Peter Costello

Speeches

Address to the Energy Supply Association of Australia dinner

Address to the Energy Supply Association of Australia dinner

Parliament House, Canberra

10 October 2006

Thank you for inviting me to speak with you this evening.  I am delighted to be here.

First, let me congratulate ESAA on its active involvement in the energy policy debate.  The Government welcomes the high quality contributions that ESAA has made, particularly on energy market reform.

This evening, I will focus on the key developments, both globally and nationally, that are shaping Australia’s energy future.  And, I will highlight the opportunities and challenges that lie ahead, including the Government’s approach to climate change.

Economy

Australia’s economic performance over the past decade has been among the best in the world.  We are now going through our longest period of economic expansion ever.

Since March 1996, the economy has grown at an average rate of 3.5 per cent a year.  This is an exceptional achievement.  And, one that has led to Australia’s economy being acclaimed internationally as an example for others to follow. 

A recent editorial in the Financial Times (1 August 2006) reads as follows:

“What can you say about an economy that is a textbook case of good policies, well executed? That is the challenge facing the authors of the latest survey of Australia by the Organisation for Economic Co-operation and Development, which struggles to find any serious blemishes in the country’s recent performance. Though the OECD identifies some causes for concern, its report card is mostly straight “A”s.”

I will later raise some areas for concern. But the overall picture is that Australia’s strong economic performance is set to continue, with the economy forecast to grow by 3¼ per cent in 2006‑07.  This will be our 16th consecutive year of economic growth — growth that will be driven mainly by investment and a pick up in net exports.

Since the beginning of 2004, over $32 billion has been invested in the mining sector alone.  The rise in world demand for resources presents a significant opportunity for Australia.  And it is one we can not afford to miss.

The investment will boost supply capacity in Australia’s minerals and energy industry. The increased supply is a response to increased global demand.

Energy freeway

Rapid industrialisation in key emerging market economies provides Australia with an unprecedented opportunity to build an energy freeway, linking Australia with Asia — and the world. 

The supply of minerals and energy at globally competitive prices, down this freeway, supplied under long term contracts with security of supply and continuity of demand will underpin mutual advantage for suppliers and users.

To build this freeway means we must create open and efficient energy markets, remove impediments to exploration and development, promote energy-conserving technological change and — at the national level — put in place sound regulatory and policy frameworks which encourage trade both within Australia and internationally. 

Achieving this goal will provide a powerful spur for development and sustainable growth in our region — to Australia’s long-term benefit. 

Figure 1 – Asia and world energy consumption, coal

Figure 2 – Asia and world energy consumption, natural gas

Figure 3 – Asia and world energy consumption, oil

Figure 4– Asia and world energy consumption, nuclear

Asia’s share of world energy consumption has almost doubled over the past 20 years.  Its share of world coal consumption has increased from less than one‑third in 1985 to more than half in 2005.  And over the same period, its share of natural gas consumption has more than tripled.

Energy demand in developing Asia will continue to grow — as a result of population, industrialisation, rising incomes and urbanisation. China and India alone are expected to account for more than a third of the global growth in energy demand over the next 25 years.  Given limited domestic supplies, a major part of that will come from world markets.

Australia has the resources to meet this growing demand.

We have 9 per cent of global coal reserves and are the world’s largest coal exporter.

We have 19 per cent of proven recoverable reserves of natural gas in the Asia Pacific region.  That’s enough to maintain our current annual production level for at least another 75 years. As well, in May 2006, we became the first country to supply LNG to China.

We have the single largest share of low-cost uranium resources in the world and contribute 20 per cent of global uranium production.

As well, we have an excellent track record of secure, reliable supply and are well placed to help meet the growing energy needs of economies in our region. 

G-20

Resources are vitally important to all economies. And these big industrialised countries want to know they will have secure supplies at globally competitive prices. The broader implications of energy market development will be a topic for discussion at the forthcoming Group of Twenty, or  G-20, meeting of Finance Ministers and Central Bank Governors in Melbourne next month.

The G-20 is an ideal forum for such a discussion as it enjoys unique representation with the key resource producers including Saudi Arabia, Russia, Brazil, Canada, South Africa and, of course, Australia — as well as the main consumers, including the U.S., Japan, China and India.

As chair of the G-20 in 2006, I placed this issue on the agenda so we could look at: -

Firstly, the macroeconomic implications of changing global patterns of supply and demand.

And secondly, the role of open and well‑functioning global markets in underpinning consumption, production, investment and trade in minerals and energy.

One of the key outcomes we want to emerge from the G-20 discussions is on market‑based approaches that can help to address a range of policy challenges, including energy security.

While there is a range of national approaches to securing supply, large differentials in resource endowments imply that growing reliance on trade is inevitable. 

Some see this increased interdependence as a cause for concern.  We do not. We do believe it offers security, as long as global markets are functioning well.

Western Australian Gas

Open supply to world markets properly prices a resource. This pricing signal is critical for future investment and resource development.

I am concerned at attempts in Western Australia to prevent a substantial proportion of natural gas supplies from offshore areas being available for contestable purchase.

To say to a business that after millions of dollars of exploration and development that it can’t sell its product for the best price available sends a very bad signal. It introduces uncertainty about future investment. It sends the wrong signal about Australia and could subdue development at a time of massive global demand.

There has been experience of other countries having difficulty meeting contractual requirements and securing future LNG export contracts due to uncertainty created by government action to divert gas to domestic users.

Energy market reform

Rather than mandating a certain proportion of energy for domestic use, Australia needs to develop liquid, open, stable energy markets to ensure the right price signals will deliver the investment required to produce more resources.

Figure 5 - Australia’s energy consumption to 2030

Australia’s primary energy consumption will increase by around 60 per cent over the next 25 years, driven largely by electricity generation.

Figure 6 – Australia’s energy investment requirements to 2030

The total investment price tag for the energy sector — both to meet our domestic demand and export potential — is expected to be at least $260 billion over that period.  Not surprisingly, investment in electricity generation and transmission assets will make up the largest share of the pie.
To attract this investment, we need the right infrastructure — both physical infrastructure and regulatory infrastructure.

Current regulatory arrangements

Let me now come to an area for concern.

The Australian Government has never owned or built coal-fired or gas-fired generation assets. It has never owned or built gas fields. It has not built electricity transmission lines. It has never been a retailer in the electricity or gas markets.

Electricity generation, and the transmission, distribution, and retail of electricity and gas historically were an area of State responsibility.

We still have complex and differing State-based regulatory regimes. We have nine access regulators delivering different access principles. We have State governments who are asset owners, regulators and policy makers.  We have some States which have embraced privatisation and some that have not. We have some States which have already implemented retail contestability in both the electricity and gas markets and some which are yet to, are in the process of doing so.

Figures 7 and 8 – Generation and retail ownership

Australia cannot afford to have inefficiencies in our energy markets which impede investment. Australia needs a genuine national market for electricity that ensures supply is secure for both businesses and consumers.

Energy is a fundamental part of life in Australia. It’s used in almost every aspect of household activity. Our international competitiveness in all of our product and service markets depends on reliable, competitively priced energy.

The gains from implementing improved and nationally consistent energy regulation would drive greater productivity in the energy sector including better governance and regulatory practices and more efficient and timely investment.

The benefits of these, and other energy reforms, will of course flow through to the broader economy, as industrial and retail energy consumers gain access to more competitive and more reliable energy services.

Figure 9 – Current range of state energy regulators

I cannot emphasize the importance of continuing reform to create a truly national energy market. 

A truly national energy market would bring with it lower energy prices but also significant benefits in terms of energy security.

For example, a fully national electricity transmission grid — in terms of planning, investment and operation — would allow electricity to move freely between buyers and sellers. There is no difference between a unit of electricity produced in Queensland and Victoria – it has the same characteristics.

There is no difference in the product demanded by the user. The only variable is price. And we should connect the supplier and consumer at the lowest price available.

A national market will increase the choice of power supply options in the National Electricity Market (NEM).

This means more competition in the market and more efficient resource allocation — both of which can contribute to lower electricity prices.

A fully interconnected network also allows reserve capacity to be shared across regions.  This means improved system reliability and enhanced energy security.

The modelling done by ACIL-Tasman for the 2002 Parer Review shows that implementation of its reform recommendations would increase Australia’s real GDP by around $2 billion a year by 2010. 

Parer’s recommendations form the basis of the current reform agenda of the Ministerial Council on Energy ‑ or MCE.

By achieving all of these things, we can help to sustain Australia’s strong economic performance well into the future.

Key reform initiatives

With so much at stake, the Australian Government is committed to energy market reform.  The Ministerial Council on Energy or the MCE, chaired — but not controlled — by the Commonwealth, is in the process of implementing an extensive reform programme.

I acknowledge the work done by my colleague, Ian Macfarlane on progressing reform through the MCE process.

As you would be aware, the MCE’s reform programme has four key elements.

  1. Creating the Australian Energy Regulator — the AER — in July 2005 to replace multiple state energy regulators.  The AER is fully funded by the Australian Government.  And, in the last Budget, we allocated over $74 million to it over four years.

    The AER is an important element of the reform programme that the Australian Government fought hard to deliver.  State governments could not agree on an industry levy to fund the national energy regulator.  So, we stepped in and offered to fund the AER in return for the States and Territories agreeing to certain reform conditions, including the timely transfer of functions to the AER. 

  2. Implementing the MCE’s response to the Productivity Commission’s Review of the Gas Access Regime.  This review led to a new light-handed regulatory option, as well as incentives for investment in new pipelines.
  3. Establishing a new limited merits review model for both the gas and electricity sectors.
  4. Developing a common approach to network pricing across energy sectors.

MCE’s reform agenda is critically important to delivering an effective energy market regulatory regime.  And the Australian Government — through the MCE — wants to ensure it is implemented as soon as possible.

Key impediments to energy market reform

One thing that concerns me greatly is backsliding by the States and Territories on their initial reform commitments. It seems to me that there are some States more concerned with protecting their own markets rather than doing what’s in the best interests of business, consumers and the national economy.

In addition, there are States that want to be paid to do the things they were elected to do and have a responsibility to do in the first place.

At the end of 2002, COAG’s Energy Market Review, chaired by Warwick Parer, issued its final report.  A year later, based on the Parer Review’s conclusions, the MCE agreed to a range of reforms.  The challenge has been the implementation of these reforms in a timely manner.  And, it’s a challenge the States and Territories have struggled to meet.

It’s now nearly three years since the start of the current reform agenda, and it is interesting to look at its progress to date. 

At the end of 2003, the MCE proposed to COAG that the States and Territories would transfer a wide range of energy regulatory functions to the national regulator ‑ the AER.

By 31 December 2006, the AER was to assume responsibility for gas transmission, distribution and non-price retail regulation — and for electricity transmission, distribution and non-price retail regulation within the National Electricity Market. 

We are nearing the end of 2006, and the States and Territories are yet to hand over most of these responsibilities.

In November 2005, the MCE agreed to amend the Australian Energy Market Agreement.  One of these amendments was for the transfer of gas transmission regulation to the AER to be postponed from June 2005 to 1 January 2007.

But yet again, this deadline won’t be met.  The MCE recently released a bulletin announcing further slippage in the timeline — pushing the 1 January 2007 deadline back by another six months.  Gas transmission and distribution regulation are now not scheduled to be transferred until 1 July 2007.

Australia needs an efficient national energy market.  The agreed reforms must be implemented.  We can’t afford to wait.  Australia’s federal system of government, as represented in the MCE, should not hinder our ability to make these critical reforms when so much is at stake.

And while the National Electricity Market — or NEM — is now governed by one National Electricity Law, there are significant jurisdictional derogations from it.  And, some energy regulatory functions are still undertaken by State bodies. 

For example, NEM jurisdictions have handed over responsibility for regulating wholesale market activities and electricity transmission to the national regulator —AER.  But each NEM jurisdiction still has its own regulator for distribution and retail activities, and State energy ministers still retain statutory roles in these areas.

The same applies in the gas market where state regulators are still largely responsible for gas distribution, network access and retail regulation.
Slippage in some areas has also put at risk the timely implementation of other parts of the reform agenda.  For example, all electricity and gas distribution revenue reviews beginning after 1 January 2007 should be determined by the AER, according to the national rules. 

The States and Territories have also agreed that non‑price retail regulation would be transferred by 1 January 2008. 

And finally, the MCE agreed that from 1 January next year that the Australian Energy Market Commission would start assessing the effectiveness of retail competition in each jurisdiction, with the longer-term aim of phasing out retail price regulation. 

It is imperative that there is no further slippage on timelines given COAG announced a new round of reform initiatives as part of the National Reform Agenda in February 2006 which focuses on demand side management and improving pricing signals for consumers.

COAG also agreed to establish an expert Energy Reform Implementation Group — or ERIG, chaired by Bill Scales — to examine and report on proposals for:

  • achieving a fully national electricity transmission grid
  • addressing any structural issues affecting the efficiency and competitiveness of the electricity sector
  • and ensuring transparent and effective financial markets to support energy markets.

ERIG released an issues paper in July 2006 and will report by the end of the year.  I note that ESAA made a submission to ERIG.  Your involvement, along with other industry bodies, is important to the success of this process.

Greenhouse gas emissions

The final topic to address this evening regards the environment.

Global warming is a phenomenon that the Australian Government has recognised and is taking steps to address.

Because it is a global phenomenon any effective action requires international action to address, and Australia has to date more than met the Kyoto targets on greenhouse gas emissions.

The key weakness of Kyoto though was that it didn’t include major developing countries like China and India.

Australia’s total emissions are 1.5 per cent of global emissions. If Australia shut down all its power stations today, the saving in emissions would be replaced by China by the time of next year’s Grand Final. China adds the total of all Australian emissions each eleven months.

Australia played a key role in bringing together for the first time China and India, along with the US, Japan, South Korea and ourselves to form the Asia-Pacific Partnership on Clean Development and Climate – known as the AP6.

Australia has committed $100 million to this practical initiative, one of its main goals being to foster the development and deployment of clean technologies to address the climate change challenge, while encouraging growth and development.

Domestically, the Australian Government is supporting the ongoing innovation and commercialisation of renewable energy technologies through the $100 million Renewable Energy Development Initiative and the $500 million Low Emissions Technology Demonstration Fund to help the private sector demonstrate clean fossil and renewable technologies.

My view is that as the hottest and driest continent on earth, we have an interest in not making Australia hotter or drier.
Our energy policy must strike an appropriate balance between our environmental responsibilities and continuing economic growth.

Conclusion

The energy reform agenda must continue to be implemented. It must be embraced by all State and Territory Governments – our economic future depends on it.

We need to simplify regulation; improve the transparency of ownership; open up access to infrastructure and build a strong national market which delivers cheaper and more secure energy.

With access to vast energy resources we are in a strong position to capitalise on growth opportunities in both domestic and global energy markets.

While our federal system challenges our capacity to achieve these outcomes, we cannot stand still, but achieve an outcome that is in the best interest of the Australian energy industry — and the Australian people.

Thank you.

Address to the Energy Supply Association of Australia dinner [.pps, 102KB]

10 Oct 2006

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