IEA: Australia steps up ambitions, but work still to be done

Australia has “stepped up” its climate ambitions with a trajectory compatible with the Paris Agreement but a clear policy roadmap is needed, according to the International Energy Agency’s (IEA) latest Australian Policy Review.

Since its last review in 2018, the analysis shows Australia is catching up to the emissions reductions pledged by other advanced countries.

Building upon the policies of the states and territories, passing the Climate Change Act in 2022, and revising the 2030 Nationally Determined Contribution to a more ambitious emissions target, have all helped according to the IEA. However, it says stronger efforts are needed to improve energy efficiency and boost clean energy investment.

A “collaborative approach”

Australia’s "collaborative approach” under the new National Energy Transformation Partnership (NETP) has helped the nation to move forward with its climate ambitions and support a smooth transformation of Australia’s energy sector, according to the IEA.

And while the agency says a whole-of-government approach is required to halt the country's high reliance on fossil fuels, it also acknowledges the range of policies to fast-track the country's transition - with the NETP, Rewiring the Nation, Capacity Investment Scheme, National Energy Performance Strategy, Safeguard Mechanism reforms, and Global Methane Pledge, all getting a positive mention.

Australia’s move to revise the 2030 Nationally Determined Contribution that pledges a 43 per cent reduction of greenhouse gas (GHG) emissions by 2030 from 2005 levels (an increase from the previous target of 26-28 per cent) is commended by the IEA - but it also flags that additional efforts are needed to meet the nation's new goal and suggests a national energy and climate information system is also needed to track progress towards reaching these targets.

The report also highlights Australia’s “active steps” on re-skilling and jobs under the Energy Workforce Strategy, however. it flags that a collaborative approach across all levels of government and communities is needed for a “just energy transition strategy.” The report was written prior to last weekend’s announcement by the Federal Government that it would legislate a National Net Zero Authority with responsibility for “promoting the orderly and positive economic transformation associated with achieving net zero emissions”. The stated aim is to have the new authority work with state, territory and local governments, existing regional bodies, unions, industry, investors, First Nations groups and others to help key regions, industries, employers and others proactively manage the transformation to a clean energy economy.

Emissions projections

In its latest review the IEA warns that Australia’s net zero commitment requires a “faster trajectory and increased efforts in energy efficiency and renewable energy”. It also calls for an updated net zero emissions reduction plan for 2050 that details a “clear policy road map with key milestones by sector and policy area”.

Figure 1: Historical and projected emissions reduction in Australia, 2020-2035

The Australian Government’s 2022 Emissions Projections show the country is on track to achieve a reduction of 32 per cent which, in Figure 1, is considered the ‘baseline scenario’ and builds on the goals from the Powering Australia plan.

The ‘with additional measures’ scenario would achieve a 40 per cent reduction in emissions by 2030 – and this reflects the Safeguard Mechanism reforms and meeting the national 82 per cent renewable electricity target.

Efficiency to step up

Improvements in energy efficiency have seen Australia achieve a total of 4714 PJ in energy savings since 2000; over this 20-year period, 50 per cent was saved from industry and services, followed by residential (24 per cent), passenger transport (17 per cent), and freight transport (9 per cent). LED lights and more efficient appliances driven by stronger minimum energy performance standards have had a powerful impact in the industry/services and residential sectors.

However, between 2015 and 2019, efficiency slowed. While this trend is similar to other countries, the IEA says there is a need to accelerate action to get the nation back on track, and to help with household energy “poverty” which is “becoming an issue.” The most recent Federal Budget included measures to assist with energy efficiency particularly in housing.

The IEA estimates a 60 per cent improvement is required to align with the nation’s net zero goals - with the National Building Code and Electric Vehicle Strategy seen as critical steps forward:

“Higher energy efficiency benefits could be expected from a net zero aligned trajectory, which would require an annual improvement of 4.2 per cent between 2020 and 2030 on average according to the global IEA net zero road map. The Australian Government estimates that a 53 per cent improvement could be achieved if the measures proposed by the end of 2021 are implemented. Hitting the target would mean Australia could decrease its energy consumption while GDP continues to increase.”

Figure 2: Australia’s average annual energy efficiency improvements and targets

“Remarkable” solar growth

Renewable electricity generation quadrupled between 2000 and 2021, from 17.6 terawatt hours (TWh) to 70.3 TWh, increasing the national share of renewables from 8 per cent to 27 per cent in electricity generation - thanks to the uptake of rooftop solar, ambitious targets, and increased funding (Figure 3).

Figure 3: Renewable energy in electricity generation in Australia, 2000-2021

Solar photovoltaics (PV) mostly contributed to this “remarkable growth” due to state-based targets and power purchase agreements (PPAs). While at a household level, one in three roofs now have solar PV accounting for 17 gigawatts of capacity.

Figure 4: Australia’s renewable capacity additions, 2010-2027 (left) and quarterly distributed PV installation capacity 2017-2022 (right)

Looking to 2027, the IEA expects Australia’s renewable energy capacity to increase by 85 per cent to 40 gigawatts (GW) due to the introduction of “ambitious” targets, increased funding, and PPAs.

(The Australian Energy Market Operator (AEMO) expects renewable energy to account for 83 per cent in the National lectricity Market by 2030, which would align with Australia’s aim of 82 per cent of renewables in the national electricity mix - up from 27 per cent today).

The IEA says 57 GW of renewable electricity capacity could be reached by 2027 - but only if Australia can accelerate the implementation of renewable energy zones (REZ), related grid projects, and coal retirements.

Maintaining security

Alongside Australia’s extreme weather events; the Covid-19 pandemic, Russia's invasion of Ukraine, and supply chain disruptions have created new challenges for the nation.

The IEA claims investment in clean energy infrastructure, grids, energy system flexibility, and fuel availability should be key priorities for Australia's transition, “and developing a national‑level energy sector plan that lays out future steps for climate resilience could further guide and accelerate co-ordinated action.”

It says the June 2022 electricity crisis highlighted the urgency for an orderly transition in the National Electricity Market (NEM), and that the government should expedite a review of the reliability approach taken by the Australian Energy Market Commission (AEMC).  But it notes that since the 2018 review, the government has carried out major reforms in its energy markets:

“The NEM regulatory rules and system operation are being adapted to higher shares of variable renewables based on key reforms, such as the AEMO’s ISP and its REZs, alongside the introduction of the five-minute settlement and new ancillary services markets. The Energy Security Board progressed longer term market design reforms with the post-2025 market design framework.”

Since the release of the IEA report, the AEMC has initiated a review into extending the interim reliability measure (IRM) by three years. The IRM was introduced in 2020 and is due to conclude in 2025. On 9 March 2023, the AEMC released a draft report recommending that the application of IRM to the retailer reliability obligation (RRO) be extended to 1 July 2028.

In its assessment of Australia’s energy transition the IEA argues that “considerable uncertainty”  remains around coal closures and the pace of clean energy investment “at the right time and in the right place.” The report notes that in December 2022, Energy Ministers endorsed a Commonwealth Capacity Investment Scheme in principle, to help reduce investment uncertainty and price volatility. The IEA suggests “an implementation plan for the NETP could provide guidance on the road map for the transformation.”

“The NEM will see a major energy system transformation, with a substantial loss of dispatchable capacity in the coming decade … AEMO’s Integrated System Plan (ISP) expects 14 GW of the 23 GW current coal capacity in the NEM to be retired by 2030, while coal plant owners have so far announced the retirement of 8.4 GW.”

The report also highlights the change in demand and prices. In the past decade electricity demand has grown 6 per cent, supported by strong economic growth, notably in the commercial buildings sector, and reached 239 TWh in 2021 compared to 223 TWh in 2010.

The industry sector accounted for 43 per cent of the total (103.4 TWh), followed by service sector buildings at 63.7 TWh (27 per cent), residential buildings (65.6 TWh, 27 per cent) and the transport sector (6.5 TWh, 3 per cent).

Figure 5: Electricity Consumption by Sector 2000-2021

Source: IEA

In terms of prices, the IEA assessment includes a comparison of Australia’s wholesale prices with those of a range of other IEA countries and while Australia’s prices have come under pressure in recent times it shows Australia continues to enjoy comparatively low wholesale prices (see figure 6).

Figure 6: Wholesale prices across regions – actual and projected

Source: IEA

In terms of household electricity prices (based on analysis of 26 countries) it found Australia’s prices were 212 USD/MWh. While the Australian average price is slightly above the IEA average of 205 USD/MWh, Australia’s prices were the 12^th lowest of the countries considered (including tax).

Figure 7: Household electricity prices

Source: IEA

Report recommendations

IEA executive director Fatih Birol has welcomed “Australia’s efforts to drive progress on low-emissions hydrogen and supplies of critical minerals – and its leadership on working with partners, including through the IEA, to strengthen the diversity and resilience of clean energy supply chains.”

And while commending Australia's step-up in climate ambition since its last review, strategies for reaching the higher goals need to be updated and reset.

The report ends with a list of recommendations for the Australian Government to consider, including:

• Boosting Australia’s unique resource position by supporting an investment environment with world-class environmental, social and governance standards and government support to attract private investment and stimulate the growth of new sectors of the critical minerals supply chain.

• Playing an active role in strengthening international collaboration to create predictable and transparent markets for critical minerals globally. It suggests making the best use of the IEA’s Critical Minerals Working Party as a forum to identify and tackle barriers to sustainable critical minerals supply chains and promote standardised ESG approaches globally.

• Assessing Australia’s exposure to critical minerals supply chain risks globally, for instance, through the National Energy Security Assessment.

• Streamlining permitting procedures alongside state and territory governments and new projects’ lead times to allow for accelerated development of mining and processing capacities in the country while engaging local communities and contributing to their socio-economic development.

• Promoting technology innovation along the value chain by stepping up research and development efforts on both the demand and production sides to enable more efficient use of materials, recycling and material substitution and to increase available supply for a secure global energy transition.