AGL: Energy transition can happen “almost overnight”

So, just how fast can the transition to a clean energy economy occur? Is the 50 per cent renewable energy target proposed by Labor for 2030 too fast? Or are the 100 per cent renewable energy scenarios for 2030 prepared by research academics too slow?

Your response to that question will likely be guided by where your business fits in on the value chain of a decarbonised economy, or along the spectrum from conservative to green ideology. The coal lobby, by and large, insists it can’t happen anytime soon, if at all.

Many in the renewable lobby, and futurists and analysts like Tony Seba, think it’s going to happen real quick. By 2030, Seba says, coal, oil and maybe gas will be all but redundant. The success of the Tesla electric vehicle and the huge demand it has unlocked has suggested that the petrol car may be redundant even sooner.

So, it was interesting to note AGL managing director Andrew Vesey saying this week that, with the right policies, the clean energy transformation in the power sector could happen “almost overnight.”

AGL’s Broken Hill solar farm. Photo: AGL Energy

Australia relies heavily on fossil fuels for its electricity – coal accounts for around 73 per cent and gas another 12 per cent – so the common refrain is that it is more difficult for Australia to transition to new energy.

But as Vesey told the 3rd Emissions Reduction Summit in Melbourne this week,  three-quarters of that generation is already past its “use-by” date, and needs to be replaced.

The inference, picked up by other academics such as the ANU, UNSW and Melbourne University, is that the next decade offers a unique opportunity to replace that dirty generation with wind and solar and other renewables. And when you are building new generation, wind and solar can’t be beaten on cost.

Vesey’s major caveat is the policy settings. “If you get it (the policy settings) right, it will happen really quickly. It’s not going to be 30 years. And I think that when you get it right you will be looking in the rear view mirror at these targets.”

Of, course, there is a lot of debate about what those policies should be, and the “right policies” will look completely different whether you are an incumbent fossil fuel generator, or a developer of renewables, or if you are consumer.

Vesey says you “have to make room for new investment” and by that he means getting rid of at least some of the excess base load coal capacity in the market. The question is how to do that.

AGL has fought against payments for closure but is now prepared to look at market scheme where the peers share the costs. Not everyone agrees. Oliver Yates, the head of the Clean Energy Finance Corporation, says that excess capacity is actually good.

Not only does it keep wholesale prices down, he says, it provides maximum options as new capacity and network connections are built. The last thing Australia wants to happen in the middle of an energy transition is to be short of energy supply, or energy infrastructure.

Another issue is tariffs. Vesey says it is important not to impose “unsustainable” costs on the end user, and “cost reflective” tariffs will be an important factor. But again, as we have mentioned before, one person’s cost reflective tariff is another person’s “revenue raiser.”

The call is for strong leadership, not just blunt regulation, from the rule setters. And here, the biggest roadblock appears to the mentality of the energy policy makers, hiding behind National Electricity Market rules that do not even mention the environment, let alone decarbonisation.

If that is changed, as Labor proposes, that could clear the way for the type of tariff reform that could actually encourage the investments in new technologies, distributed generation and different business models – many of which are stranded by greed of the incumbents and the backward vision of the regulators.

For AGL, the transition also means moving away from “energy only” markets and introducing “capacity” payments to ensure some “firm” capacity remains to help out fluctuating wind and solar. It’s a common argument in the coal sector.

Some argue that these capacity payments amount to an effective subsidy. Vesey believes they are essential because otherwise the wholesale price of energy will fall to a level where it is not sustainable. The experience in Western Australia, where diesel and other fossil plants were built and never switched on, shows the perils of a badly framed capacity market.

Vesey is also arguing for “ring-fencing”, which means keeping the networks, or at least the regulated part of their business, out of the domestic market. Vesey says it would be unfair. Others argue that the best way to extract value from the key new technology breakthroughs, such as battery storage, is through the networks, because much of the savings can be found in avoided grid investment. But the retailers are terrified of more competition “behind the metre” in the home and business market.

Less controversially, Vesey says that the dislocation of employees and communities also needs to be addressed. He says AGL is speaking with the NSW and Victoria government on this issue. RenewEconomy understands there has been a lot of work done by governments, regulators, energy companies, unions, and NGOs about creating a plan for the Latrobe Valley and Hunter Valley communities to transition away from fossil fuels.

You would expect Vesey, and other incumbents, to talk their own book. That’s what they are paid to do. Vesey and others in a similar position have a legal, fiduciary duty to do the best thing by their shareholders, and doing the best thing is usually defined by short-term financial measures.

That’s OK. And Vesey is hedging his bets by creating the “new energy” division which is looking at the best business models of the future, which as Vesey told RenewEconomy last year, are not entirely clear. He just has to make sure he pays a dividend in the meantime.

But the significance of what Vesey says is that it is not really a technology issue for his company, or for others, but an economic one, in the same way that the transition to renewables for grid operators is more of a cultural issue than a technical one.

That gives hope that the rapid transition scenarios being painted by the likes of the Institute for Sustainable Futures and Beyond Zero Emissions are not “pie in the sky”, but as the likes of Seba, and now Harvard academic and one time solar skeptic David Keith notes, this transition could happen very, very quickly.

And that turns the emphasis back on the political leaders. The energy transition is inevitable, technology costs will cause that. But incumbents have enormous influence over the pace of that change, and will want to maximise revenues and clip the ticket as they exit or evolve.

As Steve Blume, the chairman of the Australian Solar Council and the Australian Storage Council, told RenewEconomy at the SolarExpo this week, you’d expect business leaders to act in their shareholders interest. But you’d also expect politicians to act in the public interest. That is what they are paid to do, but too often forget.