Boardroom Energy
Bulletin

This week

– The EV strategy you have, when you have no EVs

Waiting for sunrise

This is how climate diplomacy gets done

Chart of the week – spot price volatility in the NEM Callide explosion vs 5 minute settlements

In Brief

The Glasgow COP26 is winding down, and the big winner from the two-week climate trade fair would have to be US Special Presidential envoy John Kerry. Kerry helped deliver the EU-US green steel deal in the first week, and then a US-China deal on increase climate cooperation in the second. The Biden administration has been working with a short rope on climate thanks to hostile Republicans and Senate, but Kerry’s appointment a year ago has demonstrated the value of old fashioned diplomacy in making progress on climate.

In what appears like a pre-election climate policy tidy up, Prime Minister Scott Morrison announced his electric vehicle strategy, which didn’t appear to involve electric vehicles. We take a closer look.

Labor is currently drafting its climate and energy policy ahead of the next election. It has ruled out a price on carbon and will need to walk the tightrope between being sufficiently ambitious to meet the expectations of progressives, but not create easy targets for the government to attack. Opposition Spokesman Chris Bowen hasn’t ruled out looking at changes to the safeguard mechanism as flagged by the Business Council a few weeks back. Even if this ends up working as a carbon price. Meanwhile the state council of the LNP in Queensland are still keen to build coal fired power stations.

Tech billionaire Mike Cannon-Brookes wants to get into energy retail via Brighte, his finance provider for household solar and batteries. Telstra is already getting ready to sell energy and recently dropped out of the bidding for 140,000 Powershop customers.

Gina Reinhardt has emerged as a possible local partner for Korean steelmaker Posco in its bid for east coast gas producer Senex. Australia has reached 3 million solar rooftops with PV sales showing no signs of slowing. The National Australia Bank will continue to finance greenfield gas extraction in Australia, but will cap overall spending at $3.2 billion. Shareholder activists were not happy. BHP is struggling to find a buyer for its highly profitable Mt Arthur Coal mine and hasn’t ruled out closing it. Presumably that announcement is designed to help flush out buyers.

The EV strategy you have, when you have no EVs

This week Prime Minister Scott Morrison announced the glory box version of EV policy. We’re not going to do anything to accelerate EV supply into Australia, but we are going to prepare for them. We will build thousands of charging stations that may outnumber the actual cars they have been installed to supply.

The Federal Government policy appears to be framed by four factors (1) not moving too far from its last dismissive views on EVs at the last election, (2) tying in with a broader campaign narrative which is about choices not mandates, technology not constraint, (3) reflecting what its internal polling says on how ordinary/marginal electorate Australians feel about EVs, and (4) the practicality of getting lots of EVs into Australia any time soon.

Maybe this has been partly fuelled by the unstoppable investor euphoria around EVs that seems to defy commercial logic. Tesla shares have recently plummeted by 14 per cent in the last two weeks. They’re now trading at the rock bottom price of $1000 a share, with a market capitalisation north of a trillion dollars. That’s still around six times bigger than Volkswagen yet they only sell 5 per cent of the cars.

This week US based EV start up car company Rivian listed on Wall St, and already has a market capitalisation of circa USD$112 billion. It has so far produced just 150 cars and has only two models. Ford has a market cap of USD$80 billion and has sold 350 million cars.

But wait, there’s more. Ford used to have a market cap less than half this. Then it bought a 10 per cent stake in Rivian in 2019 for USD$500 million. That stake is now worth 20 times the purchase price. So that half a billion investment has now not only helped create USD$10 billion in direct value for Ford shareholders, Ford‘s share price has increased by 40 per cent in the last two months. This is an extra USD$20 billion over the value of the Rivian stock (Ford’s share price performance over recent months is much better than its arch-rival GM’s). This is a brilliant result for Ford and Rivian executives. There is real value in the disruptive capacity of these new businesses, but the scale of the current valuation suggests irrational exuberance.

Electric cars appear to be the future of personal transport, unless you think hydrogen cars are the future. EVs have great acceleration, can reach 300-500kms on a single charge, have most of their weight down low in the car meaning better handling, can be designed to be safer, and produce zero emissions if recharged by zero emissions electricity. They are better cars than conventional internal combustion engine cars and have significantly lower running costs.

The cost of EVs has been falling with scale and battery costs, but they continue to be materially more expensive than conventional cars (except at the ultra-luxury end of the spectrum where price is a negligible concern anyway). EVs are highly desirable, but they are still a premium car purchase. This is likely to help explain the Federal Government’s careful position (they’ve been sitting on this for 2 years) on EV policy. In the 2019 election Morrison said an EV couldn’t tow a trailer.

To come back from there without making it look like a complete flip-flop requires a tone of cautious optimism. Electric cars might be ok, but we’ll let you decide. We won’t make you buy one. Choices, not mandates. This fits neatly with the government’s broader climate narrative. Technology not taxes. Targets without policies. All carrots, no sticks. Anything that looks like a stick from the Opposition will be pounced upon and attacked.

In practical terms the Future Fuel Strategy will spend $250m to build EV charging stations for heavy commercial vehicles, passenger cars and households. That translates to chargers installed in 400 businesses, 50,000 households and 1,000 public charging stations. This is then projected to deliver EVs comprising 30 per cent of new car sales by 2030, which appears ambitious.

That’s not just a lack of political will. It’s a lack of EVs. On top of a chip shortage which is slowing production of all cars there is a looming battery shortage, driven by scarcity of key inputs like nickel, lithium and cobalt. Policies to accelerate uptake of EVS risk exacerbating these shortages.

Other governments policies are also shorting EV supply into Australia. Mandatory European carbon targets for cars have placed a premium on EVs worth as much as $26,000 per car in “super credits”, meaning car companies selling into Europe are diverting all their EV stock into that market and marketing them hard to avoid paying multi-million euro carbon penalties.
This is why there are no Volkswagen ID.3s or Renault Zoes coming to Australia, even though they are top selling European EVs. It would take an extremely generous federal government subsidy to disrupt this.

It might help to scrap the luxury car tax, and for the federal government to nationalise road user charges, but that’s not going to fit the current political narrative. The most successful EV markets in the world aren’t national, they’re city based – San Jose, Oslo, London, San Francisco, Shanghai, Beijing, Tokyo and Kyoto. All require creating a critical mass of EVs, by developing local infrastructure and state or national EV incentive schemes.

The problem Australia faces is getting its hands on this critical mass of EVs. That may be outside the remit of state or federal governments until later this decade.

Waiting for sunrise

The Morrison government has drawn the battlelines on climate policy for the upcoming federal election. Its dubious “technology not taxes slogan” and steadfast refusal to increase 2030 targets is a dare to the ALP to come back with greater ambition and a firmer set of policies to achieve it. Central to the Coalition’s narrative is its Technology Investment Roadmap. Last week saw the release of the second annual Low Emissions Technology Statement of priorities and progress.

It’s perhaps harsh to seek to measure progress over a single year. Of the existing priorities: cheap clean hydrogen, green steel and aluminium, carbon capture and storage (CCS), electric storage and cheap soil carbon measurement, hydrogen has seen the most activity. But it is still all about announcing strategies and funding – there are not many molecules of green or blue hydrogen being produced.

The main change this year is the addition of a sixth priority technology: ultra-low cost solar, with a target benchmark cost of $15/MWh. ARENA, which is effectively now the government’s technology slush fund, has a conveniently aligned goal of 30 per cent module efficiency at 30c/watt (installed cost) by 2030. 30 per cent efficiency  has been exceeded many times in lab conditions, with the current “world record” at 47.1 per cent. But the best widely commercially available solar PV panels are around 22 per cent. So, efficiency gains need to be around a third in under a decade. Meanwhile the cost of both the panels and the installation (“balance of system”) need to fall by around 70 per cent from the current benchmark of $1/watt.

How much the federal government has to do with this remains to be seen. Global deployment volumes will be the main driver of panel cost reductions and local deployment rates will assist with balance of system costs.

Setting aside soil carbon, the striking thing about the other five priorities is their interdependence. The two (alternative) foundation technologies are ultra-cheap solar PV and cost-effective CCS.

Green hydrogen will require very low cost renewable electricity, which in Australia largely means wind and solar, with solar expected to ultimately by the cheapest generation source.

Green steel could also be produced using low cost renewable electricity, either via direct reduction of iron (which will also need clean hydrogen) or molten oxide electrolysis. Green aluminium meanwhile could come from renewable electricity and inert anodes (alumina refining would also need to be decarbonised, which would require renewable electricity or clean hydrogen to produce steam and heat).

The alternative pathways to hydrogen steel and aluminium are to retain current production methods but to capture emissions from the processes. Given the challenges CCS has faced over two decades of development and potential deployment this is a less likely path to decarbonisation. But most credible net zero pathways  – for example the IEA’s latest modelling – assume some CCS deployment, so it shouldn’t be written off just yet.

The renewables pathway doesn’t just depend on cheap electricity but also reliable electricity. In the case of aluminium smelting this is a practical necessity, but in any case, intermittent production of metals or hydrogen is unlikely to be economically viable. So, storage is needed to firm the renewables. One of the storage options is – again – clean hydrogen. More likely is lithium-ion batteries for short term storage (up to two hours). But the existence of longer periods of low renewable activity  – up to 16 hours every night for a week in winter conditions with persistent low winds – requires longer duration storage. Pumped hydro is physically capable of contributing here, but generally takes the form of expensive mega-projects, so a more modular, widey deployable alternative is likely to be required. Notably, one homegrown candidate, Redflow, has had to go to California to find its first utility-scale customer.

It’s easy to see why ultra-low cost solar has been added to the priority technologies – without it, there’s heavy dependence on cost-effective CCS to decarbonise multiple sectors of the economy. The government’s net zero plan expects the priority technologies to deliver around half of Australia’s emissions reduction between now and 2050. And since the Morrison government is adamant, no-one should be penalised for their emissions, then there’s no incentive for greenfield investments to incorporate CCS even if it can be delivered at low cost. For existing sites, the safeguard mechanism allows them to claim credit for emissions reduction. But are there enough customers to buy all these credits, especially given the government itself has been the major customer to date?

This is how climate diplomacy gets done

As the COP struggles to a close, with an overarching climate deal looking as remote as ever, the US and China announced a new bilateral agreement to work together on emissions reduction. As some commentators were swift to point out, the agreement doesn’t confirm any hard commitments on either side, merely to work together.

The agreement covers a wide range of issues, including methane reduction, which the US convened a multilateral deal on earlier in the COP, but which the Chinese conspicuously declined to sign up on. This in itself may be a sign to the cynics that the deal is not worth the paper it’s printed on.

It also covers greenhouse gas regulatory frameworks and environmental standards; policies to encourage decarbonization and electrification of end-use sectors;  green design and renewable resource utilization; and deployment and application of technology such as CCUS and direct air capture.

Electricity-specific policy areas covered include the effective integration of high shares of low-cost intermittent renewable energy; transmission; distributed generation; and energy efficiency policies and standards to reduce electricity waste.

The agreement follows hot on the heels of another bilateral deal, the US-EU green steel deal. America just needs to announce a bilateral agreement with India for the trifecta of major emitter deals.

These bilateral deals tell us two things. First, agreement between two parties is always easier than between 196, which is effectively what the annual COP jamborees are trying to deliver.  Providing they turn out to have some substance, bilateral details between major economic – and therefore emissions – blocs can provide an anchoring point for other, smaller countries to rally round. It was a bilateral agreement between the U.S. and China that paved the way for the landmark Paris Agreement in 2015. While COPs rarely fail to disappoint, it will be worth keeping an eye on COP27 next year to see if this agreement can similarly serve as a catalyst for multilateral progress.

Secondly, it shows the value of having an experienced and committed negotiator lead the discussions that result in these deals. President Biden’s choice of John Kerry, an experienced former senator and secretary of state as America’s first special presidential envoy on climate change is looking like a wise appointment.

The full text of the agreement can be found here.

Chart of the week – spot price volatility in the NEM Callide explosion vs 5 minute settlements

There is a natural price volatility in the energy-only National Electricity Market. Prices are supposed to increase to signal generators to switch on and to decrease to signal them to switch off. The start of five-minute settlements on 1 October 2021 was seen as a potential volatility event, as traders adjusted behaviour to comply with the new rules. This is a planned shock, as opposed to the unplanned explosion at the Callide C power station in Queensland on May 25 2021. We can measure the impact these events have had on price volatility by measuring the statistical deviation of spot prices around these times.

Chart 1: NEM volatility – before and after Callide explosion

Source: Boardroom Energy analysis from NEM Review

The Callide C explosion was a major disruption to both prices and reliability, causing blackouts across SE Queensland that afternoon. The spot price standard deviation exceeded 4,000 on the day, driving smaller price shocks in NSW. Queensland and NSW prices remained volatile in the following weeks. By comparison spot price volatility in Victoria and South Australia remained low throughout this period.

Chart 2: NEM volatility before and after the start of five minute settlement

Source: Boardroom energy analysis from NEM Review