Speaker 1: This is Dana Perkins and you're listening to Switched on
Speaker 1: the BNAF podcast. Each week we bring on a different
Speaker 1: B and EF analyst to the show and we talk
Speaker 1: to them about a piece of research that they've written.
Speaker 1: And really, if you're anything like me, I hope this
Speaker 1: research helps you think about the things that might be
Speaker 1: in your peripheral vision, the stuff that you're not working
Speaker 1: on day to day, but to stay up to date
Speaker 1: on all of the different things that are happening in
Speaker 1: the transition now. It can be hard sometimes given that
Speaker 1: there's so much going on within different sectors and different
Speaker 1: parts of the world. And today we're going to dig
Speaker 1: a little bit deeper on a specific country. We're going
Speaker 1: to talk about Australia. The reason I'm really excited to
Speaker 1: talk about Australia is because oftentimes people think about it
Speaker 1: as a sandbox due to the size of the country
Speaker 1: and the nimbleness of the government. When they do something,
Speaker 1: they can move a little bit faster and the rest
Speaker 1: of the world can really learn from it. We also
Speaker 1: go to think about Australia and the role that they
Speaker 1: have historically played as a hydrocarbon exporting nation for things
Speaker 1: like coal, and increasingly now natural gas. But let's really
Speaker 1: think about the role that Australia can play as that sandbox,
Speaker 1: and let's think about the energy transition. They've announced that
Speaker 1: they intend to double renewable energy capacity by twenty thirty
Speaker 1: and the federal government has really underlined this aim by
Speaker 1: handing the clean energy sector the equivalent of one point
Speaker 1: two billion US dollars as a part of their federal budget.
Speaker 1: One of the things we're going to drill into in
Speaker 1: more detail will be solar because Australia's really been an
Speaker 1: adopter of this, both at the utility and residential level,
Speaker 1: and that has actually led to some negative power prices.
Speaker 1: So what does that do to the economics? Now. To
Speaker 1: tell us more about Australia and what's happening there is
Speaker 1: Bonif's head of Australia Research, Leonard Kwang. He's based out
Speaker 1: of our Sydney office and certainly knows a thing or
Speaker 1: two as he lives and breathes this. He's going to
Speaker 1: use a recent report that he wrote, which is about
Speaker 1: the first half of twenty twenty four and what is
Speaker 1: called our Australia Market Outlook. If you want to take
Speaker 1: a closer look at that market outlook and read the report.
Speaker 1: BNEF subscribers are going to be able to find it
Speaker 1: at bu go on the Bloomberg terminal or at BNF
Speaker 1: dot com. Make sure to subscribe to switched on wherever
Speaker 1: you get your podcasts, and give us a review to
Speaker 1: help other people discover the show. But right now, let's
Speaker 1: talk to Lenny about our outlook for Australia. Lenny, great
Speaker 1: to have you here today and thanks for joining the show.
Speaker 2: Dang, long time listener, first time call up, overall, big
Speaker 2: fan of your work and it's a pleasure to be here.
Speaker 1: And you're joining us from our Sydney office and we're
Speaker 1: here to talk about Australia and what is really a
Speaker 1: true energy transition story. I mean one where a country
Speaker 1: that has a lot of natural resources and is largely
Speaker 1: known as one of the world's exporters of things like
Speaker 1: coal is going through the transition as other parts of
Speaker 1: the world are, but actually in some respects at a
Speaker 1: faster pace depending upon the industry that we're looking at.
Speaker 1: So we're going to get into that today and talk
Speaker 1: about what that transition looks like in Australia. But can
Speaker 1: you set the baseline how should the world be thinking
Speaker 1: about Australia and well, essentially in their place where they're
Speaker 1: at in this transition.
Speaker 2: Absolutely so, I think it's important to give context to
Speaker 2: listeners who might be familiar with the idea of Australia
Speaker 2: but not with the country itself. We recognize we're a
Speaker 2: long way away from the rest of the world now.
Speaker 2: By some of the numbers, Australia has a relatively wealthy population,
Speaker 2: but an incredibly low number of people compared to its
Speaker 2: land mass. To give some relative figures, it is thirty
Speaker 2: seven times larger than the United Kingdom, but it has
Speaker 2: only about forty percent of its population. For our US listeners,
Speaker 2: Australia is about eighty percent of the land masks of
Speaker 2: the US, but only the population of Texas. So it
Speaker 2: has a lot of land that's sparsely populated, but it
Speaker 2: does have a lot of stuff in it. It has
Speaker 2: a lot of animals that can kill you, which I
Speaker 2: think a lot of people think about when they think
Speaker 2: of Australia, unless like the late Great Stevia, when there's
Speaker 2: not much you can do with dead animals to drive
Speaker 2: economic growth in a country.
Speaker 3: It also has a lot of very high quality.
Speaker 2: Wind and solar resources some of the best in the world,
Speaker 2: and as a result it can produce some of the
Speaker 2: least cost wind and solar generation. And while that is
Speaker 2: likely to play a role in its economic prosperity in
Speaker 2: the years ahead, today it has very little role in
Speaker 2: the domestic energy system and the economic story. But what
Speaker 2: Australia also has is an enormous bounty of natural resources. Really,
Speaker 2: any mineral or resource you can think of, Australia probably
Speaker 2: has somewhere in its borders. It has precious and rare
Speaker 2: earth metals, has a large amount of industrial metals exports
Speaker 2: copper and bulk side. It's the world's largest exporter of
Speaker 2: iron or It also has an enormous amount of battery
Speaker 2: and transition metals, an enormous amount of hydrocarbons like gas
Speaker 2: where it's vye with the US and guitar to be
Speaker 2: the world's largest exporter of LNG, and an enormous amount
Speaker 2: of coal.
Speaker 3: And it is the world's largest exporter of coal.
Speaker 2: Now, if you put some numbers about production to exports,
Speaker 2: about ninety one percent of all the black coal produced
Speaker 2: in Australia were sent off shore, and about the same
Speaker 2: time about seventy five percent of its natural gas extraction
Speaker 2: was destined Velini exports, and this was to countries like China, Japan,
Speaker 2: South Korea and other countries.
Speaker 3: Across the Asia Pacific region as well.
Speaker 2: And so as you might expect, these export industries, these extractions,
Speaker 2: these mining industries have played a very significant role in
Speaker 2: the country's economic story and have formed a very important
Speaker 2: part of the Australian sense of national identity and of
Speaker 2: its national politics. And of all these extraction industries, historically,
Speaker 2: at least in many parts of the country, coal was keen.
Speaker 2: To give you a particularly shining example of this, former
Speaker 2: Prime Minister Scott Morrison once got up in Federal Parliament
Speaker 2: holding a lump of coal in an attempt to scare
Speaker 2: the opposition. Now this sounds like it might be an
Speaker 2: anecdote for many decades ago, but this happened just back
Speaker 2: in twenty and seventeen, and this is a real example
Speaker 2: of the dynamics, the complicated politics and the relationships with
Speaker 2: coal and extraction industries that Australia has faced. Because of
Speaker 2: these challenges, for much of the past twenty years, Australia
Speaker 2: has struggled with its decarbonization trajectory, often flip flopping on policies, ambitions,
Speaker 2: and targets. Being famously the first country in the world
Speaker 2: to both introduce and remove a price on carbon, it
Speaker 2: has increased and decreased and removed and increased again renewable
Speaker 2: energy targets and aspirations. And while over recent years it
Speaker 2: feels like Australia is turning a corner on its decarbonization
Speaker 2: plans and becoming more paras aligned to the years ahead,
Speaker 2: it's expected that extraction industries and things like coal and
Speaker 2: gas will continue to play an important role in the
Speaker 2: economy of Australia for the foreseeable future.
Speaker 1: That was an incredible amount of information around numerous industries
Speaker 1: that Australia is in and why don't we start with
Speaker 1: the exporting part of the market, because really, when we
Speaker 1: talk about hydrocarbons, that is the starting point for a
Speaker 1: transition and the baseline with which we can really have
Speaker 1: that discussion about what is changing. And one of the
Speaker 1: things that Australia has actually had is headline in the
Speaker 1: news more recently has been around really a commitment to
Speaker 1: natural gas in saying that they intend to continue with
Speaker 1: natural gas through twenty fifty and I'd really like to
Speaker 1: better understand from your perspective where you think that really
Speaker 1: originates from, given that the transition is certainly happening. Is
Speaker 1: it more around the export revenues or the role that
Speaker 1: natural gas can play is an important source of flexible
Speaker 1: capacity for knowables or is there something else that maybe
Speaker 1: I'm not understanding regarding the commitment to natural gas in
Speaker 1: the long term.
Speaker 3: It's a great question.
Speaker 2: And let me give you some context of natural gas
Speaker 2: as an extraction and export industry for Australia to put
Speaker 2: it in some context. Now, amongst this stable of export
Speaker 2: commodities that Australia has through mining an extraction, natural gas
Speaker 2: is one of the most recent additions that has really
Speaker 2: just scaled up over the past decade really from about
Speaker 2: twenty and sixteen, so really quickly, Australia went from a
Speaker 2: very closed off self supplying market for all its gas demand,
Speaker 2: began to rapidly scale up its extraction, particularly of coal
Speaker 2: seam gas throughout many different states Queensland, Western Australia and
Speaker 2: now the Northern Territory as well, to become a global
Speaker 2: player in this export commodity. And due to that rapid
Speaker 2: change of pace, Australia has struggled to keep up with
Speaker 2: its longer term vision around what natural gas and other
Speaker 2: hydrocarbons might mean for its economic story, either domestically or
Speaker 2: from an export's perspective, and this becomes increasingly important when
Speaker 2: we've established valuable trading relationships with other nations both around
Speaker 2: the Asia Pacific region from China, Japan, South Korea, Taiwan
Speaker 2: and many others, as well as our visions of what
Speaker 2: Australia might transition to over the longer term in terms
Speaker 2: of exports as the world transitions to.
Speaker 3: A lower carbon future as well.
Speaker 2: And so I think right now, particularly within political circles
Speaker 2: across the country, they're not at the time they're looking
Speaker 2: to make enemies.
Speaker 3: They're not willing or looking to rule anything out. Even
Speaker 3: if we look.
Speaker 2: At commodities like thermal coal use for power generation far
Speaker 2: more carbon intensive in terms of its scope three impact
Speaker 2: on the world, we're sending it primarily to countries who
Speaker 2: have targeted low or no carbon ambitions of their own
Speaker 2: by twenty fifty or by twenty sixty, and that tells
Speaker 2: Australia its investment and export communities that we are at
Speaker 2: some point going to have to transition away from the
Speaker 2: status quo. There is some hope that we might find
Speaker 2: other economies to export these hydrocarbons to, particularly emerging economies.
Speaker 2: They're rapidly growing appetite for energy, although that comes hard
Speaker 2: up against the need for the world to decrease its
Speaker 2: carbon emissions in line with the net zero future, to
Speaker 2: stay in a well below two degrees scenario. And so
Speaker 2: the government, who is in charge of directing policy, signaling
Speaker 2: to investors, signaling to industry what the future might hold
Speaker 2: is as of yet really welcoming all comers, and so
Speaker 2: we might hold views that the future role of gas
Speaker 2: isn't quite as rosy as the Australian government is currently suggesting,
Speaker 2: and some of the newer industries it's looking at, like
Speaker 2: transition metals, potentially hydrogen and hydrogen drived clean products play
Speaker 2: a more important role, although this transition from traditional to
Speaker 2: new has to be managed and might not be as
Speaker 2: smooth as the government is hoping.
Speaker 1: So there's certainly a pivot there for Australia in terms
Speaker 1: of the fact that there just really are an abundance
Speaker 1: of natural resources to call upon. So you're even saying,
Speaker 1: you know, natural gas has a future, but it may
Speaker 1: not be quite as long as predicted at this point
Speaker 1: in time. But then there are these transition metals that
Speaker 1: we see or battery metals that we see as a
Speaker 1: part of you know, the electric vehicle and stationary storage
Speaker 1: supply chain. But then how about the thing that they
Speaker 1: are known for being the largest exporter of coal. Now
Speaker 1: that is actually huge because you see coal retirements happening
Speaker 1: in developed countries all over the world, saying that we
Speaker 1: are committed to bringing these down as a really kind
Speaker 1: of quick way to reduce emissions from the power sector.
Speaker 1: When it comes to coal, what is the state of
Speaker 1: play for Australia. Are they seeing fewer exports? Is that declining?
Speaker 1: Have we reached peak demand? And then after we talk
Speaker 1: about the exporting element, I then want to come to
Speaker 1: domestically are they using it? Is it largely exported but
Speaker 1: internally being used only sparingly in that transition to renewables
Speaker 1: is happening. Can you talk a little bit about the
Speaker 1: role of coal both out of the country and in
Speaker 1: the country.
Speaker 2: So I think it's important to break coal out into
Speaker 2: two major classes, if you will. Thermal coal which is
Speaker 2: used for power generation, and that's for the production of electricity,
Speaker 2: which you're talking about in terms of major uses, being
Speaker 2: carbon intensive but important for electricity supply in global markets.
Speaker 2: The other is metallurgical coal coal which is often used
Speaker 2: in metal processes, particularly for steel manufacturing.
Speaker 3: Now we've seen some very interesting trade.
Speaker 2: Dynamics unfold for Australia over recent years, particularly more volatile
Speaker 2: on the end of thermal coal. It was only a
Speaker 2: couple of years ago where famously China banned or thermal
Speaker 2: coal imports for the country, although at the same time
Speaker 2: they did continue to allow metallurgical coal. And we've seen
Speaker 2: very volatile global markets for coal prices, in part driven
Speaker 2: by the energy crisis as much as invasion of Ukraine,
Speaker 2: in part due to waxing and waning supply and demand
Speaker 2: dynamics across the region. Now, if we look into the future,
Speaker 2: what we see in our longer term analysis here at
Speaker 2: BNF is that the world is going to have to
Speaker 2: dramatically reduce its reliance on thermal coal, in particular in
Speaker 2: order to stay on a low carbon trajectory to stay
Speaker 2: within the Paris targets. If we look within the Australian market,
Speaker 2: the story is similar, if slightly more advanced. Now, given
Speaker 2: what I've said and what we've talked about the role
Speaker 2: of coal being a superpower of economic force in Australia
Speaker 2: in years gone by, it probably wouldn't surprise you to
Speaker 2: hear that coal generation made up the backbone of power
Speaker 2: supply in the country's electricity system. But now Australia's once
Speaker 2: mighty coal fleet is facing structural decline, and the question
Speaker 2: is increasingly when, not if it will exit the market completely. Now,
Speaker 2: to put some numbers to that, about fifteen years ago
Speaker 2: coal accounted for about seventy five percent of Australia's electricity generation,
Speaker 2: and today it accounts for roughly forty seven percent. Now,
Speaker 2: coal generators are a bit like old car. As they
Speaker 2: get older, it can get a little bit less efficient.
Speaker 2: It might have a harder time speeding up and slowing down,
Speaker 2: and they might start to break down more often, becoming
Speaker 2: less reliable and more costly to repair, maintain, and retrofit
Speaker 2: to keep them running efficiently. And when you take into
Speaker 2: account that many of Australia's coal assets were never built
Speaker 2: to be particularly flexible or efficient to begin with, you
Speaker 2: can begin to see some of the challenges that Australia
Speaker 2: might face when you realize that Australia hasn't built a
Speaker 2: new coal generator in its domestic market for over ten
Speaker 2: years now, but we continue to send coal offshore to
Speaker 2: supply others who are building you coal generation. But the
Speaker 2: domestic fleet is of now about thirty one years old
Speaker 2: on average, and most coal plants around the world are
Speaker 2: built with an expected operational life of between forty to
Speaker 2: fifty years, and so if you run the numbers on
Speaker 2: the age of these assets, by twenty thirty, you would
Speaker 2: expect about twenty three percent of the fleet twiggs of
Speaker 2: the market just due to aging out, and by twenty
Speaker 2: forty this would be about fifty two percent of the
Speaker 2: remaining assets.
Speaker 3: Now.
Speaker 2: Over the past decade, Australia has seen a rapid rise
Speaker 2: in investment and supply coming from variable newbal energy sources
Speaker 2: and this has had a pretty big impact on the
Speaker 2: coal fleet. Again, going back fifteen years to two thousand
Speaker 2: and nine, Australia had about twenty nine gigawatts of operating
Speaker 2: coal capacity. This was running with a capacity factor a
Speaker 2: utilization of about seventy three percent. Today, coal capacities down
Speaker 2: to about twenty three gigawatts and it's operating with the
Speaker 2: utilization rate closer to sixty percent, and it is really
Speaker 2: not ideal for capacity designed to operate as a base
Speaker 2: load where you want higher utilization to disperse your returns.
Speaker 3: Over higher capex and running costs.
Speaker 2: So we can see coal is beginning to be squeezed
Speaker 2: out now. Following the last federal election in twenty twenty two,
Speaker 2: the newly elected Labor government came in with a raft
Speaker 2: of new commitments to decarbonization, including a commitment to reach
Speaker 2: a forty three percent missions reduction on two thousand and
Speaker 2: five levels by twenty thirty, as well as reaching eighty
Speaker 2: two percent renewable energy supply in the domestic market over
Speaker 2: the next six years. Some other commitments like reaching eighty
Speaker 2: nine percent of all new light duty vehicles being electrified
Speaker 2: by the year twenty thirty as well. And overall you
Speaker 2: can see that these policy ambitions and increasingly the policy
Speaker 2: mechanisms that support them, are likely to have a dramatic
Speaker 2: impact on the remaining.
Speaker 3: Coll asets in the country. Now.
Speaker 2: Last year we did a piece of work looking asset
Speaker 2: by asset at both the policy drivers, the underlying economics
Speaker 2: the assets life and operational health, along with various corporate,
Speaker 2: government and owner commitments for closure, and we found that
Speaker 2: by twenty thirty five, about eighty three percent of Australia's
Speaker 2: remaining coal assets are likely to exit the market, which
Speaker 2: is a very dramatic fall from both where we are
Speaker 2: today and certainly from where we were just a decade ago.
Speaker 1: So, Lenny, you just mentioned how coal is getting squeezed
Speaker 1: out by renewable So let's then do that pivot to
Speaker 1: this part of the transition. What's happening. How large of
Speaker 1: a role do renewables play in the national electricity market
Speaker 1: in Australia's mix, So the.
Speaker 2: Role of renewables is rapidly increasing, and thank you for
Speaker 2: mentioning the national tricity market. That the initiation should probably
Speaker 2: give you a very quick geography lesson. So Australia's almost
Speaker 2: land masks can be broken up into several different grids.
Speaker 2: By far, the largest, representing about eighty five percent of
Speaker 2: electricity demand, sits on the east to southeast coast of
Speaker 2: the country and covers most of the major cities and townships.
Speaker 2: There are a series of smaller grids throughout the rest
Speaker 2: of the countries and are being for the larger towns
Speaker 2: and are being for mining sides, but really a lot
Speaker 2: of the action in the country does happen within the
Speaker 2: national electricity market. But if you zoom out and look
Speaker 2: at what role of what impact renewables are having across
Speaker 2: the country, it can be useful to put some numbers
Speaker 2: to that as well. Back in two thousand and nine,
Speaker 2: renewable energy accounted for about eight percent of total electricity
Speaker 2: generation in Australia. Today this is closer to thirty four
Speaker 2: percent of the market. Now, this is a pretty significant
Speaker 2: amount of growth, even if it's over quite an extended
Speaker 2: period of time. But this is an annual figure and
Speaker 2: if we drill into it, we can see some pretty
Speaker 2: extraordinary incidences within the market being caused by renewable energy.
Speaker 3: If you look at the.
Speaker 2: Fourth quarter of last year, across that East Coast market,
Speaker 2: on average in the middle of the day, wind and
Speaker 2: solar combined accounted for about sixty three percent of electricity generation.
Speaker 2: And again if we drill and even further, there were
Speaker 2: particular days in certain hours where wind and solar accounted
Speaker 2: for over one hundred percent of electricity demand in certain
Speaker 2: regions of the grid, in this case in South Australia,
Speaker 2: and there were even still hours of the day when
Speaker 2: behind the meter solar capacity alone was supplying more demand
Speaker 2: than the state had at that point in time. So
Speaker 2: to spell that out, consumers in South Australia have been
Speaker 2: producing more power at certain hours of the year than
Speaker 2: the whole state is consuming in terms of electricity. It's
Speaker 2: pretty remarkable. Now, other firms of generation were operating at
Speaker 2: that same time, the interconnectors to other states were able
Speaker 2: to move that excess supply into other regions. But just
Speaker 2: from those figures alone, you can see that the impact
Speaker 2: that wind and particularly solar is having on the market.
Speaker 1: The question what is it doing to prices?
Speaker 2: So this is really where we're seeing Australia becoming an
Speaker 2: interesting case study in the impact of high amounts of
Speaker 2: renewable energy generation. So, on one hand, as I mentioned,
Speaker 2: we have this immovable object, a fleet of baseload coal
Speaker 2: assets which were inflexible and getting more inflexible as they
Speaker 2: get older. They don't or can't ramp down when renewable
Speaker 2: energy generation are ramping up, and so they might be
Speaker 2: tempted to bid into the market negative pricing, that is,
Speaker 2: paying to stay online in order to not further damage
Speaker 2: their assets or to be available when prices might increase
Speaker 2: later on.
Speaker 3: And on the other side, we have this unstoppable force.
Speaker 2: This wave, a tsunami of renewable energy generation, particularly in
Speaker 2: the middle of the day and with rooftop solar and
Speaker 2: not responding to price signals from the wholesale market.
Speaker 3: These two forces are colliding now.
Speaker 2: These renewable energy resources are hollowing out this midday demand period.
Speaker 2: We've talked about a duck curve. This is beyond that.
Speaker 2: It's beyond a swan curve. It's into a Bronzsaurus curve
Speaker 2: or any other form of long neck dinosaur that might
Speaker 2: be your favorite. And the impact on electricity prices is remarkable.
Speaker 2: Across all of last year, in that East Coast system,
Speaker 2: prices and the spot market were below zero fourteen percent
Speaker 2: of the time. This is a seventy four percent increase
Speaker 2: from the year prior. In the fourth court of last year,
Speaker 2: in South Australia, spot price and electricity market were below
Speaker 2: zero thirty two percent of the time. And this is
Speaker 2: of course having a massive impact on the value of
Speaker 2: the rest of the generation fleet, in particular self cannibalizing
Speaker 2: effect on other forms of renewable energy generation there have
Speaker 2: been multiple months now across the country where the value
Speaker 2: of large scale solar generation is below zero. To give
Speaker 2: you a more clear example, in December of twenty twenty two,
Speaker 2: in South Australia, utility solar generators paid an average of
Speaker 2: twelve Australian dollars per mega what hour for the privilege
Speaker 2: of generating. That's how low and how frequently below zero
Speaker 2: wholesale prices were. And if we look to the future
Speaker 2: as the government races towards its ambitious renewable energy targets
Speaker 2: in years twenty three, if we can't see this bulk
Speaker 2: of coal capacity getting out of the way fast enough,
Speaker 2: and if we can't manage to shift demand either through
Speaker 2: flexible price signals or through energy storage, we would expect
Speaker 2: this trend of negative prices to only get worse.
Speaker 1: So I want to better understand how that market is
Speaker 1: structured because you have varying degrees displayed around the world,
Speaker 1: but one that is often talked about as being very
Speaker 1: liberal is urcut in Texas. That's the Texas grid. So
Speaker 1: I want to know how similar is the national electricity market,
Speaker 1: given that this is eighty percent of the country's demand,
Speaker 1: How similar is that to air cut and is installing
Speaker 1: this capacity really just down to whether or not companies
Speaker 1: want to do it, And they're building this network of
Speaker 1: the future, and we're hoping that demand will actually end
Speaker 1: up kind of evening out in the prices, will level
Speaker 1: out with natural market forces, or is it more regulated
Speaker 1: and is this very intentional and intentional push to actually
Speaker 1: get more renewables online.
Speaker 3: So it's a bit of both and a bit of
Speaker 3: all the above really.
Speaker 2: Now to explain the Australian market structure again, particularly the
Speaker 2: national electricity market, and I'm just going to call it
Speaker 2: in then for now, it's a very liberalized, very open market.
Speaker 2: Now in terms of market players, utilities in our system
Speaker 2: can operate power generation capacity and they can hold a
Speaker 2: retail a demand book, so you can create electricity and
Speaker 2: you can sell electricity in the middle within the networks.
Speaker 2: These are largely natural monopolies and they're held by separate entities,
Speaker 2: so distribution companies or transmission companies who build, maintain and
Speaker 2: operate the polls and wires that move those electrons around. Now,
Speaker 2: what's been driving this renewable energy capacity in the years
Speaker 2: gone by has.
Speaker 3: Been a mix of improving economics.
Speaker 2: For years, building new wind and solar has been cheaper
Speaker 2: than building any other form of new electricity generation in
Speaker 2: the country, and with sawing fuel prices particularly over recent years,
Speaker 2: building new wind and solar has been cheaper at times
Speaker 2: then operating the existing coal and gas assets in the market.
Speaker 2: It's also been driven by government policy to some extent.
Speaker 2: This has been done at the federal level, but also
Speaker 2: state and territory governments playing a very important role in
Speaker 2: driving up renewable energy generation in their home grids, and
Speaker 2: corporates too have a role to play. We've seen quite
Speaker 2: a rise of demand from corporate entities and utilities looking
Speaker 2: to on sell clean power to their own consumers, who
Speaker 2: are all contributing to this rise in recent years of
Speaker 2: renewable energy supply.
Speaker 1: So, if I'm understanding things correctly, Australia really has times
Speaker 1: of day where negative prices are a real problem from
Speaker 1: market design standpoint and also creating profitability for some of
Speaker 1: the companies that are actually operating in the energy system.
Speaker 1: So can you talk to me a little bit about
Speaker 1: where the opportunities lie. You know, what is it that
Speaker 1: companies are actually looking to invest in in Australia or
Speaker 1: is this really causing a bit of a standstill.
Speaker 2: I think one of the things we've seen in Australia recently,
Speaker 2: particularly driven in by the rise in volatility and the
Speaker 2: increase in negative pricing events, is a real reassessment of
Speaker 2: what investment opportunities look like across the energy system. Now
Speaker 2: in some of the causes of this volatility the rooftop
Speaker 2: solar market, which again respond to very different price signals
Speaker 2: from other large scale generating assets.
Speaker 3: The impact of negative pricing has.
Speaker 2: Eroded some of the value of these investments, but they
Speaker 2: still remain fairly attractive for the typical Australian household, although
Speaker 2: to a lesser extent to small businesses and industrial consumers
Speaker 2: as well. Now it's important to highlight here the history.
Speaker 2: Australia is one of the world's most decentralized markets and
Speaker 2: if we look at the numbers and noscile, systems has
Speaker 2: been sold around the country to now cover one in
Speaker 2: three households, accounting for about twenty three gigawatts of rooftop
Speaker 2: solar capacity. And with these negative pricings that we have
Speaker 2: seen throughout the wholesale market, the value of electricity generated
Speaker 2: from these systems has fallen both in terms of the
Speaker 2: electricity fed into the grid through feed in tariffs, which
Speaker 2: Australia doesn't really have outside of a few regions of
Speaker 2: the country any mandatory feed in tariffs. Most of this
Speaker 2: is up to the discretion of the local utility to
Speaker 2: decide and value and potentially attract additional consumers through higher
Speaker 2: solar feed and tariffs under certain rate designs. But this
Speaker 2: erosion of midday prices has also caused an introduction of
Speaker 2: new tariff design models for consumers, incentivizing shifting demand towards
Speaker 2: the middle of the day when electricity prices are at
Speaker 2: their lowest, and to reduce consumption in those afternoon periods
Speaker 2: when solar ramps down and more expensive forms of generation
Speaker 2: have to come online to keep the system in balance. Now,
Speaker 2: there have been some teething problems with deploying these cost
Speaker 2: deflective tariffs across the country. They're much more complicated than
Speaker 2: the traditional flat tariff design and in some cases can
Speaker 2: decentivize some of the cleaner technologies like rooftop solar that
Speaker 2: customers across the country really like to see both to
Speaker 2: manage electricity bills but also feel like they're having a
Speaker 2: positive impact on their own carbon footprint, and even though
Speaker 2: across the world we have seen falling solar module prices,
Speaker 2: we haven't necessarily seen that trickle through into the residential
Speaker 2: or small scale market In Australia. A lot of that
Speaker 2: has to do with managing the inventory of price fluctuation
Speaker 2: of the recent years. It has to do with rolling
Speaker 2: off of upfront subsidy schemes and also a softening in
Speaker 2: the Australian dollar. But that doesn't mean Australia is installing
Speaker 2: less behind the meter solar generation. Last year was a
Speaker 2: near record year for new installations in capacity terms, with
Speaker 2: an estimated three point two gigawa's constructed. Now a lot
Speaker 2: of that had to do with the energy crisis across
Speaker 2: the world and here in Australia in twenty twenty two.
Speaker 2: A direct consequence of that was rising retail tariffs, which
Speaker 2: went up by about forty percent by July of twenty
Speaker 2: twenty three, and as customers rolled on too larger bills,
Speaker 2: they turned to solar in larger numbers in order to
Speaker 2: reduce their consumption from the grid while retail electricity prices
Speaker 2: were high. And the other factor is that Australians have
Speaker 2: a love of these rooftop solar systems and they have
Speaker 2: a comfort of playing manywhere between five to seven thousand
Speaker 2: Australian dollars to install one, and as a consequence, any
Speaker 2: cost reductions from modules or through subsidies results in larger
Speaker 2: and larger systems being built, and by our numbers, towards
Speaker 2: the end of last year, these were inching up closer
Speaker 2: to nine kilowatts of solar per system in stall, which
Speaker 2: compared to most of the rest of the world is
Speaker 2: incredibly large.
Speaker 3: And a result of these forces.
Speaker 2: Looking forward, we think the march of rooftop solar across
Speaker 2: Australia will continue. We believe installation rates have peaked back
Speaker 2: in twenty twenty one at over three point three gigawatts
Speaker 2: and these could fold to about one point six gigawats
Speaker 2: vnual installations by twenty thirty maybe about one point nine
Speaker 2: gigawats by twenty thirty five if we see an increase
Speaker 2: in commercial and industrial systems. But the cumulative impact of
Speaker 2: this area of technology in the market could represent about
Speaker 2: forty five gigawatts of behind the meita capacity that responds
Speaker 2: to very different price signals than generation assets connected to
Speaker 2: the wholesale market. Which these other forms of either balancing
Speaker 2: technologies or supportive infrastructure are going to have to work around.
Speaker 1: You just noted that price signals are really used for
Speaker 1: being used to manage demand and to spread it out
Speaker 1: to the times when prices are lowest. But the other
Speaker 1: way to tackle this is actually through storage. So I
Speaker 1: want to better understand how Australia is approaching the concept
Speaker 1: of storage, whether at the residential level, which pairs very
Speaker 1: nicely with residential solar, or at the utility level when
Speaker 1: we're thinking about battery infrastructure being used to really bring
Speaker 1: down those peaks and to spread that, you know, solar
Speaker 1: energy throughout the times when the sun isn't shining.
Speaker 2: So Australia has a really interesting history within its storage
Speaker 2: markets if you look at the utility scale of things.
Speaker 2: It all kicked off back in twenty seventeen following a
Speaker 2: Twitter bet between Elon Musk and the Australian tech billionaire,
Speaker 2: And unlike most Twitter bets, this one actually ended in
Speaker 2: a reasonably positive result. I mean that was the construction
Speaker 2: of the one hundred and fifty megawatt Hornsdale Power Reserve,
Speaker 2: which at that time was by far the biggest litimon
Speaker 2: battery operating anywhere in the world, and in the years
Speaker 2: that follows, batteries were continued to be built, pushed on
Speaker 2: by governments, pushed on by independent power producers, pushed on
Speaker 2: by network companies and utilities as well. Today Australia has
Speaker 2: about one point for gigawatts of utility scale storage operating
Speaker 2: across the country and this is particularly heavily weighted towards
Speaker 2: li imaan batteries. State governments have continued to try to
Speaker 2: outdo each other, building bigger and bigger systems and this
Speaker 2: has peaked right now with the Acacia Energy Warata super battery,
Speaker 2: which is eight hundred and fifty megawatts and is currently
Speaker 2: under construction. Across the rest of the fleet under construction,
Speaker 2: we have about four point four gigawatts of battery capacity
Speaker 2: and this is expected to come online in the months
Speaker 2: to years ahead. But the rapid increase in battery capacity
Speaker 2: has had a really interesting result on the dynamics of
Speaker 2: the power system and the rolls of these storage projects.
Speaker 2: Years ago, frequency control and auxiliary services, which are the
Speaker 2: services required to stabilize the power group. This is offering
Speaker 2: energy over one second or four seconds, sixty seconds or
Speaker 2: even five minutes and not participating directly in the wholesale market,
Speaker 2: but these frequency control and auxiliary services represented the vast
Speaker 2: majority of market revenues for batteries. Es are quite shallow
Speaker 2: and it doesn't quite take a lot of capacity to
Speaker 2: begin to flood these markets, and by twenty twenty three,
Speaker 2: on the back of the energy crisis, arbitrage that is,
Speaker 2: buying when prices are low and selling electricity when prices
Speaker 2: are high became the majority form of market revenues for
Speaker 2: most batteries operating around the country. And if we expect
Speaker 2: that negative pricing events are likely to become more common
Speaker 2: as Australia races to meet its renewable energy targets, batteries
Speaker 2: are going to increasingly play an important role in moderating
Speaker 2: these fluctuations in wholesale power prices. If we look to
Speaker 2: the future, we continue to see batteries playing a bigger
Speaker 2: and bigger role in the energy system. By our forecast
Speaker 2: by twenty thirty in additional seven point four gigawats of
Speaker 2: batteries could be constructed up to fifteen point three gigawats
Speaker 2: by twenty thirty five, resulting in a total of about
Speaker 2: twenty one point three gigawatts. Now increasingly these batteries aren't
Speaker 2: just getting bigger in terms of megawatts of capacity, diggining
Speaker 2: bigger in duration of storage as well. When we look
Speaker 2: at the operations of these we can see shorter durations. Batteries,
Speaker 2: whether it's five minutes fifteen minutes, can play a very
Speaker 2: important role in these smaller balancing services, particularly managing frequency
Speaker 2: in these power systems. But when you begin to shift
Speaker 2: larger amounts of energy in response to fluctuating prices, whether
Speaker 2: they're negative or near zero or incredibly high, you need
Speaker 2: longer and longer durations as well. And across the country
Speaker 2: governments have seen this and are responding in kind. Many
Speaker 2: of the new policies coming forward to support storage across
Speaker 2: Australia and now focusing.
Speaker 3: On eight hours or more of duration, and.
Speaker 2: This would include different types of technologies, whether it's pumped
Speaker 2: hydro compressed air energy storage or other forms of electrochemical batteries.
Speaker 2: That can play a role in this arbitrage is energy
Speaker 2: shifting dynamics in the market now, despite the impact that
Speaker 2: residential solar has had on causing these negative pricing events
Speaker 2: and the need to begin to shift this energy around
Speaker 2: to have a more efficient energy system. Australia has a
Speaker 2: relatively small residential battery and this is really a artifact
Speaker 2: of its policy dynamics. Australia has had some small local
Speaker 2: schemes to support the uptake of battery storage technologies on
Speaker 2: behind the meta level that we've never really had a
Speaker 2: robust national policy, certainly none that would reduce the upfront
Speaker 2: cost of these batteries like we've seen in the Australian
Speaker 2: rooftop solar market, and as a consequence, we do see
Speaker 2: continued growth, but it is significantly further behind compared to
Speaker 2: rooftop solar adoption. Now, some of this also has to
Speaker 2: do with the increased complications of installing and selling solar
Speaker 2: systems to consumers. Australia has a hyper competitive residential solar market,
Speaker 2: with many installers often operating within fairly small business operations,
Speaker 2: and understanding how to economically model pitch to install a
Speaker 2: solar system can be more challenging. But if you look
Speaker 2: in the years ahead, by twenty thirty we expect residential
Speaker 2: installations to reach about two point one gig what hours
Speaker 2: per annum, increasing to about two point nine by the
Speaker 2: year twenty thirty five. Which will mean humulatively, it will
Speaker 2: play a greater and greater role in beginning to shift
Speaker 2: some of this excess supply of electricity from the middle
Speaker 2: of the day to other periods where it's more valuable.
Speaker 1: So behind the meter storage hasn't quite gotten the same
Speaker 1: adoption that residential solar has up until this point, perhaps
Speaker 1: due to a lack of policy incentives as you outlined,
Speaker 1: but it could potentially gain speed as the economics really
Speaker 1: do end up playing into how people make decisions and
Speaker 1: whether or not they find it to be useful. So
Speaker 1: another thing that actually complements residential solar quite well are
Speaker 1: electric vehicles. So it's a stability to not only be
Speaker 1: your own energy generator, but also to be your own
Speaker 1: generator for the fuel that goes into your car. And
Speaker 1: what I want to know is have electric vehicles really
Speaker 1: had a positive uptake in Australia as well, and is
Speaker 1: that kind of come along with the residential solar boom
Speaker 1: or has it been separate.
Speaker 2: So it's really been quite separate for a whole host
Speaker 2: of different reasons. But to lay it out, Australia is
Speaker 2: a laggart in the adoption of electric vehicles compared to
Speaker 2: many of its peers. This is largely due to the
Speaker 2: dynamics of policy and supply.
Speaker 3: It's not really on demand.
Speaker 2: As I mentioned earlier, Australia is quite a wealthy country
Speaker 2: despite its relatively small population. Households have quite a lot
Speaker 2: of disposable income, and if we look at the data
Speaker 2: of purchasing internal combustion engines, have quite a high appetite
Speaker 2: for very large vehicles, often at quite high prices. But
Speaker 2: what Australia doesn't have is an automotive industry of its own.
Speaker 2: Its last car manufacturing plant closed sometime in twenty seventeen,
Speaker 2: and for years many areas of politics and policy have
Speaker 2: seen any move to support the increase or adoption of
Speaker 2: electric vehicles simply being as a cost on the Australian
Speaker 2: consumer without a broader economic benefit to a manufacturing base.
Speaker 2: That's the consequence of a lack of policy. Has meant
Speaker 2: that global automotive manufacturers, with a limitive number of evs
Speaker 2: and their portfolios have simply chosen to prioritize sending those
Speaker 2: lower missions vehicles to other markets that have more onerous
Speaker 2: or looming decarbonization targets on their transport fleets.
Speaker 1: And what sort of vehicles would I see on the ground.
Speaker 1: Are Australians very keen on SUVs or is it more stowns.
Speaker 2: Australians have an increasing love of SUVs, both in the
Speaker 2: moderately priced range in the local market, which is north
Speaker 2: of forty thousand Australian dollars up into the excess of
Speaker 2: hundreds of thousands. But Australias have a particular love of
Speaker 2: utes as we would call them in the local market,
Speaker 2: or pickup trucks as you would call them offshore, and
Speaker 2: this has been a problem for adoption as well. While
Speaker 2: we are increasingly seeing electrified SUVs and some limited range
Speaker 2: of pickup trucks that come with a battery and a plug,
Speaker 2: there have been limited models available historically and very limited
Speaker 2: supply available to Australian consumers.
Speaker 3: This is beginning to change.
Speaker 2: The Australian government has set itself an ambitious target of
Speaker 2: decarbonators in the transport sector on its transition to a
Speaker 2: low carbon economy and to drive the update of EVS.
Speaker 2: It's looking to introduce a new policy, the New V
Speaker 2: Vehicle Efficiency Standard, which will be the primary driver of
Speaker 2: EVS to.
Speaker 3: The year twenty thirty.
Speaker 2: It's a crediting scheme that sits across automotive manufacturers, benefiting
Speaker 2: those that sow a portfolio of low missions vehicles and
Speaker 2: potentially penalizing those that sell carbon intensive cars into the market.
Speaker 2: And when we've crunched what the policy suggests it might be,
Speaker 2: we've calculated that light duty vehicles could be sixty five
Speaker 2: percent electric by the year twenty thirty, which is a
Speaker 2: pretty dramatic uptake from where the market is today. And
Speaker 2: while we might see growth in the policy environment which
Speaker 2: could be introduced in a few months time, it doesn't
Speaker 2: mean the transition will be easy.
Speaker 3: Barriers to deployment still remain.
Speaker 2: A lack of model availability for right hand drive markets
Speaker 2: in the types and cast segments that Australian consumers prefer,
Speaker 2: as well as an increasing concern about of lack of
Speaker 2: action on building out the charging infrastructure a very large,
Speaker 2: very spread out country like Australia would need to see
Speaker 2: for consumers to feel comfortable to transition over to electric vehicle.
Speaker 1: So I want to now go back to where we started,
Speaker 1: which is this fun mental premise of Australia natural resources,
Speaker 1: exporting them around the world, and one form of power
Speaker 1: that is going to be very useful for the hard
Speaker 1: to abate sectors or could be very useful for the
Speaker 1: hard debate sectors. Is hydrogen Australia has really, you know,
Speaker 1: over the past few years, has been positioned as a
Speaker 1: potential exporter of hydrogen and thinking of this idea of
Speaker 1: generating it in Australia and potentially shipping it around the world.
Speaker 1: Is that still actively being discussed, especially now that the
Speaker 1: US has taken such an interest in hydrogen production through
Speaker 1: the Inflation Reduction Act.
Speaker 2: It absolutely is, although I find right now the conversation
Speaker 2: has moderated to some extent now Australia still has said
Speaker 2: its cites on becoming a hydrogen exporting superpower to the
Speaker 2: world and establishing its role in the global energy transition,
Speaker 2: particularly as concerns around its current suite of export commodities
Speaker 2: begins to grow. The abundance of land the high quality
Speaker 2: nature of wind and solar resources means that Australia is
Speaker 2: well positioned for the production of low cost hydrae in
Speaker 2: the years ahead. It has additional advantages in its position
Speaker 2: in the Asia Pacific region, with many of its existing
Speaker 2: trading relationships being with countries who might have energy security
Speaker 2: concerns of their own, particularly as they look to their
Speaker 2: decarbonization targets by twenty thirty or even by twenty fifty,
Speaker 2: and many companies are beginning to capitalize on this opportunity
Speaker 2: or their perception of it, particular example being Forteskew Future
Speaker 2: Industries and the Fortskew Metals Group, who have high pline
Speaker 2: of proposed projects about twenty gigwats of electoralizer capacity and
Speaker 2: have recently opened a two gigawatt proton exchange membrane electoralizer
Speaker 2: manufacturing facility in Queensland in Australia. Now, on aggregate, if
Speaker 2: we look across the country, Australia has about one hundred
Speaker 2: and twenty six gigawatts of proposed electoralizer opacity to produce
Speaker 2: green hydrogen, which is an enormous amount and it would
Speaker 2: produce somewhere in the ballpark of about thirteen million tons
Speaker 2: of green hydrogen per year, far more than the Australian
Speaker 2: economy domestically could ever hope to can and this is
Speaker 2: really because of this export opportunity. Now, how that will
Speaker 2: manifest is where the problems really begin. The challenges, the costs,
Speaker 2: the infrastructure required to send liquid hydrogen or hydrogen derivatives
Speaker 2: offshore could be a challenge, and the economics of their
Speaker 2: use case in these markets is still being examined. We've
Speaker 2: seen a lot of interest from markets like Japan, South
Speaker 2: Korea and even increasingly Taiwan of the role of Australian
Speaker 2: produced green ammonia to be co fired in their existing
Speaker 2: coal assets to reduce their carbon emissions. But increasingly Australia
Speaker 2: is looking at greener commodities that could be produced with
Speaker 2: a hydrogen it makes locally with an abundance of iron
Speaker 2: or in the local market. We're beginning to investigate whether
Speaker 2: green iron or green steel production could play an important
Speaker 2: role as an export industry within our existing trading relationships
Speaker 2: more broadly across the Asia Pacific region, and the government
Speaker 2: is really aware of this still. When we run the
Speaker 2: numbers on promised support, we can account for about forty
Speaker 2: three billion Australian dollars of earmarked funding a hydrogen or
Speaker 2: hydrogen related industries or infrastructure, and a flagship program within
Speaker 2: that is the two billion Australian dollar Hydrogen Headstart program,
Speaker 2: and this looks to bridge the gap between the cost
Speaker 2: of supply and the willingness to buy hydrogen from an
Speaker 2: export perspective, to support over one gigawatt of electorallyzer capacity
Speaker 2: by the year twenty thirty. So there still is a
Speaker 2: lot of conversation. Some of the hype may have dried
Speaker 2: out over recent years, but the conversation on exactly what
Speaker 2: the opportunities are I think is getting more sensible and
Speaker 2: in some cases more serious.
Speaker 1: So within the power system, if Australia is considered to
Speaker 1: be in some respects this Postcard from the future because
Speaker 1: of the regulatory environment and just the dynamic nature of
Speaker 1: the way Australia's power system works, what does that tell
Speaker 1: us about the future of the energy transition.
Speaker 2: So one of the things I think we've really learned
Speaker 2: in this Postcard from the Future is that very often
Speaker 2: energy setne systems, whether it's the infrastructure, policy, environment, the regulation,
Speaker 2: or the perception of investment opportunity, have been built around
Speaker 2: the idea of older technologies and older ways of doing business,
Speaker 2: and that renewable energy, decarbonizing the technologies and accelerating the
Speaker 2: deployment to a low carbon economy can be very disruptive
Speaker 2: to their core. Whether that's around the deployment of physical infrastructure,
Speaker 2: such as grids, poles, and wires to move electrons around,
Speaker 2: whether that's the regulatory environment that creates price formations in
Speaker 2: a wholesale power system, whether that's the way we view
Speaker 2: flexible balancing services and technologies as well. The need to
Speaker 2: accelerate decarbonization efforts brings the need to accelerate change in
Speaker 2: the systems that support power markets, and those that are
Speaker 2: too slow to transition, whether it's infrastructure, regulation or policy,
Speaker 2: can come hard up against disruptive forces as a result,
Speaker 2: whether that delays in network congestion, whether that's negative pricing,
Speaker 2: or with that's new forms of volatility and disruptions in
Speaker 2: wholesale market price design. It shows that the transition to
Speaker 2: a low carbon future is a disruptive one, but an
Speaker 2: incredibly important one for global markets.
Speaker 1: Lenny, thank you very much for joining us today.
Speaker 3: It's always a pleasure.
Speaker 1: Today's episode of Switched On was produced by Cam Gray
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