Energy White Paper-Issues Paper
Introduction
There is no area of public policy which is so much driven by beliefs, opinions, assertions and
special interest groups as Energy Policy. Furthermore, there has been confusion within
governments as to what energy policy is and what a greenhouse gases emissions’ policy is.
As a result, there has been a dis-connect from what is publicly written and spoken about
energy policy and what has been carried out by governments during the last decade in the
name of energy policy.
The result of this confusion has had a major impact upon our electricity industry. Australia
has lost one of its two sources of international competitiveness. Very high electricity costs
have accelerated the closure of much of the post war energy intensive manufacturing
industry and the restructuring of the remainder, a process that is still taking place. Loss of
policy focus also resulted in Australia having zero stocks of strategic fuel to be available in
the event of a major disruption to its supply chain.
It is my intention to address the causes and solutions to this policy failure in the context of
this Issues Paper.
Energy White Paper 2012 (4)
The last Energy White Paper was written in 2012. It was stated in the Executive summary:
“The cornerstone of the government’s energy policy framework is the delivery of Australia’s
energy needs through competitive and well-regulated markets that are operating in the
long-term interests of consumers and the nation.”
”Therefore, as part of its policy framework the government is institutionalising a regular
four-yearly strategic review of energy policy, commencing with this Energy White Paper.”
The objective of “competitive and well-regulated markets” is laudable, though it was quickly
changed to a policy of government picking winners, which cost consumers billions of dollars
in subsidies and grants and greatly affected the living costs of all Australians, especially the
poor, who have had to subsidise a disproportionate share of the cost of renewable energy.
The implications of major geopolitical issues had also been missed:
1. The rapid development of the shale gas (and oil) industry in the US has ensured that
the US currently trades natural gas at one-third of import prices to Europe and onefifth of those to Japan. Average Japanese, European and Chinese industrial
consumers pay around double for electricity as their counterparts in the US. This has
re-established the link between relatively low energy prices and the industrial
outlook (2) and helped the US with the recovery of its economy in contrast to
Australia, for example.
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2. The Australian domestic price for oil has, for the past thirty or so years, reflected
international market prices which will shortly be joined by natural gas. This will
change the cost of meeting peak electricity demand, of home/industrial/commercial
heating and of input to the manufacturing process.
3. Sectarian wars continue to be fought in Libya, Syria, Lebanon and Iraq, with the
potential to destabilise the Middle East, given that these wars are really a proxy for
war between Saudi Arabia and Iran. The cost to global supply disruptions (excluding
the embargo on Iran) has been estimated at some 3 million b/d by OPEC and 1
million b/d by non-OPEC producers. (3) Thus, given also a surplus crude oil
production capacity of some 3 million b/d, future oil prices will remain volatile,
possibly falling, and create uncertainty for the price of Australia’ exports of LNG and
the viability of the expansion of this industry.
4. There are tensions in the South China Sea between China, Japan, South Korea,
Vietnam and the Philippines as well as in the Sea of Okhotsk between Russia and
Japan, which may spill over suddenly as a threat to some of our major trading routes
and the transport fuel supply chain.
Investments in major energy infrastructure are usually based on a 20 year lifetime. Whilst an
occasional major review of energy policy is essential, to be followed by regular updates,
frequent major updates only cause confusion to the investor and add to Australia’s
sovereign risk.
As part of an attempt to improve the quality of such reviews, it is proposed that a thorough
analysis be done of previous review(s) as to whether proposed policies had achieved their
stated objectives. That review must include the costs and benefits of all existing and
proposed policies, (1) including the costs and benefits of the massive R&D and administrative
spend now devoted to energy, first started in 1973 at the Federal level following the first
OPEC crisis. One must note that no commercial technologies have yet been developed from
this expenditure, nor new industries established nor new skills created.
Furthermore, the 2020 ‘planning horizon’ used by government was adopted around the turn
of the century. As that year is only 6 years away, it is proposed that the government adopt
2035 as its new planning horizon, given that the major decisions which will affect 2020 have
largely been made.
The objective of an Energy Policy
The problem with any White Paper and the resultant policies is that whilst some policy
objectives may be stated (“the need to deliver secure, reliable and competitively priced
energy”, for example), the chosen policy options are not tested against those objectives. In
case of the 2012 White Paper, its policies failed to deliver competitively priced energy.
Australia’s electricity costs have risen from 2007 till 2012 from amongst the world’s
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cheapest to amongst the world’s most expensive and continue to rise to this day, this in a
country which has some of the world’s cheapest primary energy.
The policy objective of an energy policy must be to provide all Australians with energy which
is affordable, secure, reliable, safe and environmentally sustainable. This implies:
1. Whilst oil and natural gas prices reflect the global market which Australia cannot
influence, electricity prices are a local responsibility which can and must ensure
global competitiveness at the wholesale price level, i.e. be in the lowest quartile
price range. Data is available to evaluate policy options.
2. Australia has secure, adequate and low cost primary energy indigenous resources
other than crude oil. These resources should be used. The energy industry is a very
high tech industry and requires skilled staff and robust infrastructure which
governments must provide. Given that Australia has a managed public/private
electricity market, this implies resolution of the State/Federal government energy
objectives and responsibilities and the roles of the public/private sectors in the
electricity industry.
3. Reliability is achieved by use of proven commercial technology and benchmark
operating standards. The costs and value of reliability can be evaluated for different
levels of risk.
4. Safety can be achieved by use of benchmark standard operating practices. The costs
and value of safety can be evaluated for different levels of risk.
5. Energy should be environmentally sustainable and its production and use should
manage the impact from its emissions and wastes.
Clearly there is no single primary energy source which can meet all five objectives. This
implies that a trade-off must be achieved between the five objectives for any one energy
option, the optimum solution being the least cost solution. The alternative to avoiding
trade-offs by pursuing the environmental objective only, the approach by recent
governments, is to increase further the price of electricity and accelerate the deterioration
in the prospects for a renewal of the manufacturing sector and Australia’s competitiveness.
However, the ultimate test of good energy policy must be whether I would be prepared to
invest my money in energy. At this stage I would not.
Part of my argument rests on the range of existing bad energy policy, for example:
1. Banning the discussion of the use of nuclear technology at the Federal and State
level, sometimes by law, even as the Federal government encourages the export of
uranium oxide for electricity generation by our competitors overseas.
2. Banning the exploration for CSG by NSW and Victorian governments. It is hard to
believe that the NSW government then sounds surprised when that policy has
created a local supply shortfall.
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3. Preventing development of some natural gas resources by the WA and Queensland
governments under the guise of reserving that gas for unspecified future
applications.
4. Mandating the use of non-commercial blending components in fuels by the NSW
government.
5. Subsidising use of non-commercial fuels and blending components via taxation and
grants.
6. Subsidising the operation of non-commercial electricity generators via subsidies and
grants with the MRET legislation.
This White Paper provides the opportunity to examine the costs and benefits of these bad
policies by those who can gain access to the data. Given the mess which the energy policy
has become, no subject nor law or regulation must be exempt from examination.
Issues Paper (5)
The Security of Energy Supplies

“ways community expectations can be better understood and reflected in reliability
standards”;
Response: It is not at all clear what these standards currently are, how they were
determined and by whom. This information must be published in order to be able to provide
an informed response, as well as the cost curve for a rising reliability standard, so that one
could express a view as to the appropriate one. One presumes that these standards apply to
each segment of the electricity chain, from providing the primary energy to production to
transmission and to distribution and consumption in order to develop an overall system
reliability standard. The issue is complicated by a legally enforced change of the industry
structure, with new risk factors emerging in the chain over time.
Governments need to provide the leadership in reliability. For example, it has recently been
reported that the Metro, Victoria’s largest electricity consumer, still uses transformers built
in 1920. The 2009 Victorian Bushfires Royal Commission (6) noted the age and poor reliability
of the electricity grid. Victoria came close to an electricity crisis in January, 2014, during a
heatwave when little or no wind blew and it took time to bring conventional power
generators back on line. Improvements in these areas alone can have a material effect on
the system.

“the value of developing fuel reserves to meet Australia’s international oil security
obligations, and augment domestic security”;
Response: It is not possible to forecast the future. Australia is located in a volatile region,
sourcing some of its fuel supplies from another volatile region which secures crude oil from
a third volatile region. It is recognised that the government has a process in place to address
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possible supply emergencies. Unfortunately, a process cannot be a substitute for fuel in the
tank. It is clearly time to address this major risk to our economy.
Australia’s current oil reserves are slightly less than 60 days and represent operational
requirements only. They comprise crude oils and feedstocks as well as blending
components, intermediates and finished products. Stocks are effectively zero for an
emergency, for Australia remains the only country which does not comply with the
requirements for membership of the IEA and hold 90 days strategic storage. Australia
therefore does not have the basis for seeking help from other members in an emergency as
it had decided not to comply with the requirements of membership.
Almost all member countries need strategic stocks, yet they were able to fund the storage
capacity and contents not only to meet their obligations but to exceed them, as they clearly
saw that to be in their national interest. This strategic reserve (and ADF does not have one
either) must be provided by the integrated oil companies in the form of crude oil and the
distribution and marketing companies in the form of finished products, funded by a
temporary increase in excise collected and distributed by the government until the 90 days
have been reached. There must not be any exceptions.
The real issue about security is Australia’s total lack of crude oil and product carriers. Only
Geelong and Altona refineries are connected by pipeline to the Gippsland crude oil fields. As
production of indigenous crude oil continues to decline rapidly (condensate and LPG often
reported by governments as crude oil are generally not suitable for the manufacture of
petroleum fuels), more and more crude oil needs to be imported. As more and more
refineries are shut down, more and more products will be need to be imported. This is fine
in a stable situation as supply chains established over time do operate well. Unfortunately,
in an emergency there will be a shortage of available tankers, particularly such as meet
Australia’s environmental and safety standards. Hence Australia (and the ADF) will very
rapidly become stationary.
It is proposed that the ADF develop its own fuel supply capability. The government must
restore marine labour/industrial relations regulations and laws to a level where it become
economical for Australian flag carriers once again to operate in Australia.

“ways to increase new gas sources to meet demand and measure to enhance
transparency in market conditions”; and
Response. At this moment, and for the foreseeable future, there is no shortage of natural
gas. There is also no unmet demand. Indeed, it is quite possible that demand for domestic
gas, and possibly price, will collapse when the carbon tax is removed and coal again
becomes the chosen fuel for electricity generation. There is, however, a shortage of cheap
natural gas as contracts expire, replaced by new contracts reflecting the cost of new
sources.
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As current reservoirs become depleted, new natural gas sources can be developed in deep
water, as CSG, as shale gas and as tight gas, gradually moving up the cost curve. Eventually
natural gas can be made from coal as synthetic natural gas and, in the very long term, from
methane hydrates from deep water offshore. It is fortunate coincidence that plans to export
LNG from CSG will increase the domestic price of natural gas, for such a price appears to be
necessary to develop even the existing resource such as Gippsland, let alone a new
resource, as well as justify new pipeline networks.
In the meantime, it is strange that both the NSW and Victorian governments have banned
the exploration for, let alone the production of, CSG, which, in the case of NSW, will result in
higher natural gas prices that should have been the case. It would help understand
government policy if the commercial/technical case for these bans would be made public.
Both WA and Queensland governments have a ‘reservation’ policy for natural gas. This is
another flawed policy as it discourages exploration for new gas, of current relevance in
Queensland. Such gas has zero value to its owner despite incurring the costs of its finding
and development. This measure therefore depresses the overall economics of the venture
and discourages further developments.

“issues relating to the regulation of energy infrastructure”.
Response. The economics of capital investment in energy infrastructure are based on a 20
year lifespan. The investors need confidence that governments will not change the rules
during this a period. That patently was not the case in the last decade. As a result, Australia
is now seen as a sovereign risk country. Only large companies are able to carry out major
investments in energy infrastructure and they often operate internationally. Hence they are
able to rank their investment portfolios globally. Sovereign risk is one of the criteria.
Australia has lost its competitiveness as a result of its government policy, so I do not see any
large new LNG or electricity investments in the near future, unless the loss of
competitiveness has been restored by this government with a major reform programme.
The bizarre aspect of the current regulatory environment is that electricity prices continue
to be increased even as demand falls! In other words, the consumer has to bear the full risk
of bad investment decisions made by the producer or the distributor, which both appear
unable or unwilling to adjust their operations to a changing market environment. This
environment, which had been created by government regulations of what should otherwise
have been very low risk public utility, now protects the poorly managed electricity producer
and distributor.
The obvious solution to this mess is to remove ROI considerations from the price control
formula, indeed, remove price control altogether, and let the market sort out those
producers, distributors and technologies which will have to go to restore the
supply/demand balance in the system.
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Driving Energy Productivity

“the current suite of energy efficiency measures, ways these could be enhanced to
provide greater energy efficiency or possible new measures that would enhance energy
productivity”;
Response. Improving energy efficiency in an existing facility yields only marginal
improvements, important as they may be. The logical approach is to replace inefficient
facilities with state-of-the-art facilities. However, our energy price is still too low, and the
political climate too unstable, to make a sound economic case for investment. Government
has responded with direct action subsidies. Despite that, there has been a dramatic
improvement in our use of energy to generate our GDP over the past decades, probably
driven by structural change of the economy.
The biggest improvement in efficiency will come when we have finally shut down our postwar energy intensive manufacturing facilities, as many owners have not re-invested to
remain technically and commercially competitive. The government’s current policy of no
longer providing ‘corporate welfare’ is a sound policy and should accelerate that move. In
particular, many of our coal fired generators are old and inefficient. They should be allowed,
indeed encouraged, to be replaced by high efficiency state-of-the-art ones of greater
capacity to ensure ongoing supply of cheap base load electricity.
One challenge is to lay the foundations for the next generation manufacturing sector, an
opportunity which all recent governments had wasted during the lengthy mining boom. A
high tech sector which does not try to manufacture products which compete with China
would be the appropriate objective, even though China too is trying to upgrade its
manufacturing capabilities. Such a sector is likely to be much more energy efficient.
The other challenge is to remove all subsidies from renewable energies and alternative fuels
so as to let the market decide the least cost course of action. Whether the government does
that now or not is not that important, for it would appear to be inevitable from current
experience in the EU, that a ranking process will need to take place in renewable and
alternative energies as governments are unable to fund any longer their large subsidies. The
Australian government could well start this renewal with repealing the MRET Act.

“The use of demand-side participation measures to encourage productivity and reduce
peak energy use”;
Response. Demand-side participation implies rationing, a measure that used to be applied
only during war. I do not believe that we are in such a situation, even if the concept of war
appears to be used rather loosely by our politicians to address messy, possibly insoluble,
problems. So I reject that approach absolutely.
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Instead, I prefer the creation of genuinely free markets driven by genuine price signals, as I
believe I can make my investment and operational decisions better to serve my interests
than any government. So there is a contradiction in the concept of a policy of free markets
subject to regulation. In other words, I do not believe the regulators add value to energy
policy.

“measures to increase energy use efficiency in the transport sector”.
Response. There are two aspects to energy efficiency, the quality of the fuel and the
efficiency of the engine cycle. Australian diesel fuel specifications meet EU standards, but
petrol standards do not with respect to sulphur content. Thus consumers are denied access
to some state-of-the-art petrol engines. As the diesel cycle is more efficient than the petrol
cycle, some encouragement should be given to the use of diesel by creating a petrol/diesel
excise margin. Such a measure would not only result is less fuel used by the consumer but
also of less imports of such fuels.
The most successful measure to improve fleet efficiency has been the imposition of
Mandated Fleet Fuel Efficiency Targets, successfully used in Australia in the 1980’s and,
more recently, in the US, where its scope was widened to include light vehicles. This target
is a surrogate for the low fuel prices prevailing in Australia (and the US), among the lowest
in the OECD. It is proposed that a mandated target again be introduced in Australia.
Australia’s vehicle fleet remains old and relatively inefficient. A Mandated Fleet Fuel
Efficiency target could reduce fuel consumption by some 40% over a decade, as new petrol,
diesel and hybrid cars have consumption less than half that of the current fleet.
However, a major expansion of public transport as a transport efficiency measure appears
to elude governments, recognising that a low density city such as Sydney or Melbourne
needs a different public transport model than a high density city such as London or Tokyo.
That alternative model for Australia could be a hub and spoke model as opposed to the
present attempts to implement the star model. Clearly adding public transport as an
afterthought to city planning will cost much more than incorporating it in the design.
Transport gridlock, if not pollution, will force a rethink sooner or later. A modest increase in
Australia’s low fuel excise could fund expansion of public transport.
Alternative and Emerging Energy Sources and Technology

“ways to encourage a lower emissions energy supply that avoids market distortions or
causes increased energy prices”;
Response. In looking at the cost of a car, the major element is depreciation, followed by
insurance, fuel and maintenance. Consumers have responded to the changing market over
the last decade. In order to reduce the cost of car ownership, all tariffs should be removed
from imported cars, as should all subsidies from locally built cars, the luxury car tax and the
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FBT subsidy. A restructuring of the manufacturing industry is in progress. As a result,
consumers should soon be able to purchase cars of their choice at a globally competitive
price, not what Detroit wanted Australians to buy nor what should be the Australian culture.
However, the larger issue is taxation of transport fuels, the proverbial dogs’ breakfast if
there ever was one. The government of the day failed to accept the recommendations of
the last study of the issue. Given that the crude oil price has risen by a factor of four since
2000, a rise not dis-similar to the rise during the first OPEC crisis in 1973/74 and the second
in 1978/79, which had such a dramatic effect upon consumption, there should now be more
than enough financial incentives for alternative fuels to be competitive with those derived
from crude oil without further subsidies, grants and mandated use as blending components.
The government should therefore review taxation of transport fuels in light of the current
crude oil price based on their energy content and remove all subsidies and grants used to
support non-commercial fuels and blending components, an industry largely driven by
vested interests.

“the need to review existing network tariff structures in the face of rapidly growing
deployment of grid-backed-up distributed energy systems, to ensure proper distribution
of costs”;
Response. Many governments, including Australian governments, have started to reduce
the feed-in tariffs and other subsidies for renewable energy as that expenditure can no
longer be sustained. The true costs have excluded the cost of back-up, the cost of losses in
transforming voltage to the appropriate level for transmission, distribution and
consumption, the costs of shutting down coal fired generators to accommodate preferential
availability of ad hoc generated renewable energy and the costs of modifying /upgrading the
network to control and transport the ad hoc generated electricity.
Renewable energy producers have been reluctant to provide back-up capacity, whether the
shortfall has been due to lack of wind, clouds or drought. Indeed, the growing legislated
share of renewable energy creates a major risk to the stability of the whole electricity
generating system. This legislation has grossly underestimated the value and costs of
renewable energy. Unfortunately, such data remains confidential. The White Paper must
ensure that such data is made public.
At the same time there has been a large decease in manufacturing costs for wind and PV
solar generation, partly as a result of surplus capacity in China and the closure of many
manufacturing facilities outside China. The products are therefore approaching
commerciality and should no longer need any subsidies or grants for their use.

“additional cost-effective means, beyond current mandatory targets and grants, to
encourage further development of renewable and other alternative energy sources and
their effective integration into the wider energy market”;
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Response. Given that Australia now has some of the world’s highest electricity prices and
pays/will pay global oil and gas prices, no other incentive is necessary for the development
of renewable and alternative energy sources. Indeed, the government must start to address
the high costs imposed by its present policies of subsidising non-commercial energy in order
to improve our competitiveness, for without that there are no prospects for renewing or
rejuvenating our manufacturing sector. That also requires the removal of regulation which
favours the producer and the vested interests’ lobby at the cost to the consumer and
taxpayer.
Fortunately market forces still operate, as shown by the demise of the local vehicle
manufacturing industry, the small market share of electric and hybrid powered vehicles and
the marginal share of non-commercial energy in the total energy mix.

“how the uptake of high efficiency low emissions intensity electricity generation can be
progressed”;
Response. The only high efficiency low emissions intensity electricity generation which our
governments refuse to evaluate is nuclear fission. Until that is done, and placed in the
context of the five energy policy objectives, it is not possible to evaluate its potential.
However, given Australia’s large exports of uranium oxide, one can assume that most
nations other than Japan and Germany (and their ‘final’ decision is by no means final) have
made that evaluation and many are still prepared to invest based on those results.

“any barriers to increased uptake of LPG in private and commercial vehicles and CNG
and LNG in the heavy vehicle fleet”; and
Response. LPG was first introduced to the private market at the beginning of the 1980s as
autogas. Early expectations of substantial growth were never realised despite it being free
from excise. Only the taxi industry, with its high mileage, took it up as its fuel. Some further
increases took place following grants for tanks and installation and availability of factory
fitted vehicles.
LPG was initially supplied by the refineries and from processing Gippsland crude oil at
Longford. Nowadays much of it is imported due to growing demand, due to closure of two
refineries and due to declining production of Gippsland crude oil. The price for LPG is the
international market price.
The scope for CNG and LNG appears limited, despite lengthy trials which confirmed their
suitability. The barrier, as always, has been poor economics.
It is proposed that all subsidies and grants be removed from these fuels to permit free
operation of the market.

“any barriers to the increased uptake of electric vehicles and advanced biofuels”.
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Response. Electric vehicles are as old as petrol, diesel and steam vehicles. Australians have a
wide range of models and fuels from which to choose. The barrier then, as now, has been
economics. There is no case for subsidising electric vehicles.
The present crude oil price provides adequate incentive for biofuel manufacturers and no
incentives should be provided. Appropriate biofuel blend specifications are available.
However biofuels suffer from the same problems faced by other agricultural commodities
and therefore create an additional supply risk for the transport fuel supply chain.
Eriks Velins
21st January, 2014
References
1.
2.
3.
4.
5.
6.
International Energy Agency, Energy Policies of IEA Countries: Australia, 2012.
International Energy Agency, World Energy Outlook 2013, Press Release 12 Nov 2013
US Energy Information Administration, Short Term Energy Outlook , January, 2014
Energy White Paper 2012
Energy White Paper Issues Paper, Department of Industry, December 2013
2009 Victorian Royal Bushfires Commission, Final Report, Volume II, part one
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