However, diagnosis suggests NEM locational investment signals – which arise through a combination of site-specific Marginal Loss Factors and multi-zonal spot prices – remain visibly strong. Primary problems revealed through an analysis of the 2016–2020 period include policy discontinuity in prior periods. This in turn caused the supercycle, viz. multiple simultaneous entrants under asymmetric investment conditions. Above all, the supercycle revealed the NEM's rapidly diminishing network hosting capacity for new renewables. Markets participants are seeking to expand renewable capacity, and by implication transmission hosting capacity, faster than existing regulatory frameworks allow. A new policy proposal, known as ‘Renewable Energy Zones’ (REZ), represents a promising means by which to accelerate renewable hosting capacity. In this article, REZs are examined through both i). a consumer-funded regulatory model and ii). a renewable generator-funded market model. A ‘super-sized concessional mezzanine’ facility is presented as a critical element of REZ capital funding. It forms the means by which to optimise and accelerate market-based REZ transmission augmentation, and moderate sponsor risks of transient underutilisation.Full Tex

On dividend policy and market valuations of Australia’s listed electricity utilities: Regulated vs. merchant

Restructuring of Australia's electricity supply industry during the 1990s led to two clear lines of business emerging, (i). regulated utilities (i.e. poles & wires), and (ii). merchant utilities (i.e. competitive generation and retail). There are dozens of utility businesses in Australia but only four were listed on the Australian Stock Exchange — two regulated and two merchant. Over the past decade the Australian Energy Regulator entered a ‘tightening phase’ vis-à-vis Opex and Capex allowances, with regulated utilities arguing regulated rates of return were sub-optimal. In this article, earnings, dividends and market valuations of Australia's ASX-listed regulated and merchant utilities are analysed over the period 2007–2021. The practical evidence is Australia's regulated utilities avoided the large swings in earnings that characterised merchant utilities, exhibiting outcomes consistent with the lifecycle theory of dividend policy (i.e. falling cost of capital). Soaring valuations culminated in the simultaneous takeover events of Australia's two ASX-listed regulated utilities. This makes criticisms of regulatory policy on rates of return hard to reconcile, at least from an historic perspective. However, the industry now faces a very different trajectory and set of market conditions — rising rates, higher inflation and an unwinding of lifecycle theory effects given substantial network investments required to meet climate change objectives. This may in turn require returns policy recalibration. Unfortunately for policymakers, all regulated utilities have now been delisted, ending our ability to observe ‘real’ capital market responses to regulatory change.Full Tex

Vulnerable households and fuel poverty: Measuring the efficiency of policy targeting in Queensland

When Australia established its National Electricity Market (NEM) during the 1990s, reforms were focused on maximising economic efficiency. Little thought was given to distributional outcomes. However, by the 2010s sluggish growth in household incomes, sharp rises in electricity prices and material increases in quantities consumed through surging uptake rates of air-conditioning units led to the possibility of (hot climate) fuel poverty. In the Queensland region, longstanding customer hardship policy pre-dated the establishment of the NEM. With the benefit of hindsight, the policy was poorly configured as it focused exclusively on the aged population and was delivered by way of fixed payment. Low income households in the family formation cohort were excluded from the policy despite obvious need. In this article, Queensland's longstanding customer hardship policy is refined using pre-existing (means-tested) welfare mechanisms in order to target low income households including families, and the payment structure is altered from fixed ($ pa) to variable (% of the bill) while holding the budget constraint constant. Changes to policy targeting produce material improvements in horizontal and vertical efficiency while changes to payment structure further enhance vertical performance, with the incidence and depth of residual fuel poverty reduced.No Full Tex

Competition vs. coordination: Optimising wind, solar and batteries in renewable energy zones

Decarbonising Australia's power system requires high market shares of variable renewable energy. An important policy initiative to achieve this is the establishment of Renewable Energy Zones (REZs). As renewable market share increases, curtailment within REZs is predictable. Curtailment occurs due to low utilisation rates or high peak-to-average output ratios of intermittent renewables (being ∼3:1), largely inelastic aggregate final electricity demand, and the economic limits of REZ network transfer capacity. In an open access, multi-zonal market setup, an intuitive response by policymakers may be to undertake connection reform (i.e. priority access) and underwrite storage assets to alleviate the worst effects of curtailment. Prima facie, curtailment and lines congestion may be reduced and wind and solar capacity increased through the deployment of battery storage. However, as model results in this article reveal, priority access can make multi-zonal markets more sensitive to curtailment, and competitive batteries within a REZ can aggravate congestion. Further, early entrant batteries may oversize their MW capacity and crowd-out renewables. All these cases harm welfare within a REZ. Optimally sized and coordinated ‘portfolio’ batteries alleviate congestion because they don't compete for scarce REZ transfer capacity.Full Tex

The Dynamic Efficiency Gains from Introducing Capacity Payments in the NEM Gross Pool

Griffith Business School, Department of Accounting, Finance and EconomicsFull Tex