EXECUTIVE SUMMARY
2.3 AUSTRALIAN ENERGY MARKETS
The most recent and comprehensive analysis of future trends in the Australian energy markets was released by the Australian Bureau of Agricultural and Resource Economics (ABARE) in early 1993. The report entitled "Energy Demand and Supply Projections, Australia, 1992-93 to 2004-05" - covers energy consumption and production projections for a range of energy materials classified by industry of use and by State of consumption.
In preparing its energy forecasts, ABARE includes a number of assumptions about economic and demographic trends. ABARE assumes that the price of oil will rise from around US$20 a barrel currently to US$22.30 in 2000-01 and to US$23.45 in 2004-05. This implies an increase of 17.5% over the ten years to 2004-05 or an average annual increase of 1.8%. The ABARE report does not include any assumptions on price movements for coal or natural gas. In a paper presented to the National Agricultural and Resources Outlook Conference in February 1993 however, ABARE in its discussion of coal exports expects the real price of thermal coal to go from US$39.90 a tonne in 1993-93 to US$40.30 in 2004-05 an increase of 4%. By contrast the real price of metallurgical coal is forecast to decline slightly from US$48.90 in 1992-93 to US$48.30 in 2004-05.
Aside from energy prices the other main assumptions made by ABARE are for a relatively steady 3% Australian real GDP growth, a nominal exchange rate of about US$0.78 an Australian dollar and population growth of a little under 1% a year.
Projections for energy consumption in Australia for years 1994-95, 2000-01 and 2004-05 are given in the table. In summary the growth rates for different fuel types are:
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A v e r a g e A n n u a l G r o w t h R a t e Historical P r o j e c t e d 1976-77 to 1991-92 to
1991-92 2004-05
S h a r e in E n e r g y C o n s u m p t i o n 1976-77 1991-92 2004-05
Black Coal B r o w n Coal Net petroleum products Natural gas
Renewables Total energy Total final energy Electricity
3.0
%
3.3 0.2 6.7 1.0 2.2 2.0 4.4
1.8
%
1.2 1.9 2.6 1.6 1.9 2.0 2.2
25.8
%
10.5 48.0 8.8 6.9 100.0 69.3 10.3
29.4
%
12.4 35.5 16.9 5.8 100.0 67.3 14.3
29.0
%
11.3 35.7 18.5 5.5 100.0 68.2 14.9 Coal
Over the period to 2004-05 black coal consumption will grow by 1.8% a year while brown coal will rise by 1.2%. In the case of black coal however production is expected to g r o w much faster (3.1%) spurred on by a 6.6% a year growth in exports of steaming coal. Domestically, both black coal and brown coal lose market share particularly as brown coal is displaced to some extent by natural gas in the generation of electricity in Victoria.
Oil and Oil P r o d u c t s
Australian production of crude oil (including natural gas liquids) is not expected to show much increase over the projection period. In 2004-05 output is expected to be 1206.2 PJ after increasing at about 0 . 5 % per year. To meet the expected rise in consumption of 1.8% imports will g r o w strongly (3.0%) with exports being roughly unchanged. Petroleum products share of energy consumption is expected to change only slightly.
Consumption of heating oil, kerosene, industrial diesel fuel and fuel oil will drop to quite low levels by 2004-05.
Transport fuels on the contrary are expected to increase with the strongest growth being in aviation turbine fuel ( 4 . 8 % a year), automotive diesel oil (2.8%) and L P G (3.1%). Aviation gasoline (1.7%) and automotive gasoline (0.9%) will also show increases.
Various non-transport petroleum products will grow at moderate rates N a t u r a l G a s
Natural gas is expected to increase slightly its market share of energy consumed by manufacturing industry but its share of fuels consumed by the electricity generation industry will rise from about 1 1 % to 14.5% over the forecast period although there will be a dip in the late 1990's as coal fired stations are commissioned in Western Australia and South Australia.
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Wood, Woodwaste a n d Bagasse
The use of wood and woodwaste as an energy source declined considerably in Australia over the post-war years before picking up in the late 1970's and is projected by ABARE to rise at a rate of about 1.2% a year until 2004-05.
The share of wood and woodwaste in energy consumption will decline somewhat from around 2.6% to 2.3%.
Wood and woodwaste as an energy source is used mainly for domestic space heating purposes which is responsible for 77% of consumption. The other main uses are in the production of wood and its associated products and for paper production. There is some minor use in the smelting and refining of metals and in the food processing industry.
Wood and woodwaste is most important as an energy source in Tasmania (12.4%) followed by South Australia (3.6%) and Victoria (2.8%). The most important markets in quantitative terms are Victoria and New South Wales. Only in South Australia is wood and woodwaste projected to increase its market share by 2004- 05 - in all other States it will decline in importance.
Bagasse is used as an energy source by the sugar processing industry in Queensland and to a much lesser extent in New South Wales. Projected growth of 1.5% a year is linked to expected outcomes for this industry to the year 2004-05.
Electricity
The Australian electricity market is in a period of unprecedented change, spurred on by the quest for greater efficiency.
The first phase of this quest started in Queensland in the mid-1980s, and spread to other states to a greater or lesser extent. This phase consisted essentially of major staff reductions, coupled with substantial improvements in plant availability. As a result of these changes, the Australian electricity industry's real operating costs fell 2 5 % between 1982 and 1991. Total real costs fell only 9% during this period, due to the impact of increasing interest rates on the industry's debt. In 1993, the average Australian price to commercial and industry customers was about 8cents a kWh and continuing to fall. For example, Pacific Power recently reduced its Public Supply Tariff by 8%.
The second phase of the moves toward greater efficiency forms part of the Commonwealth and state governments' micro-economic reform agenda. The policies concerned aim to increase competition through structural change in the industry. Only the "wires" business of transmission and distribution are now regarded as natural monopolies, with generation and retail supply to be made contestable.
The Industries Commission estimated that this introduction of competition could reduce electricity costs by over $2 billion a year, a decrease of about 20%. The electricity industry argues that around $600 million of these savings have already been made, as part of the first phase.
Whatever the precise numbers, it is clear that investors in biomass-generated electricity will have to aim at carefully-selected niches in a market where the well-
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established competition is already one of the lowest-cost electricity producers in the world.
Such ruches could be facilitated if more cost-reflective transmission prices are introduced. Recent National Grid Management Council publications include examples where the cost of transmission to a load 250km from a power station would be over 8cents a kWh. This could radically improve the relative economics of biomass-fuelled electricity close to that load. Of course, this implies that transmission charges of this magnitude are politically acceptable.
As discussed earlier, the global climate change issue could result in policies aimed at internalisation of externalities. The recent report to the Victorian Government
"Externalities Policy Development Project: Energy Sector" includes a worked example of externality values for the Loy Yang A power station. Only the high scenario included a externality value for carbon dioxide, which dominated all other externality values due to the large volumes involved (compared, for example, to sulphur or nitrogen oxides). The carbon dioxide externality value was 3cents a kWh.
Again, there is a strong political dimension to this issue. Environmentalists may wish to see higher prices for electricity from fossil fuels (and even large-scale hydro) but business and domestic consumers generally want their electricity bills reduced.
2.4 E N V I R O N M E N T A N D T H E B I O E N E R G Y M A R K E T
The global interest and quest for renewable energy supplies is mainly in response to a number of broad key attributes of energy derived from fossil fuels, which are listed below:
• the unsustainability of fossil fuel supply;
• the geographic distribution of fossil fuel resources and economies;
• the accelerating rise in Greenhouse gas emissions; and
• the lack of national energy self sufficiency, especially in the third world.
As a consequence of these attributes, considerable attention is being focused worldwide on energy derived from biomass as a renewable energy supply.
There is also wide interest in the scope for the bioenergy cycle to enhance both the local and global environment with positive effects on the existing environmental practices employed in agriculture, forestry and energy production. There is potential for positive impact on the following key global environmental issues and the manner in which energy production from biomass resources could potentially reduce the impact of these environmental issues.
Greenhouse gas emissions and global climate change
A significant replacement of fossil fuel use with biofuels would result in reduced greenhouse gas emissions together with progress towards a carbon neutral fuel resource, where the volumes of carbon emissions are equivalent to those sequestered in the biomass feedstocks.
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Deforestation and land degradation caused by erosion, salinisation and desertification
Economic demand for biomass feedstocks would result in dedicated re- afforestation plantations on suitable degraded or marginal agricultural land. This has the potential to rehabilitate large areas of land affected by erosion or salinisation without creating an economic burden to the nation.
Unsustainable land use practices, including forestry
Integrated harvesting of a range of biomass feedstocks has the potential to reverse unsustainable land use practices in Australian forestry and agriculture.
Loss of biodiversity
Re-afforestation and rehabilitation of degraded or marginal agricultural land has the potential to reduce the need or the desire to clear native forests, woodlands and grasslands, which could result in the effective maintenance of Australia's biodiversity. In Victoria alone, between 3000 to 6000 ha of land are cleared of native vegetation each year. The economic cost to revegetate is $1500/ha in 1993.
It is estimated that between $7m to $10m is spent on revegetation and land rehabilitation each year across Australia, without a direct income incentive. Much of the re-afforestation is potentially a significant resource for bioenergy production if the appropriate species are planted.
Deteriorating urban air quality
The use of biofuels has the potential to improve urban air quality through the changed chemical composition of vehicle exhaust emissions.
However, if energy produced from biomass is to be environmentally positive in its global and regional impacts, then all life-cycle phases of the plant growth, plant harvesting and conversion must be environmentally sound. The two main existing impacts bioenergy can reduce are: the national life-cycle greenhouse gas emissions, particularly carbon dioxide by displacing fossil fuel use; and unsustainable land use practices by employing sound ecological principles. The bioenergy feedstocks must demonstrate a significant capability in carbon sequestration if bioenergy is to make a strong contribution to the slowing of greenhouse gases and global climate change.
A significant net reduction in national life-cycle greenhouse gas emissions could be achieved by the large scale production and use of, for example, transport fuels such as ethanol from biomass. However, it is important to assess local/regional environmental problems with the siting of such facilities and the treatment and disposal of their waste. As these, if not treated adequately could provide significant barriers to development in the short term.
Whilst food and energy cropping employ similar agricultural methods, there are strong limitations to the improvements bioenergy production can have on environmental impact and sustainable land use. For example, if bioenergy feedstocks were significantly limited to crop residues, we could expect the potential for significant degradation in land use practices as farmers sought to maximise their income between energy, food and fodder cropping, unless strict environmental management policy was enforced.
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In addition, any dedicated energy cropping should be established on cleared land and not impact on remaining native vegetation and habitat. This may be difficult to achieve if there is strong competition between biomass feedstocks and food crops for the same parcels of land. There is also the danger of large tracts of land being used for energy crop monocultures which would have significant impacts on the maintenance of biodiversity.
Large areas of degraded land, often marginal agricultural land could be identified suitable for the establishment of plantations, in particular, hardwood plantations.
However, there are strong limitations to the extent of available land since much of the land is already intensively used for agriculture. Another limitation to the extent of new hardwood plantations is the reduction of catchment water yields which will need to be balanced against downstream water demands, and possibly salinity control in some catchments.
Changes in land management policy and community attitudes will be required to allow a significant increase in the land application of sewage and industrial effluent. Effluent irrigated plantations are likely to be high yield with short rotations, and located close to regional markets, could make them ideal for the production of bioenergy feedstocks.
The last but not least environmental consideration in selecting suitable bioenergy feedstocks and their geographic locations, is the effect of climate change over the next twenty years. Although, the Australian climate is highly variable, any long- term changes in the rainfall pattern and temperature will have enormous effects on agricultural water balances, including yield, demand, fluctuations in the groundwater table and irrigation suitability.
Significant areas of southern Australia may experience a progressive shift from winter-dominated rainfall to summer-dominated rainfall (Whetton et al. 1992) which will affect crop type suitability, time of harvest and erosion hazard.
Consequently, development of biomass feedstocks over the next twenty years will need to be adaptive to increased climate variability and shifts in regular climate patterns.
2.5 E N E R G Y M A R K E T A S S E S S M E N T S U M M A R Y
While most biomass to energy technologies have still to prove their economic competitiveness, they continue to attract government support because of their assumed benefits in helping to solve economic and strategic problems associated with a perceived increasing dependence on fossil fuels, principally oil.
While the concerns on this front may have lessened over recent years, the emphasis has switched to the role biomass-derived energy may play in meeting increasingly stringent environmental targets for atmospheric pollution and greenhouse gas reduction.
The role of energy crops as a substitute for crops for food has gained support in Europe.
The analysis of international and Australian energy markets indicates that the price of conventional energy sources will rise only mildly on world markets over the next fifteen to twenty years and there appears to be little in the way of supply constraints emerging over this period.
BIOMASS IN THE ENERGY CYCLE
The arguments for supporting biomass to energy technologies in the medium term will therefore rest mainly on environmental concerns rather than economic feasibility in other than niche applications.
Technologies based on using various animal, human, food processing and abattoir wastes may prove the exception.
In the context of the rest of this study, the benchmark Australian energy prices used are those prevailing mid-1994. These are:
• petrol production cost at 20 cents a litre and 50 cents a litre with taxes and excises
• electricity averaging 8 cents a kWh to commercial and industrial users with production cost of 3 to 4 cents a kWh.
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