Pearls and Irritations

As one of the three largest fossil fuel-export nations globally, Australia’s economy is exceptionally exposed to the current massive energy disruption occurring in markets around the world. At the same time, massive opportunities exist for Australia to take advantage of the energy transition.

Australia could continue to ‘invest’ in yet more thermal coal and liquefied natural gas (LNG) capacity and build more energy infrastructure soon to be stranded (and continue to entirely ignore the harm to regional communities involved).

Alternatively, Australia could accept the world is already moving and hence that we too need to transition and pivot towards low-emission industries of the future.

Australia’s domestic economy makes up 1.3% of global carbon emissions, but when exported emissions (scope 3) are taken into account, the real economic exposure is three times this level.

Australia is the world’s largest exporter of LNG, having overtaken Qatar this year to reach 81 million tonnes per annum (Mtpa) (worth A$49bn) or a 23% global share. Australia is likewise the world’s largest exporter of coking coal (for steel production), exporting a forecast 195Mtpa (A$36bn) in 2019/20, a global trade share of 55%. And in thermal coal (for electricity generation), Australia is second only to Indonesia, with exports of 213Mtpa (A$21bn), putting our global traded share at 18%.

With Australia’s Office of the Chief Economist forecasting A$106bn of fossil fuel exports in 2019/20, the Australian economy is exceptionally leveraged to the implementation of global treaties like the Paris Agreement and any resulting carbon borders, as proposed by the European Union.

Given the historical importance of fossil fuel exports to the Australian economy, it is understandable but deplorable that the incumbent industry seeks to undermine climate change and delay action, entirely supported by  the Murdoch media (which controls 59% of all newspapers across Australia), but also with coal lobbyists in government. However, the climate denial strategy is fated to fail.

The global energy sector disruption is well underway – and accelerating.

Global financial markets are assessing the financial risks of climate change. Firms like the A$10 trillion asset manager BlackRock announced divestment from thermal coal last month, and while couched in ESG terms, the underpinning is the fading economics of coal. BlackRock joins over 116 globally significant financial banks and insurers already exiting coal, with new announcements occurring on average weekly. And our thesis is that this trend will accelerate, given financial institutions act like lemmings. Only this week the CEO of State Street, manager of A$5 trillion of passive funds, warned they would now act on firms and boards failing their fiduciary duty to manage the known financial risks of climate change.

Last year marked a decade low for U.S. coal use with just a 25% share of all electricity, half that of a decade earlier. The U.S. Energy Information Administration forecasts another 6 gigawatts (GW) of coal-fired power plant closures in 2020, and not a single new coal plant.

Meanwhile, U.S. investors will fund US$45bn or 32GW of new renewable energy infrastructure in 2020 alone. Jim Robo, Chief Executive Officer of NextEra Energy, forecasts entirely unsubsidised near-firm wind power will cost just US$20-30 per megawatt hour (MWh) by 2025, by far the lowest cost source of generation, and Robo argues coal use in the U.S. power sector will likely cease entirely by 2030 (an entirely economic perspective).

These accelerating trends towards renewables are starker in those markets long seen by lobbyists as coal’s saviour.

India is the second largest producer, consumer and importer of thermal coal globally. Yet domestically, renewable energy tariffs are well below Rs3/kilowatt hour (US$40/MWh) which is 20% below existing domestic coal-fired power plant costs (averaging Rs3.60/kWh), and nearly half the cost of a new imported coal- or LNG-fired power plants.

India’s stranded energy assets tell a story of misreading the global disruption. Newly commissioned coal-fired power plants are regularly trading at 60-80% below total investment cost, with India’s financial institutions facing US$40-60 billion in loan losses.

Adani’s Carmichael thermal coal mine is infamous in Australia for its stranded climate bomb in the Galilee Basin. Few might also be aware that Gautam Adani in January 2020 said the age of renewable energy has dawned faster than anticipated, vowing: “Our vision is to become the world’s largest solar power company by 2025 and the largest renewable power company by 2030.” The Indian stock market has endorsed this renewables strategy with Adani Green’s share price up more than 500% in the last year. Further, in a single tender, Adani won the contract to supply 8 gigawatts of new solar in India at just Rs2.92/kWh (which equates to a levelised cost of energy of below US$30/MWh).

Australia should embrace the opportunities the global energy disruption is unleashing.

A key component of Australia’s electricity sector transformation was approved by the Australian Energy Regulator in January 2020. The A$1.5bn 900km South Australia – New South Wales grid interconnector is expected to reduce electricity costs for consumers while enabling another A$6bn of variable renewable energy infrastructure projects, bringing much needed regional investment and employment. This grid expansion facilitates 5.3GW of new wind and solar projects at tariffs of A$40-50/MWh (US$30-35/MWh), half the prevailing A$93/MWh wholesale electricity price in the National Electricity Market in 2019. Even allowing for firming, new zero emissions supply can be delivered at below A$70/MWh, offering a-more-than 25% reduction.

This is an important step forward, and IEEFA argues that the Regulator’s move materially underestimates the economic benefits of a clear, considered transition of electricity markets over the coming decade.

Australia’s bushfires are wreaking havoc on communities and our environment, and extreme weather events globally are becoming more frequent. The economic costs of failing to act on climate are far higher than the cost of preparing for the inevitable, technology-driven disruption of the energy system. Transition planning is necessary so that communities, workers and economies are not left stranded and ill-prepared.

Renewable energy prices have fallen some 10% annually globally, and IEEFA expects this to continue over the coming decade. When we quote renewable energy tariffs of A$40-50/MWh or firmed electricity tariffs of below A$70/MWh, we ignore the inevitable ongoing technology-driven deflation that is accelerating the energy transition.

In contrast, the long decline of Australia’s manufacturing sector has been further hollowed out over the last decade by the doubling and tripling of electricity and gas prices respectively.

While Australia’s four aluminium smelters and other manufacturing giants lament the looming end of subsidised electricity, forward-looking analysts are documenting opportunities for a re-industrialisation of Australia by embracing the revenue-generating opportunities of new technologies to bridge the intermittency of zero emissions, low-cost but variable renewable energy. Demand response management could see Australia’s smelters both progressively decarbonise their business whilst being paid to make historically inflexible operations flexible. Likewise, the opportunity for Australian technology to have the global lead are already being seized in efforts by Calix Ltd to decarbonise cement and Tritium’s fast-charging electric vehicles.

One can only imagine the opportunities for Australian businesses when our government finally decides to invest in new energy and technology opportunities.

Climate change impacts are accelerating. Financial markets are accepting this economic norm, increasingly investing in clean industries of the future while divesting from historically important, but now fading, fossil fuel industries of the past.

As the Reserve Bank is loudly warning, transition planning is urgently needed to help manage the orderly exit of those businesses looking increasingly stranded.

We must seize the huge new opportunities emerging.

Tim Buckley is the Director, Energy Finance Studies, Australasia at IEEFA, the Institute for Energy Economics and Financial Analysis.

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