Boardroom Energy
Bulletin

This week

The explosion at Callide C coal plant in Queensland set off a chain of events that ultimately led to almost half a million Queenslanders losing power briefly on Tuesday. We covered this story further in a blog. It was a reminder that, even in an oversupplied generation market like Queensland, black swan events still exist and no electricity system can be made bullet proof.

Australian Energy Week was an opportunity for energy leaders and businesses to position themselves. Federal Energy and Climate Minister Angus Taylor doubled down on the Government’s decision to build the 650MW Kurri Kurri gas plant was all about price and reliability. Further he inferred that the Physical Retailer Reliability Obligation presented by the Energy Security Board (ESB)  may become government policy. We looked at the PRRO last week. The Kurri Kurri theme was continued by Snowy Hydro’s Gordon Wymer, who disclosed that the Federal government is using Snowy Hydro as an alternative forecaster in place of AEMO. The competition for energy forecasting is hotting up, as it’s likely Queensland will be paying attention to its renewable energy arm CleanCo’s bullish forecast that electricity demand will double by 2050 thanks to EVs and other electrification trends, well above AEMO’s step change scenario.

Less widely picked up was AEMO‘s chief boffin Alex Wonhas’s warning that ever-increasing solar will require the NEM to triple the rate at which it can “ramp up” dispatchable generation. The solution? Batteries of course, the swiss army knife of the energy system.

Everyone’s favourite new energy vector, hydrogen, got a run, of course. CEFC chief Ian Learmonth presented his agency’s views on cost trajectories. In our story below, we point out that the CEFC and ARENA are working on very different assumptions of electrolyser size.

There was a clutch of electric vehicle (EV) stories this week, although these lacked a unifying theme. At opposite ends of the spectrum were Judith Sloan for the Australian, who thinks we should treat EVs as a niche toy for the rich and Peter Martin for the Conversation who thinks we should lead the world in EV uptake given we don’t have a local car manufacturing base to worry about.

Oil major Shell had a mixed week. On the upside it secured a $2.3bn deal to supply the NSW government with electricity, along with its partner Edify Energy. On the downside, it wrote down the value of its Queensland coal seam gas reserves. Even further on the downside it was ordered by a Dutch court to increase its emission reduction targets. For those who think this kind of litigation couldn’t happen here, an Australian court found the federal government has a duty of care to protect young people from the impact of climate change. Awkwardly in this context, the Australia Institute published analysis arguing that underlying industrial emissions were rising, belying the federal government’s reliance on land use to support its claim of a downward trajectory. Meanwhile the Lowy Institute published polling that suggests widespread support for firm climate action, including a carbon price, a national net zero by 2050 target, more ambitious interim targets, subsidies for EVs and renewable energy. Arithmetically this must include many people who have and will continue to vote for the Coalition, who say they won’t do any of these things. Go figure.

Shell wasn’t the only oil major grappling with the implications of the energy transition. Exxon had to give two seats on its board to activist investor Engine No.1 who want the company to improve its strategy for addressing climate change.

Another study reveals hydrogen is exciting

It was only a matter of time before Australia’s government owned clean energy investment bank, the Clean Energy Finance Corporation (CEFC), released a report on the potential of hydrogen. Hydrogen is the wunderkind technology of the decade. A buzzword finding its way into political and corporate speeches, media releases and reports filled with excitement and potential.

We’ve been here a few times already: with carbon capture and storage, with geothermal energy, solar thermal energy and wave energy to name just a few. So often the technology has not lived up to the hype. And that is normal. Most new technologies arrive slower and more expensive than hoped, under-deliver or fail completely.

Hydrogen’s story may be at least partly different. The world consumes around 70 million tonnes of hydrogen a year made from natural gas, mostly used in oil and gas refining and to make ammonia for fertilisers.

Cheap “green” hydrogen made from renewable electricity and water could be stored and then used as a fuel when the wind isn’t blowing and the sun isn’t shining. It could also be used as a reductant replacing coking coal in steel making and in cement. It could be used as a transport fuel, particularly for heavy vehicles. It wouldn’t solve everything, but cheap green hydrogen would revolutionise the 21st century and make the process of global decarbonisation much, much easier. You can understand why everyone is losing their minds over the stuff.

So let’s come back down to reality. Green hydrogen can be made today, but it’s expensive. How expensive? So expensive that people who have actually made it won’t reveal the cost. The numbers that do get offered up vary wildly, which is generally a sign of immature technology. Try and find the sticker price for a Tesla Powerwall. It isn’t easy. Whereas mature technologies, like solar PV is now, compete on advertised price.

Being bullish on hydrogen fits a broad range of current political agendas. Promoting its rapid success acts as a form of endorsement for the Federal Government’s technology-not-taxes approach to climate. It would also be a technological complement to the pro-renewables approach evolved by state and territory governments. It’s hard to find anyone who wants to express caution about the practical reality of taking an infant technology and making it a global energy changer within a handful of years. That is, everyone except us here at Boardroom Energy.

So, joining in the chorus, CEFC Chief Executive Ian Learmonth has indicated the fund is nearing its first investment in green hydrogen technology. Learmonth predictably described the investment as “exciting”. He’s not alone, everyone does. The CEFC this week dropped a new hydrogen report to signal its intent.

The looming CEFC investment is curious because early R&D funding is supposed to be the role of ARENA, which has recently handed out $103 million towards what it describes as three “commercial scale” renewable hydrogen projects. As far as we can see from the grants, ARENA has almost completely funded three 10MW electrolysers, described by ARENA as “among the largest so far built in the world”. The CEFC is supposed to help with co-investment to help proven technologies reach economies of scale. At least that’s what it used to be for.

The CEFC’s Australian Hydrogen Market Study was prepared by consultants Advisian and provides the now typical graphics-heavy review of the potential for H2. The report is a useful summary of some of the key learnings to date: hydrogen is expensive to move, it identifies three factors that determine H2 costs: cost of renewables, electrolyser costs and intermittency of renewables. In Boardroom Energy’s own Background Paper on hydrogen we consider a fourth variable: electrolyser efficiency.

The report provides what it sees as the likely glide path for hydrogen investment: remote power storage and long-distance freight haulage, buses and then ammonia. This may provide some clue as to where the CEFC will be investing.

The key challenge for the CEFC report is around what each of these use cases will cost. For this it has chosen to reference work done by the International Energy Agency (IEA), the International Renewable Energy Agency (IRENA) and Bloomberg New Energy Finance (BNEF). The problem with these studies is they are based on a spread of claims and analysis sourced mostly from academic literature over the past decade. It notably excluded the hydrogen cost analysis done by ARENA in 2016 which concluded hydrogen is much more expensive, but is just as up-to-date (or out-of-date) as other reports quoted.

The report makes a remarkable observation: “electrolysers at small scales <50MW, were higher cost and not considered representative of the electrolyser market.” The problem with this statement is reality: no electrolyser has been built on earth that is bigger than 20MW. This is the market, and it is so expensive that the CEFC consultants elected not to report it. It also directly contradicts the “commercial scale” claim made by ARENA of 10MW electrolysers. Maybe we should get our story straight.

Pricing estimates built on this stack is like a house of cards. Our analysis of the costs provided by recent ARENA hydrogen projects suggests these smaller, real world electrolysers are a long, long way from $2/kg. If this is the real world, then should we start from here?

Is an RGT (Renewable Gas Target) on the way?

Energy Infrastructure company Jemena’s boss Frank Tudor used his energy week speech to call for a renewable gas target. Much like the electricity sector RET, this would create an incentive for the production and distribution of “renewable” gases. The quote marks indicate that there is currently no consensus over the definition of renewable gas, as with the original RET where there were tussles over the inclusion of certain types of biomass. The ENA’s Gas Vision 2050 project envisages the following types of zero emission gas:

  • Hydrogen produced by electrolysis powered by zero emissions electricity
  • biomethane created from biomass, wastewater or landfill waste
  • Gas processes that entail carbon capture and storage (CCS) – this could be at the production end for hydrogen made from steam reforming methane, or the consumption end for natural gas used by large industrial facilities.

Any reasonable definition of renewable gas is likely to include the first two, with the major controversy being over whether projects based on CCS to achieve zero emissions should qualify.

The technical challenges are somewhat different. Renewable power technologies produce the same electrons as traditional sources, it is their intermittency that has created system challenges as their scale has grown. The underlying resources are also abundant, it’s just a case of building enough machines to capture the wind and sun. In the case of gas, the major technical challenges is that one of the two main renewable gas options, hydrogen is a different molecule from methane (natural gas), which is what gas systems are currently based on. Boardroom Energy subscribers can read more about these challenges here, but in summary, it will be necessary to test out the ability of existing pipeline systems to carry hydrogen without major leakages and of end uses to function with hydrogen blended into the methane. Pilot projects are already starting to do this, but these have been reliant on individual ARENA grants rather than a broader incentive/subsidy scheme.

Biomethane is still methane from a molecular perspective but faces different challenges. It is essentially a by-product of other activity and is either directly produced as a waste product or is derived from waste biomass (in principle you can produce it from biomass grown for that purpose, but this is assumed to be uneconomic). This limits the supply, and in the case of agricultural or forestry waste there may be expensive logistics entailed in capturing, aggregating and processing at an economic scale for injection into the network. Given gas reticulation is aligned with urban rather than rural areas there may also be material transport costs, whether as biomass or as gas. Jemena reckons there could be up to 30PJ/year of biomethane developed, but this is only around 5 per cent of domestic east coast gas demand.

Jemena estimate the required subsidy for a renewable gas incentive would be $3-$15/GJ, or roughly 50-200 per cent of current wholesale gas prices. This is comparable to the RET, which maxxed out around $80-$90/MWh due to the shortfall penalty, which acted as a cap. This is broadly equivalent to double the average wholesale electricity price over the decade or so the 20 per cent RET has been in place. Much like the RET, the renewable gas scheme would have to spare large industrial gas users from bearing the cost of the scheme given their sensitivity to gas prices. So, the cost burden would fall on smaller users. Given that: the wholesale gas price is only about 30 percent of household gas costs, and the target will at least initially, only cover a few per cent of gas use, the overall impact would be barely noticeable. At least that’s what the proponents hope.

The other thing about a RET is – you don’t always get the technology you were expecting. For a few years, the initial 2001 RET was expected to deliver mostly bioenergy projects, but we built more wind than anticipated. The expanded RET was expected to unlock thousands of megawatts of geothermal energy, but it never arrived.

Hydrogen and biomethane are very different propositions and almost inevitably one will win the cost battle. This is why the European proposal for a similar scheme carves out separate portions for the two: 8 per cent biomethane and 3 per cent hydrogen for a total of 11 per cent by 2030. But the more you slice and dice by technology the more you miss the point that the scheme is supposed to find the cheapest solution.

One commonality between the EU and Australian proposals is that they come from the gas transport sector. This sector, with its large sunk costs in pipeline and compressor infrastructure is one of the big potential losers from decarbonisation, if this turns into electrify everything. It’s no coincidence that gas transmission giant APA had to field queries from investors over its stranded asset risk this week.

Corporate Australia starts to plunder retail energy market

For more than 20 years there has been little real innovation in the delivery of retail electricity services to customers. The sluggish and uninteresting nature of retail electricity has been the biggest failing of the design of the National Electricity Market.

Consumers were supposed to engage with electricity like they were shopping at Target. But, unsurprisingly, over the years they have expressed little interest in engaging with retailers to pay for a completely fungible service that they had already consumed. Who could see that coming?

Finally, the innovation is coming, but not from within. Australia’s energy retailers have already been under siege with re-regulation of prices through the introduction of a default market offer in 2019, falling value of customer accounts with increasing penetration of rooftop solar PV and possibly batteries and the potential for retailers to be required to contract generation to ensure reliability through a physical retailer obligation.

The most obvious line of new competition – from cut price supermarket retailers – never eventuated because to support this Coles and Woolworths discovered they needed to be in the large-scale generation game in order to cover their position in electricity retail. Even for them that was a bridge too far.

The rapid modularisation of renewable generation and storage has opened up the market to models which exploit lack of consumer interest in who they buy energy from by bundling it with other services with a view to evolving a more integrated (and sticky) relationship with customers.

The Commonwealth Bank (CBA) has been exploring opportunities in the electricity market. In February they introduced low cost (0.99 per cent) green loans for residential mortgage customers buying solar and home batteries. These loans not only help CBA manage its sustainability reporting, but it helps keep valuable mortgage customers more sticky.

CBA has already developed a user-friendly digital platform and is monetising it now by offering a range of services to customers. This week CBA stepped up a notch buying a stake in boutique retailer Amber which allows customers to exploit times of increasingly cheap solar electricity (see our Chart of the week below). It’s another way of engaging positively with customers while increasing demand for renewables, especially for those younger renters who don’t own their own home and can’t install solar yet.

There is likely to be further upside for CBA if and when electric vehicles become more affordable, with the potential to bundle EV finance with the technology to recharge it cheaply.

After kicking tyres for the past two years Telstra has finally applied for a retail electricity licence and could be selling low carbon gas and electricity later this year as Telstra Energy. This would enable Telstra to bundle energy and telephony. It’s the reverse of embattled energy retail AGL, which last year entered the telecoms market selling data plans after it purchased Southern Phone.

AGL and Telstra are both trying to fix similar problems in separate markets. The roll out of the NBN is crimping Telstra’s broadband business in a similar way to the death by a thousand cuts being experienced in electricity retail.

Bundling telephony and energy has been tried before when internet retailer Amaysim bought Click Energy in 2017. Click was on-sold to AGL last year. Dodo has had slightly more success with bundling energy and telephony, but remains a minor player in both markets.

Telstra has been working hard on promoting its green brand and building renewables projects to support its business expansion. CBA and Telstra are unlikely to be the only ones who want to use energy to consolidate customer retention.

Chart of the week

Spot prices vary depending on several factors, principally available generation and demand. Increasing supply of intermittent renewable generation has had a growing impact on spot prices when it generators. Significantly, the generators who are most exposed to these periods of increased supply are the renewable generators themselves.

A review of volume weighted average spot wholesale prices for April 2021 reveals the generators exposed to the lowest prices are wind and solar PV. This is most acute in jurisdictions (solar in Qld and SA, wind in SA and Victoria) where these types of generators are in greater supply. Coal generators are indirectly impacted, experiencing softer prices because they are often generating into these periods of oversupply. Solar prices are weak across the NEM because the large-scale generators are competing with 13GW of rooftop solar PV, which softens demand and prices during the day.

VWA spot price by fuel by state, April 2021

CoalGasHydroSolarWind
NSW$  59.38$119.73$  91.91$  36.19$  48.47
QLD$  56.64$  85.62$  70.52$  28.42$  44.18
SA$  76.21$  32.02$  33.48
VIC$  49.78$134.18$  90.78$  32.82$  29.91

Source: NEM Review

Looking at these results in comparison to the last year, average solar PV wholesale prices have been low in south Australia, averaging at a negative price in September 2020 and only around $23/MWh for the year. This would be below the cost of generation. In Victoria the annual average solar price is around $31/MWh. Wind generation in Victoria ($32/MWh) and SA ($27/MWh) is also soft. Solar prices in Queensland are also low $28/MWh). Prices are firmer in NSW with a larger market and lower renewables penetration, although increased renewables investment will have a similar effect over time, absent of new, large and controllable loads to increase demand at these times (from storage technologies)

VWA spot price by fuel by state, April 2020-21

SA Gas $/MWhSA Large Solar $/MWhSA Wind $MWhVIC Brown Coal $/MWhVIC Gas $/MWhVIC Large Solar $/MWhVIC Wind $/MWhVIC Hydro $/MWh
Apr-20 $  44.78 $  24.22 $  21.63 $  34.64 $  59.16 $  27.34 $  26.06 $  57.27
May-20 $  47.44 $  30.91 $  29.26 $  38.17 $  63.77 $  33.92 $  31.11 $  51.63
Jun-20 $  64.83 $  43.82 $  34.64 $  49.72 $  95.93 $  44.29 $  34.85 $  74.42
Jul-20 $  68.70 $  54.24 $  47.12 $  63.49 $  84.74 $  60.63 $  51.02 $  84.90
Aug-20 $  59.17 $  33.95 $  34.66 $  53.99 $  87.18 $  42.78 $  47.55 $  85.21
Sep-20 $  28.66 $  (9.10) $  11.57 $  35.14 $  64.32 $  26.52 $  31.16 $  54.99
Oct-20 $  46.53 $  16.97 $  22.04 $  45.71 $  81.96 $  34.64 $  34.16 $  63.18
Nov-20 $  48.05 $  28.86 $  31.41 $  45.03 $  71.53 $  38.52 $  39.26 $  69.39
Dec-20 $  30.29$    4.73 $  11.18 $  26.15 $  48.15 $  18.19 $  17.50 $  50.79
Jan-21 $  54.91$   9.06 $  22.39 $  24.46 $  52.42 $  15.26 $  18.90 $  42.81
Feb-21 $  37.85 $  12.27 $  20.15 $  23.36 $  40.24 $  14.47 $  19.43 $  37.72
Mar-21 $134.43 $  22.96 $  30.05 $  30.58 $  54.36 $  21.05 $  28.49 $  41.18
Apr-21 $  76.21 $  32.02 $  33.48 $  49.78 $134.18 $  29.91 $  32.82 $  90.78
12 month Average $  57.07 $  23.46 $  26.89 $  40.02 $  72.15 $  31.35 $  31.72 $  61.87
NSW Black Coal $/MWhNSW Gas $/MWhNSW Hydro $/MWhNSW Large Solar $/(MWhNSW Wind $/MWhQLD Black Coal $/MWhQLD Gas $/MWhQLD Hydro $/MWhQLD Large Solar $/MWhQLD Wind $/MWh
Apr-20 $  42.08 $  52.93 $  55.12 $  32.57 $  37.27 $  38.33 $  41.47 $  51.01 $  28.63 $  35.43
May-20 $  43.89 $  58.57 $  54.37 $  37.19 $  39.11 $  32.88 $  39.13 $  43.66 $  19.22 $  32.83
Jun-20 $  49.96 $  80.41 $  62.02 $  42.77 $  42.87 $  35.30 $  39.46 $  48.36 $  20.74 $  33.67
Jul-20 $  49.78 $  63.15 $  69.11 $  40.98 $  44.01 $  39.72 $  45.47 $  49.41 $  25.22 $  37.32
Aug-20 $  51.80 $  73.72 $  70.06 $  38.98 $  46.96 $  32.98 $  41.10 $  45.64 $  13.02 $  32.22
Sep-20 $  42.71 $  64.67 $  53.05 $  33.36 $  38.86 $  29.82 $  38.64 $  41.75 $  11.04 $  28.00
Oct-20 $  59.09 $  88.45 $110.34 $  48.22 $  52.12 $  36.82 $  44.98 $  49.55 $  24.35 $  37.23
Nov-20 $  65.35 $129.71 $116.99 $  70.23 $  61.07 $  47.56 $  64.85 $  59.57 $  35.75 $  45.01
Dec-20 $  77.47 $263.28 $181.77 $  80.13 $  49.85 $  55.78 $  72.13 $  90.21 $  54.65 $  49.22
Jan-21 $  39.97 $  54.35 $  50.13 $  37.48 $  38.14 $  41.35 $  48.47 $  45.72 $  37.09 $  39.03
Feb-21 $  35.65 $  32.80 $  36.76 $  33.79 $  34.92 $  42.59 $  53.06 $  46.38 $  35.06 $  40.56
Mar-21 $  39.85 $  54.49 $  43.21 $  32.89 $  40.06 $  47.56 $  63.52 $  56.44 $  33.49 $  42.18
Apr-21 $  59.38 $119.73 $  91.91 $  36.19 $  48.47 $  56.64 $  85.62 $  70.52 $  28.42 $  44.18
12 month Average $  50.54 $  87.40 $  76.53 $  43.44 $  44.13 $  41.33 $  52.15 $  53.71 $  28.20 $  38.22