Leadership in the New Energy Future

Thank you for inviting me to talk to this joint luncheon organised by the Netherlands & American Chambers.  I really appreciate the opportunity.

Today I’m going to talk about the future of energy and the leadership that’s going to be needed to help us through some difficult challenges.

Energy is a subject that gets quite a lot of attention; many days you will see something relating to my industry in the media. But energy is not just the issues that are reported in the press, energy is at the centre of economic life and human progress.

Without energy there would be no heating, no lighting of our nights, no speedy transport for goods or leisure, no power for the education of our young, care of our elderly or prospect of employment for our middle years. Our entire modern way of life, and our progress through history has been built on the effective production, distribution and consumption of energy.

So I’m happy to have spent my professional career in this industry. And I’m pleased to be in the energy industry now, when arguably, we’re facing our sternest challenge. The challenge of more energy with less CO2. That challenge is, I believe, defined by three realities that we can see today.  I call them three hard truths.

The first is that central role of energy in peoples’ lives and prosperity I referred to a moment ago. There are six billion people in the world today, but by the middle of this century there will be nine billion, half as many again, mainly in developing countries.

Importantly they will be more prosperous than today. While today we’re seeing a synchronized economic downturn it’s reasonable to expect that the deep forces underpinning economic growth in China and other developing nations will reassert themselves and that in the developed world we will once again return to economic expansion.

As currently poor people get richer they use more energy as they increasingly enjoy labour saving devices, televisions, and buy motorbikes and cars.

So, three billion more people, getting richer and using more energy. One part of the future we can be almost certain of is that there will be far more demand for energy than there is today.

The second hard truth is that energy supply will struggle to keep up. Today we meet our energy needs primarily with fossil fuels: coal, oil and gas, while about six percent is met with nuclear power and four percent from renewables. Each of those sources must grow to meet all that extra demand. But in reality there are limits to how fast they can do so.

Like it or not, fossil fuels will remain the dominant energy source for the first half of this century. But it’s becoming harder to find and produce conventional oil and gas, And while coal is abundant, it’s difficult to imagine the huge increase in mines, rail tracks, ports and ships that would be necessary to sustain a high growth rate of that commodity long term.

Meanwhile, around the world there are so many old nuclear power plants being decommissioned that many planned new plants are simply replacing those being taken out of service.

Renewables are growing fast and will continue to do so but their small scale today means that even with fast growth rates they will take decades to compound up to a large part of the mix. I’ll dwell on that last point for just a moment more because it often contradicts popular beliefs.

Of that four percent renewables a fair proportion is comprised of hydroelectric power, but most of the world’s great rivers that are suitable for hydropower have been tapped already. There is little room for growth.

The other renewables such as wind and solar form smaller parts of the mix and so that compounding point is even more true. As they reach larger scale those sources are likely to experience the other limitations of large industries, amongst them competition for talented engineers, a skilled workforce and the availability of suitable sites acceptable to local communities.

I say that not with the slightest degree of pleasure, we need all these sources and I hope they continue to grow fast. I say it to take stock of the challenge ahead and what we must do to lead through it.

So, just as I said the first reality will be surging demand for energy, the second reality is that supply will not be able to keep up. The resulting dynamic will play out for the next half-century and dominate much of what we are discussing today.

So, what is that third hard truth I referred to? It is that the stress of our societies upon our environment is increasing and the environmental impacts of growing energy use are not sustainable.

We are all familiar with the debate that is taking place here in Australia over climate change policy. But in fact these stresses go beyond only greenhouse gases. They include water issues with which we are all too familiar, and local pollution, especially in the industrializing developing world where, for example, we see Chinese cities struggling with the smog from the coal fired power plants that power them.

These three hard truths are the main drivers of how we use energy; you can see they are in tension with each other. On top of this in the short term, hopefully, we have to contend with the worst economic situation the world has faced since the 1930s. In itself the economic crisis is more than enough of a challenge of leadership, and one we could discuss for hours.

However, this crisis also adds complexity to the future of energy. Such is the vast scale of our energy system that making additions and changes to it require investments that are counted in the billions, in long life assets which will remain in place for decades, and collectively add up to many trillions of dollars.

The International Energy Agency, the authoritative body on this subject, estimates that globally we will need to invest 26 trillion US dollars before 2030 in energy production and infrastructure. That staggering figure is twenty six times greater than the annual economic product of Australia and even more tellingly nearly twice that of the United States.

To make this scale of investment businesses need many things but two factors stand out. Those are access to capital and sufficient stability of market conditions that they can make reasonable assumptions about their returns over the long lives of their assets. The global economic crisis has disrupted both.

There is a danger that if we don’t succeed in making large investments soon we will face an energy supply crunch around the middle to second half of the next decade.

Today it is not clear how we, as societies, will choose to tackle these challenges. But it is clear that to have the energy needed to continue our affluence in the western world and for developing nations to pursue prosperity, at the same time as we necessarily make deep cuts to CO2 concentrations, we are going to need exceptional leadership.

That then is our challenge, both short and long term. While none of the answers needed are obvious, nor without complications let me do my best to describe what leadership I believe is needed and what some of those answers will be.

Such is the breadth of this challenge that we will need changes in behaviour across the supply and consumption chain. Today, in much of the world we take energy for granted. Like many necessities we treat it as a right and we’re careless in its use: consuming ever more energy-demanding gadgets, enjoying hot buildings in winter and freezing ones in summer, and driving gas guzzling cars in America and Australia.   

Today the economics of energy use encourage this profligacy, for example a consumer may buy a television that uses more energy than a more efficient but also more expensive model. Over the medium term the greater running costs may still be less than the alternative greater upfront cost of the pricier model and this decisions thus makes sense for the consumer.

But for society as a whole it doesn’t. In order to reliably meet that greater energy need, multiplied by millions of consumers who will often turn on their televisions at the same peak time, power companies have to invest in additional generating capacity which is unused for much of the day.

Moreover that economic decision to buy the cheaper television does not currently reflect the cost to society of the carbon emission involved in its use. For society these economics no longer make sense but that is not reflected in the drivers of that individual decision.

The same is true of nations that worry about their dependence on foreign oil but which have developed their cities as vast suburban communities linked by freeways and which have inefficient vehicle fleets and poor public transport.  In our energy systems the economics of individual or even community decisions do not always add up to the outcomes societies want.

It takes leadership to bridge that gap. For example cars in Europe are more efficient and tend to use diesel because over decades there has been consistent political leadership in setting efficiency standards.

Brazil has developed a huge ethanol industry that reduces that country’s carbon footprint and dependence on imports while boosting local agriculture because it has over decades pursued policies supportive of that industry.

Vancouver has what is probably the world’s finest public transport network, easing congestion, reducing carbon emissions and energy needs for its residents, because city leaders have for many years given preference to this network when it has made choices on transport policy.

I’d guess that at times some of the smaller decisions that achieved these outcomes didn’t seem to make sense, there may have been other tempting roads they could have walked down. But through consistent leadership with the end in mind these leaders achieved results with which their societies can be pleased.

A critical part of consistent leadership is in government setting clear rules within which markets then operate.

A choice now confronts us, here in Australia, and across much of the world, that goes to the heart of this issue.   That choice is whether we apply an economic cost to carbon emissions.   Doing so would go a long way to addressing the market failures I mentioned earlier.

By placing a cost on carbon emissions, we would more accurately reflect the true cost of energy in the prices that consumers see. This would promote efficiency in consumption and in industry. And it would stimulate renewable energy supplies and provide incentive for technologies to reduce the environmental impacts of fossil fuels.

Later this year, international leaders will gather in Copenhagen, looking for agreement on how to do this on a global scale. Meanwhile, in Australia, we’re discussing the proposed Carbon Pollution Reduction Scheme. The debate is fierce, and it’s complicated by the economic turmoil we’re experiencing right now.

I believe that resolving this policy debate is essential and it is urgent. If the CPRS legislation is not enacted now, it is in my view inevitable, that it will come back in some form. In the intervening period, we will have left open an important question, adding to the uncertainties that threaten to undermine the investments needed in energy supply.

So, while there are important issues still to be resolved in the CPRS, notably how we manage the competitive disadvantage of applying a carbon price in Australia before our trading partners, I believe it is important that we do resolve them, and that our representatives pass this legislation. That in itself would be a significant leadership contribution from Government and Opposition alike.

Looking at energy supply it is clear that Australia is in an almost unique situation. We are simultaneously a developed nation with a diverse economy and a major holder of energy resources with a huge endowment of gas, coal and uranium.

Moreover we are an attractive location for large investments because of our political stability and skilled workforce. While we are a net importer of crude oil and of some of our refined petroleum products, we can pay for these from the export earnings of our other resources.

Our good fortune extends beyond having a secure resource base for our own needs. We also enjoy the benefits of thriving energy export industries. In this, we are not only contributing to our own prosperity but also enabling the economic advancement and energy security of other nations in our region.

By increasing our exports of liquefied natural gas we will, over many decades, also provide the world with a cleaner burning fossil fuel that bridges us to a sustainable future.  It’s a great opportunity for Australia to lead, to the benefit of all.

That brings me to another important area for Australian leadership. We are, as you know, the world’s largest exporter of coal. This fuel plays a big part in meeting global energy needs but it comes at an environmental cost with high greenhouse gas emissions as well as local pollution. Yet coal will inevitably continue to be a major source of the world’s energy for decades to come, it’s abundant, available, native to several large energy consuming nations and is too inexpensive for developing nations to ignore.

So we have to use coal in ways that minimise its impact. Gasifying coal before it is burned significantly reduces pollution near power plants and it facilitates the capture of an almost pure CO2 stream that can then be safely stored underground.

This carbon capture and storage where CO2 is taken from large stationary emitters such as power plants or heavy industry and is stored underground in geological formations may be one of our most significant tools in solving this energy challenge. It provides a way to clean up the fossil fuels we will continue to use for decades, allowing us to benefit from their energy while minimising their environmental impact.

There is a debate right now on whether CCS technology can work, I don’t think that’s the real issue. In the oil industry we’ve been pumping CO2 underground for years, using it to improve production from depleting oil fields. So we know how to do this, but at the moment it’s hugely expensive.

The real question is whether we can make it more affordable so it can be rolled out on a global scale. This is a question of leadership, finding ways to fund development and early deployment until the technology is ready for mass take up through the market. If we can move fast we might expect this technology to begin to make a difference by 2020.

By the middle of the century it’s possible this technology could reduce global greenhouse gas emissions by fifteen to twenty percent. Australia has an obvious and direct strategic interest in the success of CCS. It could provide a way for Australia to continue to enjoy the advantages of our coal reserves in a carbon-constrained world.

Our government is taking the lead with the establishment of the Global Carbon Capture and Storage Institute. If this institute can help overcome the cost hurdles I’ve mentioned this will indeed have been an act of leadership.

I’ll finish with the point that, to lead successfully towards a new future for energy, we must take a broad perspective on both the challenges and the solutions.

None of the issues I’ve mentioned stand alone, and answers to only one aspect of this challenge will be, by their nature, inadequate. Single-issue answers will lose legitimacy and will fail, when the world is confronted with their side effects. 

Take for example a headlong rush to secure and produce additional energy supplies to meet unmitigated demand, without proper consideration for our environment. As a result, we would risk changes to our climate that might threaten the very way of life we were seeking to achieve.

Similarly, imposing environmental constraints on energy use that would inherently deny developing nations the opportunity to progress, or would require the developed world to move backwards, would fail through lack of social support.

Leadership in this new energy future will be characterised by breadth of perspective and a willingness to look past seemingly easy but in fact futile superficial remedies towards wider and deeper answers. Those answers include: developing renewable energy; finding and producing more oil and gas; reducing the environmental impact of fossil fuels, understanding the value of these resources and using the energy they give us more efficiently.

Ladies and Gentlemen, the energy challenge is demanding, real and immediate. Meeting it requires us to look ahead, understand it and respond with urgent yet well-considered actions that integrate responses to demand, supply and environmental needs.

This is a true task for leadership and one to which I hope we will all be equal.