Boardroom Energy

This week:

  • The new climate plan is no new climate plan

  • Sun Cable: visionary or vanity?

  • What do you do when no-one responds to demand response?

  • Chart of the week: Carbon prices compared

In Brief

This year’s global climate negotiations formally begin next week in Glasgow. You might have noticed it in the media. Australia’s Prime Minister Scott Morrison will be attending, after stopping off in Rome this weekend for a G20 meeting. The G20 will discuss phasing out coal, fossil fuel subsidies, international financing of coal projects. Key leaders like China’s President Xi Jinping and Russia’s Vladimir Putin will not be there. You can draw your own conclusions on how that will go.

Swedish youth activist Greta Thunberg will be joined by striking binmen and school staff in climate march through Glasgow on November 5. The climate negotiations will trigger not only garbage strikes but industrial action from local railway staff and council cleaners. Welcome to Scotland.

A wave of climate solutions have been offered by commentators. We should build nuclear power, we should switch to electric cars faster, we should have a methane emissions target, we need more transmission lines, we should use more green ammonia, make more green hydrogen, put a price on carbon. That’s ok, because as it turns out the Federal Government has a plan already. Bureaucrats are still working on the modelling to support it, but, don’t worry, they’ll be finished soon. We take a look at the new “plan”.

Singapore is looking to import renewables, but nothing suggests they want to buy it from giant solar farms connected by 4000 kilometres of undersea cables. We take a look at some of the challenges with Sun Cable.

Origin Energy, Fortescue and Woodside are all looking to produce green hydrogen in Tasmania ahead of other locations in Australia. That makes sense, as it’s the only place they can get around the clock, low cost hydro renewable electricity to make expensive electrolysers more cost effective.

The new climate plan is no new climate plan

The Morrison government has released its new plan to deliver net zero the Australian way to back its commitment to target net zero emissions by 2050. The only thing new about it is the cover. There are no new policies. The plan relies on existing initiatives, primarily the Technology Investment Roadmap that it rolled out last year.

The Commonwealth will continue to underwrite technology development and a handful of demonstration plants in order to help bring costs down. Beyond that, businesses and households are on their own (unless the states and territories step in with more concrete policies to drive emissions). Perhaps this is the government calling our bluff – if we want net zero, many of us will have to pay the premium to choose the lower emissions alternative. If we don’t want to do that (because of lack of access to capital, competitive pressures, etc.) then we don’t really want net zero.

The Australian way in practice is a set of slogans – “technology not taxes”, “choices not mandates”. The latter is an especially curious claim in the context of Australia’s approach to the global pandemic in which mandates have played a very prominent role. And many have already pointed out that a technology-driven approach requires plenty of subsidies, which ultimately are funded…by taxes. Highlighting that technology costs can come down fast – just look at solar PV – glosses over the fact that taxes and mandates played a critical role in stimulating global demand, which in turn allowed the scope for manufacturing efficiencies and funding for innovation. It also ignores the fact that for many years it was official LNP policy to abolish the energy R&D funding agencies (ARENA and CEFC) that now have a central role in supporting this technology development.

The net zero plan is highly optimistic, whichever way you cut it. Starting from 2019 (the last full year of emissions data), half of the emissions abatement is expected to come from the Technology Investment Roadmap. This was released last year and is a wish list of emerging and prospective emissions-reducing technologies. The most promising of these  – green hydrogen, batteries, soil carbon) are labelled priorities and will benefit from early stage funding via ARENA, CEFC, Co-operative Research Centres (CRCs) or other handouts.

The other half is expected to come from “global technology trends”, “further technology breakthroughs”  and domestic and international offsets. The technology items are simply placeholders. They may occur, they may not. There is an element of realism to this – no-one knows exactly how the world will get to net zero. Offsets are likely to play a role in most countries’ net zero plans (they are the “net” in net zero, after all). But if there is heavy demand for offsets the price could be high. The battle over land between “carbon farming” and actual farming appears to have already begun.

Looked at by sector, most emission reductions to date have come from land use, land use change and forestry (LULUCF). This is a controversial area of emissions – Australia is one of the few developed countries to include it in its emissions calculations. Large gains in this area (which are hard to replicate) resulted early in the 2000s due to rules inhibiting new land clearing activity and protecting old growth forests. Mandates, if you like. Electricity has now picked up the baton, with the influx of renewables reducing the sector’s emissions quite rapidly while most other sectors continue to rise. Net zero by 2050 is only in reach if the most optimistic level of reductions in the government’s modelling is achieved. If the most conservative assumptions are used, emissions will only reduce by around half if LULUCF is excluded or nearly 2/3rds if it is included.

Table 1: Emissions in 2005, 2019 (actual) and 2050 (projected, upper and lower limits), mtCO2e

2005 emissions2019 emissionslower limit reduction by 2050upper limit reduction by 20502050 lower limit emissions2050 upper limit emissions
Industry, mining, manufacturing17020018%54%13978
Total ex land use53555452%70%257163

Source: Boardroom Energy analysis of data from The plan to deliver net zero the Australian way

The modelling has not been released. It’s unlikely the full set of assumptions will be released for transparent review.

What’s puzzling is that since there is nothing new here, then what was holding the government back from agreeing the net zero by 2050 target? And why did it have to placate the Nationals with an extra cabinet position and who knows what else when its plan “will not shut down coal and gas production” and “no Australian jobs will be lost” as a result of it?

The political dynamics appear to be that Morrison has avoided creating targets for populist/right wing minor parties, while daring the ALP to create a point of difference through greater ambition and more concrete polies to drive emissions lower. This would allow him to attempt a fear campaign as he successfully did at the last federal election, when he claimed that the ALP wanted “to end the weekend” with its proposed target for electric vehicles.

The difference this time is that civil society, including a range of business groups that are usually fairly aligned with the Coalition, is already out ahead of the government. The Business Council, which condemned the ALP platform in 2019 as economy-wrecking is now advocating for a similar 2030 target to that ALP manifesto. Having sided so firmly with the Coalition last time, can it and others give the ALP cover to differentiate itself on ambition?

Sun Cable: visionary or vanity?

The SunCable project is the stuff of science fiction. Millions of solar panels laid out across 15,000 hectares of desert in central Australia, connected to a gigantic battery system and then all this clean electricity sent to Singapore via 4,200 kilometres of undersea transmission lines.

Everything about the proposed project is off the scale: the size of the solar farm (biggest in the world) , the size of the cable (longest in the world), the size of the battery (biggest).

It’s been proposed by two Australian billionaires, iron ore magnate Andrew “Twiggy” Forrest and tech billionaire Mike Cannon-Brooks.

Both self-made and successful. Neither has any experience in large scale electricity generation or transmission. Their brand message is they think outside the box. Billionaire rebels with a cause. It’s like a movie, it just hasn’t been made yet.

Every week or so there is a new announcement related to the project. It has received permission to lay cable through the deep waters of Indonesia. It has appointed experts to help with the design. Originally proposed in 2017 as a 10GW solar project, the size of everything has continued to grow. It now is looking at 17 to 20GW of solar, plus a 36GWh battery in Darwin.

It’s heady stuff. The project website says it will have supply commencing in 2027. This mega renewable project plans to supply 15 per cent of Singapore’s electricity.

This week the Singapore Government announced plans to invite proposals for up to 4GW of low carbon electricity imports into the country by 2035, or around 30 per cent. The first 1.2GW import would start in 2027.

Sun Cable went into media overdrive, announcing expressions of interest from Singapore customers on the back of the deal. Its success seems all but assured.

Maybe not. Because after four years of self-marketing, Sun Cable doesn’t appear to have any customers in Singapore. The only interest it had managed to raise was enquiries, no contracts, from Singapore retailer iSwitch. iSwitch collapsed earlier in October due to high gas prices.

Singapore’s Energy Market Authority is interested in importing renewables. They’ve already signed a deal to import 100MW from Malaysia from next year, and another 100MW from Indonesia via a much shorter and cheaper undersea transmission line by 2024.

They’re also working on a Lao-Thailand-Malaysia-Singapore Integration Project getting hydro from Laos using existing mainland interconnectors. Southeast Asian economies have been exploring the possibility of greater electricity integration since the end of the 20th century.

The US Government established the Advanced Energy Partnership for Asia to develop sustainable regional electricity markets and systems.

There’s no reason why Australian solar farms like Sun Cable couldn’t also sell into Asia. But they have a few challenges.

The cost of solar may be falling, but the cost of very long undersea transmission, will add billions and generate no energy. A 4,000km high voltage DC cable will lose around 12 per cent of the energy fed in as heat.

The longest undersea cable in the world is the Viking Link between Denmark and the UK. It’s 760km long, has a capacity of 1.4GW and will cost around AUD $4 billion. The waters it runs in are around 50 metres deep. Basslink is around 70 metres deep. The newly commissioned Norway – UK North Sea link has sections at 700m.

The Sun Cable cable is nearly six times longer than Viking Link and more than double the capacity. Based on the real world Viking Link numbers, adding the extra cable required will push the cost to around $40 billion.

They may make some savings for economies of scale. They may explore innovative solutions to lay cable such a long distance. They will also have joins in the cable that will sit in much deeper waters. The Timor Sea has an average depth of 400 metres, going down to more than 3,000 metres. The circuitous path of the cable appears to do its best to avoid the deepest waters. Laying undersea cable at such depths will be challenging. The constant pressures of deep water operation over decades will also be challenging.

Undersea transmission cables have an operating life of around 25 years, but can run longer. Let’s say Sun Cable runs for 30, meaning the multi-billion dollar cost of the cable will need to be amortised over this time. And contracts will need to be signed for this duration. At fixed prices.

The battery-firmed solar electricity might only cost around $50/MWh, although the solar and battery will each cost around $20 billion. But assuming it’s at market best price, the cable at current market rates could add another $150/MWh.

Even if this is shaved down to $100/MWh, that’s still expensive electricity to sign up an offtake for 30 years, especially given the alternative technology developments being touted to places like Singapore like green hydrogen or ammonia. We’re speculating on the capital costs of the cable, but that’s in part because Sun Cable won’t show its homework. It doesn’t have to, but we’re confident the numbers will be eye-watering. To give a sense of scale, it’s roughly the same distance as running a cable from Canada to Britain.

Repairing undersea transmission cables is time consuming and expensive. A fault in the 370km Basslink line under Bass Strait took six months to find and repair in 2016. A fire in a subsea cable between France and the UK also took it out of service for 6 months.

In terms of energy security, a six-month outage is a very long time. A 4,000km cable could take much longer to repair and bring back on line. Singapore has no natural resources, and its Government places a high priority on energy security. It’s hard to see how relying on electricity via a first-of-its-kind 4,000km undersea cable enhances this.

The Sun Cable runs in the wrong direction, from east to west. This means the sun will have set at the giant solar farm before the sun sets in Singapore. The evening is normally the time of peak electricity consumption. Most large-scale solar projects in Australia have been built on the western edge of the grid, to maximise the effect of delayed sunsets. Running big solar from west to east might be a great idea.

To exploit economies of scale, a project like Sun Cable might be better off selling into larger markets, which are less risk averse. Like Indonesia. It’s closer and has a higher emissions grid, but they probably don’t have the money to pay for the expensive electricity. Or like Australia’s National Electricity Market. It’s still high emissions, much closer, and lies due east of the proposed solar farm. Transmission costs would be much cheaper and easier to fix.

Using long distance transmission to move electricity around between countries is an interesting idea. Solar energy from north Africa could be shifted into Europe via the Mediterranean, but going via the straits of Gibraltar would be much cheaper.

Former Tesco CEO Sir Dave Lewis is another non-energy billionaire who wants to do the same thing and build his own Sun Cable between Morocco and the UK. His dream is 3,800kms of undersea cable, a big solar farm and he will then use wind turbines which will, according to him, always run at night to firm the solar. “We are not intermittent” said Sir Dave. He’s been spruiking the project since 2018, but no cable has gone down. Which sounds a bit like Sun Cable.

Billionaires throwing their resources at solutions to climate change is great. But it’s more useful if they solve things, not promise things they end up not delivering.

What do you do when no-one responds to demand response?

Flexible demand is the holy grail of the electricity system. A high proportion of electricity system costs are focussed on meeting peak demand that occurs on 1 or 2 percent of the time. Even when the price spikes to over $15,000/MWh there’s usually little response. This is partly due to electricity consumers expecting power on demand, and partly because most consumers pay a fixed price, so they don’t see the price spike.

Advocates of demand response have long claimed that the market design works against them. To this end, the rules have been changed to facilitate demand response competing directly against generation. The wholesale demand response mechanism (WDRM) went live this week. While it’s too soon to draw conclusions about its effectiveness, the early signs aren’t promising.

The rule was made over a year ago and AEMO has been busy preparing for it ever since. It opened up a portal for WDRM providers to register in April. A couple of months later, when it published its Electricity Statement of Opportunities, it noted that only 4MW had been registered (2MW in each of NSW and Victoria).

Fast forward to the go-live date this week, and there appears to be no wholesale DRM active and ready to go. This was illustrated when prices hit the cap of $15,100 a few times within a half hour in South Australia on Wednesday. A WDRM provider could have cleaned up – but there was no-one there. Some have pointed out that it’s very early days.

Demand response plays a valuable, if minor role in other wholesale markets around the world, so it will likely find its niche in the NEM. But this may not be in the energy market. Wholesale demand response tends to thrive in capacity markets where it can secure upfront capacity payments and is rarely called upon. The WEM is an example of this, although demand response’s role there is not without controversy and the rules have been tightened up to ensure that demand response will actually deliver when called on.

In the NEM Enel-X has registered aggregate demand response in the South Australian FCAS market, where it competes against gas generators and batteries. Demand response is also a major source of emergency reserves (RERT), although this market is less transparent, so it’s hard to see who and how much exactly. It may be that these niche markets are more attractive  – they pay more and require less, and so we may not see much activity in the WDRM. It’s unlikely at this point that there are other material barriers in the rules – the recent switch to five minute settlement was triggered by a complaint from a large user that the old settlement rules disadvantaged demand response too.

The proposed introduction of a capacity mechanism may make the NEM more like those other electricity markets where WDRM thrives. The devil will be in the detail of the rules for what counts as capacity, which are yet to be worked out

We should all want the WDRM to succeed. Flexible demand is likely to be an essential part of a system based around variable renewables.

Chart of the week: Carbon prices compared

The spot price for Australian Carbon Credit Units (ACCUs) under the Emissions Reduction Fund has continued a steady increase through 2021, now spot trading at $34, nearly doubling its price since April. The deeper and much more liquid European carbon price has also increased during 2021, driven heavily by low wind generation and generators needing more permits to run gas and coal generators harder. It’s been kicking around AUD$100/tonne since September. Are they related?

Only weakly. Europe’s energy market conditions are acute, more an outlier event than a permanent trend. Although tail risk events will need to be factored into future price risk.

The ACCU price is being driven by three factors. The national commitment to net zero by 2050 infers some sort of implicit or explicit scarcity pricing on carbon, while the Business Council of Australia is pushing for a more dynamic ACCU market to drive abatement. Given the cost of ACCU abatement is still cheap, speculators and agents are tending to hold ACCUs. This shorts the market and pushes prices up.

Corporates are increasingly making voluntary abatement commitments, which is also increasing demand for ACCUs as surrendering these is one form of easy abatement. They’re happy to hold certificates while they think the price is low.

The Clean Energy Regulator is launching its carbon exchange in 2023, and this will support trades of ACCUs, renewable certificates and guarantee of origin certificates for products. Given the scarcity value of carbon appears to be much higher than any of these current certificate trading prices, more transparent markets is likely to reveal this. It’s also a small but necessary step towards international linking of carbon.

Chart 1: EU carbon prices per tonne vs ACCU certificate prices (per tonne)

Source: Ember, Demand Manager