Victoria's Clean Energy Future 2ndEdition

8/8/2019 Victoria's Clean Energy Future 2ndEdition

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January 2005 2nd Edition


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The Clean Energy Future Group came together in 2003 to commission a study investigating how to meetdeep emission cuts in Australias stationary energy sector. The Group published a Clean Energy Futurefor 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 1710www.sustainabilitycentre.com.auLiability - Neither Sustainability Centre Pty Ltd nor its employees accepts any responsibility or liability for theaccuracy 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 alternativeopportunities for the long term sustainable supply of power generation in Victoria, particularly through the increasedpenetration of renewable energy sources and energy efficiency measures.

WWF Australia, GPO Box 528, Sydney NSW AustraliaTel: +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, pleasecontact us at [email protected] or call 1800 032 551.

Front Cover Images left to right:

AGLs gas peaking power stationat Somerton, in Melbournes northern suburbs. The facility comprises four37.5 megawatt gas fired generating units. Courtesy of BCSE

Stanwell Corporations Toora wind farm. The wind farm consists of twelve turbines, producing 21megawatts of electricity. This is enough to power more than 6,600 homes, and prevents the release of 48,000 tonnesof greenhouse gas emissions per annum. The towers were manufactured in Bendigo, VIC. Courtesy of StanwellCorporation

Charles IFE Ltds 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 PiggeryFarm. The System generates electricity from biogas, conserves and recycles water and collects waste for sale asfertiliser. Courtesy of SEAV

Pacific Hydros Victorian hydro projects. Three hydro-electric stations were built on irrigation dams. Theyconvert previously wasted energy from water releases into clean electricity. Total average annual generation is 34GWh for the three stations. This represents over 37,000 tonnes of greenhouse gas savings per annum. Courtesy ofPacific Hydro Ltd

Solar and gas hot water heating. Courtesy of BCSE60L The Green Energy Efficient Buildings, Melbourne. This uses two thirds less energy than a similarstandard commercial building. Efficiencies are gained through widening internal temperature control band tobetween 19-26C, optimising natural ventilation and natural lighting, high efficiency artificial lighting and lightfittings and solar shading to name a few. All electricity comes from renewable sources resulting in close to zerogreenhouse gas production. Courtesy of BCSE


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Contents

Executive Summary 4

Section 1 Introduction 6

Section 2 Victorian electricity backgrounder 82.1 Victorias electricity industry 82.2 State Governments greenhouse policies and strategies 9

Section 3 Reducing demand growth and cleaning up energy supply 113.1 Efficient energy use 113.2 Supply options for capacity and energy 133.3 MMA Report 143.4 A cleaner energy mix 16

Section 4 Energy reserves 204.1 Gas 204.2 Biomass 214.3 Wind 21

Section 5 Recommended policies and strategies 225.1 Expand MRET 225.2 Require energy retailers to surrender RECs 235.3 Place greenhouse intensity constraint upon baseload power stations 235.4 Implement tradeable emission permits or carbon levy 245.5 Remove subsidies for fossil fuels and energy wastage 255.6 Encourage the purchase of solar hot water 265.7 Mandate Energy Efficiency Measures 265.8 Encourage voluntary energy efficiency measures 285.9 Remove barriers to energy efficiency in network price regulation 285.10 Local jobs in appropriate regions 29

Section 6 Allocation of costs of the alternative mix 306.1 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 andrenewables 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


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Towards Victorias Clean Energy Future 4

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. byextending the life of the old 1600 MW Hazelwood power station in the Latrobe Valley), developgas fired power assets (e.g. Origin Energys proposed natural gas-fired station near Mortlake)and develop renewable energy power assets (eg Pacific Hydros Portland Wind Project). Anydecision to continue supporting coal fired power asset development would lock the State intoCO2 emissions that could dwarf any current and proposed measures for reducing the Statesemissions.

This report, TowardsVictorias Clean Energy Future,shows that cleaner energy sources couldsubstitute for both the capacity and energy generation of a 1600 MW base-load, coal-fired stationby means of a mix of realistic supply-side and demand-side initiatives by 2010. This cleanerenergy system would reduce Victorias carbon dioxide emissions by about 13.8 million tonnesper year. If adopted, it would be cost-effective and would set the State on the path away fromcoal-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 cropresidues), and either natural gas combined cycle and cogeneration or a reduction in exports ofVictorian (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 majorrefurbishments and other life-extensions of old power stations;

either a carbon levy or tradeable emission permits of the cap and trade type implementedjointly with other States; and

the requirement that energy retailers submit Renewable Energy Certificates (RECs) annuallyto the State Government as a licence condition.

Recommended demand-side measures include:

the extension of energy performance standards from new buildings to buildings with newrenovations, all existing government-owned and government-tenanted buildings, and someother categories of existing buildings;

substantial expansion of the use of solar hot water encouraged by both incentives andpenalties; 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 aunit of electricity to the Victorian community. However, the demand-side energy efficiency


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savings will reduce the number of units purchased by consumers, with the net result that energybills will either decrease or remain approximately the same Then the challenge in moving ontothe clean energy pathway becomes neither technological nor economic, but rather organisationaland institutional: namely, how to deliver cost-neutral packages of energy efficiency, renewableenergy 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 politicalwill.

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 theresult of having an electricity supply system that is based 97% upon brown coal, the mostgreenhouse-intensive of all fuels. In the likely event that international greenhouse gas emissionconstraints are tightened over the next decade, this high dependence upon brown coal wouldbecome 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 economicactivity. We strongly advocate that the Victorian Government provide incentives to ensure thatthe major proportion of these new jobs be located in regions most affected by the closure of coalfired power assets, such as in the Latrobe Valley.


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1. Introduction

There is widespread and growing international concern about global climate change resultingfrom the greenhouse effect. We know that our worlds average temperature is rising unusuallyrapidly. 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 ofnative species and the weather (e.g. in terms of the frequency and severity of floods anddroughts). The most pressing solution to this is to act immediately to cut our greenhouse gasemissions by 60% by 2050 (Coleman et al. 2004).

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

For example, the power station operator, International Power Hazelwood, has requested theVictorian Government to approve the development of an extension to the Hazelwood West CoalField. 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 arguablythe largest point source of annual greenhouse gas emissions in the country. An expansion wouldlock in 380-407 million tonnes of Victorias future total CO2 emissions. This would wipe outmany times over the greenhouse gas savings envisaged under current government polices and beat odds with the Victorian Governments Greenhouse Challenge and recent acknowledgment toaddress the negative impact of climate change.

The recent scenario study,A Clean Energy Future for Australia, explains how Australia canreduce 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 andutilises existing technologies. It identifies a myriad of cost-effective technologies for usingenergy more efficiently, together with cleaner energy supply based primarily upon gas (the leastpolluting fossil fuel), crop residues and wind power. The study finds that coal-fired powerstations with geosequestration are unnecessary for achieving the target.

The study by Saddler, Diesendorf and Denniss (2004) suggests that achieving the 50 percentemission 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 expansionof the federal Mandatory Renewable Energy Target (MRET), the introduction of either a carbonlevy or tradeable emission permits and some mandatory requirements for energy efficiencymeasures.

1Conventional 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, nitrogenoxides, fluoride, hydrochloric acid, boron, particulate matter, sulphuric acid and mercury. Therefore, the maximumgreenhouse intensity would be set to promote the building of low or zero emission power plants or energyefficiency measures.


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In this context, this report focuses on the potential of a mix of energy efficiency and cleanerelectricity supply measures to substitute for 1600 MW of coal-fired base-load generation by2010.2 In making this substitution, we match the two principal contributions that a base-loadpower station makes to electricity supply:

annual energy that is measured here in GWh/yr, where 1 GWh = 1 gigawatt-hour = 1,000megawatt-hours (MWh); and capacity to meet peak demand, that is measured here in megawatts (MW).

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

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


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2. Victorian electricity backgrounder

2.1 Victorias 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 was8,019 MW3 and occurred in summer; electricity generation in the financial year 2000/01 was49,971 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 consumptionwithin Victoria was 38,395 GWh (ESAA, 2002).

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

Table 1: Fuels used in Victorias electricity generation, main grid, 2000-01

Fuel Electricitygeneration

b

(GWh/y)

% ofgeneration

Brown coal 48,465 97Gas 881 1.8Hydro

a625 1.2

Oil 0 0Total 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 isgenerated 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 annualelectricity generation of about 240 GWh. At that time there were proposals for an additional 915MW of wind power, but most of these would depend upon the expansion of MRET. In the firsthalf of 2004, additional proposals have been announced.Biomass energy is not as yet being used to generate much electricity in Victoria, although thereis significant potential, as discussed in Section 4.

In 2000/01 the power stations on Victorias 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). Victorias per capita CO2 emissions from electricity generation (11.1t/person) were higher than those of every other State (Wilkenfeld, 2002) 4. This is because of the

3The maximum demand was greater than the States generating capacity. Imports supplied the difference. On 29January 2003 Victoria set a new record of 8104 MW.4Queensland was second highest with 10.0 t/person.


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domination of Victorias electricity generation by brown coal (see Table 1) and because Victoriaalso has several large electricity intensive industries, such as aluminium smelting.

Drivers of Victorias growth in energy demand are population growth, economic growth fromindustrial 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 theuse of electrical appliances, including air conditioners.

2.2 State Governments greenhouse policies and strategies

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

Solar Hot Water Rebate Program: available for a new solar hot water system installed in anexisting 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 isalready subsidised by the Federal Governments Renewable Energy Certificates. (For detailssee www.seav.vic.gov.au)

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

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

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

Renewable energy target: Increase the share of Victorias electricity generation using

renewable energy sources from the current 4 per cent (including hydro) to 10 per cent by theyear 2010. Again, the Victorian Government does not appear to have set in place anystrategies to achieve this target. However, there are measures that State Governments could

5Only 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 thegreatest financial return for Victoria.
http://www.buildingcommission.com.au/http://www.buildingcommission.com.au/http://www.buildingcommission.com.au/


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implement to get more out of the existing MRET (see Section 5.2). In addition, the followingitem may assist.

Inter-jurisdictional working group on renewable energy targets: The governments ofVictoria. 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 renewableenergy targets in the absence of Federal Government action.

SEPP for energy efficiency: Under the State Environment Protection Policy (Air QualityManagement) Victorian enterprises subject to the EPA Victoria works approvals andlicensing system are required to implement cost-effective opportunities for improving energyefficiency. By December 2003 businesses subject to the SEPP were required to undertakeenergy efficiency audits and submit plans to implement energy efficiency measures with apay back period of three years or less. The measures must be implemented by December2006.

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

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


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3. Reducing demand growth and cleaning up energy supply

Generally speaking the cheapest and fastest measures for reducing greenhouse gas emissionsfrom 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 ofcertain technologies (e.g. some office equipment, vending machines, refrigerators and washingmachines), but a much wider range of studies is needed. It is well known that many of thebarriers to implementation are neither technical nor economic, but rather arise from marketfailures such as the split incentives of landlords and tenants, and the lack or appropriateorganizations or institutions (such as energy service companies) to facilitate large-scaleimplementation. The economic potential is large, but to capture it we need policies, strategiesand 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 carriedout 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 of1092 GWh/y and demand reductions of 392 MW in winter and 263 MW in summer could beachieved cost-effectively after 6 years. The energy and demand savings did not stop after 6years, but increased in magnitude for each year until they peaked around 17-18 years after thecommencement of the proposed program. At this peak the energy savings were about 3760GWh/y while the demand savings were 950 MW in summer and 1454 MW in winter. Weconsider here a period of 6 years, in order to compare the SRC results with the potential energysavings for the period between 2004 and 2010 over which Hazelwood coal-fired power stationcould be replaced.

The Queensland electricity supply industry was rather different in the starting period for the SRCstudy, 1990-91, compared with the Victorian supply of today. Then, Queensland electricityconsumption was only about 21,000 GWh/y; the maximum demand of 4090 MW occurred inwinter; and there was no significant use of gas by consumers. Nevertheless, until the equivalentof the SRC study is repeated for Victoria, a rough estimate of the potential for efficient energyuse can be obtained by simply scaling up the SRC results to present conditions: i.e. doubling thesavings in energy generation and doubling the savings in summer peak (which was considerablylower 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 2188GWh 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 keepincreasing over 18 years and are still at least as good as the 6-year benefit after 30 years. As timegoes on, the costs of the renewable energy technologies continue to decline. There are too manyuncertainties in the data scaled up from 1990-91 to attempt a Net Present Value calculation.


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For comparison, the study by EMET (2004) obtains a reduction in residential electricityconsumption, beyond that of business-as-usual, of 6,400 GWh/y and of summer demand by 1324MW for the whole of Australia in 2010, assuming a payback period of 6.5 years. To rescale theseresults to apply to Victoria, we multiply them by 0.22 (the ratio of electricity consumptions inVictoria 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 areduction, beyond business-as-usual measures, of 1800 MW in Australias summer peak, whichbecomes 396 MW when rescaled to Victoria. EMETs corresponding estimate of savings inAustralias 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 aftercommencement of an energy efficiency program

Study SRC resultsfor Qld in1997

Scale-up ofSRC to Vic. in2010

EMET for Vicin 2010

Residential sectorElectricity consumption (GWh) 532 1064 1408Summer peak (MW) 65 130 291Winter peak (MW) 282 564 291

Commercial SectorElectricity consumption (GWh) 460 920 1680Summer peak (MW) 151 302 396

Winter peak (MW) 76 152 282

Industrial SectorElectricity consumption (GWh) 102 204 NDSummer peak (MW) 47 94 NDWinter peak (MW) 34 68 ND

Total: All SectorsElectricity consumption (GWh) 1,094 2188 NDSummer 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 resultsfor commercial sector have 4-year payback.


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On the basis of the amount of efficient energy use identified as resulting from medium energyefficiency measures in the recent national study (Saddler, Diesendorf & Denniss, 2004), weconsider that this report, Towards Victorias Clean Energy Future, and McLennan MagasanikAssociates (2003) (see Section 3.3) may have underestimated the potential for electricity savingsthrough 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 doesnot take into account the substitution at the point of use of gas in the place of electricity forheating and cooling. Fuel substitution reduces emissions for these particular energy services by afactor of about 4.

3.2 Supply options for capacity and energy

Before considering the various energy supply options, we consider the requirements forsubstituting 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 thedistinction between reliable and unreliable is simplistic. On one hand even coal-fired powerstations have a significant probability of forced outage (unplanned failure) that typically variesbetween 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 plant8.

As a rough approximation, we consider the capacity of a base-load coal-fired power station tomeet 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 Hazelwoods capacity and energy generation we require a mix ofenergy 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 the2000-01 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 purerandomness. Furthermore, a group of wind farms, located at geographically dispersed sites, isconsiderably more reliable than a single wind farm.

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

7In 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.8Indeed, 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.9Strictly speaking this should be divided by a factor of about 1.07 to allow for the electricity use within the power

station.


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On short-term (10-year) timescale, it is assumed that there will be no cheap solar electricity, orgeothermal, or hydrogen storage & transport of renewable energy, or capture andgeosequestration 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 canbe 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, Australiasoperating non-hydro renewable energy generating capacity comprised mainly 368 MW bagassecogeneration, 197 MW wind power

10, 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 forthe 1600 MW Hazelwood power station. This is of course relevant to the substitution of adifferent energy mix for any large coal-fired station. MMAs new mix has the followingcharacteristics.

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 pointin replacing brown coal with black coal. The use of both types of coal have to besubstantially 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 abuffer as generating units of current Victorian coal fired assets are withdrawn whilealternatives are ramped up.

Renewable sources of electricity are all lumped together, thus missing the individualcontributions that each can make to the mix, and their total contribution appears to beunnecessarily small.

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

10By 31 December 2004, Australias wind power capacity had reached 380 MW, with an additional 1350 MWapproved or under construction.


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Solar hot water is not mentioned. Over 20% of Victorian homes use electric hot water, sothere is significant scope for reduction in electricity use here, using gas-boosted solar wheregas is available and electrically-boosted solar or electric heat pumps where there is no gas.

Although the MMA report states that the Governmentwould need to get quite serious

about promoting alternative measures such as demand side efficiency, it is pessimistic aboutdoing this within the framework of the National Electricity Market: Such programs wouldrequire 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 Snowyhydro; peak and/or intermediate-load imports from Tasmania via Basslink (underconstruction); peak and/or intermediate-load imports from South Australia; open-cycle gasturbines; and, a novelty, compressed air storage using aquifers in Gippsland and using energyfrom brown coal or gas.

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

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

Technology Capacity(MW)

Cost of electricity(c/kWh)

Efficient energy use (all sectors) 285 Various items in range 3.9-4.8Cogeneration at Maryvale 300 4.0Industrial cogeneration, small-scale 240 4.2Snowy interconnection upgrade(peak-load)

600 4.0-4.2

Imported coal-fired power from NSW Large butnotspecified

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 forcedoutages.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 casesof distributed generation with the price of coal-fired power at the power station, because the

11If the alternatives involved improving energy efficiency by, say, 5%, then a 5% increase in electricity price would

essentially be cost-neutral.


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former avoid the capital costs of transmission and distribution which is around 4 c/kWh andline losses. Furthermore, if efficient energy use and distributed generation are focused on regionswith 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 thisleaves a large reserve plant margin which is used to export electricity up to 1300 MW to NSWand SA during off-peak periods. Since this displaces mainly black coal, the high level ofVictorian electricity exports, while rational from the market viewpoint, increases AustraliasCO2 emissions. We suggest that reducing Victorias interstate electricity exports

12 could providea large fraction of the required capacity and electricity generation. The mothballed half ofPelican Point combined-cycle gas-fired power station in S.A. and, as a temporary measure, themothballed black coal power stations in NSW could be restarted to cover reductions in Victoriasexports.

MMA note that its scenario would displace a large number of jobs in the Latrobe Valley. Weaddress 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 thatcould substitute for coal-fired assets generating 1600 MW, using Hazelwood as an example, by2010. The scenario in Table 4 offers measures that are additional to those installed or underconstruction at 30 June 2004. It supplies the annual energy generation in GWh/yr, and muchmore than the Equivalent Firm Capacity in MW, of a 1600 MW coal-fired power station. Itwould reduce Victorias CO

2emissions by 13.8 Mt/y in 2010. The principal contributions to our

alternative energy mix comes from cogeneration and combined cycle power stations fuelled bygas, followed by wind power, then efficient energy use, and then bioelectricity fuelled mostlyfrom crop residues.

On the demand side we use the rescaled results of SRC (1991) to obtain the reduction in peakload and electricity consumption resulting from efficient energy use (see Table 2, column 3). Amore accurate calculation must consider fuel substitution at the point of use and boosting of solarhot 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. Forbase-load thermal power stations the average power is taken as a proxy for Equivalent FirmCapacity.

12E.g. by applying either a carbon tax, or tradeable emission permits or a constraint on carbon emissions.13While 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 (viaa display inside) as to the water temperature in the storage tank and a suggested best boost and shower time. Thiswould give feedback to users to maximise solar contribution and allow for minor behaviour change.


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In the limit of very small penetrations of wind power into the grid, the Equivalent Firm Capacityof 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. Withthis penetration, the equivalent firm capacity of wind power is about 0.71 times the annual

average wind power generation

14

(Martin & Diesendorf, 1980, Table 2). Under thesecircumstances it is arguable whether there is need for any additional partial backup 15 or storageof 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 capacitycredit, our energy mix in Table 4 provides larger Equivalent Firm Capacity than that of the 1600MW coal-fired power station. Furthermore, we have done our costing in Table 4 on theconservative assumption that, to better compensate for fluctuations in wind power, 200 MW ofgas 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 notbe compared with theprices of electricity sent out from Hazelwood, but rather with the respective prices of electricitydelivered 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; andMelbourne 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 savedby efficient energy use in Column 10. This halves the total cost of electricity delivered by oursupply-side and demand-side mix in 2010, bringing the cost far below that of a typical browncoal-fired power station of Hazelwoods capacity of about 3.8 c/kWh.

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

14This 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.16If 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 toone-quarter of the wind capacity that still has to be backed up. If all the wind farms were concentrated at one sitethe back-up required would be one-half the wind capacity (Martin & Diesendorf, 1982).


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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 efficiencymeasures, our mix is likely to be in the long run less expensive than continuing with Hazelwoodor any equivalent coal-fired power station.

Redding Energy Management (2000) find that Victorias commercial and manufacturing sectorshave a combined technical potential17 for cogeneration of over 1,000 MW. The study also refersto economic forecasting by the gas industry indicating that an additional cogeneration capacity of320 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 ispossible by 2010.) Assuming a gas price of $3/GJ and 12% discount rate, Redding finds that thecost of cogenerated electricity varies from about 3.4 c/kWh for a 220 MW power plant up toabout 6-8 c/kWh for plant in the range 1-10 MW. Electricity from microtubines smaller than 1MW will be even dearer. However, as with efficient energy use, we must consider that smallcogeneration plants, e.g. those installed in commercial buildings, are not competing with thegeneration 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 todo that in Table 4. Clearly, Victorias cogeneration potential could be large. The problem forcogeneration (and combined cycle gas-fired power stations) in Victoria is the limited gasreserves (see Section 4).

According to Outhred (2003) up to 2,200 MW of wind power could be readily integrated into theprincipal 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 existinglevel 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 MWcould be integrated in the longer term.

17Technical potential is generally much greater than economic potential.


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4. Energy reserves

4.1 Gas

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

ABARE comments that, in the absence of significant and positive exploration results, there is areal possibility that eastern Australian supplies will need to be supplemented within the period to2019-20 from gas resources in Australias north west, Papua New Guinea or from coal seammethane. (Fainstein et al., 2002). These comments apply to business-as-usual as well as cleanenergy 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 methanethan the above two gases and so may have to be used on-site at the coal mine; and waste gasfrom petroleum refining. Firm estimates of the reserves of these gases are notoriously difficult toobtain, both because of corporate confidentiality and the uncertainties inherent in proving theseresources. At present there are no proven reserves of coal seam methane in Victoria, where aninvestigation 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 thisis 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, willrequire more gas reserves to be proven and more gas processing facilities or a new transmissionpipeline to be built. However, gas must be seen as a transitional fuel to take our energy needsfrom 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 ofVictorias electricity from brown coal to NSW and SA.

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


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4.2 Biomass

In Saddler et al (2004) biomass contributed 28% of Australias future electricity generation by2040. Potentially significant sources of biomass residues in Victoria include, in probable orderof 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. FollowingKelleher (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, givenappropriate policies and strategies, it should be possible to obtain at least one-quarter of this, 900GWh/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 landthat is not earmarked for housing is available. Biomass crops are expected to be more expensivefuel for generating electricity than biomass residues, unless multiple economic benefits can beobtained 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 ofreducing dryland salinity.

4.3 Wind

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

The present paper suggests an additional short-term wind energy capacity of 1000 MW, which isequal to the Victorian Governments target for 2006. However, with the Federal Governmentsrefusal 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 nocost to itself, could assist the wind industry to make better use of the existing MRET as discussedin 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 andwarrants wind monitoring and modelling.


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5. Recommended policies and strategies

To substitute for 1600 MW of coal-fired power and at the same time to achieve significantreduction 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 allowcleaner energy sources to compete with highly polluting coal (see appendix). Here we proposeseveral such strategies, among others.

These strategies can be justified on the grounds that the price of coal-fired electricity does notinclude externalities, such as the environmental and health costs of its use, and that existingmarket signals fail to fully reflect important costs e.g. pricing of transmission and distributionis averaged over large areas, so that the costs of supplying some customers is underpriced and sothe economics of alternatives in those areas are undermined, even though, from societysperspective, 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 isMRET. 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, severalelectricity generators are either failing to create Renewable Energy Certificates19 (RECs) forparts of their renewable energy generation or accumulating RECs that they have created untiltheir price increases. This has the effect of limiting the market for RECs and increasing RECprices. As a result, MRET is expected to be fully utilised by 2007. This means there is a seriousrisk that the renewable energy industry will face a boom and bust situation as MRET demanddries 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 theCommonwealth Government to expand MRET for Australia to 21,600 GWh/y by 2010 and to33,800 GWh/y by 2020. We also support BCSEs recommendation that projects installed prior to2020 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, eitherindividually or collectively, could resolve this situation by setting their own separate andadditional 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 licencecondition 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 electricitythrough the use of solar hot water.


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the State, to the State Government. This would force retailers to purchase more RECs fromgenerators, thus freeing up the market for RECs and hence making better use of the existingMRET. Thus, each energy retailer would then have to surrender RECs to the Office of theRenewable Energy Regulator (ORER) for the Commonwealth MRET scheme and additionalRECs to a State agency for the State scheme.

To stimulate local renewable energy industries the State Government could also require that theRECs 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 MRETis that the costs do not come out of the State budget, but rather are covered by all electricityconsumers through a very small increase in electricity prices.

The details of how this scheme would work depend on how the Commonwealth Governmentresponds to the MRET Review Panel (2003) recommendation relating to extinguishment ofRECs. 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 ofwho they are) should be able to extinguish it. If the Commonwealth Government legislates toallow this, then a State Government could become the owner of the retailers RECs and couldthen simply extinguish them. Since these RECs would no longer exist for compliance withMRET, this would effectively increase the number of RECs that had to be generated beyondthose required for MRET target.

On the other hand, if the Commonwealth Government does not change the legislation, a StateGovernment could still set up a mechanism to acquire and quarantine RECs so that they were notavailable at any time in the future for surrender to ORER. A precedent exists: the Green Poweradministrators have already set up such a mechanism, so that all renewable electricity used forGreen 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 tocreate RECs for parts of their renewable energy generation or accumulating RECs that they havecreated 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 therequirement that electricity retailers submit RECs, that they have created in the State, annually tothe State Government. This will force retailers to purchase more RECs from generators, thusfreeing 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 emissionintensities typically in the range 1.0-1.5 Mt CO2 per TWh of electricity sent out, depending uponage, choice of technology, type of coal, capacity, etc. Hazelwood, as an old brown coal-fired


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power station, is close to the upper end of this range. The low end could possibly be achieved bynew power stations and new technologies for the pre-combustion treatment of brown coal, buteven these still have emission intensities greater than those of new black coal-fired powerstations and more than double emission intensities of new combined cycle gas-fired powerstations. 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 coalassets 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 range3.7-4.0 c/kWh. These costs do not reflect the substantial environmental and health damage theyproduce. 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 easternAustralia (see Appendix) and will undermine any strong measures to implement efficient energyuse.

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

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

A future Federal Government could assist the States by applying a greenhouse trigger leadingto a national inquiry on proposals, such as new coal-fired power stations, that would significantlyincrease Australias 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 emissionpermits would assist in allowing gas, renewables and efficient energy use to compete with cheapand polluting coal. In the long run, if the price of tradeable permits increases sufficiently, it maybe possible to phase out MRET. The permits should be applied to all industry sectors, includingaluminium smelting which after all takes a large fraction of Victorias electricity. The method ofallocation of permits should strike a balance between encouraging new entrants with newtechnologies into the market and recognising that some emitting businesses have previouslymade investment decisions that produce high levels of emissions.


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Tradeable emissions would best be implemented as a national scheme. However, it would still beof value if implemented by a group of cooperating States. It is not a recommended action for asingle 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 socialequity e.g. by substituting for payroll tax and assisting low-income earners to reduce energywaste.

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 fossilfuels (Riedy and Diesendorf, 2003; Riedy, 2003). These subsidies are perverse in the sense thatthey are both economically inefficient and environmentally damaging. Most of these subsidiesgo 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 haveto 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 costscould be of the order of $1,500 p.a. based on a 10-year simple payback. However, at present thecustomer 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 electricityconsumption by time of day and allows the use of the air conditioner to be controlled by both thecustomer 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 electricityprice goes above a specified level (otherwise households will feel victimised when they receivebills 3 months after their children ran the air conditioner after school on a hot day). The energyretailer would be required by law to charge for electricity consumed according to cost by time ofday. This would:

encourage some prospective purchasers to install energy efficiency measures, such asshading 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, tocompete with conventional peak-load electricity generation.

There is also the historical subsidy to centralised power, as the whole infrastructure was builtusing low interest-government-guaranteed finance, and until the 1980s, no dividends were paidby publicly owned electricity suppliers. The sale of the Victorian electricity infrastructure alsolocked 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


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this historical subsidy, the State Government should subsidise new powerlines or upgrades ofexisting 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 onlyabout 5% of households have solar (or electric heat pump for shaded roofs) hot water systems. InVictoria ownership is less than 2%. It is clear that existing incentives (i.e. the inclusion of solarhot water in MRET; Victorias solar hot water rebate program) are not sufficient. In terms ofachieving greenhouse gas reductions, a large shift from electric resistance hot water to solar andelectric heat pump hot water, could achieve a large reduction in emissions. The problem is thatelectric resistance hot water is more quickly and easily installed, and has a lower upfront costthan solar, even though the lifetime cost of electric resistance hot water is higher than that ofsolar in large areas of Victoria.

Therefore, we propose the following additional measures to enable consumers to overcome thebarriers to solar and heat pump hot water:

State Governments should pass legislation making it illegal for local governments to requireplanning permission for installing solar hot water. At present, some local governments doand others dont. Obtaining planning permission takes so much time that it discourages homeowners 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 watersupply to have solar, heat pump or solar-compatible gas hot water systems. At present NSWis moving towards this measure through the introduction of the Basix scheme, while Victoriais taking the measures summarised in Section 2.2, which allow a choice between solar hotwater 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 watercircuit. This would bring users closer to the user pays requirement. Furthermore, allreplacement 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 toimplement substantial amounts of efficiency in energy use (Saddler, Diesendorf & Denniss,2004). The national study found that implementation of a medium level of efficient energy usereduced the growth in total energy demand over the period 2001 to 2040 from 57% in thebaseline (weak energy efficiency) scenario to 25%. Similar results were obtained by economicmodelling for the Ministerial Council on Energy (2003), whose strong energy efficiencyscenario, which envisages 100% penetration of end-use energy efficiency measures with a fouryear or less payback period, would achieve an 18% reduction in greenhouse gas emissions fromstationary energy together with increases in real GDP and employment.


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Although the potential is huge, the wide dissemination of efficient energy use technologies isimpeded by market failure (Greene and Pears, 2003). Therefore, this is an area where regulationmust play an important role. The following measures are recommended:

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

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

State Governments should make it illegal for local government, developers or the bodycorporate 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 shouldalso apply to developers covenants.

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

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 thecircuits where the meters are installed. For buildings with smart meters, energy retailersshould be required to charge by time of day. These meters should allow the occupant toprogram load management strategies and give them feedback on electricity use. This willallow time-of-day pricing and widespread load-shedding to be introduced.

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

existing buildings.

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


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The Victoria Government should establish a Clean Energy Fund or Demand ManagementFund to provide incentives and resources to overcome barriers to energy efficiency andaccelerate the adoption of energy efficiency in homes and businesses. The fund should be setat a reasonable level (no less than 1% of total energy bills) and be made independent of theVictorian 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-costenergy efficiency measures for energy-using appliances and equipment that are not part of thebuilding envelope. The package could include compact fluorescent lamps, water efficient showerheads and tap fittings, insulation wrap and adjustment of thermostat on hot water systems, andreplacement of compressors and seals on refrigerators. This package would include a service-callby 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 thecommunity about simple energy efficiency measures in the home. It could be further justified bythe 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 moreexpensive 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 savinglow-income households the high running costs of these inefficient appliances. A scheme toremove unrepairable fridges has been developed by Moreland Energy Foundation.

Recently Sydney Water ran a more limited version of the proposed package of low-cost energyefficiency 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 toprovide low-interest loans to assist low-income householders to make these and otherimprovements. Governments could encourage energy retailers to run the scheme by putting inplace revenue caps on the amount of revenue a retailer could earn per household on sales ofelectricity. 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 shouldensure that the system of distribution network price regulation to commence 1 Jan 2006 rewardsrather than penalises distribution networks that effectively help their customers to save energy.


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Therefore, the Essential Services Commission should adopt measures equivalent to or better thanthe 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 encouragerenewable energy installations and equipment manufacturing (e.g. of components for windturbines and bioelectricity power stations) in rural and regional areas. This will facilitate atransition of skills for workers from industries dependent on coal and electricity generation.


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6. Allocation of costs of the alternative mix

We must distinguish between the cost to State Government and the cost to State electricityconsumers.

6.1 Cost to government

The present paper considers the responsibility of State Government to maintain social equity, toregulate the market and to administer some of the proposed strategies. Of these, the onlysignificant 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 Cost1 Upgrading energy efficiency of government housing State Government to

estimate

2 Low-interest loans to low-income owners of buildings for upgradingenergy efficiency of their buildings. Cost is for interest subsidy only.

Cap to be chosen bygovernment.

3 Low-interest loans to low-income tenants for package of energyefficiency measures. Cost is for interest subsidy only.

Cap to be chosen bygovernment

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

6.2 Cost to electricity consumers

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

On the other hand there would also be reduced costs resulting from the reduced number of unitsof electricity consumed after implementation of efficient energy use measures. Electricityconsumers 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 EnergyFuture for Australia, found that it is possible that there may be no net costs of the principal cleanenergy scenario in 2040 (Saddler et al, 2004, chap. 10). This result depends on the future costs ofelectricity from fossil fuels and renewable energy and the amount of demand reduction that canbe achieved with short payback periods from efficient energy use. In the early 1990s, when theState Electricity Commission of Victoria was running a demand management program, it foundthat it delivered net financial benefits to Victoria, even though it reduced net revenue for theSECV (Gilchrist 1994). That result was obtained when programs were being trialled and energy


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efficiency technologies were nowhere near as good as they are today. The present study (Column10 of Table 4) suggests that our energy supply and demand-side substitution for a 1600 MWcoal-fired power station would be less expensive in 2010, provided the long-run marginal cost ofelectricity from the coal-fired power station is greater than 2.67 c/kWh. However, the benefits ofthe recommended efficient energy use measures will increase with time, well-beyond 2010.


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7. Employment gains from substituting renewable energy for coal

One of the economic advantages of substituting efficient energy use and renewable energy for allor part of a coal-fired power station is that there is a net gain in jobs within the State perkilowatt-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 toexamine coal-mining, power generation, transmission, distribution and retailing. Unfortunately acomplete database covering all these aspects together does not exist. However, there are data forthe electricity industry as a whole (without coal mining) showing that employment in theindustry decreased by 50% to 32,700 over the period 1991 to 1999(Australian Bureau ofStatistics, 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 coalmining 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 ofincreasing automation. In the Latrobe Valley brown coal is excavated with giant dredges madeoverseas, 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 pastdecade about 25% per annum (see Figure 1). This rapid growth presents some problems forestimating 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 arecreated by completed projects from those under construction and in planning.

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

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 awind farm, each commissioned in Australia since 2000 (Table 6).


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Table 6: Case studies of total Australian employment for different types of base-loadpower station

Powerstation(name)

Description Australiancontent (% ofcost)

Total Australianemployment(job-yr/TWh)

Tarong North Coal-fired, rated 450 MW, baseload 26 49Albany windfarm

Wind farm, rated 21.6 MW 44a

120

Rocky Point Cogeneration, rated 30 MW, fuel:bagasse + sawmill waste

50 220

Source: MacGill et al. (2002).a. More recently commissioned wind farms have a higher Australian content and it seems likely that, if the industrycontinues to expand in Australia at the global average rate, it may be possible to manufacture most of thecomponents in Australia, thus reaching an Australian content of about 80%.

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

A detailed examination of employment in the wind power industry is given in a Danish studybased on 1995 data (Vindmoellenindustrien,1996). The study uses input-output analysis tocalculate the total direct and indirect jobs created by the manufacture of wind generators andtheir components in Denmark, plus installation of wind generators, research, consultancy, etc. Inthat paper indirect employment refers to purchases from Danish subcontractors and theirsubcontractors throughout the economy. Taking into account that Danish wind generatormanufacturers supplied about half the world market, the study finds that worldwide employmentin the wind power industry was in the range 30,000 to 35,000 persons in 1995, when worldwind power capacity was 4,778 MW. (As shown in Fig. 1, world installed wind power capacityat the end of 2003 was about 40,000 MW.) However, we cannot deduce job-years/kWh from thiswithout 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 capacityfactor 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 doesnot include jobs in operation and maintenance.

20

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

0

10

20

30

4050

1992

1994

1996

1998

2000

2002

End of Year


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The worlds largest manufacturer of wind generators, Vestas, has production facilities inDenmark, Germany, India, Italy and Scotland

21. 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 Vestasand 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 7to compare job-years/TWh for coal-fired electricity and wind power in Australia. In constructingthe 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& installation

Fuel,operation

&maintenance

Total

1. Australian electricity industry without coal, (ABS) 532. Australian coal industry (ABS & ProductivityComm.) These jobs must be added to those in Row1.

10

3. Australian electricity generators (from annualreports). These jobs should be included in those inRow 1.

12-21

4. Tarong North power station, includes someindirect jobs; Aust. content 26%, Aust. jobs only.

(MacGill et. al. 2003)

7 (Aust. only) 42 49

Source: Diesendorf (2004)

21In 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. Withthe Federal Governments refusal to expand MRET, some of the new Victorian jobs and a proposed expansion ofthe Wynyard factory are now on hold.

b. WIND5. Extrapolation from Danish data to globaldirect+indirect global jobs. (EWEA: www.ewea.org)

418

6. Vestas, direct jobs only in countries where it hasproduction facilities (www.vestas.com)

59(direct only)

Unknown

7. Albany wind farm, includes some indirect jobs,Aust. content 44%, Australian jobs only (MacGill et.al. 2003)

65(Australiaonly)

52 117

8. ditto with hypothetical Aust. content 80%,Australian jobs only

213


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From this rather limited data set and several untested assumptions, the following preliminaryconclusions are drawn (Diesendorf, 2004):

The coal-fired electricity industry, including the contribution of coal mining, provides about63 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 andmaintenance than in manufacture and construction.

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

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

So, with current Australian content, there could already be 2-3 times the job-ye

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