A deal sealed?

The Morrison government has announced another of its signature energy deal packages with a Coalition-run state, this time South Australia. Following on from last year’s NSW deal, the package is a similar mix of funding announcements for electricity infrastructure, hydrogen pilots and aspirational gas production targets.

The so-called Energy and Emissions Reduction Agreement is worth around a billion dollars, half the headline value of NSW but given that South Australia is economically much smaller, it’s more generous on a per capita basis (note that the Commonwealth is funding about 60 per cent). Major elements of the deal include:

  • A gas production target of an extra 50 PJ pa by end of 2023 and 80PJ pa by 2030
  • $400m for so-called “priority areas” such as carbon capture and storage (CCS), electric vehicles (EVs), hydrogen and other unspecified emission reduction projects.
  • $100m for early works on the SA-NSW interconnector
  • $110m in concessional finance for solar thermal and other storage projects.

The accountants among you will have noticed around $400m shortfall in the spending announcements – it’s not clear whether this is for several smaller initiatives or represents the money needed to achieve the gas target. In any case there is likely to be less to this announcement than meets the eye. Let’s take each of the major items in turn:

Gas exploration and production is still driven by private investors responding to local and global supply and demand balance. Governments can help support this activity by reducing red tape, for example, but not much more without extreme market intervention. South Australia has already announced an energy and mining strategy (last October) that includes some grants for exploration through the PACE program, but this is only expected to contribute 3.5 PJ pa. So, it’s not clear what the governments will do to achieve their gas targets, let alone whether those actions are economically justifiable.

The money for priority areas looks like a big deal, but $400m could easily get swallowed up on a single large CCS project. Given SA has no active coal plants or mines, the CCS is presumably either for industrial emissions or capturing fugitive emissions at oil or gas wellheads or using waste CO2 to enhance oil recovery EOR. But the Cooper basin, where most of the oil and gas is located, is a long way from any major industrial or power facilities that might generate significant CO2 waste streams for EOR. CCS was not a major feature of the energy and mining strategy, which merely noted its existence.

SA already has an Electric vehicle action plan, so perhaps some of the funding is to implement key actions from that plan – certainly there is no indication that there is any new SA policy in this space since the plan was released last year. But the policies in the plan aren’t that expensive – the commitment to government fleet purchases of EVs is predicated on it being cost-effective against the status quo, and the charging network is supposed to be built out using private investment.

Similarly, SA already has a hydrogen plan, and has funded four pilot projects, so the question is – what is new here?

The SA-NSW interconnector has been signed off by the AER, meaning the two companies that are building it (ElectraNet on the SA side and NSW on the NSW side) should be entitled to raise their prices to recover the budgeted costs of the project. They just need to commit to building it and they will get $2.15bn. It’s not obvious why government funding would be required at this stage, but a clue may be that they have been crying poor and unsuccessfully sought a change to the Rules that would have allowed them to recover the money from customers faster.

Finally, the cheap financing for storage. Veteran observers of SA’s electricity sector may have raised their eyebrows at the idea that solar thermal was a likely candidate for storage. Only a few years ago, the previous government announced with great fanfare that it was supporting a utility scale solar thermal project near Port Augusta. The support was cancelled in 2019 when it became clear the project could not be financed (the developer had struggled with its other projects including a briefly operational plant in the US). Another firm has since bought the rights to the project and must be rubbing their hands in anticipation of some cheap funding. We shall see…

In summary, it’s not clear whether any of this money is really for new initiatives or is largely there to help SA pay for its existing suite of energy policies – many of which are presented is entailing private funding or covered by business as usual state funding. Notably, unlike the NSW deal, there is currently no published MOU that spells out the relevant actions in more detail, and the SA government have not issued their own press release. If the money is offered on a “use it or lose it” basis, the Commonwealth may barely need to open its wallet.