Energy transition towards net zero

Since the International Energy Agency’s (IEA) last review of Australia in 2018, the Australian Government has stepped up its climate ambition at the federal level, building upon the goals and policies of states and territories.

In June 2022, the Australian Government submitted a revised 2030 Nationally Determined Contribution (NDC), pledging a 43% reduction of greenhouse gas (GHG) emissions by 2030 from 2005 levels, an increase from the previous government’s target of 26-28%. This target was legislated alongside the NDC commitment to achieve net zero emissions by 2050 in the Climate Change Act 2022. Australia caught up with the pace of emissions reductions pledged by other advanced economies and more closely aligns with a trajectory compatible with the Paris Agreement. In October 2022, Australia joined the Global Methane Pledge.

Reaching the 2050 target is possible but will require a clear policy road map with key milestones by sector and policy area to 2050. Monitoring progress based on a coherent energy transition data strategy will be critical to allow early corrective actions to be taken. As stipulated under the Climate Change Act 2022, the government will present an Annual Climate Change Statement to Parliament. The first one was presented in December 2022. The statement can indeed serve as an annual progress review of Australia’s energy transition.

Existing strategies need to be updated in the context of Australia’s higher near-term emissions reduction goal and net zero targets, including the Long-Term Emissions Reduction Plan. The net zero commitment requires a faster trajectory and increased efforts in energy efficiency and renewable energy. The Australian Government is taking a collaborative approach with states and territories under the new National Energy Transformation Partnership (NETP) with a broad scope of action. The NETP focuses on consumers, energy market reforms, technology development, manufacturing in Australia, job creation, and the underpinning requirements to create a just and inclusive energy transition.

Australia’s focus on deploying low emissions technologies over the past two decades means that 72% of total government expenditure of AUD 21 billion was spent on commercialisation, while only 23% was spent on energy-related research and development (R&D) and 6% on demonstration. The government and state-owned energy RD&D budget peaked in 2013 at AUD 1 124 million, but dropped thereafter before reaching AUD 460 million in 2021. By international comparison, public funding for energy RD&D accounted for 0.019% of gross domestic product (GDP) in 2020, half the IEA average. This does not reflect Australia’s research and development tax incentive which is an important driver for innovation investment by the private sector.

Australia’s energy transition will require a whole-of-government just energy transition strategy at both federal and state and territory levels, boosting job opportunities and skills for the transition and securing the social licence to construct and operate the necessary infrastructure. Australia is taking active steps on reskilling and jobs under the forthcoming Energy Workforce Strategy to transform its energy and mineral resources sector into higher value products for exports, creating new manufacturing jobs and export‑ready technologies. 

Key role for energy efficiency

Under the National Energy Productivity Plan (NEPP), the Australian Government, jointly with states and territories, committed to an energy productivity target of a 40% improvement between 2015 and 2030.

IEA analysis confirms that energy efficiency improvements have allowed Australia to achieve energy savings since 2000 in industry and services sectors thanks to efficiency disclosure regimes and labelling as well as the GEMS product efficiency standards. However, between 2015 and 2019, annual improvement rates slowed down to around 1.9% per year, similar to trends in other countries. There is a need to accelerate action and annual improvement rates from their recent drag to bring Australia back on track to reach its target and closer to net zero. Transport and residential buildings have the greatest productivity potential.

Higher energy efficiency benefits or 60% productivity improvements could be expected from a net zero aligned trajectory, which would require an annual improvement of 4.2% between 2020 and 2030 on average according to the global IEA net zero road map. The Australian Government estimates that a 53% improvement could be achieved if the measures proposed by the end of 2021 are implemented. Hitting the target would mean Australia could decrease its energy consumption while GDP continues to increase.

It is welcome that the Australian Government is proposing stricter standards and policies, notably for the high potential transport and residential buildings sectors. In the transport sector, the National Electric Vehicle Strategy is an opportunity to raise the efficiency savings of and decarbonise the transport sector. As part of the strategy, Australia is considering introducing fuel economy standards. The revision of the National Construction Code with efficiency standards for new builds and large-scale renovations is another positive development. The revision is supported by the expansion of the home energy rating scheme to include energy used by appliances, not just the home’s thermal shell.

To reach an early peak in emissions and address upwards pressure on energy bills due to the global energy crisis, accelerating energy efficiency can reduce household and business energy expenditure and is, therefore, more relevant and urgent than ever. The government must confirm the role of energy efficiency and the expected share in achieving Australia’s climate ambition and scale up policies and measures to unlock efficiency upgrades and higher productivity across the economy.

The Department of the Treasury forecasts a 56% hike in electricity prices over financial year 2022-2023, with gas prices rising by 44%. The Australian Competition and Consumer Commission (ACCC) confirmed that electricity bills have jumped by AUD 300 on average since April 2022. This is the equivalent of a 25% increase for the median residential household in the National Electricity Market (NEM) and AUD 1 500 for small businesses. The ACCC retail pricing inquiry of 2018 found that 30% of the lowest income households spend 8% on fuel, but this has greatly increased since. Judging by the United Kingdom fuel poverty definition (10% of lowest income households), energy poverty is becoming an issue.

The critical importance of lowering energy bills has also been emphasised by the new Australian Government’s election commitment to reduce consumer energy bills by AUD 275 per household by 2025. The IEA’s 2022 Energy Efficiency Market Report also confirms how living in a more efficient home and driving a more efficient car can save consumers up to 70% of their household energy bill. 

Towards a largely decarbonised power generation in 2030

Renewable energy has seen remarkable growth, meeting all incremental electricity demand in the past decade thanks to the Commonwealth Large-scale Renewable Energy Target and the state-based auctions. Renewable electricity generation quadrupled between 2000 and 2021, from 17.6 terawatt hours (TWh) to 70.3 TWh, pushing up the national share of renewables from 8% to 27% in electricity generation. Most of the growth stems from solar photovoltaics (PV), as high state-level targets and power purchase agreements (PPAs) are driving the expansion of utility‑scale renewables. At the household level, Australia has the highest penetration in the world, with one in three households having solar PV installations.

Up to 2027, the IEA forecasts Australia’s renewable energy capacity to expand by 85% to reach 40 gigawatts (GW), thanks to the introduction of ambitious targets and increased clean energy funding at federal and state levels, PPAs, and new projects announced in the renewable energy zones (REZ). Provided Australia can accelerate the implementation of the REZ and related grid projects alongside additional coal retirements, the IEA expects 57 GW of renewable electricity capacity to be achieved by 2027. This forecast also includes Snowy Hydro adding 2 GW by 2026 or 2027. Grid development and new wind power deployment will require more community engagement and the work of the Energy Infrastructure Commissioner is important in this regard. While commissioning lead times decreased for onshore wind projects, they increased for distributed solar PV projects, notably due to the introduction of grid fees and higher system costs.

In the NEM, the Australian Electricity Market Operator (AEMO) expects renewable energy to account for 83% by 2030 as part of the Step Change Scenario, which is aligned with the Australian Government’s plans of reaching 82% of renewables in the national electricity mix. The Australian Government places an emphasis on promoting major infrastructure investment to “rewire the nation” and agreed under the NETP that an emissions reduction goal would be enshrined into the National Electricity Objective alongside security, competition and affordability objectives.

The NEM will see a major energy system transformation, with a substantial loss of dispatchable capacity in the coming decade. Changing generation economics and the age of the plants are accelerating closure decisions. Lignite use in power generation is expected to end in 2032, according to the AEMO. There is no clarity provided on the speed of coal retirements. The AEMO’s Integrated System Plan (ISP) expects 14 GW of the 23 GW current coal capacity in the NEM to be retired by 2030, while coal plant owners have so far announced the retirement of 8.4 GW. The Australian Government only requires a minimum three-year notice from coal-fired power plant owners for plant closure.

Considerable uncertainty remains on the pace of clean energy investment at the right time and in the right place and the system integration and flexibility needs in generation and storage; demand response and grid investment; and workforce, supply chain and community needs. An implementation plan for the NETP could provide guidance on the road map for the transformation. In December 2022, energy ministers endorsed in principle a new Commonwealth Capacity Investment Scheme to help reduce investment uncertainty and price volatility by underwriting investment in zero emissions dispatchable capacity, including storage. 

Maintaining energy security during the transition

Australia has a vast natural resource base of renewables, critical minerals and fossil fuels. Today, it is one of the largest energy exporters in the world and has the stated ambition to become a renewable energy export superpower in the future. Australia produces a breadth of critical minerals, including lithium, of which it is the largest producer in the world, and cobalt and rare earth elements.

The Russia Federation’s (hereafter “Russia”) invasion of Ukraine in February 2022 has created a new set of energy security challenges both internationally and domestically for Australia with regard to energy security and energy affordability. A combination of factors led to a natural gas and subsequent electricity crisis in June 2022, including the delayed maintenance of generation plants post-Covid-19, the flooding of coal mines, the higher gas demand in July (during a colder winter in the southern hemisphere), and very high international prices for natural gas and coal. The June 2022 crisis saw the temporary introduction of administered price caps in the east coast gas market and the suspension of the NEM.

The crisis has prompted the Australian Government to consider a range of reforms to increase its resilience against such events across the gas, oil and electricity sectors.

Since the last IEA review in 2018, the government has carried out major reforms in its energy markets, prompted by the Finkel Review of 2017 and the 2016 South Australia blackout. Many of the IEA’s 2018 recommendations have been implemented. The NEM regulatory rules and system operation are being adapted to higher shares of variable renewables based on key reforms, such as the AEMO’s ISP and its REZs, alongside the introduction of the five-minute settlement and new ancillary services markets. The Energy Security Board progressed longer term market design reforms with the post-2025 market design framework.

Compared to market operators in other jurisdictions, the NEM’s rules grant the AEMO more power to directly intervene at times of market stress. This includes applying a wholesale market price cap and a price floor, to direct generators to run (which triggers generators’ rights to apply to the Australian Energy Market Commission [AEMC] for compensation), to direct load shedding, and to suspend the market. These AEMO directions come at a substantial and rising cost, notably for maintaining frequency control and procuring ancillary services. The AEMO can procure out-of-market reserves through the Reliability and Emergency Reserve Trader. However, the NEM has no obligatory arrangements for power generators to hold oil/gas/coal fuel in storage.

The June 2022 electricity crisis reinforces the urgency and the need for an orderly transition in the NEM. Based on the AEMO’s and the Australian Energy Regulator’s (AER) analysis of the crisis and its upcoming recommendations, the government should expedite a review of the reliability approach taken by the AEMC.

A period of sustained high international fossil fuel prices cannot be excluded in the short term as global liquefied natural gas (LNG) investment is subdued and the global LNG market is expected to remain tight through 2025. With the start-up of LNG exports from the east coast and rising global demand and prices, Australia has also seen rising domestic gas prices, which are increasing in step with LNG netback prices. This is a unique situation for a producer and exporter.

The Australian Government is commended for the east coast gas market reforms and the more robust approach to ensuring adequate supplies. In 2022, it started a review of the Australian Domestic Gas Security Mechanism and adopted the necessary rules for the transition to low-emission and renewable gases. Based on the results of the ACCC’s latest inquiries, the Australian Government should implement the new Heads of Agreement with LNG producers by ensuring adequate and affordable gas for the domestic market. The IEA urges the government to review incentives for gas storage investment and LNG import terminals.

Net imports of oil products have increased sharply following significant refining capacity rationalisation, and with oil demand expected to grow in the coming decade, net imports will likely rise further. The Australian Government has placed a strong focus on improving the security of oil supply in recent years, particularly through the various measures included as part of the 2020-2021 and 2021-2022 Budgets. The government has taken steps to ensure that Australia’s two remaining refineries remain open in the short term and to increase diesel storage capacity. It is also planning to implement a minimum stockholding obligation on oil suppliers. The government should also strengthen efforts to reduce oil consumption, particularly in the mining and transport sectors, which are the main drivers of oil demand growth. Once the IEA collective actions end, the government should take all necessary measures to increase its oil stock levels to comply with its IEA stockholding obligation.

One of Australia’s major security challenges is its high exposure to more significant and more frequent extreme weather events, such as storms, flooding, wildfires and heat waves. The energy sector, from mining to renewables and grids, will need to adapt to the impacts of climate change. Australia has not yet completed a comprehensive assessment of climate change impacts on the energy sector outside of electricity. Developing a national‑level energy sector plan that lays out future steps for climate resilience could further guide and accelerate co-ordinated action.

Key recommendations

  • Review Australia’s emissions reduction plan taking a consultative approach to emissions reduction pathways, inclusive of the energy, agricultural, land-use, industry and waste sectors. For 2030, elaborate, jointly with states/territories and various stakeholders, a national climate and energy strategy which lays out the milestones and actions.
  • Step up national energy efficiency polices and measures and clarify the role of efficiency in achieving Australia’s climate goals and reducing energy bills. Introduce specific energy efficiency and savings targets and support programmes, notably for the energy poor.
  • Ensure adequate infrastructure and policies are in place to guarantee the security of fuel supply domestically while pursuing efforts to strengthen long-term energy security by accelerating the uptake of energy efficiency, renewables and low-emission fuels.
  • Agree on the critical energy market reforms as part of the National Energy Transformation Partnership to mobilise private sector investment and ensure reliability. Streamline the regulatory landscape of the NEM and agree jointly with states/territories on policies and measures towards 2030 and 2035 for:
  1. decarbonisation of the energy sector, including through energy efficiency
  2. affordability and consumer engagement
  3. energy system reliability and climate resilience
  4. research, innovation and commercialisation
  5. workforce development and reskilling.
  • Adopt a people-centered transition approach and evaluate reskilling, jobs and growth impacts on communities and workers. Develop the social licence with citizens and communities for infrastructure through community engagement. Ensure the Office of the Australian Energy Infrastructure Commissioner is fully resourced to support communities and project developers.
  • To track the progress of Australia’s energy transition, create an appropriately resourced national energy and climate information system, including end-use energy and prices data, a national energy forecast and market data function, enlarged scope for mandatory reporting on natural gas and new fuels, while strengthening data governance and removing barriers to data sharing across government.