The decarbonisation of the Australian economy will be one of our most significant transitions in coming decades. More than just substituting renewables for hydrocarbons, it will require major systems change as we transition our energy systems – for households, transport, industry and agriculture – towards new architectures that can deliver net zero carbon emissions.

Decarbonisation will thus be a generational undertaking to restructure the Australian economy, creating many new industries, skills and jobs, just as older ones are made obsolete.

In recent years, there have been huge investments in energy transitions technologies in Australia. These include new generation capacity for renewables, new transmission and storage infrastructure, electrification and decarbonisation in heavy industry, as well as the arrival of EVs into the transport system.

How are these investments changing Australia’s energy system? How much progress has been made in moving towards decarbonisation, and how much further do we have to go?

This Research Note uses one of the most comprehensive sources on the national energy system – the ABS’s Energy Account 2021-22 – to answer these questions.

The results might surprise you. Three quarters of Australia’s energy use is by industries, not households. We’ve been very successful at improving energy efficiency, but not achieved much when it comes to electrification. And while we’ve quadrupled renewables in just a decade, we still have a long way to go to meet our energy needs from net zero sources.

Who are Australia’s big ticket energy users?

When people think about the energy transition, they often reflect on its everyday impact. Energy use in the household typically comes to mind: things like home appliances, heating and air conditioning, motor vehicles, and perhaps rooftop solar and batteries.

So it might come as a surprise that households are not the primary locus for Australia’s energy transition.

Data from the Energy Account shows that direct use by households – which includes our use of privately-owned cars – only contributes 22% of net energy use in Australia.

Rather, it is businesses that consume the bulk of Australia’s energy supply. Energy-intensive industrial sectors – manufacturing, mining, construction, agriculture and utilities – together account for 51% of national energy use. Less energy-intensive services sectors like retail, education, healthcare and commercial transport account for another 27%.

Of all industries, manufacturing is an especially prominent energy user. Its nearly 1000 petajoules of energy a year is the largest of any industry, and about a quarter of the national total. The mining (647 PJ) and commercial transport (512 PJ) sectors also have large energy footprints relative to their size.

This data shows that industrial decarbonisation is where the heavy lifting will occur for Australia’s energy transition. So how is industry doing in preparing itself for the lift?

Could we try using less energy first?

Alongside the more challenging and costly energy transition strategies, Australia should be sure to exhaust the easier and cheaper options first. Improving energy efficiency is some of the lowest hanging fruit when it comes to the energy transition. A joule of energy saved is a joule that needn’t be decarbonised.

When it comes to energy efficiency, the data shows Australia has already made some solid improvements, with our heaviest energy users leading the way.

Over the last decade, Australian industries have collectively reduced their energy intensity – measured as gigajoules of energy used per million dollars of output – by a significant 21%. Households have also done their part, cutting per person energy use by 23% over the same period.

But there are marked differences in efficiency performance. The manufacturing, transport and service industries have all delivered significant efficiency improvements. For services industries this has been enabled by the use of more efficient appliances, while and manufacturing and transport have economised on one of their primary input costs.

Not all have been as successful, however, with mining, construction and agriculture all seeing declining efficiency. This reflects the difficulty of reducing energy consumption in these industries, particularly due to the use of diesel fuels.

These efficiency savings have made a material reduction to Australia’s energy consumption.

Industry-level efficiency gains had reduced national consumption in 2021-22 by about 620 petajoules per year compared to baseline levels a decade earlier, while households contributed another 280 petajoules worth of efficiency savings.

Given Australia currently consumes 4144 PJ of energy per year, about a fifth of the national decarbonisation lift has already been achieved simply by not using the energy in the first place. 

A less than electrifying performance?

But once we’ve cut down our energy use, how do we decarbonise what’s left? Electrification is an important, if sometimes under-appreciated, enabler of the energy transition.

The adoption of EVs is the type of electrification which has attracted most public attention. But industrial electrification equally matters. Significant volumes of hydrocarbons are used not for power generation, but as a direct source of energy. For example, around half of the Australia’s natural gas consumption is used directly in manufacturing.

The electrification of these kinds of industrial processes, where is it technically and economically feasible to do so, will be critical to allowing grid-supplying renewables to be substituted for hydrocarbons.

Unfortunately, our progress on electrification is not nearly as strong as for energy efficiency.

Australia’s electrification rate – the share of final energy use that comes from electricity – has barely budged. The national rate increased from 22% to 24% over the last decade, with most industries turning in only modest increases of 1 or 2%.

Electrification rates will not necessarily need to reach 100% to achieve the net zero transition. The use of biofuels and green hydrogen will mean there are some lasting uses of hydrocarbons, particularly for chemical feedstock uses that simply can’t be electrified.

But electrification will need to do a lot of the heavy lifting, through technologies like high-temperature heat pumps and thermal batteries. And with limited progress made so far, most of Australia’s electrification journey remains ahead of us.

Plugging in to sunshine and wind

As we electrify the energy system, the parallel step is to build out and connect renewables to the grid.

In international comparison, Australia is relatively well positioned for the renewables build-out. While water constraints limit hydropower, Australia is very well endowed with sun and wind resources.

Our performance in bringing new renewables generation online has been relatively successful. Over the last decade, Australia’s supply of renewables has quadrupled: from 77 to 291 petajoules per year.

And as hydropower has been stable, the headline numbers hide much higher growth rates for the other renewables: eight-fold growth for wind generation, and twenty-two-fold growth for solar.

However, there remains a long way to go to decarbonise the energy grid. Renewables have increased their share of national electricity use from 8% to 30% over the last decade.

But the Federal Government has declared an intent to achieve 82% renewables penetration by 2030, before moving to near-total renewables by 2050.

The path to achieve this level of renewables is complex. We not only have to build enough renewables to meet our current needs, but also to meet growing demand as electrification shifts industry and transport onto the grid.

To turn those variable renewables into a reliable system we’ll need new transmission, battery and pumped hydro energy storage, and peaking generators burning gas and, progressively, hydrogen or biogas.

While there are some uncertainties around the precise figures required, recent AEMO estimates suggest electrification of the domestic economy will approximately double electricity demand by 2050. Total generation capacity would actually be around six times today’s level, given the role of variable renewables.

So while we have reached 30% renewables of electricity demand today, we are only about a sixth of the way to the annual clean energy output we ultimately need. And if Australia’s highest hopes for exports of green hydrogen or green iron were to be realised, the total generation needed would be much higher again.

A quadrupling our renewables capacity in just ten years is a major achievement. But we still have a long way to go in the renewables build out.

Dr Jeffrey Wilson

Dr Jeffrey Wilson is Ai Group's Director of Research and Economics. He leads our economics team, and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities. He specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.