Boardroom Energy

This week

– ALP: Powering ahead?

A very cold war looming

– What makes an electricity retailer green?

– Chart of the week: solar PV per capita

In brief

The reviews are in on Labor’s Powering Australia policy platform. APPEA said it provided “much needed clarity”. The Australian said it will force a faster rate of emissions reduction, and was cautiously optimistic about its return to a market based approach on climate. Frontier Economics said the plan was safe and sensible, but some of the numbers were wrong. Environmental groups say the plan doesn’t go far enough. Sounds like they got the mix just about right. Not to be outdone, we take a detailed look at the plan too.

The jungle drums have started beating around the Vales Point coal fired generator in NSW, with a major profit downgrade signalling the end could be sooner rather than later. Vales Point might enjoy a brief respite after Liddell starts to close next year, but with 5GW of renewables coming in every year, coal fired power stations are on borrowed time.

The world’s biggest energy utility, Enel, has finally decided to stick its toe in the Australian market with a renewable/retail offering they have cannily described as a greentailer. That’s snappy, but does it mean anything? We take a look. This announcement further contradicts rather spurious activist claims that Australia is struggling to attract new energy investment. Nope.

Australia’s booming gas industry is at risk of running out of gas, with most existing fields set to run out by 2050 according to EnergyQuest, which appears to understand such things better than most governments or their agencies.

UK hedge funds are developing voodoo economics methodologies to cobble together lucrative ESG funds. Some practices including shorting higher emissions stocks and then claiming these as emissions reductions.

Alinta has offered to build a 1000MW offshore wind farm to power the aluminium smelter at Portland. The wind farm will only cost $4bn (about double the capital cost of conventional wind) and will still need significant back-up to deliver the constant supply needed by the smelter. At this point it’s hard to see how the numbers stack up without government support.

Meanwhile government leaders and security experts are openly talking about a Russian invasion of Ukraine this winter, while Europe is gripped by desperate gas shortages and needs more Russian gas. Coincidence? We take a closer look.

ALP: Powering ahead?

Labor’s Powering Australia plan is politically savvy. Climate and energy is a tightrope walk for them: provide enough ambition for the left balanced with enough pragmatism for the centre. Grandiose claims will be seized upon and attacked by the Coalition. Labor’s headline target is close to the Coalition’s projected figures. What it does to differentiate itself is the use of a policy framework to achieve emissions reduction, a step beyond the Coalition’s hands-off “technology not taxes” approach.

In many areas, the ALP’s position is well-pitched:

On industrial emissions they have lined up very carefully with the BCA’s proposals, keen to stress that they are simply offering what business has asked for. So, the safeguard mechanism will begin to ratchet down, requiring companies near their limit to start thinking about emissions reduction or offsets purchases.

On electric vehicles, they will address some of the sticker price gap to conventional cars by exempting EVs from a range of taxes: luxury car tax, fringe benefit taxes and import tariffs. Whether this will be enough to induce the manufacturers to send more models our way and price them competitively remains unlikely in the short run, but falls short of being accused of doling out middle class welfare.

On skills, they correctly recognise the need to train up more young people in a range of relevant skills to build and maintain the new lower emissions infrastructure. Whether we need 100,000 new energy recruits to make the same amount of energy in an industry that currently employs around 50,000 and whether they all need to be bribed $10k for the opportunity to be trained up for jobs of the future is moot. But they are nice round numbers for a manifesto.

Using government procurement to help stimulate the EV sectors and to underpin some extra renewables is sensible and aligns with what several states are already doing.

There is some devil in the detail. One headscratcher is the underlying rationale for the “rewiring the nation” fund. This proposes using cheap government debt to spend $20bn on new transmission. But funding transmission is not really a problem. It’s the process of demonstrating the project is worth building that is challenging, particularly as the definition of cost-effective is changing every day. Transmission companies unsurprisingly claim that their regulator, the AER, is too stingy with its allowances for their cost of capital. They would. A Labor Government might rather think about how it would define cost-effective transmission in the 21st century.

Another solution looking for a problem is the Solar Banks initiative. This is intended to benefit households who can’t put up their own solar (renters, apartment dwellers, etc) by allowing them to buy a share of a mid-sized community-owned solar project. The ALP will make sure their investment pencils out by subsidising over 50 per cent of the up-front cost of the project.

Solar PV is probably the last technology to need more subsidies in Australia. And mid-sized solar is a king of reverse goldilocks. Rooftop PV, while small in scale, benefits from being co-located with load and not requiring land space. Utility-scale solar benefits from genuine economies of scale. Mid-sized solar has neither. Hence the one community solar fund that has got up needed an eye-watering $195/MWh guaranteed feed in tariff from the ACT government.

How seriously should we take the specific figures on benefits like lower electricity prices and job creation? Not very. All economy-wide job claims should be taken with a massive dose of salt. What really creates jobs is: improved productivity or increased population to serve (i.e., immigration). Favouring some industries over others just moves jobs around the economy.

Projected lower electricity prices are highly optimistic. The plan has been modelled by Reputex who have published a summary but not revealed their methodology. So, it’s something of a black box, which has led to Reputex sparring with other consultants about their numbers. Best bet is that over the long run, electricity will cost about the same through the transmission. Falls in wholesale prices are likely to be broadly matched by rises in non-energy costs to stabilise the grid and higher network charges for the big transmission build out. So, promising specific numbers could backfire on a future ALP government.

Taken in the round, however, the ALP program is capable of being pitched as a pragmatic, centrist yet appropriately ambitious set of policies. Some of the less practical elements can be finessed away in government. And across many industries involved in the transition to net zero, a clear direction and the prospect of national policy consistency will be welcomed. But quietly in some quarters. After all, the Coalition could still win the next election…

A very cold war looming

The threat of a Russian invasion of Ukraine is reminding everyone of the critical link between energy security and national security

In September Europe realised it had stumbled into a slow moving energy crisis, largely of its own making. A month later Russia began to mobilise thousands of troops and relocate them near its border with Ukraine. Coincidence? Hardly.

Through the lens of an environmental activist, energy supply is all about emissions: closing coal fired power stations and building renewables. Setting targets and pushing technologies. To defence and international relations experts, energy is a critical component in national security and geopolitics.

This relationship has a deep history. The attack on Pearl Harbour was the result of crippling oil embargoes on Japan by the US. The German Army was stopped at the Battle of Stalingrad in part because of the diversion of critical resources to try and secure the oil reserves in the Caucuses. The Suez crisis and the two Iraq wars were energy flashpoints.

Old school Republican hawks watched the recent climate negotiations in Glasgow with alarm. They see moves to slow and stop fossil fuel production in the developed world as a foolhardy way of ceding geopolitical power to non-democratic energy exporters, including Russia and Iran.

The US is currently engaged with three major post-cold war global flashpoints: China’s belligerence against Taiwan and its manoeuvring to control gas and oil reserves in the South China Sea, Iran’s brinkmanship on its nuclear program and Russia seeking to re-assert greater strategic control over eastern Europe, starting with the Ukraine. All are directly or indirectly liked to energy.

Since late October US defence analysists have been using satellite photos to track Russia slowly build up its military at towns like Yelnya near the Ukraine border. NATO has responded with stern questions, the director of the CIA went to Moscow to warn against any military action against Ukraine. And the troops continued to amass.

Russia is the biggest exporter of fossil fuels to Europe and increasing its energy exports has been seen as critical to mitigating the gas shortage that has sent prices skyrocketing by as much as 400 per cent since September.

Russia’s decision to ignore diplomatic warnings on its military build-up resulted in the German regulator halting its approval process of the controversial Nord Stream 2 gas pipeline in November. This sent European gas prices soaring. The US has long opposed the pipeline, saying it will only increase European dependence on Russian gas and help cede critical strategic influence to a malevolent force. Germany is now signalling it will shut down Nord Stream 2 altogether if Russia invades Ukraine. Does Russia need the increased exports more than it needs greater control over its former ally? The symbiotic relationship between energy security and national security could hardly be more stark.

US President Biden is continuing to step up his rhetoric, warning of sanctions against Russia, while there is open speculation of a Russian invasion of Ukraine this winter – when European reliance on Russian gas is at its highest. They have form in this regard. In winter 2008-09 Russia cut gas supplies into Europe to renegotiate prices, plunging some countries into an energy crisis.

Europe may not support US sanctions, both because it prefers diplomatic sanctions and because it is too dependent on Russian energy.

Renewables are like nuclear power, in that both can reverse the ceding of strategic power to fossil fuel exporting countries like Russia. It doesn’t help if nuclear is phased out in key economies like Germany, while the impact of renewables on their own is to shut down coal generation and increase reliance on gas to firm them. Renewables need to evolve to a cost-effective end-to-end solution including storage to fulfill their promise of energy security.

What makes an electricity  retailer “green”?

Italian utility giant Enel launched its Australian retail electricity business this week, promising to be “a one-stop shop ‘greentailer’ delivering energy from Australia’s abundant renewable resources for the country’s clean energy future”, according to its country manager. Meanwhile, Shell’s takeover of Powershop has sparked an activist campaign for Powershop customers to switch away from what was previously deemed to be a “green” retailer. This prompts the question: what makes an electricity retailer “green”?

The laws of physics determine the flow of electrons on our grid. Choosing a greener retailer doesn’t make any difference to where your electrons come from. Even financially speaking, the NEM is a gross pool, which means generators sell into the pool and retailers buy out of it. So retailers can’t claim they are buying directly from one generator rather than another.

Accordingly, retailers have tried different strategies over the years to demonstrate their green credentials. Some years back, Momentum Energy leveraged off its ownership by Hydro Tasmania to claim it was supplying its customers with clean renewable energy. The ACCC disagreed, arguing “purchasing electricity from Momentum had no direct effect upon the amount of renewable electricity which Hydro Tasmania supplied in the NEM”. Momentum was fined for misleading consumers and had to change its advertising campaign accordingly.

Some retailers automatically offset all emissions associated with their customers’ electricity. EnergyAustralia is the largest retailer in the NEM to do this as a matter of course.  But as last week’s bulletin explained, they do so using cheap CDM credits, which may cease to be a viable offset source as the Paris agreement carbon trading rules come into effect.

Amber electric calls itself “The fastest way to shift Australia to 100% renewables” based on its combination of real-time energy pricing and informational tools, both about price and about the renewables mix in the grid at any given time. The logic is that in doing so they are empowering and incentivising their customers to orient their consumption to times when there are higher levels of renewables.

Powershop, however, has a track record of being presented as the greenest retailer in the NEM. It was top of the ratings on Greenpeace’s Green Electricity guide (last published 2018), due to its combination of: being owned by a New Zealand hydro-based business, Meridian Energy, its investments in Australian wind farms, its reasonable (but not market-leading) rates for GreenPower and for solar exports; and its public statements about climate policy. Like any such ranking exercise, the more one delves into the methodology, the more questions one has.

For example, some smaller retailers were marked down for deciding to pay the penalty charge instead of buying certificates to meet their RET liabilities when the spot price was north of $80. This is a legitimate compliance strategy for a small retailer that in the long run results in the same amount of renewable energy.

Similarly, it’s hard to know what one should make of the fact that some retailers have legacy fossil fuel generation assets. Is AGL “good” because it can claim to be Australia’s largest renewables investor, or “bad” because it still owns some coal plants? Will it magically become a greener retailer when it demerges from the fossil fuel generation arm? Enel has a massive renewables investment pipeline but still own coal and gas plants in Italy and elsewhere (though not in Australia). So can it call itself a “greentailer”?

If customers really want to buy clean power, then choosing one retailer over another is irrelevant. Certified Greenpower purchases provide some guarantee of additionality (i.e. that your electricity purchases are helping to underwrite new renewables). Or, for large users, they can underwrite a whole new project by buying a power purchase agreement (PPA) from them. Beyond that, it is just a case of buying into a brand. Which is a choice customers are entitled to make of course.

Chart of the week: Solar PV per capita

While Australia gets a public berating both at home and at international climate conferences for its lacklustre climate goals, you can hardly say we’re not doing anything to decarbonise the economy. Australia is the clear world leader for both solar installation and generation rates. Australia clipped ahead of Germany in 2019 on a kilowatt hours per capita basis, and has surged away since then, approaching 900 KWh per capita of solar PV in 2021 and likely to pass the magic MWh/capita barrier next year. The big driver is rooftop solar PV, which has added more than 6GW of new capacity in the past two years alone. It’s also a growing wrecking ball for the commercial and technical case of large coal fired generators. Something will need to give, and soon. In the meantime, Australians can celebrate that we’re at least winning one energy transition “race”.

Chart 1: Solar PV per capita, KWh/year, selected countries

Source: Boardroom Energy analysis from World Bank, IRENA data