The energy mix is front of mind in Australian boardrooms. AICD’s latest Director Sentiment Index identified energy policy as the second highest priority for the federal government to address in both short and long term.
Decarbonisation, climate change and clean energy are inextricably connected. But when it comes to Australia’s own Venn diagram, the important overlaps are the number of countries globally pledging to decarbonise their economies, the rapidly falling costs of producing renewable energy and the risk premium attached to carbon-intensive industries by financiers.
Six major trading partners are considering applying tariffs to imports based on their carbon footprint, although not all are prioritising it to the same extent as the European Union. “With those in train, Australian society and government might seek a faster rate of change post-2025,” says Matt Rennie of energy advisory firm Rennie Partners. “International pressure may be a factor impacting Australia’s carbon footprint.” He believes the most important changes are the pledge by President Biden to decarbonise the US electricity sector by 2035; and by China to become carbon-neutral for 2060.
While the Australian government has not yet adopted a net-zero by 2050 commitment, the European Union and Japan’s position of applying carbon tariffs on imports is likely to force a theme of decarbonisation down the supply chain that will reach all the way to Australian generators.
“It’s not a matter of acquiring new technology or new sources of energy generation,” says Rennie. “It’s about the ability of the traditional players to simultaneously divest, or roll out of one business model and to find the capital, focus and cashflow to begin another completely new way of generating revenue. This is a real challenge and it’s plausible many of the incumbents won’t be able to accomplish it.”
Rennie believes governments and regulators are also alert to the fact they need to move up the maturity curve and ensure they are able to “understand, interpret and plan for the rules, regulations, policies and laws that will be required to deal with such significant changes in commercial modes, technology and markets”, be they domestic or international.
- Australia’s energy transition is shaping up as one of the world’s fastest
- 2020 was a tipping point where economics kicked in
- Commitments by Australia’s major trading partners to achieve net-zero carbon emissions have mobilised corporates into action
- Financiers and credit agencies are attaching higher-risk premiums to carbon-intensive organisations
Decarbonisation as risk mitigation
It’s a growing realisation that climate and carbon represent an inbound risk for companies and governments engaging in global trade. The AICD Director Sentiment Index identifies the cost of energy and climate risk as issues of concern. In the latest survey (first half 2021), directors say top priorities the federal government should address in the short term are climate change, energy policy and infrastructure. There was also support for investment in renewables.
“It’s no longer about an ideological argument around sustainability. It’s about economic strategy and asset value,” says John O’Brien FAICD, partner of energy transition and decarbonisation at Deloitte. O’Brien knows of several emissions-intensive companies that have been forced to implement net-zero plans because “holders of money are putting conditions on that money that [are] changing behaviour”.
Former Chief Scientist Alan Finkel AO noted in his 2020 National Press Club speech that natural gas would be a necessary transition fuel to generate electricity while the sector moves away from coal to clean energy sources, including hydrogen. “The only way to meet the energy needs of the future without sacrificing standards of living, or undermining the economy, is by planning for an orderly transition that embraces science and technology as the stepping stones to the future we want,” he said.
Origin Energy CEO and managing director Frank Calabria MAICD calls out the changing investment environment as one of four key trends driving the biggest transformation the energy sector has seen since the alternating current was invented by Nikola Tesla in 1887 — alongside the growth in renewables, storage and green fuels; the electrification of everything; and the convergence of data and energy.
In March, Fortescue Metals Group announced it would start linking executive pay to its emissions targets, providing a major incentive to hit its now-2030 goal to make scope 1 and 2 emissions carbon neutral.
The announcement ties in with the miner’s ambitions to drive low-carbon energy consumption with green hydrogen for steelmaking and heavy transport. Fortescue is also trialling green ammonia to power shipping and locomotives. Fortescue chair Andrew Forrest AO hopes the company will produce green hydrogen on a commercial scale by 2023. By building supply, he says, demand will follow.
It’s no longer about an ideological argument around sustainability. It’s about economic strategy and asset value.
Also in March, AGL — the nation’s largest carbon emitter — announced a plan to hive off its huge coal-fired power plants into a separate business, allowing its retail arm to emerge as a zero-carbon electricity supplier. Two months later, Macquarie Group announced it would no longer have any exposure to coal on its balance sheet by 2024, simultaneously pledging to be a net-zero emissions company by 2025.
BlackRock CEO Larry Fink famously led the charge in 2019, writing a letter to CEOs about the risk he believed a changing climate and sentiment posed to the allocation of capital; while ratings agency Moody’s acquisition of climate risk assessment firm Four Twenty Seven was what The New York Times deemed “the latest indication that global warming can threaten the creditworthiness of governments and corporations around the world”.
According to Energetics’ general manager of Strategy, Dr Peter Holt, it’s not just stakeholders and investors that boards answer to. Increasingly, they need to be alive to the risk of hostile analytics from ratings agencies. It’s why so many big-energy users are “course- correcting”, he says.
BHP’s 2020 Climate Change Report into its decarbonised future was a “watershed”, he adds, not just due to the miner’s commitment to changing its business model, but also because its analysis showed there were still ways to profit from existing business models in that future.
However, while decarbonisation is driving the energy transition, it’s technology that’s driving the cost down and making the transition achievable — fast. Earlier this year, wholesale energy prices hit levels not seen since 2015 because of the increase in large-scale solar and wind farms, as well as residential rooftop solar penetration. It caught even those at the cutting edge of the sector off guard, forcing Australia’s two biggest energy utilities, AGL and Origin, to write off assets and downgrade earnings.
Manufacturing efficiencies mean that solar panels and wind turbines produce more for less, says Holt. Transmission and storage are getting better, too, which means the lurking risk of renewables dropping out diminishes and there are more sophisticated options for firming supply through technology. Crucially — and as long as you can firm renewables — new coal-fired power is no longer the cheaper option.
Transmission company TransGrid is working with the NSW government to develop alternate funding models for the infrastructure and transmission needed to roll out these zones. “The Australian Energy Market Operator’s Integrated System Plan called out the establishment of renewable energy zones, and NSW’s Electricity Infrastructure Roadmap has taken that next step,” says Richard Lowe, CEO of TransGrid’s renewable infrastructure group Lumea. “Which is to say, where is there great resource, good social licence to operate, opportunity for regional development and community buy-in? How you facilitate development at scale and coordination of transmission to get that product to market at the lowest possible cost [is] the next iteration of that. We’ll look back and wonder what all the fuss was about. We’ll still have a world-class energy system and it will still be reliable, but it will be low-cost.
Much of the “fuss” stems from the extreme politicisation of energy. State and federal policies — for example, the federal government’s gas- fired recovery announcement last September, followed closely by the NSW government’s Electricity Infrastructure Roadmap and the more recent announcement of the $600m Kurri Kurri gas power plant development in the Hunter region — can unravel or boost financial investment decisions in a single stroke.
The public is asking why, if we have the best-quality sunshine and the best adoption of renewables, do we still pay so much for power? The short answer is: policy. At an Australian Shareholders’ Association conference in May, Calabria flagged the need for a new investment model for energy infrastructure. “Currently, energy companies that operate power stations are only paid for the energy they generate — what’s called ‘an energy-only market’. The low cost of renewable energy drives down wholesale energy prices to low or negative levels much of the time, yet it is the higher wholesale prices that have historically incentivised investment in new [energy] generation,” he said.
Benefiting from the energy transition
What are leading companies doing to make hay while the sun shines on the energy sector?
Organisations that consume more than an average amount of energy, either as manufacturers or because of their scale, should look at upgrading equipment to reduce energy use. Boards could consider linking EBITDA improvements generated through lower energy costs to remuneration; after all, bonuses are paid for EBITDA improvements from acquisitions, so why not for internal efficiencies?
Technology to manage demand is improving exponentially. For retail customers, for example, Amber Electric has built technology called SmartShift, which manages Internet of Things devices.
At enterprise scale, demand becomes more complicated. But when former Australian Energy Market Operator CEO and managing director Audrey Zibelman resigned to take a job at Google X, it signalled an important shift. “What I’ve learned in Australia is how important advanced computing and the application of AI and machine learning is to our industry,” she said. Demand management is a part of that equation.
Generate your own electricity
Korean-owned Sun Metals is Queensland’s biggest zinc refinery and the second largest single-site consumer of energy in the state. The company has built its own $200m solar farm to supply 22 per cent of its energy needs and intends to be totally renewable by 2040 under its own RE100 pledge. It’s also transitioning its fleet of trucks to hydrogen- powered vehicles.
“Sun Metals aren’t doing this just because they want to make green zinc for sustainability reasons; they’re doing it because it’s a lower cost of energy,” says Smart Energy Council non-executive director Oliver Yates GAICD. “Generating your own electricity is still the cheapest option.”
In WA’s Pilbara, a conglomerate of mining companies is taking that further. The Asian Renewable Energy Hub is planning 26GW of wind and solar on a single site — almost as much as all the wind/solar power infrastructure built in Australia to date. Ten per cent (3GW) of that will power the mining companies and the rest will be used to make green hydrogen for export.
Talk to suppliers about procurement
These long-term contracts lock in a fixed price rather than a spot price for renewable energy. It’s not worth doing unless there is sufficient scale, and the question to ask around price is: how much safety do you want in locking in a fixed price and what are you prepared to pay for that certainty?
“You’ve got to take a longer-term view. I’d encourage people to look past a single blip,” said one board member Company Director spoke to.
For smaller companies, aggregators such as the Business Renewables Centre Australia are a lever to exercise collective bargaining power. “While PPAs have been around forever in the power sector, their use by small and medium-sized businesses is relatively new,” says the Smart Energy Council’s Simon Holmes à Court. “We’re starting to see standardised contracts and retail offerings that make it much easier for businesses to achieve an RE100 goal.”
Steeling for change
For some companies, the opportunity cost of failing to plan has already hit home.
In January 2019, the spot price for electricity breached a $5000 per-megawatt-hour limit, triggering alarm bells for manufacturers. Michael Parker, Australasia president for mining consumables manufacturer Molycop, watched as it became uneconomic to run Molycop’s electric arc furnace for five days in a two-month period that summer. The shutdowns cost the business millions of dollars and triggered a rapid change in strategy.
By June 2019, Molycop moved on a 10-year deal for renewable energy in what’s known as a power purchase agreement (PPA). Molycop explored five- and seven-year deals, but the numbers didn’t stack up. It also couldn’t get a normal retail contract through traditional generators for anywhere near the 10-year PPA price.
“We’re owned by private equity, so after the initial debate around a 10-year agreement, we were able to move very quickly to negotiate and execute the PPA,” says Parker. Molycop now effectively gets 55 per cent of its total electricity at a fixed price. “We were going to go all-in, but decided to do a substantial amount and see what else emerges.”
What began as a risk-management exercise has had sustainability benefits, something Molycop is pleased with, given it benchmarks against Asian, particularly Chinese, competitors. The agreement gets them “back closer to where we were before wholesale price escalations, but with much more certainty.”
Supercharging the Australian energy grid.
As energy generated from renewables floods the system and coal-fired generators exit, large- scale batteries are now challenging gas as a critical stabilising technology for the grid. There is now a pipeline of 7000 MWh worth of batteries across the country.
A new study from the Clean Energy Council states batteries are a far superior choice — “the true bridge to a clean energy future” by allowing energy generated from renewables to fully participate in the system instead of being curtailed by the Australian Energy Market Operator. This has led to investment in battery projects by the likes of French renewables energy producer Neoen and AGL.
An invisible disruption
The largest disruption to the energy sector in history — of which batteries are just one piece of the puzzle — will be invisible to most people, says Simon Holmes à Court, a director of solar industry peak body Smart Energy Council.
Despite being the world’s second-largest exporter of thermal coal, Australia has embraced renewables more enthusiastically than many other major economies.
In May, the energy market operator stated that Australia is tracking well ahead of its 2020 Integrated System Plan’s “step change” scenario, which would see more than 90 per cent renewable penetration, including rooftop solar PV, by 2040.
Businesses that can introduce flexibility with some of their load stand to reduce energy costs considerably and gain competitive advantage.
The race is on to secure premium industrial roof space, bringing together commercial real estate giants, energy retailers and large power consumers. These partnerships are as much about having a clear decarbonisation strategy to articulate to stakeholders as they are about smart asset management and cost-efficient energy.
For smaller organisations, the shift to renewables comes with the promise of bountiful low- cost energy — some of the cheapest in the developed world. That will also have ramifications for business models, new supply chains and the potential for whole industry shifts if intensive manufacturing and processing returns onshore.
An Australian future as a renewable energy superpower is a definite possibility, says economist Ross Garnaut in Superpower: Australia’s Low-Carbon Opportunity.
The volition with which this is happening has led the Energy Security Board to warn a disjointed and reactive approach to energy transition could create instability.
In the five years to 2017, one-third of coal-fired power stations closed and more are set to be retired ahead of schedule over the next few years. Some are already operating at a loss, yet remain in the system for stability and due to political pressure.
“The transition has the potential to get messy as we’re likely to see coal-fired generation leaving the market in a... potentially unplanned way, leading to shocks to reliability or affordability.” says Origin CEO Frank Calabria MAICD. However, handled well, former Chief Scientist Alan Finkel AO believes Australia can build an economy that reaps immense opportunity. “If we cling to the past, we’ll miss opportunities the rest of the world will seize,” he wrote in Quarterly Essay.
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