Update Paper 8: Transforming the electricity sector

Released 29 March 2011

• Read Update Paper 8
• Download Update Paper 8 – V 31 March 2011 (PDF 909 KB)

Summary of key points

• The electricity sector will respond strongly to reduce emissions with carbon pricing.
  • There will be early switching of fuels, especially from coal to gas and an increasing focus on less emissions-intensive forms of generation.
• With or without a carbon price, a significant amount of investment in generation capacity will be required in the years ahead, reflecting the age of generation assets.
• The introduction of a carbon price is highly unlikely to threaten physical energy security.
  • Nevertheless, it may be prudent to implement cost effective policy measures to assuage concerns about energy security and to improve the regulatory functions of the energy market. These measures include:
    • the introduction of an Energy Security Council to implement measures to counter energy market instability regardless of the source; and
    • the judicious provision of loan guarantees to high-emissions generators through the transition to carbon pricing.
• While electricity prices will rise in coming years, the increase associated with a carbon price is in fact smaller than recent increases.
  • Increased capital costs, and rising gas and coal prices from the resources boom will contribute to higher electricity prices in the years ahead.
• The recent electricity price increases have mainly been driven by increases in the costs of transmission and distribution.
  • There is a prima facie case that weaknesses in the regulatory framework have led to overinvestment in networks and unnecessarily high prices for consumers.
  • The upcoming review of regulatory arrangements by the Australian Energy Regulator presents an opportunity to correct distortions in current regulations.
• There can be large gains from planning transmission for a truly national electricity market, with greater inter-state connectivity increasing competition, resilience against supply shocks, and reducing the cost of connecting new low-emissions power sources.
  • Other and more expensive power generation mitigation measures, especially the renewable energy target and subsidies for new roof top solar, can be phased out as the carbon price rises, or feed-in tariffs replaced immediately by more efficient measures for new investments.
• Electricity price effects from the introduction of a carbon price on low- and middle-income consumers can be offset by efficiency-raising tax and social security reform and supplementary measures.
  • Other sources of price increases can probably be greatly reduced with more efficient regulation.