Australia’s new energy giant

Fortescue Metals is apparently about to transition into an energy business. Or maybe a steel business. Or a technology company. Or all of the above. That’s according to its Chairman Andrew Forrest who kindly telegraphed Fortescue’s seismic shift in corporate strategy at a recent public lecture. Companies are normally relatively discrete about how and where they invest and shift, at least until the deal is done. But not this time.

According to Forrest, Fortescue has “locked in exclusive access to almost 300 gigawatts of hydro and geothermal power”. That’s more than four times the generating capacity of Australia. It’s also almost a quarter of global hydro generation capacity (1307GW), which is mostly owned and run by national governments and has been used for decades to anchor national electricity grids and support major industries like aluminium. Global geothermal capacity is around 13GW.

Fortescue is apparently looking at run of river hydro for at least some of this capacity, which is a higher cost technology which operates at a smaller scale along existing rivers. Its harder to get scale, more expensive and is limited to specific sites.

Both geothermal and hydro technology types are geographically constrained, meaning there are limits to developing new capacity. Contracting exclusive access to these critical resources at that scale might have, you know, been noticed by someone. Snowy Hydro (4GW) and Hydro Tasmania (2.6GW) have not reported contracting any of their generation to Fortescue, so it must be a global play.

The cost of contracting 300GW of zero emissions dispatchable generation would be expensive. The capital cost of hydro is around $4 per watt, so the cost of building 300GW of new hydro would be $1.2 trillion. Given Fortescue claims it has secured exclusive access to existing generation, the cost of this deal would reflect the terms, probably not less than a decade of supply. Let’s call it a $120 billion deal. Fortescue’s market capitalisation is around $70 billion.

In addition to this base deal Fortescue is looking at buying or building 500GW of wind and solar PV. Assuming this is all large scale generation, the capital cost is around $1 per watt, so that’s another $500 billion. Presumably most of this would be located outside of Australia as total domestic electricity generation is only around 70GW, and only about 15GW of utility scale renewables, and another 10GW on rooftops.

These two deals alone would make Fortescue the largest utility in the world, the crown currently held by Enel with a trifling market cap of only USD$89 billion.

At least some of this renewable generation will be used to make green hydrogen, which uses renewables to electrolyse water. Fortescue aims to build Australia’s first green steel project in the Pilbara “in the next few years”, targeting domestic steel production of around 187 million tonnes, or 10 per cent of global supply. Australia’s only surviving steel business, BlueScope, produces 3 million tonnes a year. So this would represent more than 60 times increase in production, presumably taking market share from countries like China, Korea and Japan who currently buy Australian iron ore and coking coal.

Green steel mills which use hydrogen to replace coking coal are in early pilot development in Europe, although even if these are successful green steel will be only a fraction of global production by 2030. Fortescue’s plan is that Australia is well placed to make green steel because it has abundant renewables and iron ore, even though Australia’s dominant position in iron ore and coking coal exports never triggered a domestic steel boom in the 20th century. 40 GW of renewables will be built in the Pilbara alone.

Fortescue’s share price fell in the week after the announcement, although this was due to concerns about Chinese demand for iron ore, not global energy prices. So, for now at least, they’re still a mining company.