Boardroom Energy

This week:

  • HumeLink – and now for something completely different

  • CCS: are we there yet?

  • Beetaloo – will the bet finally pay off?

  • Chart of the week: Asia the coal continent

In Brief

Sometimes, even in energy policy, you need a rest. This week was light on substance, heavy on spin and messaging. The UN decided to give Australia a lecture about when it should quit coal – 2030 to be exact. That’s only nine years away, and 68 per cent of current generation. Predicatbly the federal government and its fellow travellers in the media seized on the moment like an early Christmas present. As our chart of the week shows, the trajectory of coal looks different in Asia than it does from UN HQ in New York or the UK, which ran out of coal 40 years ago. If you don’t believe us then go and watch Billy Elliott again. As if on cue, coal prices hit a high, thanks to Chinese demand while the Europeans are burning more of it than usual because gas prices are rising (thanks, Russia…). The federal government had another boost this week with news that the UK was so keen to sign a free trade deal with Australia that it removed the climate clauses.
In a contrast to our recalcitrant government, Australian companies continue to embrace net zero targets, with Boral the latest to set out its plans, while Ampol spruiked its newly minted green credentials by offering carbon-neutral petrol and diesel, and floating the idea it might like to buy renewable electricity company Meridian. Poor old AGL had another bad week, with climate activists continuing to pile on and demand clearer, stronger decarbonisation targets.
There was plenty of new technology hype on offer. On the hydrogen front, BP is apparently looking at turning its shuttered Kwinana oil refinery into a clean energy hydrogen hub. In the Hunter, a sawmill owner is looking to reinvent itself as a biomass and green hydrogen player. In a rare dose of realism, though the head of ARENA admitted commercial green hydrogen may still be a decade away.
ARENA’s expanded mandate has revived interest in an old new technology – carbon capture and storage (CCS). We write below on whether CCS will ever move beyond the pilot stage. Even so, the next frontier of carbon sequestration is opening up – direct air capture, which is being piloted in Iceland, and talked up by Santos as one of the clean energy projects the company can fund after its merger with Oil Search.
Last week’s bulletin looked at offshore wind, which is also getting more publicity now the federal government has finally tabled enabling legislation for getting approval to build in Commonwealth waters. A proposed offshore wind farm in South Australia says it could create 800 construction jobs and 100 longer term.
You know that Big Battery Victoria is building? Well get ready for the Ultra-Big battery – a proposed 1200MW project in Melbourne’s western fringes. This is big enough to fill in for a whole coal plant – for 100 minutes anyway.
Of course, we can get carried away with conventional energy sources too. Promising drilling results in the NT’s Betaloo basin have sparked breathless claims that this could be our version of the US shale boom. Betaloo explorers have been given a boost by the failure of the Greens to block drilling grants for shale gas there. We explain below why this is overexcitement. Back to reality, Santos were forced to defend their record in supplying the domestic market even as east coast LNG broke new records.
The latest big transmission project, HumeLink, which will transfer power from Snowy 2.0 into the NEM took some flak from critics this week.
Twiggy watch – surprisingly in a week of spin, the great man was pretty quiet.

HumeLink – a chance to try something different?

HumeLink is the latest in the series of major transmission projects to come out of AEMO’s Integrated System Plan (ISP). It is shaping up to be a set of transmission lines linking Bannaby, Maragle and Wagga Wagga in southern NSW. Its key role is to allow the transfer of energy from Snowy 2.0 to NSW load centres. It will also serve as a backbone for new renewable generation in the area, enabling a Renewable Energy Zone (REZ).

The proponent, TransGrid recently completed the final round of the Regulatory Investment Test, the Project Assessment Conclusions Report, meaning it now falls to the AER to sign off on the project. Once it has the go-ahead, TransGrid will firm up the cost estimates and submit a claim for funding.

The last major project to come under review, EnergyConnect, was dogged by concerns about whether it is justified. The same concerns are now being levelled at HumeLink, especially given its eye-watering price tag is now up to $3.3 bn. At this point in the process, EnergyConnect was costed at $1.5bn. By the time the detailed estimates had been completed, the companies carrying out the project (TransGrid again and ElectraNet) had decided they needed over $2.3bn. A similar increase for HumeLink would see the costs blow out to $5bn.

Concerns over whether TransGrid have properly considered all the best options have led to a formal dispute being lodged with the AER. A broader critique of the project was outlined this week by Bruce Mountain and Ted Woolley, who have previously collaborated on a take-down of the business case for Snowy 2.0. They argue that the cost-benefit analysis should include the cost of Snowy 2.0, since the transfer of power from Snowy is the key value driver. Even then, the full benefit of Snowy 2.0 will only be realised if another link into Victoria, VNI West, gets built as well. 

The Mountain-Woolley critique glosses over the project’s role in enabling new renewable development as well as transporting Snowy 2.0 output. And as they admit, the politics of the project will likely get it over the line one way or another. Both the federal government (who own Snowy Hydro), and the NSW government want to see rapid renewables growth. Therefore both have strong reasons to back the project in. The critics’ conclusion is that the federal government should take on the project as part of the overall Snowy 2.0 project and spare NSW energy consumers the 40 per cent hike in transmission charges they estimate would arise.

This situation creates an opportunity to think outside the box. It comes at a time when the AEMC is reviewing the whole issue of how transmission investment is determined. One of the options likely to come up in that review is the notion of contestable transmission projects. This approach has been successfully used in the UK, Texas and elsewhere to keep transmission costs down. 

So, HumeLink could be used as a test case for this kind of approach. We could skip the formalities of AER sign-off on what appears to be a political fait accompli by having the federal government take on the project. This would bring it forward a few months, which would please the project’s supporters. Then it would need to find an appropriately qualified party to finalise the route and tender for the construction. This could be Snowy Hydro itself, which would allow it to be dovetailed with Snowy 2.0 or they could subcontract the job to TransGrid or AEMO, both of whom have experience in procuring construction for transmission projects.

Once built, if the government wanted to get the project off its books, it could tender for someone to own and operate the infrastructure. This is what happens under the UK’s offshore transmission regime for connecting up offshore wind farms to the national grid. Someone still has to pay for it in the long run, but this process would allow for a few years to decide that.

Treating it as a standalone project with its own finance would also keep the project out of TransGrid’s regulatory asset base. TransGrid had concerns about its ability to finance its share of EnergyConnect and unsuccessfully sought a rule change to help it do so. In the end, it secured CEFC financing which helped get it over the line. If EnergyConnect was tough for TransGrid to finance under the existing framework, HumeLink will be twice as hard, given its cost is currently almost twice TransGrid’s share of EnergyConnect.

Lessons learned from these processes can be fed back into the AEMC review, which will likely take some time to conclude. The legal basis for doing things this way has not been examined, but when governments are involved, where there’s a will there’s a way.

CCS: Are we there yet?

Greenhouse emissions are a stock, not a flow. Which means every tonne of carbon dioxide not emitted into the atmosphere, regardless of how this is achieved, delivers against objective of abating emissions.

The popular debate around climate has tended to reduce this principle to an overly simplistic narrative around good versus evil. Renewables are good, coal is evil. Anything that promotes renewables is good, and solving climate change, anything that cuts emissions from coal is evil, and hindering it. All said and done, this is a bit dumb.

Federal Climate and Energy Minister Angus Taylor thinks so too. Having already taken control of the Australian Renewable Energy Agency’s board, he’s now expanded its investment plan to broaden the scope of ARENA’s activities beyond developing renewables.

One of these expansion packs is research into carbon capture and storage (CCS), the somewhat mature technology of harvesting greenhouse emissions before, during or after combustion of fossil fuels or industrial processes. Its ability to reduce emissions are as valid as anyone else’s, at least in theory.

ARENA’s scope was due for an upgrade. It was created in 2012 by the Gillard Government, the rationalisation of an amalgam of a host of different funds and schemes designed to develop and promote renewables technologies. This was back in the day when, for reasons unknown, it was assumed a rainbow alliance of different renewable technologies would be needed.

Having dallied with the likes of wave energy, geothermal and even solar paints, it was decided what was needed was an early development renewables R&D funding agency. This would act like an angel fund investor, like a talent scout get all these undiscovered technologies out of sheds and workshops and heading towards commercialisation.

ARENA soon discovered there was no great hidden store of renewables ideas. In its battle to survive the politically lean years of the Abbott Government, it self-diversified, making itself politically useful by supporting more practical projects. This included integration and deployment of proven renewables technologies like wind and solar in new locations, like off-grid mining locations.

In recent years ARENA has developed a bit of a reputation for being a bit of a soft touch. If you get the politics right, the money strangely seems to follow. But, in fairness, it is having some success in non-renewable but related technologies like pumped hydro, batteries and now has been dabbling in hydrogen.

The expansion has five elements: optimise electricity decarbonisation including low cost solar and storage technologies, hydrogen (although it was already doing it), low emissions metals, soil sequestration and CCS.

For the most part this just validates approaches ARENA was already taking, and reinforces the broader economy -wide abatement need to make deep emissions reductions. The political pot sticker is CCS. Labor and the Greens opposed the inclusion but failed to block it in the Senate.

The deeper issue it not the worthiness of CCS abatement, but how long governments keep throwing money at an expensive and relatively mature technology that for a decade has failed to get past the pilot project stage.

CCS is mature: it was adapted from the practice of injecting carbon dioxide into underground gas fields to push the gas out. Capturing at least some carbon dioxide from various stages of power station combustion of coal and gas and industrial processes is possible and proven. But it consumes so much energy to capture, compress and pump carbon dioxide underground. Facilities need to be adjacent to suitable underground storage.

Even in lower cost, adjacent commercial applications like Gorgon sequestering fugitive carbon dioxide from gas produced in the north-west shelf, it is struggling to deliver. Santos is about to replacitate Gorgon’s efforts in the Cooper Basin, hoping for better results.

Everyone builds a pilot to demonstrate the possibility of the technology. But no one goes on to scale it up. Since 2006 more than 70 pilot CCS facilities have been built around the world to test its suitability for coal fired power stations, gas generators, chemical facilities, cement production and waste to energy.

The small handful of commercial CCS facilities exist in very specific technical and geographic conditions. Promises made to scale up continue to tail off as commercial close approaches. The US Government pulled out of its FutureGen CCS project twice, in 2008 and 2015. It simply couldn’t land a credible commercial scale CCS power station.

The tricky question governments continue to put off is not whether we try to make CCS work. We should. But what will it take to accept that maybe CCS isn’t getting there? As desirable as cost-effective capture and storage of emissions might be, there must be a point where further investment in a technology is like putting another coat of paint on a wall. It doesn’t make it any whiter.

Beetaloo – is the Federal Government’s bet finally about to pay off?

It’s possible the gas reserves in the Beetaloo Basin in the Northern Territory might turn into something. Last week you could buy junior gas explorer Falcon Oil and Gas at 8 cents a share. This week they were 18 cents. Falcon is the junior partner to Origin Energy as it attempts to convert Beetaloo’s potential into reality.

The Beetaloo Basin is a shale gas reserve around 600 kilometres south of Darwin, estimated to hold around 7000PJ of gas. That’s enough to run the east coast of Australia for seven years. Not great, not terrible.

Put another way, that’s around $70 billion of gas which could be made available to the east coast of Australia via Jemena’s new Northern Gas Pipeline. It could make a real difference to east coast gas prices and concerns about supply scarcity.

Beetaloo would be handy, with the ACCC warning of looming east coast gas shortages from next year. The Federal Government has spent more than $200 million accelerating development of the gas field, upgrading roads and fast-tracking exploration.

Activists and the Greens continue to oppose the development. They were recently rolled in the Senate by both Labor and the Coalition with a bill to ban fracking in the NT. They claim global demand for gas is falling when it is increasing, encouraging journalists to describe Beetaloo as “controversial” based on the bizarre logic that the way to reduce emissions is to stop fossil fuels at their source.

The only credible zero emissions replacement for gas is hydrogen, and even ARENA CEO Darren Miller has warned that its commercial scale development could be a decade away. And ARENA is typically optimistic about most technologies.

In the interim Australian manufacturing will need gas to make alumina, cement and ammonia and gas peakers may become busier, not quieter, depending on the closure rate of Australia’s remaining 18 coal fired power stations.

Chart of the week – Asia, the coal continent

For a conservative government, criticism from an unelected supranational body is like an unexpected birthday present. So, Morrison and co will have been quite pleased with the tongue-lashing they received this week from a senior UN official over Australia’s reluctance to shut down its coal industry on an accelerated time frame. The UN’s assistant secretary for climate, Selwin Hart, told the Crawford Leadership Forum on Monday that Australia – along with other OECD countries  –  should phase out coal use by 2030. It’s not clear if this includes coking coal, still an essential ingredient for making steel. This allowed resources minister Keith Pitt the opportunity for grandstanding, declaring “Fortunately, the UN don’t run the country of Australia. Australia is governed by the government of the day, elected by the Australian people,”. The government’s cheerleaders in chief at the Australian were happy to join the chorus.

What the UN may have overlooked is how different the world looks from Canberra compared to UN HQ in New York. While the US has been reducing its coal use over the last decade (driven mostly by competition from cheap gas rather than altruism, China has gone over four decades from using a similar amount of coal to almost ten times the US. Meanwhile, india has overtaken the US as the 2nd largest consumer.

Chart 1: Coal use in China, India, USA (Mtpa) Source: EIA

Meanwhile, the next tier of Asian nations is also either increasing or flatlining their consumption. In this group Australia stands out as the only country with a clear decrease over the last 10 years. Admittedly, our coal consumption per capita is still higher than our neighbours.

Chart 2: Coal use in selected Asian countries (Mtpa) Source: EIA

Of these Asian nations, only Australia and Indonesia are net exporters. Hence our production far exceeds our consumption, as we supply other Asian nations. From this vantage point, coal is still booming and calls for a rapid phase out seem like a fantasy.

It may be different in Brussels and New York. Like the US, Europe is generally decreasing coal use, with environmental mandates being a stronger driver there. Countries like UK and Spain have all bit phased it out already, while the biggest European user, Germany is making inroads after a couple of decades of stalling post-reunification as it focussed on shutting down its nuclear power sector first.

Chart 3: Coal use in selected European countries (Mtpa) Source: EIA