WESTERN AUSTRALIA'S ENERGY FUTURE - Responding to a sector in change November 2017 - ATCO
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WESTERN AUSTRALIA’S
ENERGY FUTURE
Responding to a sector in change
November 2017
WESTERN AUSTRALIA’S ENERGY FUTURE 1FOREWORD
We are in the midst of an With this in mind, our strategic
energy transformation as priority remains the delivery
the economic, political of services that our customers
and technological value now, and into the future.
underpinnings of our We envisage the evolution of a
energy supply change in cleaner, more competitive and
rapid and unpredictable customer centric energy system,
ways. while also acknowledging that
It is a fascinating and promising
successfully navigating to this
future state will be complex and
$20B
time for our organisation, our challenging. in assets
customers and the communities (CAD)
within which we operate. The investment planning
process for energy networks
Founded on entrepreneurial used to be relatively simple,
spirit, ATCO has embraced based on predictable long-term
innovation from its earliest forecasts with little competition
days. As traditional energy for services. Today, planning
systems transform and the needs to consider a range of
needs of customers change, we complex policy drivers, rapid
stand committed to developing technological change and
solutions to meet these an increasingly empowered
changes, while continuing to customer base. It is therefore
deliver reliable, affordable and imperative that energy services
sustainable energy around the companies incorporate this
world. broader set of factors into their
planning processes and business
From extensive consultation model design.
and engagement with our
customers, to developing This paper is part of our routine
and delivering integrated
energy solutions, we take our strategic surveillance and
responsibility as a trusted scenario planning program. We
energy partner seriously. have published this paper to
In Western Australia, where we
help Western Australian energy
own and operate the state’s market participants understand,
largest natural gas network - prepare and respond to an
delivering natural gas to more uncertain energy future.
than 750,000 homes and
businesses is our priority. ATCO is committed to actively
working with policy makers,
We recognise that the delivery
of stable and affordable energy
market participants, our
customers and communities
88,000K
is critical to Western Australia’s in navigating through this Electric power li
growth, and importantly, our uncertain environment towards
customers are telling us that gas a stable, sustainable and
will continue to play a key role affordable energy future for
as part of their energy mix. Western Australia.
2 WESTERN AUSTRALIA’S ENERGY FUTUREATCO: GLOBAL, INTEGRATED & DIVERSIFIED
Approximately
7,000 200,000M3 2M+ 100+ 18
employees Hydrocarbon storage Global Countries in our Power plants with a
capacity customers 70-year history combined generating
capacity share of
2,473MW*
ATCO OPERATIONS
WORLDWIDE
KM 7 52PJ 65,000KM 85,200M3/D
ines Modular building Natural gas Natural gas pipelines Water infrastructure
Manufacturing facilities storage capacity*** capacity**
*megawatts **cubic metres per day ***petajoules
WESTERN AUSTRALIA’S ENERGY FUTURE 3CONTENTS
Foreword
Executive summary 5
Introduction 12
A sector in change 14
Imagining our energy future 17
Scenario 1: Continuation of trends 18
Scenario 2: Decarbonisation partially pursued 22
Scenario 3: Decarbonisation actively pursued 26
Scenario 4: Technology drives disruption 28
Concluding remarks 34
References 35
Appendix A - Scenario modelling approach 36
4 WESTERN AUSTRALIA’S ENERGY FUTUREEXECUTIVE SUMMARY
We are in the midst of an SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4
energy transformation as CONTINUATION DECARBONISATION DECARBONISATION TECHNOLOGY DRIVES
the economic, political and OF TRENDS PARTIALLY PURSUED ACTIVELY PURSUED DISRUPTION
technological underpinnings
of our energy supply
change in rapid and
unpredictable ways. FIGURE 1: THE FOUR SCENARIOS
Traditional energy systems are the tendency to be locked into an The assumptions that underpin
transforming, and the needs outlook that is not adaptable to each scenario can be aggregated
of customers around the world circumstances as they unfold. into three key factors of change –
and here in Western Australia Using the Energy Networks Australia energy policy, technological change
are changing too. Given this and CSIRO Network Transformation and customer behaviour.
landscape, the delivery of stable Roadmap (April 2017) as inspiration,
and affordable energy is critical we created four scenarios (Figure Like most jurisdictions, the
to Western Australia’s growth and 1) with each describing a different overarching global trend toward
ATCO is committed to engaging economic, technological and policy decarbonisation is shaping an
with market participants to develop environment in which we might find increasingly complex national and
opportunities that provide flexible, ourselves in. local energy policy response. It is
innovative solutions to support the also a catalyst for innovation and
economy now and into the future. This paper has been supplemented the emergence and adoption of
with insight from a series of new technologies. Customers, who
The publishing of this paper is an customer forums held in late are now more empowered than
important step in this journey and is 2016 and early 2017. Our analysis ever before, are realising the value
intended to help Western Australian also involved reviews of energy of these technologies and the
energy market participants literature and industry thought environmental and cost benefits
understand, prepare and respond to leadership both nationally and they provide.
an uncertain energy future. To help internationally. The creation of the
address this uncertainty, we have scenarios and related assumptions
used scenarios to contemplate a involved extensive energy market
range of possible energy futures for modelling to explore the impact on
Western Australia. Contemplating energy demand, network prices and
more than one future helps us resist capital investment.
WESTERN AUSTRALIA’S ENERGY FUTURE 5FIGURE 2: KEY ASPECTS AND OUTCOMES OF SCENARIO 1
- CONTINUATION OF TRENDS
WHAT WE IMAGINED WHAT WE FOUND
• Federal Government is not willing to • Slow growth in retail electricity
employ market-based climate policy prices is partly due to average unit
instruments. costs for the network falling as
• The existing renewable energy target consumption grows at a faster pace
Under Scenario 1 the is maintained, but there is a lack of than network expenditure.
current trends regarding clarity regarding the best strategy • The slow growth in electricity retail
energy policy, power is to support the transition to a low prices leads to consistent growth in
generation and energy carbon future. residential electricity demand.
use continue. A key and • The possibility that energy and • Gas retail prices decline and
dominant feature of this climate policy might change residential gas consumption
scenario is the ongoing dramatically in future electoral cycles increases. This, combined with a
continues to play on the minds of growing population, results in an
energy policy uncertainty investors. increased number of residential
at both the State and connections to the gas network
• As a result, investment in large scale
Federal levels. The key renewable energy projects is stifled and an increase in residential gas
aspects and outcomes of in Western Australia. consumption overall.
this scenario are outlined • Residential customers continue to
• The Western Australian energy mix
in Figure 2. continues its progression towards use natural gas in the same way they
lower carbon energy sources mainly do now - primarily for cooking and
as a result of growth in the adoption water heating.
of residential and small scale • While the cost of supplying gas
commercial photovoltaic (PV) solar. remains relatively constant, the retail
gas price is quite low, encouraging
greater consumption.
WHAT IT MIGHT MEAN
• The lack of large-scale renewable energy investment is expected to constrain
Western Australian retailers in procuring large-scale renewable energy
certificates locally.
• As a result we expect to see a flow of capital from Western Australia to the
eastern states.
• The residential gas supply industry comes under a small amount of margin
pressure towards the end of the modelling period even though the impact of
disruptive forces on the energy sector is not as strong as that under the other
scenarios.
• Residential gas customers enjoy comparatively low prices, without significant
risk of their suppliers coming under so much pressure that they consider
exiting the market.
6 WESTERN AUSTRALIA’S ENERGY FUTUREFIGURE 3: KEY ASPECTS AND OUTCOMES OF SCENARIO 12
- DECARBONISATION PARTIALLY PURSUED
WHAT WE IMAGINED WHAT WE FOUND
• The Western Australian Government • Similarly to Scenario 1, retail electricity
plays a more active role in energy prices continue toward a more cost-
policy. The continued Federal energy reflective price.
policy uncertainty prompts the State • Residential electricity demand rises
Under Scenario 2, Government to adopt its own state- in response to slow growth in retail
based renewable energy target - 50% electricity prices.
intermittent renewable renewable energy generation by
energy growth is 2050. • The cost of supplying gas increases,
supported by a boom in which is driven by an increase in
• Regulatory and grid connection wholesale gas prices due to a rapid
natural gas-fired firming barriers are removed and renewable
capacity, which is used as increase in the demand for wholesale
energy investment increases. gas.
a low emissions alternative
• The energy mix moves toward lower • The continued competition in the
to coal-fired generated carbon energy sources as a result of
electricity and as a means retail gas market maintains downward
the state-based renewable energy pressure on retail gas margins.
of supporting Western target, continued uptake of rooftop
Australia’s transition solar PV, and indirectly to increased • As the retail gas prices decline we see
toward a renewable use of natural gas to support residential gas consumption rise.
energy-based grid. The key intermittent renewable generators. • Substituting natural gas with
aspects and outcomes of electricity in a highly competitive retail
this scenario are outlined environment results in continued falling
gas prices.
in Figure 3.
• The use of gas as an enabling fuel and
resulting higher wholesale natural gas
prices, causes wholesale electricity
prices to increase sharply just after the
state-based renewable energy target is
introduced.
WHAT IT MIGHT MEAN
• The declining demand for residential gas, coupled with an increasing cost of
supply places pressure on gas retailers.
• The retail gas margin decreases rapidly, falling below the sustainable long-term
benchmark of 25% by 2024.
• The proportion of gas revenue collected from residential customers decreases
and is replaced in part by growth in commercial and industrial customers.
• The transition toward a clean energy future within a fractured policy
environment creates sub-optimal, and unintended outcomes for the gas
sector.
• The unintended outcomes of this scenario highlights the need for any
emissions reduction policy to be developed in a way that considers
interactions with other policies, technological and engineering constraints,
market behaviours, and customer preferences.
WESTERN AUSTRALIA’S ENERGY FUTURE 7FIGURE 4: KEY ASPECTS AND OUTCOMES OF SCENARIO 3
- DECARBONISATION ACTIVELY PURSUED
SCENARIO 3
DECARBONISATION WHAT WE IMAGINED WHAT WE FOUND
ACTIVELY PURSUED
• The Federal government establishes • Residential electricity demand flattens
a transparent and stable emissions as prices rise, while retail gas prices
reduction mechanism. The WA State initially rise, then fall.
Government follows other states and • Small-use customers reduce their grid
Under Scenario 3, the adopts an ambitious target of 100% consumption of electricity, but most
renewable energy by 2050. remain connected for backup and
Federal Government
pursues decarbonisation • Rapid regulatory reform occurs security purposes.
to meet Australia’s in WA along with the adoption • The state-based renewable energy
commitments under the of a constrained network access target drives an increase in grid capital
framework. Full retail contestability expenditure to support the rapid inflow
Paris Agreement. This is also introduced giving customers
results in aggressive policy of large-scale renewables.
greater choice in where they buy
measures that force the their power. • Retail electricity prices increase by
investment in and uptake approximately 20% between 2018
• Policy changes and reforms are
of renewable sources and 2030. This rise is driven by both
flagged to the market in a timely
of energy, despite them manner allowing industry investors an increase in the cost of supply and a
remaining a higher cost to respond accordingly. reduction in electricity demand.
option. The key aspects • Gas distribution networks are • As prices rise, customers look to
and outcomes of this adapted to allow low emissions substitute grid-supplied electricity with
scenario are outlined in biogas followed by hydrogen gas by cheaper energy sources.
figure 4. 2050. • Towards the end of the modelling
• The energy mix shifts towards lower period, we see the beginning of a
carbon energy, and battery storage vicious circle, as demand for grid
costs fall to a point where enabling supplied electricity decreases and
renewable energy technologies electricity prices continue to rise.
start to become economically • The regulated retail gas price initially
viable in residential and commercial increases, then begins to decrease until
applications. it plateaus between 2027 and 2030.
WHAT IT MIGHT MEAN
• The coal-fired generation industry ceases to exist under this scenario as a
result of strong government prohibitions against that form of supply.
• The large- scale renewable energy industry thrives.
• The electricity network is not seriously threatened by the policy push towards
alternatives, although it is likely under this scenario that it would need to move
towards pricing structures that are not based on energy throughput.
• As retail gas prices fall and the average cost of supplying gas to residential
customers increase, we see retail gas margins fall. However, these margins are
still relatively healthy in a competitive landscape.
• Hence, we can conclude that even with policy disruption and an increased
capital cost to convert the network to hydrogen by 2050, that residential gas
supply will remain competitive in the short to medium term.
8 WESTERN AUSTRALIA’S ENERGY FUTUREFIGURE 5: KEY ASPECTS AND OUTCOMES OF SCENARIO 4
- TECHNOLOGY DRIVES DISRUPTION
WHAT WE IMAGINED WHAT WE FOUND
• Rapid regulatory reforms remove • In the wholesale electricity market,
barriers to entry for disruptive demand slows and prices do not
technologies and in turn, they are increase at the same level as under the
aggressively pursued and adopted. other scenarios.
Under Scenario 4, • In WA, reforms include the • High residential electricity prices are
disruptive technologies implementation of a constrained driven by an increase in the cost of
are aggressively network access framework and supplying electricity and a reduction
pursued and become full retail contestability. This drives in the customer base as people
healthy competition and rapid increasingly defect from the grid,
cost competitive with innovation in the electricity sector. particularly its transmission backbone.
conventional power supply
options. Households and • Wholesale electricity market • A vicious circle between electricity
reforms and digital technologies prices and demand emerges, as retail
businesses generate and allow aggregated behind–the-meter gas prices slowly decline.
store power and effectively solutions to be dispatched as if they • The retail gas price initially increases
manage their own energy were larger, centralised generators. until 2021, but then rapidly declines
needs. This changes • Smaller scale stand-alone power between 2021-2022, before flattening
the traditional role of systems are further facilitated by between 2022 and 2030.
generators, network peer-to-peer trading using the • A $1Bn investment (over 5 years) will
operators and retailers and distribution network infrastructure. be required to convert the existing
the services they provide. • Renewable technologies become network to carry hydrogen by 2030 and
The key aspects and increasingly cost-competitive will result in an increase in the cost of
outcomes of this scenario compared to conventional sources. supplying gas.
are outlined in figure 5. • Customers change their
consumption patterns through the
use of integrated smart appliances or
operate ‘off the grid’ by generating
and storing their own energy.
WHAT IT MIGHT MEAN
• The key implication of technological disruption for the traditional supply
industry is that it reduces the demand for electricity supplied through the
transmission network and fundamentally changes the traditional roles of both
the electricity network operator and electricity retailers.
• It is easy to imagine today’s electricity network starting to disaggregate under
such a scenario to form a number of smaller, islanded networks.
• For the residential gas supply industry, technological disruption increases
supply costs, so that the retail gas margin converges towards, but does not
fall below, what we assume to be the sustainable long-term benchmark retail
margin of 25%.
• Despite the significant investment in the distribution network to convert it to
biogas and hydrogen, and ongoing competition in the retail sector, gas retailers
remain viable over the modelling period.
WESTERN AUSTRALIA’S ENERGY FUTURE 9FIGURE 6: SCENARIO SUMMARY TABLE
The summary table in
figure 6 compares the
four scenarios across MOST FAVOURABLE SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4
several key metrics. Continuation Decarbonisation Decarbonisation Technology drives
LEAST FAVOURABLE
Understanding the of trends partially pursued actively pursued disruption
complexity of the energy
Carbon emissions reduction: Unlikely to achieve Less likely to achieve Likely to achieve Likely to achieve
system as a whole, it is not
surprising there is no ‘one Paris Agreement commitments Paris Agreement Paris Agreement Paris Agreement Paris Agreement
size fits all’ solution to the Energy Forecasts for the WEM
challenges we are facing. (GWh)
21587 21587 20148 17958
Each scenario will have its
own winners and losers, Residential Retail Electricity
Price (c/kWh)
33.2 33.9 34.4 37.0
and it is the responsibility
of policymakers and
Residential Retail Gas Price
industry players to balance 11.6 12.1 14.4 13.0
(c/kWh)
the long-term needs of
customers, investors and
the environment. Residential Gas Demand (GWh) 3431.1 3391.0 3148.0 3345.5
Wholesale Gas Prices ($/Gj) 2.88 5.08 3.71 2.03
WA Balancing Market Wholesale
Electricity Price ($/MWh)
75.54 87.41 55.87 46.47
Estimated gas retail margin (%) 23% 6.9% 28.3% 29.5%
Carbon Prices ($/t) 0.0 13.5 47.7 0.0
Large scale renewable energy as
% of wholesale generation (%)
21.6% 26.6% 45.3% 18.2%
Electricity Network CAPEX
profiles ($ million)
473.0 497.5 563.0 452.9
Gas Distribution Network CAPEX
profiles ($ million)
101.2 111.2 139.6 272.8
10 WESTERN AUSTRALIA’S ENERGY FUTUREEach scenario will have its
own winners and losers,
and it is the responsibility
of policymakers and
industry players to balance
the long-term needs of
customers, investors and the
environment.
WESTERN AUSTRALIA’S ENERGY FUTURE 11INTRODUCTION
Although we can’t stop The purpose of this paper is This paper has been supplemented
with insight from a series of customer
change from occurring, to help Western Australian forums held in late 2016 and early
we can plan for how energy market participants 2017. Our analysis also involved
we respond and take understand, prepare and reviews of energy literature both
advantage of it. respond to an uncertain nationally and internationally. The
creation of the scenarios and related
energy future. assumptions involved extensive
To do this, we have imagined four energy market modelling to explore
future energy scenarios for Western the impact on energy demand,
Australia between 2018 and 2030. The network prices and capital investment.
scenarios are not intended to predict By exploring these scenarios, we will
Western Australia’s energy future, learn more about potential impacts
but instead to stimulate thinking and on our energy market, our customers
foster discussion with and between and how market participants and
customers, market participants and policy makers might respond to future
policy makers. changes.
SCENARIO 1 SCENARIO 2
CONTINUATION OF DECARBONISATION
TRENDS PARTIALLY PURSUED
SCENARIO 3 SCENARIO 4
DECARBONISATION TECHNOLOGY
ACTIVELY PURSUED DRIVES DISRUPTION
12 WESTERN AUSTRALIA’S ENERGY FUTUREWESTERN AUSTRALIA’S ENERGY FUTURE 13
THE WESTERN AUSTRALIAN
ENERGY LANDSCAPE:
A SECTOR IN CHANGE
The Western Australian energy sector is experiencing a period of unprecedented
change. Energy policy, technology and customer behaviour are key factors that will
influence the future energy landscape.
How do energy market activity, is shaping public policy
and potentially the structure
energy uptake would provide
the best conditions for investor
participants and policy of the energy sector. The Paris confidence in the energy sector. In
makers address Australia’s climate agreement resulted in this regard, the Federal Government
energy trilemma, stimulate 197 countries, including Australia, recently announced that a National
Energy Guarantee policy would be
demonstrating a commitment to
investment in new reduce greenhouse gas emissions. pursued in lieu of the Clean Energy
technology and help Many industry commentators Target originally proposed by the
contribute toward a more believe that a united approach will Chief Scientist. While the National
Energy Guarantee concept has
be required from both the private
sustainable future? sector and all levels of government received support from some market
if Australia is to achieve its commentators, the challenge of
A number of uncertainties are commitment. aligning all stakeholders remains
influencing the Western Australian significant.
energy landscape. Like most However, energy and climate
jurisdictions, the overarching global change represent two of the For example, the National
trend toward decarbonisation is most politically contested areas Energy Guarantee’s successful
shaping an increasingly complex of public policy in Australia. For implementation will require
national and local energy policy example, the introduction and the support of Australian States
response. It is also a catalyst for subsequent removal of a carbon and Territories, and recent
innovation and the emergence pricing mechanism is one example indications are that this may not be
and adoption of new technologies. of how the nation’s approach to forthcoming.
Customers, who are now more decarbonisation has shifted across
empowered than ever before, electoral cycles. Policy uncertainty
are realising the value of these adds further complexity to
technologies and the environmental challenges faced by energy utilities
benefits they provide. when trying to balance the three AFFORDABILITY
elements of the energy trilemma
(see figure 7).
ENERGY POLICY
Western Australia’s Minister for
Recognition of the risks presented Energy, Ben Wyatt, has indicated
by global warming and the drive to that a nationally consistent
decouple emissions from economic approach to supporting renewable SECURITY SUSTAINABILITY
FIGURE 7: THE ENERGY TRILEMMA
14 WESTERN AUSTRALIA’S ENERGY FUTURE“
This [the National Energy Guarantee]
Continued policy uncertainty will
reduce the willingness to invest
in long-lived energy sector assets,
investment, technological innovation
and cost reduction.
including both fossil fuel and There are also a range of new
is a welcome change for a few reasons. technologies that offer substantially
Firstly, it marks a well-needed shift renewable energy infrastructure.
reduced greenhouse gas emissions
away from reviews and interventions, while maintaining the safety,
and signals a reliance on the market What are the technologies reliability and security of energy
to derive the future generation mix. that will make a difference supply. The public policy response
Secondly, it hits the security limb of to climate change combined with
the energy trilemma directly. These two in realising a cleaner energy these technologies is creating new
factors combined will provide certainty future? markets with the potential to disrupt
to the market to lock in strategies traditional energy business models.
around the provision of new capacity. Will they be provided by new
entrants to market? The future direction of technology
Like any policy, there will be winners and
and its adoption is hard to model
losers. We expect mass market retailers, and thereby uncertain. For example,
who bear the brunt of the obligations Will consumers embrace natural gas is produced in greater
and guarantees, to be negatively them at the outset, or wait quantities today than it was five
impacted by the changes, as well as the until they become more years ago because of technological
renewables development industry. Gas
power will play a much more significant
affordable? advances in hydraulic fracturing.
However, there is uncertainty over
role in providing system security the rate at which greenhouse gas
under this policy, putting continued TECHNOLOGICAL CHANGE emitting fuels like natural gas will
pressure on the availability of well- be replaced by very low emission or
priced domestic natural gas supply. Western Australians are custodians renewable alternatives.
While not yet announced, we expect to of world class renewable energy
resources and have the scientific Ultimately however, as clean
see a growing focus by regulators on energy technologies become cost
generation bidding behaviour as well as and engineering capability to
transition to a clean energy competitive, or even substantially
network prices over the next 12 months, cheaper than conventional
as state and federal governments drill economy in a carbon-constrained
world. alternatives, it is likely that market
further into affordability as a key cost of forces will accelerate their adoption.
living issue for households. Consequently, Western Australia In particular, the increasing
enjoys a significant comparative commerciality of energy produced
Matt Rennie from renewable sources will have
advantage in ‘clean energy
EY – Oceania Power & Utilities Leader
“ production’ and is well positioned
to respond to recent global
significant, but also somewhat
unpredictable, impacts on the
trends toward renewable energy energy sector.
WESTERN AUSTRALIA’S ENERGY FUTURE 15How will customers embraced as they become more willing to pay. However, the cost
familiar due to the consumption of renewable energy has been
respond to new technology choices of others. in rapid decline for many years
that offers increased now, and a number of recent
In Western Australia, the rapid
efficiency and affordability, uptake of residential rooftop solar
energy procurement auctions
have resulted in renewable energy
a lower carbon footprint and the installation of the first Tesla solutions outbidding competing
and the ability to generate Powerwall battery indicate that gas generators for energy supply
customers are already embracing
energy for both personal new energy solutions outside
contracts.
use and trading? those provided by a traditional It is clear that the time will come
utility. Existing energy players when low emissions technologies
Will they defect from are compelled to respond to this are able to consistently provide a
traditional utilities and changing demand, not only by reliable energy supply at a lower
cost than fossil fuel based options,
respond positively to delivering affordable, safe and
reliable energy solutions, but by at which stage we may see a
new entrants to market? delivering new energy solutions ‘tipping point’ as traditional fossil
that are innovative, efficient and fuel assets become stranded. The
environmentally friendly. risk that this may happen soon is
driving some of the uncertainty in
CUSTOMER BEHAVIOUR Based on consistent feedback from energy markets. Holders of long-
Changing customer behaviour and our customers, ATCO is embracing lived traditional energy assets are
preferences will play an important this change and has taken the assessing their capital investment
role in defining the future Western first steps in the journey through programs and engaging in scenario
Australian energy technology and the development of our ‘GasSola’ planning as a response.
policy landscape. Customer choices solution as shown in Figure 8. This
system combines photovoltaic (PV) Uncertainty over the timing and
will no longer be based purely on
solar panels, battery storage and a nature of a transition away from
affordability and reliability as an
gas powered generator. fossil fuel technologies may
increased awareness of climate
dampen investment incentives
change creates new markets for
Until recently, achieving an energy well before the transition occurs,
environmentally sustainable energy.
supply package that provided with the reduction in supply
Customer sentiment can be both both reliability and environmental impacting customers in the short
a cause and effect of technological sustainability came at a price term from both price and reliability
and policy change. The that only some customers were perspectives.
development of new technologies
gives customers a range of new
choices over their energy supply
options. Conversely, customer
demand for new technologies can
focus the efforts of government on
supporting the commercialisation
of these opportunities or
alternatively, removing regulatory
barriers to their adoption. Changing
preferences can also have natural
flow-on effects, where these new
technologies are increasingly
FIGURE 8: ATCO’S GASSOLA SOLUTION
16 WESTERN AUSTRALIA’S ENERGY FUTUREIMAGINING OUR ENERGY FUTURE
We have imagined four future energy scenarios for Western Australia. By analysing
these scenarios, we hope to learn more about their potential impact on our energy
market, the customers in that market, and how market participants and policy
makers might respond.
WHY SCENARIOS? THE SCENARIOS
The investment planning process futures, and helps us resist the
for energy networks used to tendency to be locked into an SCENARIO 1: CONTINUATION OF
be relatively simple, based on outlook that is not adaptable to TRENDS
predictable long-term forecasts changing circumstances.
with little competition for services. This scenario assumes no
We have developed four future meaningful change to the current
With disruption an almost everyday WA energy landscape. It assumes
occurrence, our planning process energy scenarios that describe recent disruptive influences on the
has evolved, considering a wider different economic, technological WA energy sector continue at their
and policy environments in which current rate.
range of policy, technological and
customer trends. WA energy market participants,
including ATCO, might find
This paper is an output of our themselves. The scenarios were SCENARIO 2: DECARBONISATION
routine strategic surveillance developed from energy market PARTIALLY PURSUED
program and scenario planning. modelling1 that explores the impact This scenario assumes
Using scenarios allows us to on energy demand, network prices rapid growth in large-scale
contemplate a range of conceivable and capital investment. renewables, and a policy/
technological choice to support
that growth through an
increased reliance on gas-fired
technologies.
SCENARIO 3: DECARBONISATION
ACTIVELY PURSUED
This is predominantly a
‘policy push’ scenario, where
governments take a hard stand
on forcing rapid emissions
reductions, including a State
Government 2050 target of 100%
renewables.
SCENARIO 4: TECHNOLOGY DRIVES
DISRUPTION
This is predominantly a
‘technology pull’ scenario,
where rapid improvements in
low emissions technologies
and associated cost reductions
outpace the need for early
government intervention to meet
carbon reduction targets.
1
The approach to the market modelling is included in the appendix to this paper
WESTERN AUSTRALIA’S ENERGY FUTURE 17SCENARIO 1
CONTINUATION OF TRENDS
Under this scenario, the current trends regarding energy policy, power generation and
energy use continue. A key feature is the ongoing energy policy uncertainty at both the
State and Federal levels.
Slow growth in electricity renewable energy support schemes commercial customers who have
remain difficult to implement and installed solar panels.
retail prices leads to sustain.
consistent growth in
residential electricity The possibility that energy and WHAT WE FOUND
climate policy could change
demand, as gas dramatically in future electoral
As shown in figure 9, the quantity of
retail prices decline cycles continues to play on
electricity demanded continues to
grow in line with current trends due
and residential gas the minds of investors and to the lack of cost-effective energy
consumption increases. energy industry players that are storage solutions, even though
considering investing capital into growth in solar PV uptake flattens
long-lived assets.
WHAT WE IMAGINED peak electricity demand.
This uncertainty at the Federal As shown in figure 10, the real
The dominant theme of this
level is coupled with regulatory retail electricity price increases
scenario is one of continuing energy
and electricity grid connection by about 15% over the modelling
policy uncertainty at the Federal
barriers at the State level which horizon. This slow growth in retail
level. While the existing renewable
continues to stifle investment in electricity prices is partly due to
energy target is maintained, it is Western Australian-based large-
unclear what the best strategy is average unit costs for the network
scale renewable energy projects. falling as electricity consumption
to support the transition to a low Retail electricity prices in Western grows at a faster pace than network
carbon future. Australia continue to increase expenditure. Further driving this
Under this scenario, the Federal towards a condition of cost slow growth is comparatively-low
Government is not willing to reflectivity, as State Government augmentation or growth-related
employ market-based climate subsidies for most residential and capital-expenditure in the electricity
policy instruments such as a small-scale commercial customers network under this scenario, as a
carbon price, or more prescriptive are removed. result of flattening peak demand
interventions such as prohibitions and relatively modest renewable
In this scenario, the Western
on internal combustion engines or energy uptake.
Australian energy mix continues its
coal-fired power stations. Similarly, The retail cost of electricity under
progression towards lower carbon
under tight fiscal environments at this scenario increases in line
energy sources mainly as a result
with the slow growth in capital
both the State and Federal levels, of growth in adoption of residential
expenditure related network costs,
and continuing political contest and small scale commercial
which rise from 38% of total cost in
over how Australia will meet its solar PV. Battery storage costs 2018 to 45% of total cost in 2030.
international climate change continue to fall in line with current
commitments, incentive-based trends, although the technology Continued competition in the retail
mechanisms such as subsidisation is not a cost-effective option for gas market maintains downward
of electric vehicles and expanded the majority of residential and pressure on retail gas prices, which
18 WESTERN AUSTRALIA’S ENERGY FUTUREFIGURE 9: OPERATIONAL ENERGY FORECASTS FOR THE WESTERN AUSTRALIAN WHOLESALE ELECTRICITY MARKET
Operational Energy Forcasts for the Western Australian Wholesale Electricity Market
24000
23000
22000 Continuation of trends
Decarbonisation partially pursued
21000
20000 Decarbonisation actively pursued
GWh
19000
18000 Technology drives disruption
17000
16000
15000
14000
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
FIGURE 10: RESIDENTIAL RETAIL ELECTRICITY PRICE
Residential Retail Electricity Price
40
Technology drives disruption
35 Decarbonisation actively pursued
Decarbonisation partially pursued
c / kWh
Continuation of trends
30
25
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
fall by approximately 31% over the We observe that there is a slight latter increasing by only 3% over
model period. Falling gas prices increase in the upstream costs that the model period due to limited
and a growing population result in retailers incur in supplying gas to growth in related capex.
an increased number of residential residential customers under this
connections to the gas network scenario. This is driven by a small While the cost of supplying gas
and an increase in residential gas increase in wholesale gas prices remains relatively constant, the
consumption overall. Residential from about $5.83 /GJ in 2018 to retail gas price is quite low under
customers continue to use natural $8.06/GJ in 2030 in real terms. this scenario (see figure 11) which
gas in the same way they do now, encourages greater consumption.
primarily for cooking and water The distribution and transmission The level of residential gas demand
heating. network components of this cost is the highest across the four
remain relatively constant, with the scenarios (see figure 12).
WESTERN AUSTRALIA’S ENERGY FUTURE 19SCENARIO 1
CONTINUATION OF TRENDS
procure large-scale renewable margin pressure towards the end
energy certificates locally. This of the modelling period (see figure
results in a flow of capital from WA
WHAT IT MIGHT MEAN to the eastern states. Energy policy
13), even though the impact of
disruptive forces on the energy
The lack of large-scale renewable uncertainty also makes the viability sector is not as strong as that under
energy investment under this of long-term investments in coal the other scenarios. The retail
plants questionable.
scenario constrains the ability of gas margin reduces from 53% in
WA retailers, including Government- The residential gas supply industry 2018 to 23% in 2030. This may not
owned trading enterprises, to comes under a small amount of be a major concern, as the retail
FIGURE 11: RESIDENTIAL RETAIL GAS PRICES
Residential Retail Gas Prices
18
17
16
15
Decarbonisation actively pursued
c / kWh
14
13 Technology drives disruption
Decarbonisation partially pursued
12
Continuation of trends
11
10
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
FIGURE 12: RESIDENTIAL GAS VOLUMES DEMANDED
Residential Gas Volumes Demanded
3,500 Continuation of trends
3,400 Decarbonisation partially pursued
Technology drives disruption
3,300
3,200
Decarbonisation actively pursued
3,100
GWh
3,000
2,900
2,800
2,700
2,600
2,500
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
20 WESTERN AUSTRALIA’S ENERGY FUTUREgas margin remains above the withstand. Retail margins have scenario highlights the need for
sustainable long-term benchmark fluctuated from as little as 3% in resilient energy solutions which
of 25% for the majority of the 2008 to 45% in 2011. have the capacity to adapt and
modelling period and is supported respond in an uncertain, highly
So, residential gas customers enjoy regulated and changeable policy
by relatively high demand. comparatively low prices under this environment.
Historical data relating to retail gas scenario, without significant risk
suggests that there is a degree of of their suppliers coming under so
allowable variation in the retail much pressure that they consider
gas margin that the industry can exiting the market. Overall, this
FIGURE 13: RETAIL GAS PRICE & NON RETAIL GAS COST COMPONENTS
Retail Gas Price & Non Retail Gas Cost Components
18
16
14
12 Average residential retail price
10
c / kWh
Non Retail Gas Cost Components
8
6
4
2
0
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
WESTERN AUSTRALIA’S ENERGY FUTURE 21SCENARIO 2
DECARBONISATION PARTIALLY PURSUED
Under this scenario, intermittent renewable energy growth is supported by a boom in
natural gas-fired firming capacity, which is used as a low emissions alternative to coal-
fired generated electricity and as a means of supporting Western Australia’s transition
toward a renewable energy-based grid.
The Western Australian flagged to the market well ahead
WHAT WE FOUND
of their implementation, so that
Government plays a investors, particularly in flexible, In this scenario, we see an increase
more active role in the gas-fired peaking plants, can in the cost of supplying gas, which
energy policy space. respond accordingly. is driven by a 117% increase in
wholesale gas prices (figure 14).
Residential electricity Similar to Scenario 1, retail This increase is mainly due to a
electricity prices continue to
demand rises in response increase toward a more cost-
rapid increase in the demand for
wholesale gas as:
to slow growth in retail reflective price, while continued
electricity prices, while competition in the retail gas market • Tri-generation and co-generation
maintains downward pressure on technology evolves and is
retail gas prices decline retail gas margins. increasingly adopted at the large-
and residential gas scale commercial and industrial
Battery storage costs continue
consumption rises. to fall in line with current trends.
levels,2 resulting in an increase in
the wholesale customer base.
However, storage technology is
not a cost-effective option for • High carbon-emitting industries,
the majority of residential and such as those in the mining
WHAT WE IMAGINED commercial customers who industry use natural gas as
their primary source of backup
have installed solar panels, and
Under this scenario, continued so firming capacity comes from generation.
Federal energy policy uncertainty flexible, natural gas generators. • Gas provides a source of
prompts the Western Australian dispatchable generation to meet
Government to adopt its own state- The energy mix moves toward network security requirements
based renewable energy target, lower carbon energy sources, not as renewable energy penetration
pursing 50% renewable energy only as a direct result of the state- increases.
generation by 2050. To enable this, based renewable energy target and
regulatory and grid connection continued uptake of rooftop solar The use of gas as an enabling fuel
barriers are removed resulting in PV but also indirectly as a result and the resulting higher wholesale
an increase in renewable energy of increased use of natural gas to natural gas prices, causes wholesale
investment. This investment support intermittent renewable electricity prices to increase sharply
translates into a steady and rapid generators. In combination, (figure 15) just after the state-
increase in Western Australia’s renewables and natural gas take based renewable energy target is
renewable energy generation significant market share away from introduced.
capacity. Policy changes, while coal-fired generators under this
moderate and relatively slow, are scenario.
2
Co-generation and tri-generation technologies improve the efficiency of fuel use by
generating electricity and useful heat at the same time as part of an integrated process.
22 WESTERN AUSTRALIA’S ENERGY FUTUREFIGURE 14: WHOLESALE GAS PRICES Wholesale Gas Prices
6
5 Decarbonisation partially
pursued
4 Decarbonisation actively pursued
c/kWh
3 Continuation of trends
2 Technology drives disruption
1
0
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
FIGURE 15: WESTERN AUSTRALIAN BALANCING MARKET
WA WHOLESALE ELECTRICITY
Balancing Market PRICE
Wholesale Electricity Price
100
Decarbonisation partially
90
pursued
80 Continuation of trends
70
60 Decarbonisation actively pursued
S / MWh
50 Technology drives disruption
40
30
20
10
0
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
The growth in PV uptake will renewables. The combination away from the use of gas towards
place some downward pressure of high wholesale prices and electricity, offsetting reductions
on peak electricity demand and growing network costs causes retail in electricity demand due to
normally this would lessen network electricity prices to grow slightly increasing electricity retail prices.
augmentation requirements. faster in this scenario than they do Residential customers continue
However, under this scenario, the under Scenario 1. to use gas for cooking and water
state-based renewable energy heating, but increasingly rely
target drives an increase in The increase in wholesale gas prices upon electricity for space heating.
electricity network augmentation- impacts gas retail prices more The net effect is that residential
related capital expenditure, to than electricity retail prices. As a electricity demand is similar to that
support the inflow of large-scale result, there is gradual substitution under Scenario 1, even though
WESTERN AUSTRALIA’S ENERGY FUTURE 23SCENARIO 2
DECARBONISATION PARTIALLY PURSUED
retail electricity prices are slightly to a low carbon economy does not
higher when gas is used as an
WHAT IT MIGHT MEAN result in a favourable outcome for the
enabling fuel. This scenario combines a falling residential gas supply industry. In this
demand for residential gas, with scenario, the existing high proportion
The trend of substituting natural of the gas supply industry’s revenue
an increasing cost of supply driven
gas with electricity in a highly that is currently collected from
by high wholesale gas prices. This
competitive retail environment residential customers decreases, and
results in significant pressure
results in falling gas prices over is replaced to some extent by growth
being placed on gas retailers. As
the modelling period. Falling in revenue collected from commercial
a result, the estimated retail gas
prices in turn leads to increased margin decreases rapidly and falls and industrial customers. While the
household connections to the gas below the sustainable long-term industrial and commercial component
network as population grows over benchmark of 25% by 2024 (see of the gas distribution supply chain
the period, and so an increase in figure 16). remains commercially sustainable, it is
overall residential gas consumption, possible that the residential component
although at a declining average Under this scenario, the use of gas may not without government
rate. as a means of rapidly transitioning intervention. It is likely residential
FIGURE 16: ESTIMATED RETAIL MARGIN VERSUS INDICATIVE BENCHMARK RETAIL MARGIN
Estimated retail margin versus indicative benchmark retail margin
60%
50%
40%
Retail Margin
Technology drives disruption
30% Benchmark Retail Margin BRM Decarbonisation actively pursued
Continuation of trends
20%
10%
Decarbonisation partially
pursued
0%
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
24 WESTERN AUSTRALIA’S ENERGY FUTUREcustomers would react negatively
to the inconvenience of natural gas
suppliers exiting the market. This
may be of concern to government
if demands are placed on them to
subsidise residential gas prices to
alleviate cost pressures, or to industry
if government decides to manage
the situation by implementing cross
subsidies that put large gas users out
of pocket.
In any case, there will be winners
and losers under this scenario, and
it shows that the transition toward
a clean energy future within a
fractured policy environment may
create sub-optimal or unintended
outcomes for the gas sector. It is
therefore critical that emissions
reduction policy be developed in
a way that considers interactions
between policies developed at
different levels of government,
technological and engineering
constraints, market behaviours, and
consumer preferences. In particular,
action must centre on developing
and implementing cohesive
commonwealth and state government
policies that recognise the need
to deliver affordable, reliable and
commercially-sustainable energy
solutions.
WESTERN AUSTRALIA’S ENERGY FUTURE 25SCENARIO 3
DECARBONISATION ACTIVELY PURSUED
Under this scenario, the Federal Government pursues decarbonisation to meet
Australia’s commitments under the Paris Agreement. This results in aggressive policy
measures that force the investment in and uptake of renewable sources of energy,
despite them remaining a higher cost option than conventional forms of power supply.
when there is insufficient network
Aggressive regulatory capacity for them to deliver their
the use of natural gas beyond
the modelling period. For
reform and policy maximum output to demand nodes similar reasons, gas distribution
change throughout the year. This removes businesses start undertaking capital
grid connection barriers, which expenditure programs to allow the
contributes to a renewable energy existing network infrastructure to
WHAT WE IMAGINED boom in the state. In addition to
adopting a constrained network
carry low emissions gas - initially
biogas, followed by hydrogen gas by
Under this scenario, we imagine access framework, the Western 2050. This occurs in the context of
strong bipartisan support emerges Australian Government adopts full an increasingly competitive Western
at the Federal level to establish a retail contestability, which gives Australian retail gas market.
transparent and stable emissions customers greater power to choose
who they buy their energy from. In this scenario, largely due to
reduction mechanism. This may the high carbon price (see figure
be in response to public pressure These aggressive policy changes
and regulatory reforms are flagged 17) the energy mix progresses
after a series of significant climate- rapidly towards lower carbon
related events or the threat of to the market in a timely manner so
that energy industry investors are energy sources, boosted by the
trade sanctions against nations aforementioned ambitious State
that do not meet their emission able to respond accordingly.
and Federal renewable energy
reduction targets. This includes A significant proportion of coal- and emissions reduction targets,
the introduction of a strong carbon fired generators voluntarily retire mandated closure of coal fired-
pricing mechanism starting in 2021 early, (i.e. at a faster rate than generators, and rapid growth
to encourage the achievement of they do under scenarios 1 and 2) in residential and small-scale
Australia’s commitments under the due to the increase in renewable commercial solar PV uptake. Unlike
Paris Agreement. generation capacity pushing them scenarios 1 and 2, battery storage
off the grid in the middle of the day. costs fall to a point where enabling
The Western Australian State renewable energy technologies
In addition, towards the end of the
Government follows the example of start to become economically
period, the government begins to
other Australian states and adopts viable in residential and commercial
mandate the even earlier closure of
an ambitious state-based renewable markets towards the end of the
coal plants. The heavy government
energy target, which aims to have modelling period.
intervention in markets causes
100% renewable energy generation
gross state product to grow at a
by 2050. To achieve this, the slower rate than it does under the
state engages in rapid regulatory other scenarios.
reform, adopting a constrained
network access framework Forced coal retirements send a
similar to that implemented in signal to the gas-fired investment
the National Electricity Market. community that policy contagion
This reform allows generators may spread to their sector, in
to connect to the network, even the form of direct restrictions on
26 WESTERN AUSTRALIA’S ENERGY FUTUREWHAT WE FOUND as a flattening of peak wholesale
electricity demand. The effect is
state-based renewable energy
target drives an increase in
Our modelling for this scenario that, while small use customers electricity network augmentation-
assumes the growth in solar PV reduce their consumption of related capital expenditure,
electricity from the grid, most required to support the rapid
uptake, coupled with the reduction
inflow of investment in large-scale
in battery storage costs, results in remain connected to the network
renewables (see figure 18).
reduced residential demand for for backup and security purposes.
electricity from the grid as well Although demand flattens, the
FIGURE 17: CARBON PRICES
Carbon Prices
60
Decarbonisation actively pursued
50
40
30
$/t
20
Decarbonisation partially pursued
10
Continuation of trends
0 Technology drives disruption
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
FIGURE 18: LARGE-SCALE RENEWABLE ENERGY AS A PERCENTAGE OF OVERALL WHOLESALE GENERATION
Large scale renewable energy as percentage of overall wholesale generation
70%
Percentage of Overall W/sale Generation
60%
50%
Decarbonisation actively
40% pursued
30% Decarbonisation partially pursued
Continuation of trends
20% Technology drives disruption
10%
0%
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
WESTERN AUSTRALIA’S ENERGY FUTURE 27SCENARIO 3
DECARBONISATION ACTIVELY PURSUED
includes increases in network decrease until it plateaus between
Residential electricity augmentation-related capital 2027 and 2030 (see figure 19).
demand flattens as retail expenditure required to support the The modelled gas price is driven
electricity prices rise, while rapid uptake in renewables. There by a rising electricity price, to
is an increased cost associated with which some consumers respond by
retail gas prices initially supplying less energy, which drives increasing their gas consumption,
rise then fall. up unit prices. As prices continue to and a slowing growth in gross state
rise, customers increasingly look to product, which reduces demand
Retail electricity prices under this substitute grid-supplied electricity for all forms of energy. The relative
scenario increase by approximately with cheaper energy sources. influence of these two factors
20% between 2018 and 2030. This Towards the end of the modelling changes throughout the modelling
rise is driven by both an increase period, this results in what might be period.
in the cost of supplying electricity the beginning of a vicious circle, as
and a reduction in the quantity of demand for grid supplied electricity
continues to decrease and
electricity demanded. The increase
electricity prices continue to rise.
in the cost of supplying electricity
is largely induced by the strong While the regulated retail gas price
climate policy interventions, and initially increases, it then begins to
FIGURE 19: COMPARISON OF RESIDENTIAL RETAIL GAS PRICES
Comparison of Residential Retail Gas Prices
18
17
16
15
Decarbonisation actively
c / kWh
14 pursued
13 Technology drives disruption
12 Decarbonisation partially pursued
Continuation of trends
11
10
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
28 WESTERN AUSTRALIA’S ENERGY FUTUREneed to move towards pricing environment. The modelling results
WHAT IT MIGHT MEAN structures that are not based on indicate that even with significant
The implications of this scenario energy throughput. policy disruption and an increase
for many industry participants are in capital expenditure for hydrogen
self-evident in its description. The For the residential gas supply conversion, it is possible for the
coal-fired generation industry, for industry, it is worth noting that residential gas supply industry to
example, ceases to exist under as retail gas prices gradually remain competitive and commercial
this scenario as a result of strong fall under this scenario, the over the short to medium term.
government prohibitions against average costs of supplying gas to
that form of supply. On the other residential customers increases,
hand, the large-scale renewable and as a consequence, retail gas
energy industry thrives. The margins fall from 49% in 2018
electricity network is not seriously before plateauing to around
threatened by the policy push 30% between 2028 and 2030.
towards alternatives, although it is This is still a healthy margin
likely under this scenario it would in an increasingly competitive
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