Powering through Australia’s uncertain energy future

Uncertainty in the energy sector is impacting Australia’s energy transition. In the lead up to the federal election, every source of energy is on the table for discussion, and depending on the election result, the mix and priority between renewable, non-renewable and emerging or alternative sources in Australia’s energy mix is unclear.

There are a complex range of factors contributing to the uncertain future of the energy sector and a broad range of economic and social objectives to consider in setting government policy. These include environmental sustainability, economic viability, energy security and natural resource and infrastructure availability. There is also a need to keep pace with technological advancement, establish strong international trading relationships and manage domestic consumer and community expectations.

In this article we discuss three of the key issues impacting the pace of Australia’s energy transition that need to be addressed by government.

1. A multijurisdictional system of environment and planning regulation

Australia’s Constitutional framework distinguishes between state-based planning legislation and environmental laws, and Commonwealth legislation, which is confined to the regulation of matters of national environmental significance. The result is that each state has its own energy priorities and environmental regulations that differ based on the policy priorities of the relevant state government, and do not always align with the policy positions of other states or the Commonwealth. For example:

• New South Wales is prioritising biodiversity conservation and nature positive reforms, while the Northern Territory and Queensland’s regimes have a different focus, including to adjust third party participation and review rights for certain approval decisions.
  
  
• In Queensland, the planning approval requirements for wind farms have recently been made ‘impact assessable’, meaning that third parties now have access to submitter and appeal rights which have the potential to delay new projects.
  
  
• In the Northern Territory, recent reforms remove third party merits review rights for planning, water and onshore oil and gas decisions.
  
  
• Federally, nature positive reforms have stalled, although the Labor Government has indicated these reforms will be revisited if it is re-elected.

The consequence of state-based controls for participants in the energy sector is two-fold. On the one hand, efficiencies in certain jurisdictions can make project delivery faster and more cost effective in that location. On the other hand, state-based nuances can cause frustration and difficulties for companies looking for certainty and consistency in the process and timeframe for securing approvals.

Under the current legislative regime, as governments change, companies must constantly assess and reassess risks arising from regulatory and policy changes in relation to securing and the renewal of approvals. This uncertainty leads to increased costs and delays. The regulatory duplication and inefficiencies are considered by some stakeholders to be stalling investment.

Nuclear energy on the political agenda

The Coalition has stated that nuclear energy should be part of the future energy mix. They have announced a strategy to develop civilian nuclear power on seven existing coal plant sites. This nuclear objective is opposed by other parties, including the Australian Labor Party and the Greens, and has received mixed community feedback. However, nuclear energy remains on the political agenda and is receiving more attention domestically and internationally as a viable ‘cleaner energy’ alternative. Whether nuclear power will become socially acceptable in Australia remains uncertain.

If nuclear energy were to become accepted as an energy priority, Australia’s regulatory settings would need to change to support it. This process would take time and require careful planning. As a first step, prohibitions at state and Commonwealth level would need to be unwound. A new legislative framework would be required to regulate the lifespan of a nuclear energy project that includes extraction, transportation, construction, use for energy generation, waste management and operations. The establishment of a regulatory body will also be a key priority. A roadmap for the development of this legislative framework has been established by the International Atomic Energy Agency, and would be a key starting point for this task.

The first step is for government to determine which energy sources should form part of Australia’s energy mix. Once this strategy is set, simplification of the regulatory regime will be a key enabler for facilitating success.

2. Global economic and geopolitical factors are shifting energy priorities

Major global factors, including the shift in US international policy, a realignment of geopolitics, the cost-of-living crisis, the ongoing war in Ukraine and global supply chain concerns, are re-emphasising the importance of energy security around the world.

In Australia, there is renewed focus on gas as a transition fuel to ensure the ongoing availability, affordability and stability of energy supply. This is partly also as a consequence of the slowdown in the energy transition. Industrial users of energy require cost effective supplies to operate their businesses, and home owners want affordable power. However, energy costs are increasing. In addition AEMO forecasts annual gas supply gaps emerging from 2029, when production from existing, committed, and anticipated projects in the southern states is forecast to fall 32%, requiring new supply investments.

This has resulted in renewed discussions about reserving more gas for domestic supply on Australia’s east coast. In response, the Coalition announced a domestic gas reservation policy as part of a suite of proposed measures to increase domestic gas supply on the east coast. Other measures include establishing a $1 billion critical gas infrastructure fund and increasing gas pipeline and storage capacity. The Australian Labor Party does not support the proposed reservation policy, and instead proposes to use the Australian Domestic Gas Security Mechanism controls as the primary mechanism for ensuring any forecast supply shortfall is covered.

While there is some recognition that the path to net zero will take longer to achieve than expected, there continues to be strong opposition to new developments in the oil and gas sector from environmental and community groups. This ongoing tension between ensuring environmental sustainability and energy security, illustrates the challenges for government in resolving the supply demand balance.

As discussed, effective policy and regulation play an important part.

In addition to obtaining environment and planning approvals, any new large-scale resources and infrastructure projects need to secure a broad range of rights and approvals, including land access and tenure, native title and cultural heritage, and foreign investment approvals. Early and comprehensive identification of stakeholders, including engagement with all relevant government authorities and local communities can assist in streamlining the assessment and approvals process. However, all stakeholders require clarity on the government’s energy policy and the underlying regulatory regime for this to be a successful and cost effective process.

For Australia, foreign investment is essential to unlocking development and innovation in energy infrastructure. Despite uncertainty, the energy sector in Australia has been seen as an attractive area for foreign investment, particularly due to Australia’s geographic traits and natural resources. For any federal and state government, promoting foreign investment in energy needs to be a key priority. Tax incentives can be a powerful tool to attract capital – especially in emerging sectors. However, Australia currently offers limited incentives in this space. The Hydrogen Production Tax Incentive for renewable hydrogen, for instance, is one of the few available, and even it raises questions around its effectiveness. Critically, it only delivers economic benefits once a renewable hydrogen project is operational and producing – offering no economic support during the high-risk and capital intensive development phase. Targeted, clear and economically astute tax incentives, paired with administrative consistency, would help unlock the next wave of energy investment.

3. Increasing need for energy intersecting with a social licence to operate

Further compounding the challenges in the energy sector are the differing and shifting community sentiments around an acceptable energy mix and an acceptable social licence to operate. There are a broad range of views to consider. For example:

• Developments of significant transmission projects are generally well received because of their perceived long term environmental and economic benefits. However, these projects, and the renewable energy projects they support, impact regional and rural communities more significantly than communities in larger cities. Some stakeholders argue that regional and rural communities are differentially bearing the cost of developing renewable energy zones and enabling the grid to expand, creating a perceived ‘unjust energy transition’.
  
  
• As discussed, nuclear energy has received a mixed community response over the years. However, there is a growing domestic and international focus on the potential offered by small modular nuclear reactors in particular to be deployed alongside energy intensive data centres, manufacturing and energy and resources projects. Small modular reactors have the potential to offer continuous and reliable ‘cleaner’ energy supply. This could extend to supplying communities without the need to change or enhance existing grid connections and infrastructure.
  
  
• New technology advancements, including increasing reliance on artificial intelligence and data centres, means there is increased demand for reliable energy. Investors in and users of these technologies have different demands and expectations to other domestic and industrial consumers of energy. Energy policy therefore needs to be set with a broad range of stakeholders in mind.

Powering forward in an evolving environment

Despite the evolving and complex nature of the current policy and regulatory settings and the opportunity for improvement, the energy sector is continuing to adapt and find solutions to ensure that the energy transition is still forging ahead.

More recently, the demand for renewable energy has evolved from an ESG-led consideration to an economic one. Renewables are considered to provide the lowest cost of energy, in particular solar coupled with battery storage, which is creating flexibility to provide competitive solar power to satisfy evening peak demand. Australia relies heavily on global supply chains for the components required for renewable generation and storage projects and competes with other international markets that are also looking to renewable power to meet growing energy demand or to replace ageing conventional energy plants. Governments at both the Commonwealth and state level have been seeking to encourage domestic manufacturing of key components for renewable generation. This is expected to remain a key priority for domestic energy security.

While an election result will shine some light on the federal government’s priorities around energy supply, the make-up of Australia's energy supply is likely to continue to evolve for some time, due to the many complex factors and tensions at play. In this landscape, remaining adaptable and proactive in navigating these evolving regulatory requirements will be critical to ensuring energy projects are successful in the long term.