Boardroom Energy
Bulletin

This week:

  • Insecurity – IEA World Energy Outlook

  • Big guns wont blast Nationals out

  • Hydrogen, hydrogen, hydrogen

  • Chart of the week: NEM wholesale price forecasts

In Brief

It is high noon inside the Coalition on climate change. For the past week a parade of conservative institutions – the Business Council of Australia, the Reserve Bank of Australia, the Federal Treasurer – have all backed the importance of setting clear emissions reduction targets for Australia. But The Nationals will not budge. Committing to net zero is a pretty symbolic act. It does not come attached to any major policy program. It simply demonstrates intent, one shared by most of Australia’s major trading partners. Morrison needs the commitment to neutralise climate and energy in time for the Federal election next year. He wants to be able to go to Glasgow and hang out with Joe Biden. It would seem to make sense for the Coalition junior partner to enable this. But so far, they remain unyielding.

RBA Deputy Governor’s speech on climate change yesterday was interesting for many reasons, not the least was the level of pragmatism on show. Debelle observed that the transition path to net zero needs to be funded, and that includes “projects with varying degrees of emissions intensity, not just net zero”.

The week belonged to the unstoppable media magnet that is Andrew “Twiggy” Forrest. On Sunday he was walking with Queensland Premier Annastacia Palaszczuk as he announced spending $115 million of Fortescue Future Industries money on a $1 billion project to manufacture hydrogen electrolysers. On Wednesday he was with the NSW Government as it launched a $3 billion fund as part of its Hydrogen Strategy. On Thursday he used a speech at the National Press Club to promote his green hydrogen vision and tell the Prime Minister to go to Glasgow.

Transgrid released its energy vision for Australia, which includes the exit of 7GW of coal generators by 2030. And of course, more renewables would require more transmission. There’s growing competition in system planning. Snowy Hydro and now Transgrid have developing their own alternatives to AEMOs Integrated System Plan. Just for good measure departing Energy Security Board Chair Kerry Schott predicted coal generators will exit the NEM by the mid 2030s, if not earlier.

Construction worker walking in the middle yellow metal scaffolding.

Insecurity – IEA World Energy Outlook

The IEA was set up in 1974 in response to an energy price crisis – the OPEC oil price shock. As such its DNA is anchored in energy security. Its membership overlaps fairly closely with the OECD, another club of developed economies. A fairly conservative organisation, it continued for many years to produce forecasts of inexorably growing fossil fuel demand.

As climate change activism grew, the IEA became a target. It was mistakenly accused of advocating for greater fossil fuel use as opposed to predicting it. In reality, its energy security concerns has made the IEA a consistent advocate for energy efficiency measures. More reasonably it was accused of underestimating the growth of renewables. But it was hardly alone in that.

Under its current head, Dr Fatih Birol, the IEA has sharply corrected its course. It now frames much of its work around climate change and the policies needed to meet goals such as the Paris targets or net zero emissions. Its language is often indistinguishable from the activists that used to pillory it. It’s even jumped on the green jobs bandwagon. Earlier this year it laid down a marker that there should be no new fossil fuel development if the world is going to meet net zero emissions targets by 2050. This claim will be cited by opponents of every new coal mine or oil/gas development in Australia going forward.

This week it published its annual World Energy Outlook. The IEA proudly calls this “the gold standard of energy analysis”. It’s undoubtedly useful to map out global trends under a range of scenarios, and to analyse the implications of each of those scenarios (which are either policy-driven or climate-goal driven). But increasingly, the required direction of travel is clear and the issue is only about the pace of change. We don’t need gold standard analysis to tell us that. But keen observers of the energy transition can see that there are significant risks and challenges ahead that will require careful management in order to keep the lights on and transport moving at an affordable price.

To be fair to the IEA, it is live to some of these risks. The most useful chapter of the 2021 Outlook is the final one, Secure Energy Transitions. This highlights risks such as: the challenges of managing electricity grids dependent on high levels of variable renewables; the geopolitical upheaval for fossil-fuel dependent economies needing new sources of income; the potential bottlenecks in supply of critical minerals; and cybersecurity risk from increased digitalisation of energy systems.

While it offers some suggestions for how to address these, it fails to acknowledge the high degree of difficulty in implementing its recommended solutions. For example, in assessing grid management challenges, it correctly points out the role of demand flexibility. But energy consumers of all sizes are used to simply getting electricity on demand – it’s a massive reorientation for them to see it as something they can make/save money on by dynamically responding to weather fluctuations. Even if this will be managed automatically for them.

It also highlights the importance of increased interconnection of electricity systems, without acknowledging that transmission buildouts in modern democracies are hard.

The Outlook’s projected outcomes, especially in lower emission scenarios is predicated on the emergence of a substantial green hydrogen industry. But it admits it doesn’t know to what extent the existing gas infrastructure can be repurposed for hydrogen and thus what the hydrogen transport and storage investment requirements will be. Or what the risks are around underutilised gas infrastructure as the fuel is gradually phased out.

Although it admits at the start of the chapter that “energy transitions can be volatile and disjointed affairs, contested by a diverse cast of stakeholders with competing interests”, it doesn’t really explore contingencies or the consequences of low probability, high impact events. A scan of previous Outlooks and other recent material suggests the IEA did not see the current European energy crisis  coming. For an organisation founded in response to a previous energy crisis that blindsided rich countries accustomed to cheap Middle East oil, this feels like quite an oversight. As Churchill said: “Those that fail to learn from history are doomed to repeat it”.

Man standing firm with his arms crossed

Big guns wont blast Nationals out

Prime Minister Scott Morrison wants to go to the Glasgow climate talks and announce a net zero by 2050 target for Australia. Morrison is transactional on climate, as with most things. It is not the result of some moral epiphany.

A net zero target by 2050 is still heavily symbolic, as it is not going to be attached to any policy framework to enforce that outcome. Only a handful of Nationals stand in his way, but like some hairy activists chained to a tree, they are stubbornly refusing to move easily.

There are three reasons why this is important for ScoMo and the Government. First, committing to net zero neutralises climate change as a political issue at next year’s Federal election. Labor has recanted from pricing emissions, and without having a long-term target to differentiate themselves on, they won’t really have much else to make an issue with.

Second, it will enable Morrison to attend Glasgow and stand with US President Joe Biden and UK Prime Minister Boris Johnson. This makes him look like a world leader, which helps back home.

Third, the warnings from the Reserve Bank and Treasurer Josh Frydenberg are largely true. RBA Deputy Governor Guy Debelle gave a speech yesterday warning of the financial risks of climate change, and specifically warned of the rising cost of capital from having investors divest Australian bonds and investments.

Even with all these voices lined up to support a political deal on net zero, the Nationals continue to hold out. They appear unmoved by the political harm they are doing to the Coalition’s changes of re-election, or the gravity of the economic warnings.

In their oversimplification of the issues, the Nationals appear to be overlooking the risks their constituents who work in emissions-intensive jobs face. Net zero policies in Australia will decrease our demand for coal and in turn, gas and oil. But most of our coal and gas is exported. That won’t – and needn’t – change, just because of our own climate policies. What threatens those exports is the prospect of the countries that buy that energy decisively shifting to net zero: China, Japan, Korea. Realistically Australian governments are only going to be focussed on regional support packages if we have set out a trajectory of reduced usage, so without a net zero target, those areas whose economies are driven by fossil energy production will remain exposed to unanticipated shifts in demand from overseas. The Nationals seem to think that business-as-usual remains an option. They and their constituents may be shocked if that turns out not to be the case.

Back view of jumping girl on the pier. Freedom concept

Hydrogen, hydrogen, hydrogen

In the absence of constraint imposed by real climate policy, marketing flourishes. The promise of riches and abundance in the future. In the world of climate marketing there are few products more hyped than hydrogen.

The promise of hydrogen is that, one day, it will be the energy vector of the future. The pitch is that in as soon as a decade from now, hydrogen will be cheap and ubiquitous. It will be the medium to capture the surplus energy generated by renewables and be used to power cities when it’s dark and still.

Australia will sell its abundance of cheap, green hydrogen from our abundant renewables instead of coal and gas. We will become a hydrogen superpower. We already are a fossil fuel one.

We have been here before. In 1954 spruikers of nuclear energy claimed it would be “too cheap to meter”. Hydrogen is not new. It was widely used in the 20th century as a lifting gas, in town gas (that pre-dated natural gas), as a rocket fuel, in the manufacture of ammonia and in oil refining.

There are three big technical challenges: to reduce the cost of industrial scale green hydrogen electrolysers, to find cost effective ways of storing hydrogen and cost-effective ways of transporting it.

This week the Queensland and NSW Governments both made multi-billion dollar announcements involving hydrogen. Curiously, and perhaps not coincidentally, both involved Andrew Forrest, the iron ore magnate turned clean energy evangelist.

Queensland Premier Annastacia Palaszczuk took a media walk with Forrest on Sunday to announce that Fortescue Future Industries (FFI)would build a facility to manufacture hydrogen electrolysers near Gladstone, the port that exports LNG, generates coal fired electricity and make aluminium.

The Queensland Government announced that “Gladstone would become a world leading hub for the manufacture of electrolysers”.

Fortescue will invest $114 million and, although it’s not entirely clear what the Queensland government is stumping up, it looks like it will provide the land. Hydrogen electrolysers are a technology still undergoing a lot of R&D. There are at least four different types of electrolysers:

There are currently four types of electrolyser used currently under investigation in green hydrogen technology development:

  • Alkaline electrolysers – a mature technology, uses an electrolyte solution
  • Polymer electrolyte membranes (PEM) – commercial scale, uses membranes, high pressure, most advanced currently available
  • Anion Exchange Membrane (AEM) – lab scale, could be more efficient than PEM
  • Solid oxide electrolysers (SOEC) – lab scale, very high temperature, could be more efficient than PEM

Making hydrogen electrolysers now is like making Commodore 64 computers. There is a high likelihood that whatever you are making now will be obsolete in a few years. Big industrial manufacturers like Siemens are making hydrogen electrolysers, but at a small scale as they explore what works and what doesn’t.

Siemens is building a 8.75MW electrolyser in northern Bavaria, due to come on line next year. While it is one of the largest electrolysers in the world, it is still very much pilot plant scale. Siemens energy CEO Christian Bruch has warned that hydrogen will not be commercially viable until at least 2025, and probably not until the end of the decade.

If it is that simple for Queensland to become a world leading hub, then what stops everyone else? What is Gladstone’s comparative advantage?

The different hydrogen technologies have different cost and efficiency advantages and in the cost of building and operating the plant. Which will FFI build? Can they switch easily between technologies?

The NSW Government followed two days later with the launch of its $3 billion Hydrogen Strategy. At this stage the strategy is more of a glossy brochure outlining the potential benefits and uses of hydrogen, pointing to a website where future funding rounds will be announced.

All other states and territories have hydrogen plans, as does the Commonwealth. There’s a real risk of a zero sum game as everyone chases the same small group of potential hydrogen producers to get them to locate in-state.

The NSW Strategy document claims hydrogen is currently around $8.50 a/kg. based on a report prepared for the Clean Energy Finance Corporation. This report bases its cost assumptions on five overseas reports. On this basis, low-cost hydrogen is just around the corner. But it’s possible the international reports don’t align with the real costs of the recent ARENA funding round for hydrogen projects.

These real-world costs put hydrogen at many times more expensive than is claimed. We all want green hydrogen to get cheaper. If private businesses want to invest their own money to develop the technology, then all power to their arm. Public money should be doled out with more probity than is currently on display here. Governments can play a role supporting new technologies. But a bit of reality wouldn’t go astray either.

For subscribers, we have a Background Paper on Hydrogen.

Chart of the week: NEM wholesale price forecasts

No-one has a crystal ball to tell us what energy prices will be in the future. But modelling can give us some idea. NSW electricity transmission business just released its Energy Visions report, on which it has collaborated with CSIRO, ClimateWorks Australia and The Brattle Group. This sets out six scenarios for Australia’s energy future through to 2050. They cover a range of demand and emissions reduction possibilities. Despite the differences they all assume ongoing renewables growth and coal decline, albeit at different rates.

They all also converge on a very narrow band of expected price outcomes (chart 1 below). The exception is the “Clean Energy superpower”, which optimistically assumes we become a major exporter of hydrogen, green steel and green aluminium. It’s important to note we can’t simply choose this scenario. if it comes about, it will be because we have found a competitive advantage in making green hydrogen, which in turn means we have managed to drive renewable electricity costs down below other countries. So the lower prices are an input to the scenario rather than an outcome.

The price per MWh in the chart is not just the energy cost, it includes transmission and the emerging costs of keeping the grid secure. So it’s a proxy for the cost to large industrial customers.

Chart 1: Wholesale electricity prices – including transmission and grid security costs ($/MWh)

 

Source: TransGrid energy vision

It’s instructive to note that most scenarios converge around $75-$80/MWh. This is slightly lower than the high prices paid in 2017-19, following the abrupt closure of Hazelwood, but higher than pre-2017 historical norms. While it’s only one model, and one where the input assumptions are not transparent, it’s a useful corrective to glib claims that increasing renewables will make electricity increasingly cheap. Falling costs of renewables will be more than balanced out by the costs of flexible dispatchable supply to match demand, increased transmission to connect the new renewables, and the need to pay separately for grid services that coal plants provided automatically.

It seems many customers intuitively understand this already. Research by Energy Consumers Australia indicates that while energy consumers are more positive about energy affordability today than they have been for years, they expect affordability issues to rise in the next decade.