January 2005 2nd Edition The Clean Energy Future Group came together in 2003 to commission a study investigating how to meet deep emission cuts in Australia’s stationary energy sector. The Group published a Clean Energy Future for Australia Study in March 2004. The Clean Energy Future Group comprises: • Australasian Energy Performance Contracting Association • Australian Business Council for Sustainable Energy • Australian Gas Association • Australian Wind Energy Association • Bioenergy Australia • Renewable Energy Generators of Australia • WWF Australia First published in November 2004 by WWF Australia; revised January 2005 © WWF Australia 2004. All Rights Reserved. ISBN: 1 875941 79 7

Author: Dr Mark Diesendorf, Sustainability Centre Pty Ltd, P O Box 521, Epping NSW 1710 www.sustainabilitycentre.com.au Liability - Neither Sustainability Centre Pty Ltd nor its employees accepts any responsibility or liability for the accuracy of or inferences from the material contained in this report, or for any actions as a result of any person's or group's interpretations, deductions, conclusions or actions in reliance on this material.

The opinions expressed in this publication are those of the author and do not necessarily reflect the views of WWF. The Renewable Energy Generators of Australia Ltd (REGA) support the endeavour to investigate alternative opportunities for the long term sustainable supply of power generation in Victoria, particularly through the increased penetration of renewable energy sources and energy efficiency measures.

WWF Australia, GPO Box 528, Sydney NSW Australia Tel: +612 9281 5515, Fax: +612 9281 1060, www.wwf.org.au , [email protected]

For copies of this report or a full list of WWF Australia publications on a wide range of conservation issues, please contact us at [email protected] or call 1800 032 551. Front Cover Images – left to right: AGL’s gas peaking power station at Somerton, in Melbourne’s northern suburbs. The facility comprises four 37.5 megawatt gas fired generating units. Courtesy of BCSE Stanwell Corporation’s Toora wind farm. The wind farm consists of twelve turbines, producing 21 megawatts of electricity. This is enough to power more than 6,600 homes, and prevents the release of 48,000 tonnes of greenhouse gas emissions per annum. The towers were manufactured in Bendigo, VIC. Courtesy of Stanwell Corporation Charles IFE Ltd’s Berrybank biomass digesters at Wyndemere ( near Ballarat). The company is saving $435,000 per year from a $2 million investment in a Total Waste Management System for its Berrybank Piggery Farm. The System generates electricity from biogas, conserves and recycles water and collects waste for sale as fertiliser. Courtesy of SEAV Pacific Hydro’s Victorian hydro projects. Three hydro-electric stations were built on irrigation dams. They convert previously wasted energy from water releases into clean electricity. Total average annual generation is 34 GWh for the three stations. This represents over 37,000 tonnes of greenhouse gas savings per annum. Courtesy of Pacific Hydro Ltd Solar and gas hot water heating. Courtesy of BCSE 60L The Green Energy Efficient Buildings, Melbourne. This uses two thirds less energy than a similar standard commercial building. Efficiencies are gained through widening internal temperature control band to between 19-26°C, optimising natural ventilation and natural lighting, high efficiency artificial lighting and light fittings and solar shading to name a few. All electricity comes from renewable sources resulting in close to zero greenhouse gas production. Courtesy of BCSE Contents

Executive Summary 4 Section 1 Introduction 6 Section 2 Victorian electricity backgrounder 8 2.1 Victoria’s electricity industry 8 2.2 State Government’s greenhouse policies and strategies 9 Section 3 Reducing demand growth and cleaning up energy supply 11 3.1 Efficient energy use 11 3.2 Supply options for capacity and energy 13 3.3 MMA Report 14 3.4 A cleaner energy mix 16 Section 4 Energy reserves 20 4.1 Gas 20 4.2 Biomass 21 4.3 Wind 21 Section 5 Recommended policies and strategies 22 5.1 Expand MRET 22 5.2 Require energy retailers to surrender RECs 23 5.3 Place greenhouse intensity constraint upon baseload power stations 23 5.4 Implement tradeable emission permits or carbon levy 24 5.5 Remove subsidies for fossil fuels and energy wastage 25 5.6 Encourage the purchase of solar hot water 26 5.7 Mandate Energy Efficiency Measures 26 5.8 Encourage voluntary energy efficiency measures 28 5.9 Remove barriers to energy efficiency in network price regulation 28 5.10 Local jobs in appropriate regions 29 Section 6 Allocation of costs of the alternative mix 30 6.1 Cost to Government 30 6.2 Cost to Electricity Consumers 30 Section 7 Employment gains from substituting renewable energy for coal 32 Section 8 Conclusion 37 Section 9 Acknowledgments 38 Section 10 References 39 Appendix A Why we need an economic mechanism to enable gas and renewables to compete with coal-fired electricity 42 Appendix B Demand management fund 44 Appendix C Remove barriers to energy efficiency in network price regulation 45 Appendix D Environmental impacts of bioenergy and wind power 46

Units and conversion factors 50 Executive summary

The Victorian Government is currently addressing the growing electricity demands of Victorians, given technological solutions that are currently available, the economics of various options and the environmental and health costs associated with greenhouse gas emissions.

At present in Victoria there are proposals to expand existing coal fired power assets (e.g. by extending the life of the old 1600 MW Hazelwood power station in the Latrobe Valley), develop gas fired power assets (e.g. Origin Energy’s proposed natural gas-fired station near Mortlake) and develop renewable energy power assets (eg Pacific Hydro’s Portland Wind Project). Any decision to continue supporting coal fired power asset development would lock the State into CO2 emissions that could dwarf any current and proposed measures for reducing the State’s emissions.

This report, Towards Victoria’s Clean Energy Future, shows that cleaner energy sources could substitute for both the capacity and energy generation of a 1600 MW base-load, coal-fired station by means of a mix of realistic supply-side and demand-side initiatives by 2010. This cleaner energy system would reduce Victoria’s carbon dioxide emissions by about 13.8 million tonnes per year. If adopted, it would be cost-effective and would set the State on the path away from coal-fired assets in order to deliver much deeper emission reductions in the longer term.

The proposed supply-side mix involves wind power, bioenergy (fuelled primarily with crop residues), and either natural gas combined cycle and cogeneration or a reduction in exports of Victorian (brown coal-fired) electricity to other States.

Policy measures required for the Victorian Government to deliver this supply mix include: • a greenhouse intensity limit on all new power stations and on all proposals for major refurbishments and other life-extensions of old power stations; • either a carbon levy or tradeable emission permits of the cap and trade type implemented jointly with other States; and • the requirement that energy retailers submit Renewable Energy Certificates (RECs) annually to the State Government as a licence condition.

Recommended demand-side measures include: • the extension of energy performance standards from new buildings to buildings with new renovations, all existing government-owned and government-tenanted buildings, and some other categories of existing buildings; • substantial expansion of the use of solar hot water encouraged by both incentives and penalties; • the wide dissemination of ‘smart’ meters and peak-load pricing to make users pay the full cost of air conditioning and other contributions to increases in electricity demand; and • the provision of low-cost packages of energy efficiency measures for householders.

The supply-side solutions to move to cleaner energy sources will increase the average price of a unit of electricity to the Victorian community. However, the demand-side energy efficiency

Towards Victoria’s Clean Energy Future 4 savings will reduce the number of units purchased by consumers, with the net result that energy bills will either decrease or remain approximately the same Then the challenge in moving onto the clean energy pathway becomes neither technological nor economic, but rather organisational and institutional: namely, how to deliver cost-neutral packages of energy efficiency, renewable energy and natural gas to consumers. Since the State Government would have to play the leading role in making organisational and institutional changes, the key issue becomes one of political will.

The proposed fuel substitution for electricity generation from coal to gas and renewable energy, coupled with efficient energy use, would reduce the socio-economic risk faced by Victoria as the result of having an electricity supply system that is based 97% upon brown coal, the most greenhouse-intensive of all fuels. In the likely event that international greenhouse gas emission constraints are tightened over the next decade, this high dependence upon brown coal would become a major economic and environmental liability.

An additional and very important benefit of undertaking the transition to a clean energy future is that the key policies detailed in this report will stimulate job growth and increased economic activity. We strongly advocate that the Victorian Government provide incentives to ensure that the major proportion of these new jobs be located in regions most affected by the closure of coal fired power assets, such as in the Latrobe Valley.

Towards Victoria’s Clean Energy Future 5 1. Introduction

There is widespread and growing international concern about global climate change resulting from the greenhouse effect. We know that our world’s average temperature is rising unusually rapidly. Climate change impacts have the potential to threaten lives, the capacity to sustain agriculture, the availability of fresh water, the control and spread of disease, the survival of native species and the weather (e.g. in terms of the frequency and severity of floods and droughts). The most pressing solution to this is to act immediately to cut our greenhouse gas emissions by 60% by 2050 (Coleman et al. 2004).

In Victoria by far the largest component of greenhouse gas emissions comes from electricity generation from coal-fired power stations. At present, in several States, including Victoria, there are proposals for either new, or extensions to the lifetimes of old, conventional coal-fired power stations. Decisions made today will determine our carbon emissions for decades, limit alternative reduced emission options for the future and undermine our ability to make the transition to a much cleaner energy future by 2040.

For example, the power station operator, International Power Hazelwood, has requested the Victorian Government to approve the development of an extension to the Hazelwood West Coal Field. This would enable Hazelwood power station to extend its operation from 2009 to 2031. Hazelwood is one of the most greenhouse-intensive power stations in Australia and is arguably the largest point source of annual greenhouse gas emissions in the country. An expansion would lock in 380-407 million tonnes of Victoria’s future total CO2 emissions. This would wipe out many times over the greenhouse gas savings envisaged under current government polices and be at odds with the Victorian Government’s Greenhouse Challenge and recent acknowledgment to address the negative impact of climate change.

The recent scenario study, A Clean Energy Future for Australia, explains how Australia can reduce by half its CO2 emissions from stationary (i.e. non-transport) energy by 2040 (Saddler, Diesendorf and Denniss, 2004). The latter study assumes continuing economic growth and utilises existing technologies. It identifies a myriad of cost-effective technologies for using energy more efficiently, together with cleaner energy supply based primarily upon gas (the least polluting fossil fuel), crop residues and wind power. The study finds that coal-fired power stations with geosequestration are unnecessary for achieving the target.

The study by Saddler, Diesendorf and Denniss (2004) suggests that achieving the 50 percent emission reduction target by 2040 requires a range of new policies to be acted upon immediately. These include a maximum greenhouse intensity for new base-load power stations1, an expansion of the federal Mandatory Renewable Energy Target (MRET), the introduction of either a carbon levy or tradeable emission permits and some mandatory requirements for energy efficiency measures.

1 Conventional coal-fired power stations have the highest greenhouse gas intensities (CO2 emissions/TWh of electricity sent out) of all types of power station. They also emit large quantities of sulphur dioxide, nitrogen oxides, fluoride, hydrochloric acid, boron, particulate matter, sulphuric acid and mercury. Therefore, the maximum greenhouse intensity would be set to promote the building of low or zero emission power plants or energy efficiency measures.

Towards Victoria’s Clean Energy Future 6 In this context, this report focuses on the potential of a mix of energy efficiency and cleaner electricity supply measures to substitute for 1600 MW of coal-fired base-load generation by 2010.2 In making this substitution, we match the two principal contributions that a base-load power station makes to electricity supply: • annual energy that is measured here in GWh/yr, where 1 GWh = 1 gigawatt-hour = 1,000 megawatt-hours (MWh); and • capacity to meet peak demand, that is measured here in megawatts (MW).

After giving a concise background on Victoria’s electricity system and existing policies and strategies to reduce greenhouse gas emissions from electricity use (Section 2), this report proposes in Section 3 a mix of demand-side energy efficiency and supply-side natural gas and renewable energy measures. Section 4 comments upon energy reserves and Section 5 proposes policies and strategies for achieving the substitution. The allocation of costs is discussed in Section 6 and the employment implications in Section 7.

2 Because conventional power stations generate large blocks of power, they are brought on line several years before their full capacity and electricity generation are actually required. Clean energy options are generally provided in much smaller blocks and so they can be brought on line as required by electricity demand.

Towards Victoria’s Clean Energy Future 7 2. Victorian electricity backgrounder

2.1 Victoria’s electricity industry

Victoria has a population of 4.8 million and 1.8 million households. On the principal electricity grid, installed capacity on 30 June 2001 was 7,864 MW; maximum demand in 2000/01 was 8,019 MW3 and occurred in summer; electricity generation in the financial year 2000/01 was 49,971 GWh; and electricity sent out from the power stations was 45,611 GWh (ESAA, 2002). Of this, net electricity exports to other states (S.A. and NSW) were approximately 3,000 GWh., equivalent to about 27% of the electricity sent out from Hazelwood. Electricity consumption within Victoria was 38,395 GWh (ESAA, 2002).

Table 1 shows the mix of energy sources used on the main grid. Brown coal, the most greenhouse intensive fuel of all, contributed 97% of electricity generation.

Table 1: Fuels used in Victoria’s electricity generation, main grid, 2000-01

Fuel Electricity % of generation b generation (GWh/y) Brown coal 48,465 97 Gas 881 1.8 Hydroa 625 1.2 Oil 0 0 Total 49,971 100 Source: ESAA (2002) a. excluding pumped hydro

Table 1 only considers the main electricity grid and so excludes some renewable energy and cogeneration with natural gas. According to ESAA (2002), some Victorian electricity is generated from waste, other biomass, wind and solar, although quantified amounts are not given.

By the end of 2003, 92 MW of wind power was installed in Victoria, with expected annual electricity generation of about 240 GWh. At that time there were proposals for an additional 915 MW of wind power, but most of these would depend upon the expansion of MRET. In the first half of 2004, additional proposals have been announced. Biomass energy is not as yet being used to generate much electricity in Victoria, although there is significant potential, as discussed in Section 4.

In 2000/01 the power stations on Victoria’s main electricity grid were responsible for the emission of about 57 Mt CO2 compared with about 170 Mt for the whole of Australia (Diesendorf, 2003). Victoria’s per capita CO2 emissions from electricity generation (11.1 t/person) were higher than those of every other State (Wilkenfeld, 2002) 4. This is because of the

3 The maximum demand was greater than the State’s generating capacity. Imports supplied the difference. On 29 January 2003 Victoria set a new record of 8104 MW. 4 Queensland was second highest with 10.0 t/person.

Towards Victoria’s Clean Energy Future 8 domination of Victoria’s electricity generation by brown coal (see Table 1) and because Victoria also has several large electricity intensive industries, such as aluminium smelting.

Drivers of Victoria’s growth in energy demand are population growth, economic growth from industrial and commercial development, and changing lifestyles, including the trend towards larger houses, smaller households (i.e. number of persons per house) and the rapid increase in the use of electrical appliances, including air conditioners.

2.2 State Government’s greenhouse policies and strategies

The Victorian Government has put in place the following policies and strategies for reducing greenhouse gas emissions, that could assist the substitution of cleaner energy sources and demand-side measures for coal-fired electricity:

• Solar Hot Water Rebate Program: available for a new solar hot water system installed in an existing building that replaces an existing gas, wood, briquette or oil fuelled water heater.5 Replacement of electric hot water systems by solar is not eligible, presumably because that is already subsidised by the Federal Government’s Renewable Energy Certificates. (For details see www.seav.vic.gov.au)

• Star homes: From 1 July 2004 all new homes (i.e. houses and apartments) in Victoria must have a greater implementation of energy and water efficiency measures. Various trade-offs are permitted until 1 July 2005. After this transitional period, the energy efficiency rating of the building fabric must be 5 Star standard and either a solar hot water system or a rainwater tank must be installed6. The standard does not apply to existing homes or to additions/renovations to existing homes. After 5 years, this scheme will save 200,000 tonnes of CO2 per year. (See www.buildingcommission.com.au)

• Green Star rating system for new and refurbished office buildings: a voluntary tool and therefore unlikely to have significant effect..

• Wind power target: total wind power capacity of 1000 MW installed by 2006. The Victorian Government does not appear to have set in place any strategies to achieve this substantial wind penetration and it would be implemented best by the expansion of MRET by a future Federal Government. However, there are measures that State Governments could implement to get more out of the existing MRET (see Section 5.2).

• Renewable energy target: Increase the share of Victoria’s electricity generation using renewable energy sources from the current 4 per cent (including hydro) to 10 per cent by the year 2010. Again, the Victorian Government does not appear to have set in place any strategies to achieve this target. However, there are measures that State Governments could

5 Only systems that result in reduced greenhouse gas emissions are eligible and therefore replacement of an existing natural gas water heater with an electric-boosted solar water heater is ineligible in Victoria. 6 Allen Consulting Group (2004) considered several different options and found that implementation of the solar hot water heater and water efficient plumbing requirement, in addition to the 5-Star energy standard, will yield the greatest financial return for Victoria.

Towards Victoria’s Clean Energy Future 9 implement to get more out of the existing MRET (see Section 5.2). In addition, the following item may assist.

• Inter-jurisdictional working group on renewable energy targets: The governments of Victoria. NSW, SA and Tasmania have established an inter-jurisdictional working group on renewable energy targets. The intention is to develop a state-based approach to renewable energy targets in the absence of Federal Government action.

• SEPP for energy efficiency: Under the State Environment Protection Policy (Air Quality Management) Victorian enterprises subject to the EPA Victoria works approvals and licensing system are required to implement cost-effective opportunities for improving energy efficiency. By December 2003 businesses subject to the SEPP were required to undertake energy efficiency audits and submit plans to implement energy efficiency measures with a pay back period of three years or less. The measures must be implemented by December 2006.

• Inter-jurisdictional working group on emission trading: All state governments are participating in an inter-jurisdictional working group on emission trading, which is scheduled to report to ministers in December 2004.

• Renewable Energy Support Fund: $8 million for grants to assist medium-scale renewable energy projects.

Towards Victoria’s Clean Energy Future 10 3. Reducing demand growth and cleaning up energy supply

Generally speaking the cheapest and fastest measures for reducing greenhouse gas emissions from stationary energy are improvements in the efficiency of energy use.

3.1 Efficient energy use

Detailed studies have been made on how to improve substantially the energy efficiencies of certain technologies (e.g. some office equipment, vending machines, refrigerators and washing machines), but a much wider range of studies is needed. It is well known that many of the barriers to implementation are neither technical nor economic, but rather arise from market failures such as the split incentives of landlords and tenants, and the lack or appropriate organizations or institutions (such as energy service companies) to facilitate large-scale implementation. The economic potential is large, but to capture it we need policies, strategies and action plans at all levels of government and in business. (Greene and Pears, 2003; BCSE, 2003a; Ministerial Council on Energy, 2003; Saddler, Diesendorf & Denniss, 2004),

One of the few detailed studies of the potential for efficient energy use within a State was carried out for Queensland by SRC Australia (1991). It found that, through efficient energy use (including solar hot water) in the residential, commercial and industrial sectors, total savings of 1092 GWh/y and demand reductions of 392 MW in winter and 263 MW in summer could be achieved cost-effectively after 6 years. The energy and demand savings did not stop after 6 years, but increased in magnitude for each year until they peaked around 17-18 years after the commencement of the proposed program. At this peak the energy savings were about 3760 GWh/y while the demand savings were 950 MW in summer and 1454 MW in winter. We consider here a period of 6 years, in order to compare the SRC results with the potential energy savings for the period between 2004 and 2010 over which Hazelwood coal-fired power station could be replaced.

The Queensland electricity supply industry was rather different in the starting period for the SRC study, 1990-91, compared with the Victorian supply of today. Then, Queensland electricity consumption was only about 21,000 GWh/y; the maximum demand of 4090 MW occurred in winter; and there was no significant use of gas by consumers. Nevertheless, until the equivalent of the SRC study is repeated for Victoria, a rough estimate of the potential for efficient energy use can be obtained by simply scaling up the SRC results to present conditions: i.e. doubling the savings in energy generation and doubling the savings in summer peak (which was considerably lower than the savings in the winter peak in the early 1990s. The results are shown in Table 2 (column 3). In total, in the sixth year there is a reduction in electricity consumption of 2188 GWh and a reduction in summer and winter peak demands of 526 MW and 784 MW, respectively.

In the SRC (1991) results, the annual benefits of the efficient energy use program keep increasing over 18 years and are still at least as good as the 6-year benefit after 30 years. As time goes on, the costs of the renewable energy technologies continue to decline. There are too many uncertainties in the data scaled up from 1990-91 to attempt a Net Present Value calculation.

Towards Victoria’s Clean Energy Future 11 For comparison, the study by EMET (2004) obtains a reduction in residential electricity consumption, beyond that of business-as-usual, of 6,400 GWh/y and of summer demand by 1324 MW for the whole of Australia in 2010, assuming a payback period of 6.5 years. To rescale these results to apply to Victoria, we multiply them by 0.22 (the ratio of electricity consumptions in Victoria and Australia), obtaining electricity savings of 1,408 GWh and summer demand reduction of 291 MW.

For the commercial sector EMET (2004) only considers a 4-year payback and obtains a reduction, beyond business-as-usual measures, of 1800 MW in Australia’s summer peak, which becomes 396 MW when rescaled to Victoria. EMET’s corresponding estimate of savings in Australia’s electricity consumption is 7,639 GWh/y, which becomes 1680 GWh/y for Victoria (Table 2). Larger reductions would be expected from a 6.5-year payback period. EMET (2004) does not investigate the electricity saving in the industrial sector.

Table 2: Annual energy and capacity reductions by sector, achieved 6 years after commencement of an energy efficiency program

Study Æ SRC results Scale-up of EMET for Vic for Qld in SRC to Vic. in in 2010 1997 2010 Residential sector Electricity consumption (GWh) 532 1064 1408 Summer peak (MW) 65 130 291 Winter peak (MW) 282 564 291

Commercial Sector Electricity consumption (GWh) 460 920 1680 Summer peak (MW) 151 302 396 Winter peak (MW) 76 152 282

Industrial Sector Electricity consumption (GWh) 102 204 ND Summer peak (MW) 47 94 ND Winter peak (MW) 34 68 ND

Total: All Sectors Electricity consumption (GWh) 1,094 2188 ND Summer peak (MW) 263 526 ND Winter peak (MW) 392 784 ND

Note: ‘ND denotes ‘no data; EMET results for residential sector have 6.5 year payback, but EMET results for commercial sector have 4-year payback.

Towards Victoria’s Clean Energy Future 12 On the basis of the amount of efficient energy use identified as resulting from ‘medium’ energy efficiency measures in the recent national study (Saddler, Diesendorf & Denniss, 2004), we consider that this report, Towards Victoria’s Clean Energy Future, and McLennan Magasanik Associates (2003) (see Section 3.3) may have underestimated the potential for electricity savings through efficient energy use in Victoria. Furthermore, the approach of this report could well lead to an even larger underestimate of the reduction in CO2 emissions, because the SRC study does not take into account the substitution at the point of use of gas in the place of electricity for heating and cooling. Fuel substitution reduces emissions for these particular energy services by a factor of about 4.

3.2 Supply options for capacity and energy

Before considering the various energy supply options, we consider the requirements for substituting for contribution to peak demand by a 1600 MW base-load power station.

One approach would classify fossil fuel and nuclear power stations as ‘reliable’ or ‘dispatchable’ and wind and solar energy without storage as ‘unreliable’ or ‘not dispatchable’7. But the distinction between ‘reliable’ and ‘unreliable’ is simplistic. On one hand even coal-fired power stations have a significant probability of forced outage (unplanned failure) that typically varies between 3% and 10%. Victoria had an average forced outage rate of 8.1% in 2000/01 (ESAA, 2002) Thus coal-fired power stations are dispatchable, but not completely reliable. Therefore, they require partial backup in the form of ‘reserve plant’8.

As a rough approximation, we consider the capacity of a base-load coal-fired power station to meet peak demand reliably to be its annual average power (Martin and Diesendorf, 1980), i.e. rated power x capacity factor9. For Hazelwood this becomes 1600 x 0.85 MW = 1360 MW. Therefore, to substitute for Hazelwood’s capacity and energy generation we require a mix of energy supply and demand-reducing technologies with Equivalent Firm (i.e. 100% reliable) Capacity of at least 1360 MW and annual energy sent out of at least 11,100 GWh (using the 2000-01 output).

On the other hand a wind farm is partially reliable, because wind speeds in the next hour or two, or even the next day, are predictable with a probability that is substantially above that of pure randomness. Furthermore, a group of wind farms, located at geographically dispersed sites, is considerably more reliable than a single wind farm.

The main energy supply options are the substitution of natural gas and renewable sources of electricity for coal-fired electricity.

7 In this context ‘dispatchable’ means ‘available upon demand’. To describe wind and solar power, we do not use the term ‘intermittent’, because it could imply incorrectly that the sources switch on and off abruptly. 8 Indeed, the ‘spinning reserve’ plant (i.e. that which is actually running, but is not loaded) must be able to replace the largest single generator in the system – 500 MW. 9 Strictly speaking this should be divided by a factor of about 1.07 to allow for the electricity use within the power station.

Towards Victoria’s Clean Energy Future 13 On short-term (10-year) timescale, it is assumed that there will be no cheap solar electricity, or geothermal, or hydrogen storage & transport of renewable energy, or capture and geosequestration of CO2 from coal-fired power stations.

However, there is: • natural gas and other forms of gas (e.g. LPG and waste gas from petroleum refining), that can be used as fuels for new power stations and at the point of use as substitutes for electricity (mostly coal-fired) for hot water, cooking, space heating and industrial processes. • bioenergy from crop residues (e.g. plantation forestry, wheat) and energy crops; • wind energy; • solar hot water to replace electric resistance water heating (which we treat here as a demand- side contributor).

Renewable sources of electricity are growing steadily. On 31 December 2003, Australia’s operating non-hydro renewable energy generating capacity comprised mainly 368 MW bagasse cogeneration, 197 MW wind power10, 100 MW landfill gas, 77 MW black liquor and 26 MW sewerage gas (BCSE, 2004).

3.3 MMA report

In its report to International Hazelwood Power, McLennan Magasanik Associates (2003), hereinafter referred to as MMA, provides a possible energy and capacity mix for substituting for the 1600 MW Hazelwood power station. This is of course relevant to the substitution of a different energy mix for any large coal-fired station. MMA’s new mix has the following characteristics.

• It has a substantial component of black coal electricity imported from NSW. But, from the viewpoint of achieving large reductions in CO2 emissions in the long term, there is little point in replacing brown coal with black coal. The use of both types of coal have to be substantially reduced over the next several decades (Saddler, Diesendorf & Denniss, 2004). However, in the short term, black coal power from existing plant in other states could act as a buffer as generating units of current Victorian coal fired assets are withdrawn while alternatives are ramped up.

• Renewable sources of electricity are all lumped together, thus missing the individual contributions that each can make to the mix, and their total contribution appears to be unnecessarily small.

• This entails that there is a large increase in the demand for natural gas and new gas fields may have to be developed in Bass Strait, the Otway Basin and/or, in the longer term, using imported gas from Papua New Guinea or the North-West Shelf. (See Section 4.)

10 By 31 December 2004, Australia’s wind power capacity had reached 380 MW, with an additional 1350 MW approved or under construction.

Towards Victoria’s Clean Energy Future 14 • Solar hot water is not mentioned. Over 20% of Victorian homes use electric hot water, so there is significant scope for reduction in electricity use here, using gas-boosted solar where gas is available and electrically-boosted solar or electric heat pumps where there is no gas.

• Although the MMA report states that “the Government…would need to get quite serious about promoting alternative measures such as demand side efficiency”, it is pessimistic about doing this within the framework of the National Electricity Market: “Such programs would require higher electricity prices in the market which are not currently in prospect.” Why not, this paper asks? For most electricity consumers, the important factor is the amount of the bill, not the price of a unit of electricity.

• For meeting increased peaks MMA includes an upgrading of the transmission link to Snowy hydro; peak and/or intermediate-load imports from Tasmania via Basslink (under construction); peak and/or intermediate-load imports from South Australia; open-cycle gas turbines; and, a novelty, compressed air storage using aquifers in Gippsland and using energy from brown coal or gas.

The MMA report does not provide tables showing the proposed contributions from the various energy sources and demand-reducing measures. It is difficult to estimate quantitative values from its graphs of projected energy generation by source over the next 12 years. However, in qualitative terms, the results are clear: it is possible to substitute for 1600 MW of coal fired power, but this would drive up the price of a unit of electricity11. One option, mentioned in the text of p.38 of the draft MMA report, is the following substitution at 4.0-4.5 c/kWh equivalent as set out in Table 3:

Table 3: An energy mix used by MMAc to substitute for a 1600 MW coal-fired power station

Technology Capacity Cost of electricity (MW) (c/kWh) Efficient energy use (all sectors) 285 Various items in range 3.9-4.8 Cogeneration at Maryvale 300 4.0 Industrial cogeneration, small-scale 240 4.2 Snowy interconnection upgrade 600 4.0-4.2 (peak-load) Imported coal-fired power from NSW Large but not specified not specified Source: The present author has compiled this table from information scattered through MMA (2003).

Notes: a. MMA seems to have made the incorrect assumption that the equivalent firm capacity of Hazelwood is equal to its rated capacity, 1600 MW. However, we have chosen 1360 MW to be more appropriate, allowing for forced outages. b. MMA does not give the energy generation by source, only capacities.

It is inappropriate to compare the price per kilowatt-hour of efficient energy use and some cases of distributed generation with the price of coal-fired power at the power station, because the

11 If the alternatives involved improving energy efficiency by, say, 5%, then a 5% increase in electricity price would essentially be cost-neutral.

Towards Victoria’s Clean Energy Future 15 former avoid the capital costs of transmission and distribution – which is around 4 c/kWh – and line losses. Furthermore, if efficient energy use and distributed generation are focused on regions with high line losses and capital costs, then large savings can be captured.

There would be additional transmission costs involved in upgrading interconnections with the Snowy, NSW and SA.

MMA mentions that the Victorian grid now has a base-load capacity of 6,600 MW and this leaves a large reserve plant margin which is used to export electricity up to 1300 MW to NSW and SA during off-peak periods. Since this displaces mainly black coal, the high level of Victorian electricity exports, while ‘rational’ from the market viewpoint, increases Australia’s 12 CO2 emissions. We suggest that reducing Victoria’s interstate electricity exports could provide a large fraction of the required capacity and electricity generation. The ‘mothballed’ half of Pelican Point combined-cycle gas-fired power station in S.A. and, as a temporary measure, the mothballed black coal power stations in NSW could be restarted to cover reductions in Victoria’s exports.

MMA note that its scenario would displace a large number of jobs in the Latrobe Valley. We address this issue in our own scenario (see Sections 5.10 and 7).

3.4 A cleaner energy mix

Table 4 sets out our own choice of a possible mix of demand-side and supply side measures that could substitute for coal-fired assets generating 1600 MW, using Hazelwood as an example, by 2010. The scenario in Table 4 offers measures that are additional to those installed or under construction at 30 June 2004. It supplies the annual energy generation in GWh/yr, and much more than the Equivalent Firm Capacity in MW, of a 1600 MW coal-fired power station. It would reduce Victoria’s CO2 emissions by 13.8 Mt/y in 2010. The principal contributions to our alternative energy mix comes from cogeneration and combined cycle power stations fuelled by gas, followed by wind power, then efficient energy use, and then bioelectricity fuelled mostly from crop residues.

On the demand side we use the rescaled results of SRC (1991) to obtain the reduction in peak load and electricity consumption resulting from efficient energy use (see Table 2, column 3). A more accurate calculation must consider fuel substitution at the point of use and boosting of solar hot water13.

Column 3 gives the capacity factors, i.e. annual average power generated divided by rated power. Column 4 gives the approximate contributions to Equivalent Firm Capacity, i.e. to peak load. For base-load thermal power stations the average power is taken as a proxy for Equivalent Firm Capacity.

12 E.g. by applying either a carbon tax, or tradeable emission permits or a constraint on carbon emissions. 13 While gas boosting of solar hot water avoids peak electricity demand contributions, for electrical boosting there is the option of smart booster controllers or an off-peak tariff. Controllers could be set up to give users feedback (via a display inside) as to the water temperature in the storage tank and a suggested best boost and shower time. This would give feedback to users to maximise solar contribution and allow for minor behaviour change.

Towards Victoria’s Clean Energy Future 16 In the limit of very small penetrations of wind power into the grid, the Equivalent Firm Capacity of wind power = average wind power (Martin & Diesendorf, 1980; Haslett & Diesendorf, 1981). In our scenario the annual wind energy generation is about 5% of the total grid generation. With this penetration, the equivalent firm capacity of wind power is about 0.71 times the annual average wind power generation14 (Martin & Diesendorf, 1980, Table 2). Under these circumstances it is arguable whether there is need for any additional partial backup15 or storage of wind power. Most, if not all, of the wind power could be backed up from the existing peak- load and reserve plant margin.16 However, even if wind power was assigned zero capacity credit, our energy mix in Table 4 provides larger Equivalent Firm Capacity than that of the 1600 MW coal-fired power station. Furthermore, we have done our costing in Table 4 on the conservative assumption that, to better compensate for fluctuations in wind power, 200 MW of gas turbines with capacity factor 10% is provided as partial backup.

The cost in millions of dollars per year of electricity generated or saved is given in Column 9. However, this could be misleading with regard to the costs of efficient energy use, especially in the residential and small business categories. The latter costs should not be compared with the prices of electricity sent out from Hazelwood, but rather with the respective prices of electricity delivered to end-users in these categories. Typical prices for Victoria, as given by ESAA (2002, Charts 5.1-5.4) and adding GST, are: Melbourne residential 13.0 c/kWh; Melbourne small business 18.9 c/kWh; and Melbourne big business 6.5 c/kWh). Rural Victoria, (non-domestic tariff) 21.4 c/kWh.

For simplicity we use Melbourne prices of electricity to calculate the value of electricity saved by efficient energy use in Column 10. This halves the total cost of electricity delivered by our supply-side and demand-side mix in 2010, bringing the cost far below that of a typical brown coal-fired power station of Hazelwood’s capacity of about 3.8 c/kWh.

The question then arises as to the actual cost of electricity generated by Hazelwood under circumstances that the Hazelwood West Coal Field is developed and further refurbishment of the power station is carried out. The operators could argue that the capital cost of the original Hazelwood power station has been written off, although the cost of some subsequent refurbishment is still being paid off annually and further refurbishment would be required if the power station is to generate beyond 2009. Based on costs in 2010, our substitution for Hazelwood is cost-effective in 2010 with the continuation of Hazelwood provided the long-run marginal cost of that power station is greater than about 2.5 c/kWh. However, we must keep in mind that the benefits of early investment in efficient energy use increase with time and, in the

14 This is an underestimate because the calculation was performed with the simplifying assumption that there is no geographic dispersion of wind farms. 15 In the form of peaking gas turbines or part of Snowy hydro. 16 If after drawing upon existing reserve and peaking plant, some amount additional back-up for wind power is required, it can be calculated to be peak load plant (e.g. gas turbine or hydro) with capacity approximately equal to one-quarter of the wind capacity that still has to be backed up. If all the wind farms were concentrated at one site the back-up required would be one-half the wind capacity (Martin & Diesendorf, 1982).

Towards Victoria’s Clean Energy Future 17 case of the scenario developed by SRC (1991), the benefits only peak after 18 years. Therefore, provided policies and strategies are implemented to capture the cost-effective energy efficiency measures, our mix is likely to be in the long run less expensive than continuing with Hazelwood or any equivalent coal-fired power station.

Redding Energy Management (2000) find that Victoria’s commercial and manufacturing sectors have a combined technical potential17 for cogeneration of over 1,000 MW. The study also refers to economic forecasting by the gas industry indicating that an additional cogeneration capacity of 320 MW could be installed by 2010, with a further 300 MW installed in the period 2010-15. (Based on more recent proposals and appropriate policies, we have assumed that 500 MW is possible by 2010.) Assuming a gas price of $3/GJ and 12% discount rate, Redding finds that the cost of cogenerated electricity varies from about 3.4 c/kWh for a 220 MW power plant up to about 6-8 c/kWh for plant in the range 1-10 MW. Electricity from microtubines smaller than 1 MW will be even dearer. However, as with efficient energy use, we must consider that small cogeneration plants, e.g. those installed in commercial buildings, are not competing with the generation cost of electricity at a coal-fired power station, but rather with the price of electricity delivered to the building via the distribution network at 6-17 c/kWh. We have not attempted to do that in Table 4. Clearly, Victoria’s cogeneration potential could be large. The problem for cogeneration (and combined cycle gas-fired power stations) in Victoria is the limited gas reserves (see Section 4).

According to Outhred (2003) up to 2,200 MW of wind power could be readily integrated into the principal Victorian electricity grid. Outhred assumes a short-term time horizon (about 10 years); no changes to the existing electricity grid; no additional backup for wind power; and the existing level of electricity demand. Therefore, if sufficient wind resource exists on suitable land or off- shore, then, with upgrades of sections of the grid and some backup, even more than 2,200 MW could be integrated in the longer term.

17 Technical potential is generally much greater than economic potential.

Towards Victoria’s Clean Energy Future 18 Table 4: Energy mix to substitute for a 1600 MW base-load coal-fired power station in 2010

b Technology Rated Capacity Contrib. Elec. sent out Emission CO2 Price of unit of Cost of elec. Cost of elec. g d power factor to peak or saved Intensity emissions elec. gen. or gen. or saved delivered (MW) (MW) (GWh/y) (Mt)/y saved (c/kWh) (Mt CO2/TWh) in 2010 ($M/y) in 2010 ($M/y)

Bio-electricity 115 0.75 86 756 0.00 0.00 7.5 56.7 56.7 c Gas Combined Cycle 240 0.80 192 1682 0.4 0.67 4.5 75.7 75.7 Gas: Cogeneration 500 0.85 425 3723 0.5 1.86 4.1 152.6 152.6 Gas turbine 200 0.1 200 175 0.5 0.09 6.3 11.0 11.0 e Wind 1000 0.30 213 2628 0.0 0.00 7.5 197.1 197.1 a EE : residential N/A N/A 130 1064 0.2 0.21 4.9 52.1 -86.1 a EE : commercial N/A N/A 302 920 0.2 0.18 4.9 45.1 -129.0 a EE : industrial N/A N/A 94 204 0.2 0.18 4.9 10.0 -14.90

2055 Total + EE N/A 1642 11,152 N/A 3.20 N/A 600.3 263.2

Hazelwood or 1600 0.85 1360 11,134 1.45 17.00 3.8 423.1 423.1 equivalent 2.5 278.4 287.4 Notes: a. EE denotes efficient energy use and includes fuel substitution at point of use and solar hot water. EE data based on rescaling the SRC (1991) data from Queensland. We assume that EE has an average cost of 4.9 c/kWh saved, which corresponds to the value after 6 years of EE implementation given by SRC (1991) adjusted for inflation. By current standards, this seems very conservative. b. Cost (column 9) is for 2010, the 6th year after implementing the program. EE contributions calculated by SRC (1991) increase with time up to the 18th year, then gradually decline up to 30th year. c. Most of this gas generation could be obtained from the currently mothballed part of Pelican Creek combined 478 MW cycle gas-fired power station in South Australia, assuming that exports of brown coal-fired electricity from Victoria to S.A are reduced. However, there are uncertainties in costs of refurbishing Hazelwood and new coal mine, among others. If there are insufficient gas reserves, we substitute for the combined cycle gas-fired power generation by reducing exports of Victorian coal-fired electricity. d. In Column 10, we have adjusted the residential, commercial and industrial energy efficiency costs to take account of the situation that they are saving electricity delivered at 11.8, 17.2 and 5.9 c/kWh respectively, instead of electricity generated at 3.8 kWh. e. For 1000 MW of wind power capacity, the Equivalent Firm Capacity is approximately 0.71 x average wind power (see Section 3.4).

f. Energy efficiency measures have been arbitrarily given an emission intensity of 0.2 Mt CO2/TWh saved. In practice it could be much less than this.

Towards Victoria’s Clean Energy Future 19 4. Energy reserves

4.1 Gas

In the latter half of the 21st century the use of natural gas will decline in Australia – since its reserves are limited, large quantities are being allocated to export, and it is a fossil fuel contributing to greenhouse gas emissions. However, in the short and medium term it is valuable as a significant transitional fuel towards an energy system with much lower CO2 emissions than the present. In this role it can be used to fuel combined cycle and cogeneration power stations and as back-up for solar hot water, solar thermal electric power stations and wind farms. It is assumed that geosequestration will be introduced to capture CO2 that would otherwise be released into the atmosphere from gas fields.

ABARE comments that, “in the absence of significant and positive exploration results, there is a real possibility that eastern Australian supplies will need to be supplemented within the period to 2019-20 from gas resources in Australia’s north west, Papua New Guinea or from coal seam methane.” (Fainstein et al., 2002). These comments apply to business-as-usual as well as clean energy scenarios.

‘Gas’ includes natural gas; coal seam (aka coal bed) methane, which is identical to natural gas; coal mine gas (aka waste mine gas) which may have a much lower concentration of methane than the above two gases and so may have to be used on-site at the coal mine; and waste gas from petroleum refining. Firm estimates of the reserves of these gases are notoriously difficult to obtain, both because of corporate confidentiality and the uncertainties inherent in proving these resources. At present there are no proven reserves of coal seam methane in Victoria, where an investigation has only recently commenced.

Geoscience Australia estimates that the Category 1 (i.e. both ‘proved and probable’18 commercial) reserves of sales gas (i.e. natural gas) in Victoria (Gippsland and Otway Basins) amount to 147 billion cubic metres on 1/1/2003, down from 152 billion cubic metres on 1/1/2002 (Petrie et al., 2003), The 2003 estimate of reserves has energy content of about 5,000 PJ and this is equivalent to 1,000 MW of gas-fired combined cycle power stations operating for 55 years. Clearly our proposed energy mix, as well as that of MMA, and indeed business-as-usual, will require more gas reserves to be proven and more gas processing facilities or a new transmission pipeline to be built. However, gas must be seen as a transitional fuel to take our energy needs from coal towards carbon neutral fuel sources.

If it turns out that no further gas reserves are proven in Victoria, a large part of the gas component of our electricity supply mix could be replaced by reducing the off-peak exports of Victoria’s electricity from brown coal to NSW and SA.

18 i.e. reserves established at the median value – that is with a 50% cumulative probability of existence.

Towards Victoria’s Clean Energy Future 20 4.2 Biomass

In Saddler et al (2004) biomass contributed 28% of Australia’s future electricity generation by 2040. Potentially significant sources of biomass residues in Victoria include, in probable order of importance: • stubble from grain crops; • plantation forestry residues, including sawmill residues; • animal residues from abattoirs / meat processing works; • other green wastes.

Probably the largest contribution from this list could be obtained from stubble from grain crops, mainly wheat, barley, oats, field peas, canola and chick peas in order of importance. Following Kelleher (1997) and based on total land area planted of 2.18 million ha, stubble yield of 2.0 t/ha (leaving 1.4 t/ha on the land to maintain the soil) and thermal efficiency of conversion to electricity of 30%, gives an annual electricity generation of about 3,600 GWh. Therefore, given appropriate policies and strategies, it should be possible to obtain at least one-quarter of this, 900 GWh/yr, from grain stubble and other biomass residues in Victoria by 2010.

Victoria may be suitable for short-cycle tree crops for bioenergy, where previously cleared land that is not earmarked for housing is available. Biomass crops are expected to be more expensive fuel for generating electricity than biomass residues, unless multiple economic benefits can be obtained from the crops (Stucley et al., 2004; Howard and Olszack, 2004). Oil mallee is a short- cycle crop that offers, in addition to electricity, eucalyptus oil, activated charcoal and a means of reducing dryland salinity.

4.3 Wind

The Victorian Wind Atlas indicates that the State has a medium level of wind energy potential by Australian standards (SEAV, 2004). In addition, some wind energy surveys have been conducted by energy utilities, but the results have not been published.

The present paper suggests an additional short-term wind energy capacity of 1000 MW, which is equal to the Victorian Government’s target for 2006. However, with the Federal Government’s refusal to extend MRET, it is unlikely that the Victorian target will be met as early as 2006. There are already proposals for hundreds of megawatts of wind farms that are currently stalled due to the refusal of the Federal Government to expand MRET. The Victorian Government, at no cost to itself, could assist the wind industry to make better use of the existing MRET as discussed in Section 5.2.

There is the possibility, that Victoria may have significantly higher wind speeds in shallow off- shore waters, close to electricity demand centres. The off-shore resource may be significant and warrants wind monitoring and modelling.

Towards Victoria’s Clean Energy Future 21 5. Recommended policies and strategies

To substitute for 1600 MW of coal-fired power and at the same time to achieve significant reduction in CO2 emissions within the framework of the National Electricity Market, it is necessary to introduce economic instruments and/or constraints on generation sources to allow cleaner energy sources to compete with highly polluting coal (see appendix). Here we propose several such strategies, among others.

These strategies can be justified on the grounds that the price of coal-fired electricity does not include externalities, such as the environmental and health costs of its use, and that existing market signals fail to fully reflect important costs – e.g. pricing of transmission and distribution is averaged over large areas, so that the costs of supplying some customers is underpriced and so the economics of alternatives in those areas are undermined, even though, from society’s perspective, they offer a lower cost solution.

5.1 Expand the Mandatory Renewable Energy Target (MRET)

The only significant existing driver of low-cost, commercially available, renewable energy is MRET. However, the current Australian target of 9,500 GWh/year in 2010 is very small, corresponding to less than 1% of projected electricity demand for 2010. Furthermore, several electricity generators are either failing to create Renewable Energy Certificates19 (RECs) for parts of their renewable energy generation or accumulating RECs that they have created until their price increases. This has the effect of limiting the market for RECs and increasing REC prices. As a result, MRET is expected to be fully utilised by 2007. This means there is a serious risk that the renewable energy industry will face a ‘boom and bust’ situation as MRET demand dries up from 2007.

An expansion of MRET is especially important to: • assist the establishment of bioenergy; and • encourage the wind power industry to utilise the numerous inland sites that have lower wind speeds than the best coastal sites. We support the recommendation of the Business Council for Sustainable Energy for the Commonwealth Government to expand MRET for Australia to 21,600 GWh/y by 2010 and to 33,800 GWh/y by 2020. We also support BCSE’s recommendation that projects installed prior to 2020 to be guaranteed 15 years to produce RECs. (BCSE, 2003b)

The expansion of MRET is best driven nationally by the Federal Government. However, in the absence of Federal action, it has been suggested by Alan Pears that State Governments, either individually or collectively, could resolve this situation by setting their own separate and additional renewable energy targets above and beyond the Commonwealth MRET Target, applying to electricity within their State boundaries. A State target could be imposed as a licence condition for electricity retailers to annually submit additional RECs, that they have created in

19 1 REC = the generation of 1 MWh of electricity from a renewable source or the saving or 1 MWh of electricity through the use of solar hot water.

Towards Victoria’s Clean Energy Future 22 the State, to the State Government. This would force retailers to purchase more RECs from generators, thus freeing up the market for RECs and hence making better use of the existing MRET. Thus, each energy retailer would then have to surrender RECs to the Office of the Renewable Energy Regulator (ORER) for the Commonwealth MRET scheme and additional RECs to a State agency for the State scheme.

To stimulate local renewable energy industries the State Government could also require that the RECs provided to it by energy retailers satisfy a specified portfolio of renewable energy sources: e.g. the New South Wales Government could require 40% bioelectricity, 30% wind power, 20% solar hot water and 10% unspecified. An advantage to a State Government of expanding MRET is that the costs do not come out of the State budget, but rather are covered by all electricity consumers through a very small increase in electricity prices.

The details of how this scheme would work depend on how the Commonwealth Government responds to the MRET Review Panel (2003) recommendation relating to extinguishment of RECs. At present, only a Liable Party (ie retailer or wholesale buyer of electricity) can extinguish RECs. However, the MRET review proposed that the owner of a REC (regardless of who they are) should be able to extinguish it. If the Commonwealth Government legislates to allow this, then a State Government could become the owner of the retailers’ RECs and could then simply extinguish them. Since these RECs would no longer exist for compliance with MRET, this would effectively increase the number of RECs that had to be generated beyond those required for MRET target.

On the other hand, if the Commonwealth Government does not change the legislation, a State Government could still set up a mechanism to acquire and quarantine RECs so that they were not available at any time in the future for surrender to ORER. A precedent exists: the Green Power administrators have already set up such a mechanism, so that all renewable electricity used for Green Power is additional to the MRET Target.

5.2 Require energy retailers to surrender Renewable Energy Certificates (RECs)

Currently MRET is not working properly, because electricity generators are either failing to create RECs for parts of their renewable energy generation or accumulating RECs that they have created until their price increases. This has the effect of limiting the market for RECs.

The State Government can resolve this situation by imposing as a licence condition the requirement that electricity retailers submit RECs, that they have created in the State, annually to the State Government. This will force retailers to purchase more RECs from generators, thus freeing up the market for RECs and hence making better use of the existing MRET.

5.3 Place a greenhouse intensity constraint upon base-load power stations

Conventional (pulverised fuel) power stations burning brown coal have greenhouse gas emission intensities typically in the range 1.0-1.5 Mt CO2 per TWh of electricity sent out, depending upon age, choice of technology, type of coal, capacity, etc. Hazelwood, as an old brown coal-fired

Towards Victoria’s Clean Energy Future 23 power station, is close to the upper end of this range. The low end could possibly be achieved by new power stations and new technologies for the pre-combustion treatment of brown coal, but even these still have emission intensities greater than those of new black coal-fired power stations and more than double emission intensities of new combined cycle gas-fired power stations. The use of conventional coal-fired power stations as major sources of electricity is incompatible with the goal of achieving large reductions in CO2 emissions. Also, these coal assets may become stranded assets under the recent ratification of the Kyoto Protocol by Russia.

In Victoria conventional brown coal-fired power stations generate electricity at costs in the range 3.7-4.0 c/kWh. These costs do not reflect the substantial environmental and health damage they produce. If they continue to be built or refurbished, conventional coal-fired power stations will, under the current National Electricity Code, make it almost impossible for combined cycle gas- fired power stations to be constructed and operated economically as base-load in eastern Australia (see Appendix) and will undermine any strong measures to implement efficient energy use.

Australian Power and Energy Ltd has suggested that the government should initially set a maximum allowable emission intensity of 700 kg of CO2/MWh, reduced to 100 kg of CO2/MWh after 2020 (APEL, 2003). However, we take the position that the initial allowable intensity should be 500 kg of CO2/MWh sent out. This would entail that in the short term the only power stations that would be built would be either renewable energy or combined cycle natural gas or cogeneration natural gas. Beyond 2020 the only power stations that would be built would be either renewable energy or fossil fuels with geosequestration (assuming that geosequestration proves to be permanent, safe, cost-effective compared with renewables, suitable for the location in question, etc.).

We recommend these proposed maximum allowable emission intensities for new and refurbished power stations, and for old power stations whose coal mines are proposed for extension. This would work best if implemented by all States in the NEM.

A future Federal Government could assist the States by applying a ‘greenhouse trigger’ leading to a national inquiry on proposals, such as new coal-fired power stations, that would significantly increase Australia’s greenhouse gas emissions.

5.4 Implement tradeable emission permits or a carbon levy

Provided a cap on emissions is established and the cap is reduced annually, tradeable emission permits would assist in allowing gas, renewables and efficient energy use to compete with cheap and polluting coal. In the long run, if the price of tradeable permits increases sufficiently, it may be possible to phase out MRET. The permits should be applied to all industry sectors, including aluminium smelting which after all takes a large fraction of Victoria’s electricity. The method of allocation of permits should strike a balance between encouraging new entrants with new technologies into the market and recognising that some emitting businesses have previously made investment decisions that produce high levels of emissions.

Towards Victoria’s Clean Energy Future 24 Tradeable emissions would best be implemented as a national scheme. However, it would still be of value if implemented by a group of cooperating States. It is not a recommended action for a single State.

A carbon levy would be a possible alternative to tradeable emission permits. The funds raised by the levy could be invested in funding the transition to a clean energy future and addressing social equity e.g. by substituting for payroll tax and assisting low-income earners to reduce energy waste.

5.5 Remove subsidies for fossil fuels and energy wastage

In Australia over $5 billion p.a. is paid as ‘perverse’ subsidies to the production and use of fossil fuels (Riedy and Diesendorf, 2003; Riedy, 2003). These subsidies are ‘perverse’ in the sense that they are both economically inefficient and environmentally damaging. Most of these subsidies go to liquid fuels and the use of the motor car. However, in several States, including Victoria, there are large subsidies to aluminium smelting (Turton, 2002) and in every State there is a large de facto subsidy to the use of air conditioning, whose use is rising out of control in Victoria.

When someone purchases and uses an air conditioner, all other electricity users in the State have to pay for the costs of the additional infrastructure required: power stations and power lines. Rough estimates suggest that, for a single-phase 5 kW residential air conditioner, the real costs could be of the order of $1,500 p.a. based on a 10-year simple payback. However, at present the customer may be paying only $60 p.a. (Anon., 2003).

We suggest the following way of removing the subsidy: Air conditioners would have to be purchased with a ‘smart’ meter that measures electricity consumption by time of day and allows the use of the air conditioner to be controlled by both the customer and the energy retailer. The meter should provide instant feedback to the household, and should have a feature that allows the householder to program load shedding if the electricity price goes above a specified level (otherwise households will feel victimised when they receive bills 3 months after their children ran the air conditioner after school on a hot day). The energy retailer would be required by law to charge for electricity consumed according to cost by time of day. This would: • encourage some prospective purchasers to install energy efficiency measures, such as shading of windows and insulation, instead of air conditioners; • discourage unnecessary use of air conditioners that are purchased; • encourage the use of evaporative coolers and fans, which use much less electricity than air conditioners; and • assist solar electricity systems, that tend to generate most during the hottest times of day, to compete with conventional peak-load electricity generation.

There is also the historical subsidy to centralised power, as the whole infrastructure was built using low interest-government-guaranteed finance, and until the 1980s, no dividends were paid by publicly owned electricity suppliers. The sale of the Victorian electricity infrastructure also locked in some subsidies. For example, the value of SECV rural assets was ‘written down’ by $450 million before sale to keep rural electricity prices low. We suggest that, to compensate for

Towards Victoria’s Clean Energy Future 25 this historical subsidy, the State Government should subsidise new powerlines or upgrades of existing powerlines required for bioenergy and wind power in rural areas.

5.6 Encourage the purchase of solar hot water

In Australia hot water accounts for about 27% of residential energy use and on average only about 5% of households have solar (or electric heat pump for shaded roofs) hot water systems. In Victoria ownership is less than 2%. It is clear that existing incentives (i.e. the inclusion of solar hot water in MRET; Victoria’s solar hot water rebate program) are not sufficient. In terms of achieving greenhouse gas reductions, a large shift from electric resistance hot water to solar and electric heat pump hot water, could achieve a large reduction in emissions. The problem is that electric resistance hot water is more quickly and easily installed, and has a lower upfront cost than solar, even though the lifetime cost of electric resistance hot water is higher than that of solar in large areas of Victoria.

Therefore, we propose the following additional measures to enable consumers to overcome the barriers to solar and heat pump hot water: • State Governments should pass legislation making it illegal for local governments to require planning permission for installing solar hot water. At present, some local governments do and others don’t. Obtaining planning permission takes so much time that it discourages home owners from replacing an existing hot water system at the end of its life with solar. • State Governments should require all new buildings and renovations involving hot water supply to have solar, heat pump or solar-compatible gas hot water systems. At present NSW is moving towards this measure through the introduction of the Basix scheme, while Victoria is taking the measures summarised in Section 2.2, which allow a choice between solar hot water and a water tank. Where both sunshine and natural gas are available, we recommend that only gas-boosted solar hot water be permitted. • For existing buildings, purchasers of electric resistance hot water systems should be required to take out mandatory Green Power and purchase and install a ‘smart’ meter on the hot water circuit. This would bring users closer to the ‘user pays’ requirement. Furthermore, all replacement electric hot water systems should be solar compatible.

5.7 Mandate energy efficiency measures

A Clean Energy Future for Australia identified a wide variety of cost-effective measures to implement substantial amounts of efficiency in energy use (Saddler, Diesendorf & Denniss, 2004). The national study found that implementation of a medium level of efficient energy use reduced the growth in total energy demand over the period 2001 to 2040 from 57% in the baseline (weak energy efficiency) scenario to 25%. Similar results were obtained by economic modelling for the Ministerial Council on Energy (2003), whose strong energy efficiency scenario, which envisages 100% penetration of end-use energy efficiency measures with a four year or less payback period, would achieve an 18% reduction in greenhouse gas emissions from stationary energy together with increases in real GDP and employment.

Towards Victoria’s Clean Energy Future 26 Although the potential is huge, the wide dissemination of efficient energy use technologies is impeded by market failure (Greene and Pears, 2003). Therefore, this is an area where regulation must play an important role. The following measures are recommended:

• Mandatory energy rating and labelling of all new and existing buildings. Energy labelling of buildings must be disclosed whenever the building is put onto the market or leased. This should not just cover the heating and cooling energy but also include the energy efficiency of major fixed appliances within the building such as water heaters, cooking stoves, air conditioners and lighting.

• Mandatory energy performance standards for all new energy-using appliances and equipment. (Current standards are limited to only a few appliances.).

• State Governments should make it illegal for local government, developers or the body corporate of residences under strata title to ban solar powered equipment such as solar water heaters, photovoltaic power systems, or solar clothes driers (i.e. clothes lines). This should also apply to developers’ covenants.

• The subsidy should be removed from electricity prices in remote and rural areas. This would assist cost-effective energy efficiency, solar hot water and local renewable sources of electricity (especially solar) to compete with the grid. State Governments could still pay the subsidy to households and businesses in rural areas by means of an annual cheque and by offering incentives and assistance programs to improve energy efficiency and install solar hot water.

• ‘Smart’ meters should be introduced as soon as possible to measure electricity demand by time of day and to allow both the energy retailer and the consumer to switch off and on the circuits where the meters are installed. For buildings with smart meters, energy retailers should be required to charge by time of day. These meters should allow the occupant to program load management strategies and give them feedback on electricity use. This will allow time-of-day pricing and widespread load-shedding to be introduced.

• Mandatory energy performance standards for all new and renovated buildings. In cases where a building is renovated (e.g. the addition of a room to a house), the energy performance standards would not be limited to the addition. Otherwise, heat could flow in and out of the added section through the rest of the building. However, the added section and new buildings would be required to achieve more stringent energy ratings than renovated existing buildings.

• Mandatory energy performance standards for all rental and Government-owned and Government-leased buildings. Existing buildings would be required to achieve less stringent energy ratings than new buildings. There would be government assistance to low-income building owners, such as pensioners, who are landlords.

Towards Victoria’s Clean Energy Future 27 • The Victoria Government should establish a Clean Energy Fund or Demand Management Fund to provide incentives and resources to overcome barriers to energy efficiency and accelerate the adoption of energy efficiency in homes and businesses. The fund should be set at a reasonable level (no less than 1% of total energy bills) and be made independent of the Victorian budget, by being raised directly from electricity bills. (see Appendix B).

5.8 Encourage voluntary energy efficiency measures

State Governments or energy/water retailers could offer householders a package of low-cost energy efficiency measures for energy-using appliances and equipment that are not part of the building envelope. The package could include compact fluorescent lamps, water efficient shower heads and tap fittings, insulation wrap and adjustment of thermostat on hot water systems, and replacement of compressors and seals on refrigerators. This package would include a service-call by an electrician-plumber. If implemented on a mass scale, the cost per household would be low, the reductions in energy consumption and CO2 emissions would be significant and so would the reductions in energy and water bills. Thus the scheme would be attractive to many households.

This proposal would have value both by reducing greenhouse gas emissions and by educating the community about simple energy efficiency measures in the home. It could be further justified by the results of a pilot project by Moreland Energy Foundation (2004), which found that: • The energy efficiency of most old fridges could be improved by up to 25% by simple low- cost measures. • Improvements in energy efficiency of greater than 50% could be attained by slightly more expensive measures, such as compressor replacement. • There is a large unfilled demand for refurbished fridges in low-income households. • The removal of unrepairable fridges from the market could reduce emissions of greenhouse gases significantly (because of both high electricity use and CFC emissions), while saving low-income households the high running costs of these inefficient appliances. A scheme to remove unrepairable fridges has been developed by Moreland Energy Foundation.

Recently Sydney Water ran a more limited version of the proposed package of low-cost energy efficiency measures, by providing a plumber to assist households to fit water-efficient shower- heads and tap aerators for a service charge of only $22. Governments could consider whether to provide low-interest loans to assist low-income householders to make these and other improvements. Governments could encourage energy retailers to run the scheme by putting in place revenue caps on the amount of revenue a retailer could earn per household on sales of electricity. There would be no cap on sales of efficient energy use products and services.

5.9 Remove barriers to energy efficiency in network price regulation For the reasons discussed in Appendix C, the Victorian Essential Services Commission should ensure that the system of distribution network price regulation to commence 1 Jan 2006 rewards rather than penalises distribution networks that effectively help their customers to save energy.

Towards Victoria’s Clean Energy Future 28 Therefore, the Essential Services Commission should adopt measures equivalent to or better than the NSW IPART 2004-09 distribution network pricing determination.

5.10 Give incentives for local jobs in appropriate regions

To establish cleaner energy industries in Victoria, the State Government should encourage renewable energy installations and equipment manufacturing (e.g. of components for wind turbines and bioelectricity power stations) in rural and regional areas. This will facilitate a transition of skills for workers from industries dependent on coal and electricity generation.

Towards Victoria’s Clean Energy Future 29 6. Allocation of costs of the alternative mix

We must distinguish between the cost to State Government and the cost to State electricity consumers.

6.1 Cost to government

The present paper considers the responsibility of State Government to maintain social equity, to regulate the market and to administer some of the proposed strategies. Of these, the only significant costs are for those items in the social equity category, as listed in Table 5.

Table 5: Items of State Government expenditure to maintain social equity

Item Strategy Cost 1 Upgrading energy efficiency of government housing State Government to estimate 2 Low-interest loans to low-income owners of buildings for upgrading Cap to be chosen by energy efficiency of their buildings. Cost is for interest subsidy only. government. 3 Low-interest loans to low-income tenants for package of energy Cap to be chosen by efficiency measures. Cost is for interest subsidy only. government

The government could cap its costs by limiting the measures taken under Items 2 and 3 to those with a payback period of a specified number of years. There would also be cost-savings to both the State and Federal Governments from reduced medical, hospital and environmental management costs resulting from the reduction in air and water pollution and land degradation caused by coal-fired power stations.

6.2 Cost to electricity consumers

For electricity consumers there will be additional costs per unit of electricity from expanding MRET, placing greenhouse intensity constraints on base-load power stations and tradeable emission permits and from a demand management fund.

On the other hand there would also be reduced costs resulting from the reduced number of units of electricity consumed after implementation of efficient energy use measures. Electricity consumers who do not purchase air conditioners would also share in the savings in infrastructure (power stations, transmission lines and distribution lines) that would be avoided.

A more detailed study would be required to investigate whether there is any net cost to electricity consumers of the cleaner energy mix for the State. The national scenario study, A Clean Energy Future for Australia, found that it is possible that there may be no net costs of the principal clean energy scenario in 2040 (Saddler et al, 2004, chap. 10). This result depends on the future costs of electricity from fossil fuels and renewable energy and the amount of demand reduction that can be achieved with short payback periods from efficient energy use. In the early 1990s, when the State Electricity Commission of Victoria was running a demand management program, it found that it delivered net financial benefits to Victoria, even though it reduced net revenue for the SECV (Gilchrist 1994). That result was obtained when programs were being trialled and energy

Towards Victoria’s Clean Energy Future 30 efficiency technologies were nowhere near as good as they are today. The present study (Column 10 of Table 4) suggests that our energy supply and demand-side substitution for a 1600 MW coal-fired power station would be less expensive in 2010, provided the long-run marginal cost of electricity from the coal-fired power station is greater than 2.67 c/kWh. However, the benefits of the recommended efficient energy use measures will increase with time, well-beyond 2010.

Towards Victoria’s Clean Energy Future 31 7. Employment gains from substituting renewable energy for coal

One of the economic advantages of substituting efficient energy use and renewable energy for all or part of a coal-fired power station is that there is a net gain in jobs within the State per kilowatt-hour of electricity generated. This is particularly important at a time when jobs in coal mining and the centralised electricity industry are falling.

To assess employment in the coal-fired electricity industry completely, it would be necessary to examine coal-mining, power generation, transmission, distribution and retailing. Unfortunately a complete database covering all these aspects together does not exist. However, there are data for the electricity industry as a whole (without coal mining) showing that employment in the industry decreased by 50% to 32,700 over the period 1991 to 1999 (Australian Bureau of Statistics, 2000). Another time series from the Australian Bureau of Statistics (2004), representing coal mining from the whole of Australia, shows a 42% decline in full-time coal mining jobs from about 37,000 in November 1985 to about 21,000 in November 2003. The employment losses in the electricity industry are the result of industry restructuring that commenced in the early 1990s, while those in the coal industry are mainly the result of increasing automation. In the Latrobe Valley brown coal is excavated with giant dredges made overseas, which place the coal onto conveyor belts that feed it into the nearby power station, untouched by human hand.

Over the past decade, wind power has been the fastest growing energy technology in the world, with an average growth rate over the past 5 years of about 32% per annum and for the past decade about 25% per annum (see Figure 1). This rapid growth presents some problems for estimating employment: e.g. in separating the short-term on-site construction jobs from the long- term jobs in manufacture, operation and maintenance; and in separating those jobs which are created by completed projects from those under construction and in planning.

Here we present two approaches to comparing employment in coal and renewable energy industries: a case-study approach and an approach that incorporates more extensive industry data.

MacGill, Watt and Passey (2002) compared direct employment involved in the manufacture, construction and operation of a coal-fired power station, a biomass cogeneration plant and a wind farm, each commissioned in Australia since 2000 (Table 6).

Towards Victoria’s Clean Energy Future 32 Table 6: Case studies of total Australian employment for different types of base-load power station

Power Description Australian Total Australian station content (% of employment (name) cost) (job-yr/TWh) Tarong North Coal-fired, rated 450 MW, baseload 26 49 Albany wind Wind farm, rated 21.6 MW 44a 120 farm Rocky Point Cogeneration, rated 30 MW, fuel: 50 220 bagasse + sawmill waste Source: MacGill et al. (2002). a. More recently commissioned wind farms have a higher Australian content and it seems likely that, if the industry continues to expand in Australia at the global average rate, it may be possible to manufacture most of the components in Australia, thus reaching an Australian content of about 80%.

Figure 1: World cumulative installed wind power capacity in GW, 1992-200320

50 40 30 20 10 0 1992 1994 1996 1998 2000 2002 End of Year

A detailed examination of employment in the wind power industry is given in a Danish study based on 1995 data (Vindmoellenindustrien,1996). The study uses input-output analysis to calculate the total direct and indirect ‘jobs’ created by the manufacture of wind generators and their components in Denmark, plus installation of wind generators, research, consultancy, etc. In that paper ‘indirect’ employment refers to purchases from Danish subcontractors and their subcontractors throughout the economy. Taking into account that Danish wind generator manufacturers supplied about half the world market, the study finds that worldwide employment in the wind power industry was in the range 30,000 to 35,000 ‘persons’ in 1995, when world wind power capacity was 4,778 MW. (As shown in Fig. 1, world installed wind power capacity at the end of 2003 was about 40,000 MW.) However, we cannot deduce job-years/kWh from this without making some assumptions.

The European Wind Energy Association (c.2004) uses 1998 Danish employment data and obtains 17 job-years/MW manufactured and 5 job-years for every MW installed. With capacity factor 0.3 and wind turbine lifetime 20 years, the 22 job-years/MW becomes 418 job-years/TWh, where 1 TWh = 109 kilowatt-hour. This includes both direct and indirect global jobs, but does not include jobs in operation and maintenance.

20 Source: 1992-2001 data from BP, www.bp.com/; 2002 and 2003 data from American Wind Energy Association website, www.awea.org.

Towards Victoria’s Clean Energy Future 33 The world’s largest manufacturer of wind generators, Vestas, has production facilities in Denmark, Germany, India, Italy and Scotland21. On 31 December 2002 it had a total of 6,182 employees, although it did not specify how many of these were part-time. In year 2002 Vestas and its associated company installed 1,640 MW of capacity.

Although there are serious shortcomings and large gaps in the data, an attempt is made in Table 7 to compare job-years/TWh for coal-fired electricity and wind power in Australia. In constructing the table we draw upon the Danish and other European studies as well as upon MacGill et al. (2002). We also distinguish between global jobs and Australian jobs.

Table 7: Comparison of employment in coal and wind electricity (job-years/TWh).

a. COAL

Method & data source Manufacture Fuel, Total & installation operation

& maintena nce 1. Australian electricity industry without coal, (ABS) 53 2. Australian coal industry (ABS & Productivity 10 Comm.) These jobs must be added to those in Row 1. 3. Australian electricity generators (from annual 12-21 reports). These jobs should be included in those in Row 1. 4. Tarong North power station, includes some 7 (Aust. only) 42 49 indirect jobs; Aust. content 26%, Aust. jobs only. (MacGill et. al. 2003)

b. WIND 5. Extrapolation from Danish data to global 418 direct+indirect global jobs. (EWEA: www.ewea.org) 6. Vestas, direct jobs only in countries where it has 59 Unknown production facilities (www.vestas.com) (direct only) 7. Albany wind farm, includes some indirect jobs, 65 52 117 Aust. content 44%, Australian jobs only (MacGill et. (Australia al. 2003) only) 8. ditto with hypothetical Aust. content 80%, 213 Australian jobs only Source: Diesendorf (2004)

21 In 2003 Vestas opened a components manufacturing plant in Wynyard, Tasmania and in 2004 the Victorian Energy Minister announced that another wind turbine manufacturer would open a factory in rural Victoria. With the Federal Government’s refusal to expand MRET, some of the new Victorian jobs and a proposed expansion of the Wynyard factory are now on hold.

Towards Victoria’s Clean Energy Future 34 From this rather limited data set and several untested assumptions, the following preliminary conclusions are drawn (Diesendorf, 2004):

• The coal-fired electricity industry, including the contribution of coal mining, provides about 63 job-years/TWh in Australia in total. However, taking into account the low Australian content of 26%, world jobs could be about 240 job-years/TWh.

• In coal-fired electricity there are more Australian job-years in fuel, operation and maintenance than in manufacture and construction.

• In wind power, there are about 117-184 job-years/TWh in Australia (with 44% Australian content) and about 265-418 job-years/TWh in the world. Most of these jobs are in manufacturing and installation, not in operation and maintenance.

• With 80% Australian content, employment in wind power in Australia could rise to 213-335 job-years/TWh.

• So, with current Australian content, there could already be 2-3 times the job-years/TWh in Australia from wind power compared with coal power. If the Australian content of wind farms can be increased to 80% as projected, 3.6-5.6 times more job-years would be created per TWh in Australia from wind compared with coal.

• It seems unlikely that the Australian content of coal-fired electricity could be increased, because the Australian market is too small for the large imported items, such as the huge dredges used in open-cut mining and turbo-generators rated at hundreds of megawatts.

• More and better data are needed on job-years required to build and install a MW of wind power and coal power and the job-years required to fuel, operate and maintain these power plants over their respective lifetimes.

• It may not be possible to capture the full employment potential by considering single wind farms and single coal-fired power stations. For instance, R&D, wind energy data collection and analysis, and the use of existing infrastructure may be overlooked.

• Without using systematic Input-Output Analysis, it is difficult to find all the indirect jobs involved in providing components of a wind farm. This remains as a topic for future research.

It is sometimes argued that the higher job creation potential of renewable energy is merely a reflection of the low productivity of jobs in renewable energy. It is indeed possible that over a period of decades the total number of global job-years/kWh in renewable energy will decline until it converges to that of coal. However, our main point is that a much higher Australian (and indeed Victorian) content can be achieved in the renewable energy technologies that are likely to make the main contributions to the clean energy mix -- namely solar hot water, bioenergy and wind power -- than in coal-fired electricity. In other words the number of local job-years/kWh in renewable energy will always be much higher than in coal.

Towards Victoria’s Clean Energy Future 35 Another standard yet incorrect objection is that distributed, renewable energy technologies will always be more expensive and less efficient economically than coal, because of the smaller scale and resulting labour-intensive nature of renewable energy technologies. Therefore, it would be more efficient (in economic terms) for Australia to continue to export primary produce and purchase coal technologies (with capture and geosequestration of CO2 if required for environmental reasons) from overseas. Investing in renewable energy is simply a “make work scheme”.

This argument is fallacious because the low price of coal-fired electricity is not simply a measure of its economic efficiency, but mainly of the failure to include in its price the very real environmental and health costs of its use. Projections by the International Energy Agency of the minimum future costs of coal-fired electricity with capture and geosequestration of CO2 put it at about 9 c/kWh, that is, higher than the current costs of electricity from wind power and biomass residues (Diesendorf, 2003; Saddler, Riedy & Passey, 2004). The European ExternE study found that just a few of the environmental and health costs of coal-fired electricity amounted over 70 Euro/MWh (about 12.3 c/kWh), which are additional to the economic costs (Rabl & Spadaro, 2000). Even allowing for the lower population density and hence lower exposure to pollutants in Australia compared with Europe, yields an environmental and health cost of over 7 c/kWh. A cleaner energy scenario, if implemented in the form of packages of cost-effective efficient energy use offsetting the additional costs of renewable energy, could turn out to be much less expensive than continuing with coal (Saddler, Diesendorf & Denniss, 2004, Table 10.5).

Towards Victoria’s Clean Energy Future 36 8. Conclusion

To allow the construction of new (or the extension to lifetimes of old) conventional coal-fired power stations would severely undermine our ability to make the transition to a much cleaner energy future by 2040. In particular, to allow the old brown coal-fired power station, Hazelwood, to continue to generate from 2009 until 2031 would lock in a total of 380-407 Mt of Victoria’s CO2 emissions. In Victoria two different scenarios, both potentially viable, have been offered as alternatives to ongoing development of coal fired assets. The energy mix discussed by MMA contains large contributions from imports of electricity from black coal, and from Victorian natural gas, but little renewable energy. Our own energy mix does not involve the importation of any fossil fuelled electricity, instead offering a greater contribution from renewable energy sources, especially wind power and bioenergy, and either natural gas or a reduction in exports of Victorian electricity. This is a much cleaner energy system that reduces CO2 emissions by 13.8 Mt per year in 2010 and creates many more local job-years.

In mainland Australia, employment in coal mining and in the conventional electricity generating industry (almost all coal-fired) has been declining rapidly as a result of automation and industry restructuring. The Australian wind power industry is expanding rapidly, driven mainly by the Mandatory Renewable Energy Target (MRET). If the State Government policy options recommended in this paper are implemented, then wind power and bioelectricity can be expected to continue to grow and gain high a local content. Under these conditions wind power will supply 4-6 times the number of local job-years per kWh of electricity compared with the local jobs associated with coal mining and coal-fired electricity generation combined, and the bioenergy industry could create even more local jobs per kWh than wind power. Efficient energy use is also an excellent creator of local jobs.

State Government policies would be needed to encourage the new renewable energy industries to locate their manufacturing facilities in regions that are currently losing jobs in coal and conventional electricity generation. Thus a win for the environment could be achieved simultaneously with a win for employment.

More work is required on the development of efficient energy use strategies and specific measures for Victoria. The implications for employment in the state of expanding energy efficiency and renewable energy industries also need further investigation. Mapping of Victoria’s bioenergy resources is another priority. However, this suggested research should not be used as an excuse to delay implementation of the proposed policies and strategies for a clean energy future.

Maintaining an electricity generation mix that is 97% brown coal could offer a substantial economic risk to the State. With Russia now having ratified the Kyoto Protocol, there is a likelihood of carbon constraints being imposed against countries that have not ratified. Post-2012 more substantial greenhouse gas emission target could be set. Under such conditions conventional brown coal-fired electricity will be the most heavily constrained, either by regulation or by economic instruments. Current and future investments in electricity generation should surely be governed by sound business principles, which involve choosing a portfolio of investments with different risks. Although wind power and bioenergy are more expensive than

Towards Victoria’s Clean Energy Future 37 coal-fired electricity at present, they are much less risky under circumstances of global climate change, and their capital and operating costs will continue to decline for decades. Efficient energy use is both cost-effective and low in risk.

9. Acknowledgements

I thank Melanie Hutton, from WWF Australia, Darren Gladman, from Environment Victoria, Alan Pears, from Sustainable Solutions, Richard Denniss, from the Australia Institute, and Steve Schuck from Stephen Schuck and Associates for valuable comments on the manuscript and for assistance in obtaining data and reports. Errors, omissions and opinions are the responsibility of the author.

Towards Victoria’s Clean Energy Future 38 10. References

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Towards Victoria’s Clean Energy Future 41 Appendix A: Why we need an economic mechanism to enable gas and renewables to compete with coal-fired electricity

Let’s start by comparing gas-fired and coal-fired electricity with the same capacity. Coal-fired electricity has high capital cost and low running cost, while gas-fired electricity has low capital cost and high running cost. For simplicity, consider an electricity grid without hydro. In theory there is an optimal mix of coal- and gas-fired electricity in which the coal runs as base-load (i.e. 7 days per week for 24 hours per day) while gas is used mainly to meet the peaks. The mix is ‘optimal’ in the sense that the annual cost (capital plus operating) is minimised.

Now what happens if we wish to reduce CO2 emissions by replacing some of the base-load coal- fired power stations with combined cycle gas-fired power stations? In theory this is economically viable provided the long run marginal cost (LRMC) of gas-fired electricity is less than that of coal-fired electricity. LRMC is essentially the annualised capital plus operating cost.

With the fuel price of natural gas at about $3/GJ and that of coal about $1/GJ it turns out that there is not much difference between the LRMCs of gas- and coal-fired electricity. Depending upon the discount rate, gas may be slightly cheaper, provided that it is not run 24x7. Balfe (c.2003) has explored the sensitivity to fuel prices of the competition between coal, gas and coal seam methane for generating electricity. Quite small changes in fuel prices can shift the balance between coal and gas. In theory, the decision rests on the values of the respective LRMCs.

Presumably on this textbook basis, the Pelican Point combined-cycle gas-fired power station was built a few years ago in South Australia. This power station comprises two generating units, but one of these has recently been shut down and ‘mothballed’. This is because, in the National Electricity Market (NEM), the decision to operate a power station is made on the basis of its short run marginal cost (SRMC), which comprises its operating costs (fuel, other operation and maintenance) only. So, even though Pelican Point was economic to build (in terms of LRMC), it is uneconomic to operate (in terms of SRMC) except as intermediate load (i.e. running for only a few hours per day). Clearly there is insufficient demand for intermediate load in South Australia to allow both units of Pelican Point to operate22.

If gas is to play a significant transitional role in reducing CO2 emissions from the electricity industry23, then there are only two choices: either a fundamental premise of the National Electricity Code (i.e. the market rules) would have to be changed to take account of the need to reduce CO2 emissions, or the relative prices of coal and gas fuels would have to be changed.

Within the electricity industry, among economists and within government, the general view is to keep the Code and use economic instruments. A carbon tax or levy, or tradeable emission permits, would have the effect of increasing the price of coal relative to gas and so improving the economics of base-load gas-fired power stations relative to coal-fired. These economic

22 By the way, restarting the mothballed part of Pelican Point could contribute to the alternative to Hazelwood by reducing exports of electricity from Vic to SA. 23 Generally speaking, to substitute for a large coal-fired power station, we would need efficient energy use, renewable energy and natural gas, until the industry capability of the first two options has been built up to a larger scale.

Towards Victoria’s Clean Energy Future 42 instruments would of course also reduce the price gap between renewable energy sources and coal, but would be unlikely to close it completely. However, if these measures led to no new conventional coal-fired power stations being built, they would also drive up the price of gas, thus further narrowing the gap between gas-fired electricity and the cheaper renewable sources, wind and biomass residues.

Incidentally, MMA (2003) seems to believe that increasing electricity prices would damage the economy. That is not necessarily true. Most very large electricity users have long-term contracts and would not feel the increases for many years. For most small businesses electricity is a small part of business expenditure. The impact on medium-sized business is less clear – it is possible that in most cases improvements in the efficiency of energy use would compensate for the increased electricity prices. It could also be argued that the economy is already paying for some of the environmental and health damage caused by coal burning. But this damage is treated as an externality, i.e. not included in the price of coal-fired electricity.

From the viewpoint of sustainability, the main concern is surely social equity: the impact of increasing residential electricity prices on low-income earners. Here the role of government is to ensure that rising price of a unit of electricity is offset by reduced number of units consumed by low-income earners, so that their energy bills remain the same. The number of electricity units consumed must be reduced, not as a result of freezing in the dark, but by sound energy efficiency measures. Hence the policy recommendations 5.6 - 5.8.

Towards Victoria’s Clean Energy Future 43 Appendix B: Demand management fund

Recognising the major barriers to the adoption of cost effective clean energy options, governments in 18 states of the USA and numerous other nations, including the UK, Denmark, Netherlands and Norway, have established dedicated funds to encourage energy efficiency and demand management. These funds are usually raised by a small levy on electricity bills (typically around 1 to 2% of total utility revenues).24 These DM funds are usually administered by either government agencies or utilities, with transparent reporting. Based on US experiences, demand management activities generally cost less than US$0.03 per kWh saved. This is significantly less than the cost to generate and supply a kWh of electricity.

The NSW Government has established a high level taskforce to report on establishing such a Demand Management Fund in NSW.

24 Martin Kushler, Dan York and Patti Witte, April 2004, Five Years In: An Examination of the First Half-Decade of Public Benefits Energy Efficiency Policies, ACEEE.

Towards Victoria’s Clean Energy Future 44 Appendix C: Remove barriers to energy efficiency in network price regulation Transmission and distribution networks make up about half of total electricity costs. These networks are natural monopolies and are therefore subject to price regulation. How regulators set prices can provide powerful incentives for or against particular technologies. Economic regulators often inadvertently obstruct efficient demand side management (DSM) by imposing a simple maximum price cap (cents/kWh) form of regulation on the network businesses. This ties network businesses’ revenue to total kWh sales volume and means that distributors have an incentive to encourage consumers to use more kWh in order to maximise sales volume and therefore maximise revenue and profit. In these circumstances, energy efficiency initiatives that assist consumers to save money by using less electricity will reduce network businesses’ revenue and therefore profit. The “weighted average price cap” adopted by the Essential Services Commission (ESC) in Victoria creates such perverse incentives. The more a distribution network business helps their customers to save energy, the less profit the network business receives. Even where it is cheaper for the network business to help customers to save energy than to invest in more network infrastructure, the infrastructure option is more profitable because the network business has no way of recovering investment in energy efficiency. The current Victorian price regulation system of the ESC, arbitrarily rewards network businesses that encourage wasting energy and penalises network businesses that help consumes to save energy. Such a system has no place in twenty-first century Australia yet the ESC appears committed to continuing this perverse and archaic system for a further five years from 1 Jan 2006. Recognising these barriers to cost effective energy efficiency programs, the Independent Pricing and Regulatory Tribunal of NSW (IPART) has adopted several measures in order to counteract the perverse incentive of a price cap for the regulated distribution network prices in NSW commencing 1 July 2004.25 These measures include: • Network businesses are permitted to retain the benefits of capital and operating expenditure avoided through DSM during the 2004-09 regulatory period; • Network businesses are permitted to recover revenue foregone as a result of energy efficiency program during the regulatory period; and • Network businesses are permitted to pass on to consumers energy efficiency program costs incurred during the regulatory period, up to a maximum value of the avoided distribution costs. The following measure is recommended: The Victorian Essential Services Commission should ensure that the system of distribution network price regulation to commence 1 Jan 2006 rewards rather than penalises distribution networks that effectively help their customers to save energy. Therefore, the Essential Services Commission should adopt measures equivalent to or better than the NSW IPART 2004-09 distribution network pricing determination.

25 IPART, NSW Electricity Distribution Pricing, 2004/05 to 2008/09 Final Report, June 2004 p.90

Towards Victoria’s Clean Energy Future 45 Towards Victoria’s Clean Energy Future 46 Appendix D: Environmental impacts of bioenergy and wind power

D.1 Bioenergy

In considering the environmental impacts of bioenergy, we must keep in mind that approximately 90% of modern bioelectricity generating capacity in the world uses the direct combustion of solid biomass. Since this report aims to substitute for coal-fired power station(s) by 2010, the main focus is on direct combustion of biomass. However, beyond 2010 it is expected that there will be a much greater use of more efficient conversion technologies in which biomass is gasified or liquefied and then converted into electricity either by combustion or by electrochemical means (e.g. a fuel cell). Engineered anaerobic digesters are likely to provide a role for conversion of wet wastes to produce a combustible gas, while having several other benefits. The main physical and chemical processes for converting biomass into other energy forms are discussed by Sørensen (2000, Chap. 4) and Stucley et al (2004).

International R&D of biomass energy conversion and its environmental impacts is coordinated by IEA Bioenergy (www.ieabioenergy.com) – see especially the work of Tasks 30, 31, 32 and 38. Bioenergy Australia (www.bioenergyaustralia.org) has collected a wealth of information. CSIRO Sustainable Ecosystems is working on a sustainability framework for bioenergy projects.

The principal environmental impacts that must be considered in using biomass to generate electricity are greenhouse gas emissions (including those from energy inputs), air pollution, solid waste, land use and soil nutrient loss. A brief summary follows.

Greenhouse gas emissions

Biomass is a renewable energy source, while coal is not. Under the Kyoto Protocol and from a scientific point of view, sustainably managed biomass is carbon neutral, in that the CO2 liberated during combustion is recaptured through photosynthesis during the regrowth of an equivalent amount of biomass. On the other hand, coal releases fossilised carbon, and is not replenished (at least not within millions of years).

In general some energy inputs to the use of bioenergy may come from fertiliser use and transportation of the biofuels produced. There is no doubt that, if a large fraction of Australia’s petrol and diesel were replaced with biofuels, energy inputs (for transportation of the biofuel to service stations) would be a significant fraction of the energy content of the biofuel. Significant life cycle analyses on the use of biomass have been conducted by IEA Bioenergy and the US National Renewable Energy Laboratory (NREL), among others. Generally the results are that, for a typical bioenergy project, the energy inputs in the form of fossil fuels tend to be only a few percent of the bioenergy produced.

For the current proposal for producing bioelectricity in New South Wales, there would be no additional fertiliser use and, since this report only considers transportation of biomass from field to power station over distances of 50 km or less, the corresponding energy inputs and associated CO2 emissions are negligible.

Towards Victoria’s Clean Energy Future 47 Air pollution

According to the National Pollutant Inventory (http://npi.gov.au), coal-fired electricity (including coal mining) is a very big emitter of nitrogen oxides, sulphur dioxide, fluoride, hydrochloric acid, boron, particulate matter, mercury and sulphuric acid. In comparison, if biomass is combusted under appropriate conditions of temperature and pressure, it emits much less26 gaseous and particulate air pollution than coal, per unit of electricity generated. Very small quantities of dioxin are emitted from the combustion of some types of biomass, however this can be minimized by appropriate system design. The exception is dioxin emitted by the incineration of municipal solid waste, which contains plastics—this is a serious problem and in the opinion of this author all such incineration should be banned.

Solid waste

Ash disposal from biomass combustion is generally not a problem, since for instance stem wood contains as little as 0.4% ash, compared to bituminous coal which can contain over 20% ash. In some instances fly ash from biomass combustion is certified as a soil amendment. Bottom ash is also sometimes used as road base, displacing quarried material. The amount of wood ash is very little —and biomass power plants do not require ash dams or major works required for coal-fired power. Biomass ash is generally free of toxic metals prevalent in coal ash.

Land use

As discussed in Section 4.2, New South Wales has huge biomass reserves from both crop residues from existing wheat and other grain crops and from the potential for short-cycle tree crops grown in the wheat belt for multiple environmental and economic benefits. Neither of these sources requires a significant area of additional land. Coal mining on the other hand uses and degrades large areas of land.

Soil nutrient loss

Nutrient loss from the use of wheat residues is kept low in this report by leaving one-third of the residue on the ground. Short-cycle tree crops on the wheat belt will share in the fertiliser received by the wheat. It is also possible to backload biomass ash from power stations to the fields on the same trucks that collect the biomass from the fields. Nevertheless, this issue requires further research.

In summary, the environmental impacts of well designed bioelectricity systems are in general much less than those of coal-fired electricity.

D.2 Wind

Wind power is one of the most environmentally sound of all renewable energy sources. But, one of its fundamental characteristics is that the power in the wind is proportional to the cube of the

26 The main exception is the typical domestic wood-burning heater used in Australia. However, the latest technology of burning wood pellets reduces these domestic emissions substantially.

Towards Victoria’s Clean Energy Future 48 wind speed. This means that a site with a 25% higher wind speed will produce double the wind power. As a result, wind turbines are often sited in prominent places such as on ridges, hill-tops and near the coast, where they can catch the best wind.

Some opponents of wind power deny the scientific evidence of human-induced climate change and bolster their subjective aesthetic judgements (to which they are entitled) by disseminating exaggerated and in some cases false notions about the alleged environmental impacts and technical performance of wind power. This appendix addresses the myths and misunderstandings that opponents regularly disseminate.

During operation modern wind turbines emit essentially no chemical pollution and their only physical emission, noise, is inaudible beyond several hundred metres, except under very rare topographical conditions.

Of the thousands of existing wind farm sites around the world, there are very few (notably Altamont Pass in California and Tarifa, Spain) where bird kills have been a significant problem and only two (both in West Virginia, USA) where bat kills are a problem27. Australian studies on the impacts of windfarms on birds show that there is an even lower level of impact than was predicted on the basis of northern hemisphere experience and approved by planning authorities prior to the wind farm being built. This may be because Australia's geography and bird ecology are different from in the northern hemisphere, and so we do not experience the same concentrations of migrating birds found in Europe and the USA. With modern wind turbines and careful siting, both bird and bat kills are rare. In comparison, on a single foggy night, about 3,000 birds were killed when they collided with the chimneys of a thermal power station in Florida, USA (Maehr et a., 1983).

To assess the biodiversity impacts of coal versus wind power, the global impacts, as well as the local, must be taken into account. Global climate change resulting from the anthropogenic greenhouse effect is predicted to wipe out many species of animals and plants. Australian ecosystems are some of the most vulnerable to climate change. In Australia the biggest single source of greenhouse gas emissions is coal-fired power stations. By substituting for coal and other fossil-fuel power stations, wind power reduces carbon dioxide emissions and therefore saves global biodiversity.

To reduce local biodiversity impacts of windfarms, planning guidelines for the siting of wind developments have been put into place by Federal, State and Local Governments. Proposed wind developments have to receive Federal planning approval under the Environment Protection and Biodiversity Conservation Act and also under any local regulator. This addresses the protection of wetlands and other specific areas of environmental importance and sensitivity.

Wind farms are highly compatible with agricultural and pastoral land, spanning approximately 25 ha per MW of installed capacity, but actually occupying only about 1-3% of that land (0.25- 0.75 ha/MW) with towers, access roads and other equipment. The Australian Wind Energy Association has developed Best Practice Guidelines for the Implementation of Wind Energy

27 Fortunately the bats concerned do not belong to an endangered species.

Towards Victoria’s Clean Energy Future 49 Projects in Australia. The industry is further refining these guidelines with regard to landscape and bird assessment protocols in partnership with environmental groups and Federal and State Governments.

The energy required to build a wind turbine is generated in 3-5 months of operation, so, with a 20-year lifetime, a wind turbine generates 48-80 times the energy required to construct and install it. Wind turbines are highly efficient in capturing renewable energy, since blades occupying only about 5% of the swept-out area can in practice extract over one-third28 of the wind energy flowing through that area. As a result the material inputs to a wind farm are modest and indeed are similar in quantity to those used in the construction of an equivalent fossil-fuelled power station..

Some of the incorrect technical claims about wind power are that: • Wind farms cannot replace a coal-fired power station without expensive, dedicated long- term storage. • Because of wind power’s intermittency, it has no value in meeting peak demand. • To maintain a steady state of voltage and frequency from a wind farm requires much additional expense. These claims are refuted by Saddler, Diesendorf and Denniss (2004, Section 7.2) and the references cited therein.

One of the most peculiar arguments by some opponents of wind power is that the technology is contributing only a fraction of 1% of electricity in Australia and globally and therefore, by implication it can never make a significant contribution. But, averaged over the past 15 years or so, wind power has been the fastest growing energy technology in the world, with an average growth rate in capacity of about 25% per year. If it continues to grow steadily, wind power will be able to contribute 20% of Australia’s electricity generation by 2040, as envisaged in A Clean Energy Future for Australia. Interestingly, in Denmark, where wind power already contributes 20% of electricity, there is very little community opposition. Apart from a few electricity utility managers, who object to the ‘inconvenience’ of being required by law to accept into the electricity grid wind power from many distributed sources, Danes support wind power as an environmentally sound, job-creating technology that has already substituted for coal-fired power stations in Denmark.

For further reading on the technical capabilities and environmental impacts of wind power see: Australian Wind Energy Association (AusWEA), fact sheets (www.auswea.com.au); American Wind Energy Association (www.awea.org/faq/index.html, go to Wind Energy and the Environment); European Wind Energy Association’s fact sheet, Wind Energy and the Environment (www.ewea.org); and Saddler, Diesendorf and Denniss (2004, Section 7.2)

28 The maximum theoretical extraction is 59%.

Towards Victoria’s Clean Energy Future 50 Units and Conversion Factors

Powers of 10 Prefix Symbol Value Example kilo k 103 kilowatt kW mega M 106 megawatt MW giga G 109 gigajoule GJ tera T 1012 terawatt-hour TWh peta P 1015 petajoule PJ

SI units Basic unit Name Symbol length metre m mass kilogram kg time second s temperature Kelvin K

Derived unit Name Symbol energy joule J power watt W potential difference volt V pressure pascal Pa temperature degree Celsius ˚C time hour h

Conversion factors

Type Name Symbol Value energy kilowatt-hour kWh 3.6 x 106 J = 3.6 MJ energy terawatt-hour TWh 3.6 x 1015 J = 3.6 PJ energy litre of petrol L 3.2 x 107 J energy m3 of natural gas at STP 3.4 x 107 J energy tonne of NSW black coal t 23 GJ energy tonne of Vic. brown coal t 10 GJ energy tonne of green wood t 10 GJ energy tonne of oven-dried wood t 20 GJ power kWh per year kWh/y 0.114 W time year y 8760 hours pressure atmosphere 101.325 kPa

Towards Victoria’s Clean Energy Future 51