Energy challenges

Dr Hunter Laidlaw, Science, Technology, Environment and Resources (STER)
Dr Jonathon Deans, Economic Policy and STER

Key issue
Energy supply is a major economic and electoral issue. Costs to consumers, and the interface with climate change action and emissions reduction, often elevate the sector to national prominence. Ensuring energy security in the electricity, gas and liquid fuel sectors is a key priority for government and industry.
Increasing levels of electricity generation from renewable sources are lowering greenhouse gas emissions for the sector but also present challenges for the management of Australia’s main electricity system.

Energy security

The security of Australia’s energy supply is important to ensure there is sufficient, reliable and affordable energy to support the community and economic activity. Although Australia is an energy-rich country, the majority of extracted energy resources such as thermal coal, natural gas and uranium, are exported. Australia’s oil production has declined rapidly, leaving much of the country’s transport dependent on imports of both refined petroleum products and of crude oil feedstock that requires processing in the remaining domestic refineries.

Given recent technological changes, Australia now faces several choices that will influence how its energy intensive sectors will evolve. For example, the types of energy required for the transport sector will depend on the level of adoption of electric vehicles. Charging infrastructure will need to be further developed if large numbers of electric vehicles are adopted. Other challenges may arise with their integration into the electricity system. Several countries, including the UK, France and Denmark, have moved to ban the sale of new petrol or diesel fuelled vehicles by 2040 or earlier. Alternative fuels such as hydrogen may also play a role as fuel-cell vehicles continue to be developed. All of these factors will influence future energy security considerations in these sectors.

Other major challenges to the adequate, reliable and competitive provision of energy are considered through the National Energy Security Assessment (NESA) process. Further information on the NESA in relation to liquid fuel security is provided below. With previous assessments published in 2009 and 2011, the Australian Government committed to complete the next NESA by mid-2019.

Liquid fuel security

Australia, as a member of the International Energy Agency (IEA) and a party to the Agreement on an International Energy Program, has an obligation to hold liquid fuel stocks equivalent to at least 90 days of the previous year’s net imports. Australia has not complied with this requirement since 2012. While some progress has been made to enable the Government to enter into oil stock reservation contracts overseas, the full strategy to return to compliance has not been developed.

In addition to the IEA obligation, liquid fuel stockholdings have domestic implications for defence capability and Australia’s resilience to supply chain interruption. In preparation for the 2019 NESA, a review of liquid fuel security commenced in mid-2018 and an interim report was released in April 2019. The Government has indicated that the review will be used to further inform the approach to meeting the treaty commitment and a return to compliance by 2026. Before the 2019 election, the Australian Labor Party committed to a Government-owned National Fuel Reserve to boost emergency reserves of fuel stock and to help meet the IEA stockholding commitment.

Renewable electricity

Renewable energy targets typically aim to reduce electricity sector carbon emissions (which account for about one third of Australia’s total emissions). The large-scale Renewable Energy Target (RET) committed Australia to generating 33,000 gigawatt hours (GWh) of renewable electricity by 2020. The Clean Energy Regulator is confident that this target will be met and expects it to be exceeded.

In addition, most state and territory governments have also set their own targets. These range from 100 per cent renewables by 2020 in the ACT to 50 per cent renewables by 2030 in Queensland and the Northern Territory. These have typically been set with a zero net emissions target by 2050.

Trends in renewable generation

Renewable electricity generation has more than doubled in the last ten years, with more than 20 per cent of Australia’s total electricity generation in 2018 coming from renewables. Figure 1 shows this increase has been driven by wind and small-scale solar photovoltaic (PV) generation.

Figure 1: Australia’s renewable electricity generation

 Australia‚Äôs renewable electricity generation

* estimate

Source: Department of the Environment and Energy (DEE), Australian Energy Statistics, DEE, 2019, Table O.

The penetration and type of renewable generation varies significantly by state and territory. Tasmania generates most of its electricity from renewable sources, primarily hydro. South Australia generates more than half of its electricity from renewables, mostly wind.

Following almost two decades of annual growth, the IEA has reported that net capacity additions for global renewables were the same in 2018 as the previous year—about 60 per cent of the net additions required to meet longer-term climate goals.

Electricity units
Electricity can be measured in terms of generating capacity (megawatts or MW) or actual generation (megawatt hours or MWh).

The National Electricity Market had capacity of around 56,000 MW and consumption in 2018 was around 203,000,000 MWh (203,000 gigawatt hours). Average household consumption was about 4.6 MWh per year.

Integration of renewables and energy storage

The integration of renewable generators into the electricity market presents challenges that must be overcome to ensure system security and reliability. Most renewable generators are variable and intermittent (sometimes predictably so), which can increase the complexity of balancing electricity supply and demand and maintaining a stable frequency of current. The electricity grid is now more diverse, with two-way power flows and many small-scale generators.

The ability to store renewably-generated electricity for use at times of later demand, is a key consideration as renewable generation increases. The Snowy 2.0 initiative, already underway with support from the Australian Government, is a major energy storage scheme to help deal with intermittency. As a pumped-hydro project, it will pump water to an upper reservoir at times when excess renewable electricity is available then release this water back downhill via turbines to generate electricity when demand is high and other renewable sources are not available. This essentially recycles the same water and avoids the water availability limitations that can be associated with large scale hydro generation. Utility-scale batteries are also being used to provide energy storage in some parts of South Australia and Victoria.

While hydrogen is being developed as a transport fuel, it can also be used to store renewably-generated energy. Both the Coalition and Labor support developing a national hydrogen industry. It has potential to become a significant export industry and a National Hydrogen Strategy is being developed through the COAG Energy Council.

Challenges in the National Electricity Market

The National Electricity Market (NEM) is a wholesale market and institutional structure for electricity in Queensland, New South Wales, the Australian Capital Territory, South Australia, Victoria, and Tasmania. It serves about 9.7 million customers and is one of the world’s longest interconnected electricity markets.

Retail prices

Historically, retail electricity prices were stable but Consumer Price Index data show electricity expenditure increased by more than 90 per cent over the last decade. This has raised concerns about affordability for households and the viability of electricity-intensive businesses (particularly manufacturers).  Higher retail prices result from changes across the supply chain. Table 1 shows the components of a typical annual residential electricity bill.

Table 1: breakdown of average annual electricity bills in 2018–19

Wholesale cost of electricity generation $537
Regulated networks $610
Transmission $101
Distribution $464
Metering $45
Environmental policies $95
Renewable Energy Target $73
State schemes $23
Retail $125
Total (excluding GST) $1,367

Source: Australian Energy Market Commission (AEMC), Residential electricity price trends 2018, AEMC, Sydney, 2018.

Wholesale costs

The Australian Energy Market Commission (AEMC) has noted that wholesale costs (which are primarily the costs of electricity generation) have been the main driver of higher retail prices since 2015. As shown in the graph below, wholesale costs increased sharply across all NEM jurisdictions in this period.

Figure 2: average NEM wholesale price

 Average NEM wholesale price

Source: Parliamentary Library estimates based on Australian Energy Market Operator (AEMO) data.

This is largely because renewable generation —which has very low operating costs—has displaced some baseload generation, such as coal-fired power stations. This has sharply reduced wholesale prices during periods when renewable generators are operating but increased wholesale prices for other periods. The AEMC expects wholesale prices to fall in the next two years as more renewable generation is added, but warn that this may lead to the early retirement of other generation, which could increase wholesale prices again.

The intermittency of some renewables creates a need for firm generation (also called reliable generation) which can provide large volumes of electricity at short notice, such as batteries, hydroelectric plants, or gas peaking plants. Despite this need, there are few firm generation projects in development in the short term. Data published by the Australian Energy Market Operator (AEMO) shows almost 4,000 MW in renewable capacity has been committed as of January 2019 but only 250 MW of firm capacity. As noted by the AEMC, this may be one factor keeping wholesale prices higher than they otherwise would be and, once the RET is achieved in 2020, there will be less incentive for additional investment in renewables.

Other costs

Network charges were the main driver of higher retail prices until 2015 and remain the largest single component of retail prices. These are subject to price regulation by the Australian Energy Regulator (AER) which approved significant investments in new and improved network assets, the cost of which was passed on to consumers. These investments were to meet increased reliability standards in some states and expected increases in demand (which ultimately did not materialise). The AEMC has noted that recent determinations by the AER have allowed only modest increases in network charges.

The AEMC have also noted that state and federal environmental programs, such as premium solar feed-in tariffs, also increased retail prices in recent years. Many of these programs operate as cross-subsidies in which electricity consumers are charged higher retail prices to subsidise renewable generators or solar-equipped households. The Australian Consumer and Competition Commission (ACCC) has labelled these cross-subsidies as regressive and urged governments to directly fund these programs instead.

Retailer costs and margins have increased in recent years but the AEMC has forecast a modest decline over the next two years, which should flow through to lower retail prices.

The ACCC inquiry into retail electricity prices released its final report in July 2018. The report raised concerns about the competitiveness of retail markets and the market share of vertically integrated entities (those with generation and retail businesses), which may be contributing to higher wholesale and retail costs. Although the inquiry was unable to demonstrate that any economic harm had occurred, it made recommendations aimed at limiting further integration.


In response to technological changes and a transition to lower emissions electricity generation, an expert panel chaired by Dr Alan Finkel prepared the 2017 Blueprint for the Future—a plan for increased security, reliability and lower emissions in Australia’s main electricity market while also financially rewarding consumers. The report delivered 50 recommendations and led the COAG Energy Council to establish the Energy Security Board (ESB) to coordinate their implementation.

The ESB subsequently developed the National Energy Guarantee (NEG) that aimed to maintain system reliability and ensure that emissions reductions were achieved at the lowest overall cost. The NEG was developed during 2017–2018 before losing support in the final days of the Turnbull Government. Prime Minister Morrison subsequently favoured more direct measures aimed at reducing power prices.

The Government has supported the development of the Retailer Reliability Obligation by the COAG Energy Council. This would provide support for reliable generation by requiring electricity retailers to acquire a proportion of their supply from firm sources.

The Integrated System Plan has been prepared by the Australian Energy Market Operator (AEMO) to consider changes in electricity and gas transmission and generation. It presents an infrastructure development plan to facilitate the ongoing transition in the energy system.

The ACCC electricity inquiry, referred to above, made 56 recommendations for the Australian, state and territory governments. While the Australian Government has not formally responded, it has developed several programs which appear to be aimed at concerns raised in the inquiry report, including the Underwriting New Generation Investments program, the development of a default market offer, and the so-called ‘big stick’ legislation (which could be used to force divestitures or to re-regulate electricity prices).

Challenges in the eastern gas market

The eastern gas market is a wholesale market and pipeline network linking eastern and southern states. The market is served primarily by producers in Victoria, northern South Australia, and central Queensland. Major consumers include manufacturing businesses, power stations, residential users, and the gas export industry.

Wholesale gas prices

Gas prices have increased markedly in recent years, as shown in the below figure.

Figure 3: quarterly balancing market prices in $/gigajoule.

 Quarterly balancing market prices in $/gigajoule

Source: Australian Energy Regulator (AER), ‘Wholesale statistics’ AER website.

There are two periods in this figure, both driven by the development of the gas export industry. From 2012 to 2015, gas production began to ramp up but domestic consumption remained stable, creating a gas glut which drove down wholesale prices to a low of $1.30 per gigajoule (GJ) in Brisbane in December 2014.

Exports began in Queensland in 2015, absorbing surplus product and arresting falling prices. However, the increase in production was not sufficient to cover export demand and prices increased markedly between 2016 and 2019.

The impact of higher prices is being felt primarily by manufacturing businesses and residential consumers, both of which are facing affordability issues. Compounding this problem, AEMO has forecast that Victorian gas production will fall sharply in coming years and warned of potential supply gaps in southern states from 2024. AEMO has also warned that the pipeline network is also restricted in its ability to deliver gas from northern producers to southern consumers.


In a typical market, supply shortages drive prices higher, which create incentives for new production to enter the market. This is not occurring in the eastern market as several state governments (including New South Wales, South Australia, Victoria, and Tasmania) have imposed moratoria or restrictions on gas exploration and production. Increased production in Queensland and the Northern Territory does little to reduce prices due to the cost of long-distance transportation.

To avoid a potential shortage, the Government legislated the Australian Domestic Gas Security Mechanism (ADGSM) in 2017. This provided the Minister for Resources with export control powers in the case of a shortfall. Following the passage of the ADGSM, exporters agreed to curtail exports and this agreement was renewed in 2018. The Minister’s power was not used on either occasion. Notwithstanding these developments, wholesale prices reached a record high of $10.37/GJ in Adelaide in December 2018.

A number of gas import projects are currently being considered, including in Wollongong and Melbourne, which may alleviate potential shortages. But the high costs of these projects mean they may do little to reduce wholesale prices.

In the longer term, wholesale prices will only decline due to either a reduction in demand or new gas supply. AEMO has also studied the development of new transmission pipelines, including a link from Wallumbilla (west of Brisbane) to New South Wales. This would remove the need for Queensland gas to travel to Sydney or Melbourne via Moomba (in South Australia), significantly reducing transportation costs.

Further reading

H Laidlaw, Liquid fuel security: a quick guide, Research paper series, 2018–19, Parliamentary Library, Canberra, 24 July 2018.

A Makeham-Kirchner, Energy resources: a quick guide, Research paper series, 2017–18, Parliamentary Library, Canberra, 18 December 2017.

Australian Energy Regulator, State of the Energy Market 2018, Melbourne, 2018.


Back to Parliamentary Library Briefing Book

For copyright reasons some linked items are only available to members of Parliament.

© Commonwealth of Australia

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.