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Australia’s Economic Transformation Part 2: A changing industrial mix

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AGL Energy
07 September 2016

Between now and 2050, Australia’s population and economy are likely to change. Together with evolving technology, community expectations and a need to reduce greenhouse gas emissions, energy companies of the future are likely to be different to those of today. While reliable and affordable energy supplies will continue to underpin the prosperity of our communities, the sources of energy, and the business models that supply it, will evolve to reflect changes to society.

To supplement the 2016 AGL Sustainability Report, we have released the Australia’s Economic Transformation report, which explores the challenges and opportunities for AGL and the broader energy industry in meeting the changing needs of Australian energy consumers, industries and communities into the future.  In this three part blog series I will summarise some of the report’s key themes and findings.  Part 2 considers Australia’s changing economy and industrial mix.

Australia’s economy

Historically, Australia’s economy has relied heavily upon the export of agricultural and mining commodities – however the services sectors are also becoming an increasingly important source of Australia’s economic growth. Services now make up over half of the Australian economy, and over half of all Australian jobs are now services based. While food, metal ores and mineral fuels continue to dominate Australia’s exports, the export of services from Australia has expanded by over 60% in the past decade (including tourism, education and professional services).

Over the past 40 years, productivity growth was the main driver of growth in real average incomes and Australian living standards, particularly as a result of important microeconomic reforms. During the 2000s, however, real income growth arose from the unprecedented rise in Australia’s terms of trade during the mining boom, while underlying productivity declined. With the mining boom now winding down, terms of trade have declined and many economists expect them to fall further, causing real national incomes to stall and even decline. To address this challenge, Australia will need to draw upon its competitive advantages to grow its economy more quickly. In particular, Australia will need to focus on improving multifactor productivity and increasing the value of its exports. Improvements in Australian living standards over the next 40 years are expected to arise from productivity improvements, with little contribution from other sources.

Australian industry productivity and real gross national income growth
GNI and productivity

There are many industry sectors where global opportunities and Australian advantages overlap. In its assessment of where Australia’s future prosperity may come from, Deloitte has identified that a new set of ‘fantastic five’ industry sectors have the potential to meet and exceed the current contribution of mining to the Australian economy in the short to medium term – agribusiness, gas, tourism, international education and wealth management. Beyond these, the ‘next wave’ of industries driving Australian prosperity are likely to be largely knowledge and services based, and may include information technology, finance, research and development of new technologies, medical research, food processing, aged care, community care, health and wellness, retirement living and leisure, logistics, skills and education. These industries are reasonably well aligned to areas where Australia currently enjoys a productivity advantage relative to other global players.

Below are three case studies where we consider how changes to significant industrial sectors may contribute to economic conditions, and demand for energy and related services.

Case study: Food and agribusiness

Australia is a provider of high-quality agricultural produce, so global growth in populations and rising incomes, particularly in Asia, represent a significant opportunity for Australian agribusiness. Demand for food is expected to increase by 77% to 2050, with Asia expected to account for 70% of this growth, and 60% of total demand. Australia is well-placed to meet some of this demand, with agriculture estimated to be amongst Australia’s most internationally competitive sectors and its geographical proximity to demand centres will reduce transport costs for exporting to Asia.
food and agribusiness overview

In 2014, Australia’s agriculture and food manufacturing sectors consumed 253 PJ of energy, or around 4% of Australia’s total consumption. Agricultural energy consumption is dominated by the use of diesel for farm vehicles and equipment, while food manufacturing consumes significant biomass (bagasse), natural gas and electricity, as well as small amounts of coal and petroleum fuels.

Agrifood historic energy consumption and scenarios to 2050

agribusiness energy 2

The energy productivity of the Australian agrifood sector is currently $226 million GVA per PJ of net energy consumption, a figure which has increased by 26% in real terms since 1990. Based on estimates from the National Energy Productivity Plan, 52 PJ of cost effective energy efficiencies within the sector could be achieved by 203033, reducing input costs and energy-related greenhouse gas emissions. These results indicate that this sector may be a significant market for energy management services, as farmers and food manufacturers seek to improve their efficiency.

Modern and emerging energy technologies may offer new opportunities for the agrifood business to reduce energy costs, improve efficiency and increase reliability of supply, particularly in remote areas. The electrification of vehicles and equipment, and the use of natural gas vehicles can help to increase efficiency and reduce greenhouse gas emissions (particularly if use is optimized with automation or advanced robotics). Distributed resources including solar PV, energy storage and energy management tools may also offer power backup at times of grid outages.

In 2016, AGL signed a cooperation agreement with peak industry body Dairy Connect to develop energy solutions to cut costs and improve environmental sustainability for dairy farmers, including through the use of energy monitoring with digital metering and renewable energy installations. This is one example of how partnerships and new technologies may deliver better energy solutions for the food and agribusinesses sector in the future.

Case study: Mining and resources

Despite a winding down of the recent mining investment boom, Australia is well positioned to continue to be a major global exporter of minerals and energy resources and products, due to its world class deposits and its proximity to growing Asian demand centres. Substantial mining investment during the boom period has resulted in record export volumes, and mining and energy resources make up around half of all of Australia’s exports of goods and services.  Demand for minerals tends to increase as populations grow and become wealthier and more urbanised - the intensity of commodity use typically accelerates as an economy starts to develop and invest in infrastructure and manufacturing capacity.

Australia is a net exporter of energy, and in 2014, exports accounted for 84% of total energy production (on an energy basis). In 2013, the value of energy exports to the Australian economy was over $66 billion, or 21% of all Australian exports – with over half from coal. The value of gas exports is expected to rise in coming decades, with growing global demand and recent Australian investments in new gas production and LNG terminals. However, future demand for Australia’s energy exports is uncertain as global demand for coal and gas may depend on international climate change and energy market policies, as nations balance growing demand for energy (particularly in developing nations) with climate change mitigation.
mining overview

In 2014, Australia’s mining and resources sectors (including the manufacturing of metals and minerals) consumed 1,162 PJ of energy (net), or around 20% of Australia’s total net energy consumption. Within the sector, the largest energy uses are in the manufacturing of basic non-ferrous metals (e.g. aluminium), which consumed 403 PJ in 2014 (mostly electricity and natural gas), oil and gas extraction, which consumed 216 PJ in 2014 (primarily natural gas), coal mining, which consumed 131 PJ in 2014 (mostly diesel) and other mining, which used 184 PJ (mostly diesel).

The energy productivity of the Australian mining and resources sector is currently $131 million GVA per PJ of net energy consumption, a figure which has increased by 52% in real terms since 1990. Mining industries tend to become less energy efficient over time, with higher-grade deposits that are easier and cheaper to extract mined first, ahead of those that are more difficult and intensive to extract. It is therefore likely that the observed growth in energy productivity was largely a result of cyclical increases in commodity prices, rather than a persistent trend. While there may be some opportunities for energy efficiencies, it is unlikely that large reductions in energy demand will be possible without reducing output.

Mining and resources historical energy consumption and scenarios to 2050

mining energy

Under a scenario of deep decarbonisation by 2050, ClimateWorks suggests that the mining and resources sector could meet this growing energy demand through increased electrification and a greater use of biofuels (although even in this scenario the use of oil and gas fuels may increase slightly in the sector). Modern equipment and energy technologies may help to boost the productivity of the sector – for example, replacing diesel generation with solar installations in remote mining regions can reduce energy costs and greenhouse gas emissions. The electrification of ports and other transport logistics can also help to drive efficiencies throughout the resources supply chain.

The manufacturing of metals is often electricity-intensive (e.g. aluminium smelting), and therefore the competitiveness (and decarbonisation opportunities) for Australian production depend upon an efficient, low cost and lower emissions electricity supply system. As Australia’s largest electricity generator, AGL works closely with these customers to ensure competitively priced and reliable supplies.

Case study: Services

A combination of local and global factors will shape Australia’s services sectors in the coming decades. According to CSIRO, consumer spending in recent decades has been shifting towards experiences  and away from durable goods, and this trend is expected to continue. Increasing wealth and an ageing population are likely to drive demand for high-quality social services, including health care, education, tourism and financial services.

services overview

In 2014, the commercial and services sectors in Australia consumed 300 PJ of energy, or around 5% of Australia’s total net energy consumption. The energy productivity of the commercial and services sector in Australia is much higher than in more energy intensive sectors, currently standing around $2,800 million GVA per PJ of net energy consumption, a figure which has increased by 18% in real terms since 1990. Energy use in the sector is dominated by electricity, which accounts for over 70%.

Based on estimates from the National Energy Productivity Plan, 104 PJ of cost effective energy efficiencies within the sector could be achieved by 2030. If these efficiencies are implemented, the commercial and services sectors could significantly outperform the national target to improve energy productivity by 40% in 2030. The wide gap between this scenario and ‘business as usual’ indicates that commercial buildings and offices may represent a large market for future energy efficiency services.

Commercial and services energy consumption and scenarios to 2050

services energy

The ‘green buildings’ sector in Australia has grown rapidly since the early 2000s, and the environmental performance of commercial buildings is now an issue of mainstream interest. Research has shown that Green Star certified buildings have lower operating costs, and greater financial returns than other buildings. These buildings require less energy for ventilation, air-conditioning, hot water and lighting. Similar to residential buildings, the average energy efficiency of commercial property stock in Australia will increase over time, as new builds and retrofits incorporate these green building features.

A greater use of distributed generation and building energy management products could see also see these buildings meeting more of their own energy needs ‘behind the meter’. The electrification of transport may create significant new demand for electricity, and commercial buildings may need to be fitted with vehicle charging infrastructure to accommodate the preferences of workforces.

Into the future, AGL will continue to support a strong Australian services sector with the reliable, affordable and sustainable energy supplies and services. A modern and decarbonised energy system will underpin Australia’s future ‘green’ economy, including eco- and sustainable tourism, research and innovation in science and technology, healthier and more liveable cities, and greater efficiencies in the delivery of social services – including health and education. AGL is committed to progressively decarbonising its electricity generation - by 2050, AGL will close all existing coal-fired power stations in its portfolio; we will continue to invest in new renewable energy projects; and we will make available innovative and cost-effective energy solutions for our customers, such as distributed renewable generation, battery storage, and demand management solutions.

Click here to read part one of this three-part series, Energy customers of the future.