by Paul Graham, Chief Economist, CSIRO Energy
CSIRO has now completed its second Australian National Outlook process. The goal was to solve the problem of how we can provide a standard of living for the next generation that is as good as, or better than, what we presently enjoy.
In the energy sector, the specific challenges in meeting this goal are to provide improved energy affordability and reduce greenhouse gas emissions to levels that minimise the impacts of climate change.
Consistent with Australia’s commitments to 2030, which were taken to the Paris Climate Convention, Australia presently has a mix of state and commonwealth climate policy goals and mechanisms.
However, none of these policies are sufficiently developed to provide a clear line of sight on how the energy sector should respond over the long term – to 2060 and beyond. They are also subject to political change.
Given this uncertainty, the National Outlook recognises the potential for a variety of outcomes, but consistent with the stated goal, the report presents an Outlook Vision to reduce emissions to net zero by 2060.
To do this, the National Outlook finds that the electricity sector, an electrified transport sector and increased energy efficiency will be the major contributors to abatement.
Electricity and the role of renewables
The electricity sector’s comparative advantage in contributing to greenhouse gas abatement stems from the fact that it now has access to renewable electricity generation technologies that are cost competitive with fossil fuel technologies.
They cannot be beaten for costs on a new build basis, even when taking into account the additional cost of supporting variable renewables to deliver reliable and stable electricity. This very recent change in relative costs stems from two difficult-to-predict circumstances.
The first is that solar photovoltaics has been able to sustain a very high rate of cost reductions for longer than any other energy technology. Most energy technologies experience a period of high-cost reductions in their early adoption but, as their market share increases, they mature and cost reduction becomes harder to achieve. The costs of solar photovoltaics have continued to fall even during their ongoing ‘mature’ phase.
The second change that was overlooked was in regard to wind power. Wind did follow the normal cost reduction pathway, with the rate of capital cost reduction falling as its share in the market for new generation capacity matured.
However, while capital cost reductions slowed, the utilisation factor for wind kept growing. Larger turbines meant that wind turbines became better at capturing wind, particularly in low wind speed conditions.
While the growing size of wind turbines was not a secret, it was easy to overlook when falling capital costs for solar were making regular headlines in the media.
Major cost reductions in not just one but two renewable electricity generation technologies makes the economic case for renewables even more difficult to ignore. Wind and solar complement each other in the sense that their renewable output is less variable when their output is combined.
Two low-cost renewables also increase the geographical reach because where one type of technology might not be suited due to local weather, the other may be. Solar, in particular, can be deployed at multiple scales from kilowatts on rooftops – which is now the norm in Australia – to hundreds of megawatt farms that are growing in size and number every year.
The inevitable increased reliance on renewables and their continued falling costs mean we can expect a flatter outlook for electricity prices over the long term, with new renewable capacity preventing a return to the sustained price increases we have seen over the past decade in Australia.
In the transport sector, electric vehicles are the most promising solution. Unlike the electricity sector, electric vehicles are not currently competitive with conventional alternatives. The path to low-cost electric vehicles is more difficult.
At low volumes they will never achieve the same costs as conventional vehicles, which are produced at factories churning out several hundreds of thousands of vehicles per year. However, there is good reason to be confident that the competitive advantage will eventually switch to electric vehicles.
Global electric vehicle manufacturing is scaling up, assisted by various policy changes across many countries to encourage their early adoption. Also, battery costs have been delivering some impressive cost reductions. It appears batteries may be following the same path as solar photovoltaics and will continue delivering significant cost reductions, despite being a relatively mature technology.
Fuel cell vehicles will also play some role, although their exact share of the fleet depends on further reductions in the cost of the fuel cell and the emergence of a hydrogen supply chain. Hydrogen could play a number of roles in the energy sector within countries seeking to reduce greenhouse gas emissions.
The Outlook Vision scenario included the emergence of a hydrogen export industry. This simply recognises that Australia has an abundance of primary energy sources that could be exported to assist other countries, with fewer resources, to build an additional low emissions source into their energy mix.
Improvements in energy efficiency have accelerated in recent decades but, in most building and industry sectors, we remain far from accessing the full technical potential. This is both a challenge and an opportunity, since energy efficiency delivers cost savings as well as emissions reduction through reduced energy consumption.
With the expected flat trend in electricity prices and rising incomes, increasing the rate of improvement in energy efficiency means that electricity’s share of income could fall two thirds compared to the present day (in real terms).
The barriers to achieving this outcome are well known – competing priorities and split incentives between landlords and renters, among others. However, the recent historical success provides a more confident position from which to plan the next phase of improvements in building and equipment standards.
The energy sector has seen surprising technology improvements and evidence of the transition having already begun in electricity generation and energy efficiency.
This means that, despite the long-term nature of the Australian National Outlook, we can be confident that at least as far as the energy sector is concerned, providing better outcomes is achievable.