The Greenhouse challenge for energy in Victoria

By Keith Orchison
(Written in mid-2004)

Driving investment and reducing emissions

Addressing the key questions:

1. What are the most cost-effective opportunities for reducing greenhouse emissions from energy supply and use in Victoria?

Providing incentives to improve energy supply efficiency and energy use efficiency by maximizing the efficiency of energy production, conversion, transmission, distribution and supply of electricity, gas and transport fuels, and, by maximizing end use efficiency. This will require a national focus on best-practice energy supply and use:

2. What level of reduction in energy greenhouse gas emissions should be sought and over what timeframe?

Within the Kyoto Protocol 2008-2012 timeframe, Victoria should focus on meeting its share of national emission reduction objectives, but without commitment to a state-based 108% or even lower target. Such targets are unachievable and unrealistic in the timeframe and will be severely damaging to the Victorian economy.

3. What policies and programs should be considered to achieve reductions in energy-sector emissions while ensuring timely investment in new energy supplies and how the preferred policies might change over time?

Significant government and private sector investment in brown-coal related abatement measures, including zero coal-based emissions, is needed to ensure competitively priced electricity for the state's manufacturing sector, commerce and households. This must be coupled with the appropriate use of stationary energy with emphasis on renewables for water heating and space heating and cooling, gas for direct heating applications and electricity for higher added-value energy use applications.

4. Should government play a direct role, beyond its current commitments, to develop and demonstrate new energy technologies?

Yes, governments must play a key role in continuing to implement cost-effective regulation, investing strategically in longer-term abatement technologies of unique importance to Victoria and moving to establish a carbon price signed over time. However, governments in general are notoriously bad in picking technology winners and such approaches should only be used for technologies related to state significance, such as securing the future for brown coal -- Victoria's only long-term viable fossil fuel resource, but using the private sector to deliver contracted outcomes.

5. Are there shortcomings in the current operation of the energy markets that would need to be overcome to reduce emissions from the energy sector while providing for energy security?

Current energy markets, and in particular the national electricity market, focus on energy as a pure commodity, bought and sold at the lowest price without valuing the underlying energy service values. This is particularly true for electricity. The national electricity market is unlikely to deliver cost-effective greenhouse abatement outcomes, even if the cost of carbon is partly or wholly internalised, without focussing on its underlying value and maximizing this through the efficient use in energy services.

Demand response for electricity (and gas and transport fuels) is essentially inelastic and greenhouse price signals are passed through to consumers without their ability to do much to influence electricity use unless opportunities exist for using energy more efficiently and effectively.

6. What would be the implications for Victoria's competitiveness of taking further action to reduce emissions from the energy sector, and how could the potential impacts be mitigated?

Comments made previously address much of this question. To reiterate: actions taken to reduce emissions from the energy sector will impact directly on the cost of energy supply and energy use and hence competitiveness, without similar actions elsewhere; cost impacts can be reduced by focussing on using the right energy source for the right energy service and providing energy services more efficiently, although this may also imply added costs initially; hence a nationally integrated approach concentrating on the longer term objectives (deep cuts in emissions), consistent with capital plant cycles and opportunities, remains imperative.

In particular, piecemeal, state-based measures should be avoided, as these will add to cost while achieving minimal outcomes and stripping industry, commerce and households of investment capital. State-based intervention can be justified if energy supply and use security are at risk. Underpinning the value of Victoria's energy resources, and in particular its brown coal resource, is a legitimate area for government intervention, as long as such activity leads to effective and efficient outcomes.

7. Are there particular policies and programs that the government should consider for implementation irrespective of the outcomes of national processes?

Refer to the previous question. Clearly a nationally consistent and effective program will deliver better energy and greenhouse outcomes than opportunistically based state programs. Victoria is particularly vulnerable if it followed NSW or Queensland mandated approaches that address, at best, only part of the challenge.

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