Laggards or Leaders Global Energy Security, Affordability and - - PowerPoint PPT Presentation

Global Energy Security, Affordability and Sustainability

Laggards or Leaders

Grant King, Managing Director, Origin Energy AmCham Address, Sydney, 5 December 2014

Over the period 2012 to 2040 IEA models growth in population of 28%, GDP of 150%, energy demand of 37% and carbon emissions of 20% As the world grows.... so does demand for energy and global emissions

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Source: IEA WEO 2014 New Policies Scenario, November 2014

Cumulative Energy CO2 Emissions

The IEA states that energy use accounts for 83% of carbon emissions that result from human activity.

2020 is now close and further changes to policies currently implemented are likely to have little impact on 2020 outcomes; the focus is now moving to post 2020 targets The Kyoto Protocol signed in 1997 established the architecture we have today that has resulted in progressive carbon emissions reduction targets out to 2020

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McKibbin’s 2010 modelling of the Copenhagen Accord commitments compare country targets to Business as Usual projections; he calculated Australia at -35%, the US at -33%, Europe at -36%, China at -22% and the World average at -17.5%

Source: WEO 2014 and Origin analysis

Country /Region Binding or pledged Targets Estimated 2020 Targets MtCO2e Base Year Target 1990 2000 2005 Australia 5% below 2000 levels by 2020 557

• 5%
• 5.0%
• 5.0%
• 12.3%

US 17% below 2005 by 2020 5,165

• 17%
• 4.4%
• 19.5%
• 17.0%

Japan 3.8% below 2005 by 2020 1,157

• 3.8%

9.3%

• 0.8%
• 3.8%

Canada 17% below 2005 level by 2020 823

• 17%

36.7% 15.2%

• 17.0%

European Union (28) 20% below 1990 levels by 2020 3,410

• 20%
• 20%
• 18%
• 18%

Germany 40% below 1990 level by 2020 734

• 40%
• 40%
• 28%
• 27%

UK 28% below 1990 level by 2017 532

• 30%
• 32%
• 23%
• 21%

Russia 15% below 1990 levels by 2020 2,688

• 15%
• 15%

15% 21% China 40-45 percent cut to 2005 emissions intensity level by 2020 na na na na

These instruments have been dismantled or are failing with a new architecture set to get us to 2020 The carbon price and the RET were interdependent policy instruments established to help Australia achieve its 2020 target

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Carbon Pricing Mechanism

• The carbon pricing mechanism obligated electricity generators

and other large emitters to pay a certain price for every tonne

• f carbon dioxide equivalent emitted.
• The price was initially fixed at $23 per tonne as part of a three

year transition period to a floating Emissions Trading Scheme.

• The revenue was largely recycled into the economy through

compensation payments to households and emissions intensive trade exposed industry.

Renewable Energy Target (RET)

• The RET requires electricity retailers to acquit a certain

amount of renewable electricity, on behalf of their customers.

• Retailers fulfil this obligation by building their own projects,

entering into contracts that underwrite projects (PPAs) or by purchasing certificates on the market.

Interdependent policies

• Renewable energy projects are underpinned by the combined

electricity price (“black”) and the RET price (“green”).

• The carbon price is embedded in the black price and was

expected to increase over time.

• As the carbon price increased, the RET price would fall – as

shown in the graph – to the point where the RET was no longer required. That is, the RET was a transitionary policy.

Source: MMA 2009 and Origin analysis

VIC Brown QLD Black NSW Black CCGT OCGT $/MWh SRMC

SRMC - Average Fuel Costs

No Carbon $23/t Carbon

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Source: NEMSight, Origin analysis

The initial carbon price implemented by the last government was insufficient to cause any material fuel switching By the last election both sides of politics determined that an appropriate carbon price was zero or near zero and this ensured that the carbon pricing scheme would make little difference to carbon emissions from power generation

105.3 101.1 96.0 55.0 48.1 46.6 23.3 24.2 24.2 13.4 17.6 17.8 6.0 6.7 8.6

50 100 150 200 FY12 FY13 FY14

Generation Output (TWh)

Generation Energy Supply (July 2011 to June 2014)

Other Wind Hydro Gas Brown Coal Black Coal

Carbon emissions in the NEM fell by ~18Mt from FY12 to FY14

• ~8Mt was attributable to falling demand (~1.5Mt of which is increased rooftop solar PV)
• ~4Mt was due to increased hydrology and ~2Mt due to increased wind
• ~4Mt due to lower coal generation, particularly the closure of Tarong and Yallourn outage

Source: Origin analysis

Black Coal CCGT Wind Solar PV $/MWh

LRMC

No Carbon $23/t Carbon

Absent any material carbon price the true cost of reducing carbon through the RET scheme is excessive Because of constant fiddling with the scheme since 2009 the RET is failing to meet its objectives of supporting new renewable technology and driving down the cost of carbon abatement

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5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Target (GWh)

RET target, supplies and estimated REC bank depletion

Existing Supply Committed Target 41 TWh REC bank

10 20 30 40 50 60 70 80 90 100 VIC Brown NSW Black QLD Black CCGT $/tonne

Effective abatement cost LGC / emission reduction through replacing various fossil fuels

Based on average 2011-15 LGC price at $35.4

Source: CER, ACIL, AEMO, Origin analysis Based on average 2011 – 15 LGC price of $35.40 Each year the target uses existing supply and then draws from the bank

Source: REC Registry, AEMO and Origin Analysis

1,000 2,000 3,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Wind Capacity Installation (MW)

Historical and forecast new wind and solar to meet the exisint RET target

Operating - Wind Under Construction - Wind Required Build - Wind Operating - Utility Solar Construction - Utlity PV Operating - Residential Solar Forecast New Residential Solar Solar Hot Water / Heat Pump

Forecast

SRET - Residential Solar LRET - Wind or utility solar

Direct Action is replacing prior schemes and is as likely as the schemes it replaced to help Australia meet its 2020 objectives With changes in forecast demand for energy the 2020 target is significantly lower than previously anticipated

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Source: Energetics, October 2013

A September 2014 research note published by Frontier Economics estimated that cumulative reductions by 2020 with a reduced true 20% RET are in the range 264 MtCO2e to 336 MtCO2e.

• There are a range Direct Action approaches to

reducing emissions in other countries including

• China closing smaller, older coal plant

primarily to improve air quality

• The US placing Emissions Performance

Standards on new electricity generation

• Japan’s Joint Crediting Mechanism
• Sweden’s Clean Development Mechanism
• Norway’s Carbon Procurement Facility
• Alberta’s Specified Greenhouse Gas

Emitters Regulation

• California’s Compliance Offset Scheme
• A range of regulation that improves

efficiency of vehicles and appliances

Source: Emissions Reduction Fund White Paper, April 2014 and other

As one of the world’s major agriculture and resource exporters we need a measure that better reflects how efficiently Australia converts carbon to GDP and how we compare with other countries We have allowed our progress to be measured against emissions per capita, which makes us look like a laggard, but this fails to understand the true nature of the Australian economy

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Source: EDGAR, Trends In Global CO2 Emissions 2013

Australia is 0.3% of the world’s population, 1.5% of global carbon emissions and 2% of global GDP:

• 10th largest country by GDP per capita
• 12th largest country by GDP at USD1.6 trillion
• 15th largest carbon emissions at 600 MtCO2e
• 51st largest country by population with 23.4 million people

But we are a major global provider of energy and resources:

• largest exporter of iron ore
• largest exporter of coking coal
• second largest exporter of thermal coal
• third largest exporter of Uranium
• largest producer of bauxite, second largest producer of

alumina and fifth largest producer of aluminium

• ne of the largest producers and exporters of Copper,

Nickel and Zinc

• second largest exporter of wheat and two thirds of

Australia’s agriculture is exported.

• projected to be the largest exporter of LNG by 2018

Source: DFAT Statistics and Origin Analysis

This shows Australia is better than the average and better than most at efficiently converting carbon to GDP, by this measure Australia looks more like a leader A better measure of progress is carbon emissions to GDP

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Source: IEA data, Deloitte analysis, November 2014 (updated December 2014)

When measured on consumption not production the UK’s emissions are 46% higher, Italy 25% higher, France 43% higher, Germany 28% higher and Australia 2% lower

Source: Research referenced in the Deloitte Report

It shows that the line is moving in the right direction with the average falling by 1% from 0.57 ktCO2e per GDP (millions) to 0.56 ktCO2e per GDP (millions) Deloitte has updated its analysis for energy related carbon emissions with data from WEO 2014

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Source: IEA data, Deloitte analysis, December 2014

In the G20 from 2011 to 2012 only Australia, the US and Canada increased GDP, improved carbon efficiency and reduced total emissions – the facts make us look more like leaders The challenge is to grow GDP, improve carbon efficiency and over time reduce absolute carbon emissions across the G20 as a whole

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Source: IEA data, Deloitte analysis, December 2014 Source: IEA data, Deloitte analysis, December 2014

Australia was one of the last countries to ratify Kyoto, the US did not and Canada withdrew

Australia should be careful in framing our targets and must make sure targets are responding to the right question The real challenge now is to look to how to frame targets beyond 2020

12 United States Australia European Union (15) United Kingdom Germany Japan Canada Russian Federation China India 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 Total Emissions Including LULUCF (Mt CO2 -e)

Historical Total Emissions and Targeted 2020/2025 Emissions by Country

United States Australia European Union (15) United Kingdom Germany Japan Canada Russian Federation China India

• China 2014-20 emissions are estimated based on IMF GDP forecast and targeted cuts
• India 2014-20 emissions are extrapolated based on observed 2008-13 trend
• All other counties 2014-20 emission are estimated based on the pledged targets
• The three largest emitters

covering half of global emissions – China, the US and the EU have already announced post 2020 targets

• The US has announced a 2025

target of a 26-28% reduction on 2005 levels shown in the graph as a continuation of recent reductions

• China has announced that its

absolute emissions will peak in 2030 or earlier also similar to BaU

• The EU has announced a 2030

target of a 40% reduction compared to 1990 levels

Source: World Resource Institute, EPA, European Environment Agency, DECC, METI, WEO 2014 and Origin analysis

Gas has also resulted in lower energy costs and improved the competitiveness of the US economy compared to the rest of the world The United States has had the most significant decrease in carbon emissions in recent years – driven by shale gas

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• The New Policies scenario

assumes that announced policies are implemented including the US EPA’s Clean Power Plan which aims to cut power sector emissions in 2030 by 30% from 2005 levels

• The US has announced a post

2020 target of a 26-28% reduction in carbon emissions on 2005 levels

• Shale development was driven by

energy economics not carbon policy and enabled by technology and scale

• Shale gas has driven US carbon

reductions to date and will continue in the future assisted by wind, solar and other renewables

• Gas, along with wind, solar and
• ther renewables will continue to

drive future carbon efficiency improvements

Source: WEO 2014

Gas use increases nearly 10 fold from now to 2040 and will be greater if nuclear and renewable targets are not met China’s economic and environmental priorities to date have been creating jobs and improving air quality. The main ways to do this also reduce carbon emissions

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• The New Policies scenario assumes

that announced policies are implemented including China’s targets to control coal consumption and reduce carbon emissions intensity.

• China has announced a post 2020

target for emissions to peak in 2030 or sooner.

• China’s growth over the period to 2040

continues to be extraordinary.

• The chart shows strong diversification

away from coal to gas, nuclear and

• renewables. However coal

consumption is still increasing dramatically

• Base load zero emissions electricity

from hydro and nuclear will enable China to continue to be an economic power house in a carbon constrained world.

• Carbon efficiency is projected to lift

considerably through increased use of nuclear, hydro, renewables and gas.

Source: WEO 2014

With many zero and low carbon choices that will help reduce carbon emissions in Australia and throughout the world Australia is a major resource and energy exporting economy, exporting (net) 68% of the energy it produces including coal, uranium and gas

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• BREE models current policy not

proposed action as in the IEA

• scenarios. BREE’s generation

numbers are gross and include off grid generation.

• Hence BREE has Australia’s growth

coming mainly from coal as the lowest cost source in the absence of policy signals.

• Brown coal produces around 60 Mtpa

CO2e and replacing it with conventional black coal generation would reduce emissions by 20 Mtpa

• Australia is a major energy exporter

helping other countries meet their growth and carbon objectives e.g. each tonne of emissions from LNG production in Australia reduces emissions in China by 4 tonnes when used in place of coal.

Source: BREE 2014

However its performance in generating wealth from energy and carbon is poor Russia has the best indigenous sources of base load low and zero carbon emissions fuels in the world

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• Russia has abundant low

carbon options with gas, nuclear and hydro but is inefficient in converting energy into GDP

• Russia’s fuel mix is not

projected to change much even out to 2040 with low growth and low cost, low carbon choices and little policy support for renewables or efficiency

• Russia will continue to be the

world’s largest gas exporter

Source: WEO 2014

Increasing energy costs and reducing global competitiveness is resulting in the withdrawal of subsidies An Emissions Trading Scheme and strong incentives for wind and solar are helping the EU to meet its 2020 emissions reduction targets

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• The New Policies scenario

assumes that announced policies are implemented including the EU climate and energy policy framework to reduce emissions and increase renewables to 27% by 2030.

• The EU has announced a 2030

target of a 40% reduction in carbon emissions on 1990 levels.

• The EU has advanced service

based economies with low growth that import a lot of their emissions.

• Europe has high population density

and strong grid inter-connection that can support high levels of wind and solar

• The EU fuel mix is shifting away

from coal to gas and renewables, driving further carbon efficiency improvements.

Source: WEO 2014

The carbon conundrum is to reduce carbon emissions and create wealth - we have to and can do both Origin recognises that climate change is a global challenge and we unequivocally support measures to progressively reduce carbon emissions

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• We need bipartisan support for a more balanced and achievable RET
• Technology diversity and neutrality are fundamental and we need all options on the table
• Investment in R&D and innovation are critical to improving carbon efficiency
• Collaboration is important to transfer technology to developing countries who will be

responsible for almost all the future growth in emissions

• If price signals are implemented to encourage carbon efficient use of energy they need to

be uniform and adopted globally

• We must recognise that reducing carbon emissions is a global challenge and Australia as

a major energy exporter has a critical role to play

• In order to set targets we must pick the right measure and adopt it globally
• Targets beyond 2020 need to be set in a thoughtful and consistent manner that avoids

carbon leakage or arbitrage across jurisdictions and be underpinned by bipartisan support

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