Energy transition: How to combine great renewables resources with even better policies

No doubt Europe has its own energy “wars,” but Europe mostly provides the policy framework that I think Australia should aspire to. A combination of Australia’s renewable resources and Europe’s policy could make us world beaters.

Because I’m a member of the Australian Institute of Energy I was invited to attend an “energy transitions” summit facilitated by Connect Media last week. It was a fantastic conference because of its global focus, as opposed to the familiar ground of just Australia.

Three presentations in particular stood out.

Maersk: Hydrogen is not the answer

First up was Maria Strandesen – director, head of future fuels at Maersk. This presentation was an absolute model of clarity and, even though delivered by video, anyone listening would likely come away believing that Maersk, one of the largest container shippers in the world, is determined to decarbonise.

Shipping accounts for 3% of global carbon emissions, but it’s expensive. Maria pointed out that long distance shipping is traditionally a low margin business. A 100% increase in fuel cost increases the shipping cost by 20%.

Maersk wants a fuel with a cost less than $US1000/t of fuel oil equivalent. Strandesen went through the fuels Maersk has considered. Of relevance to Australia, Maersk has concluded hydrogen is NOT the answer for them due to its own shipping and storage costs.

Ammonia might be an answer, but at Maersk thinks the disadvantages, principally ammonia toxicity, mean it’s a difficult choice.

For Maersk, the most viable candidate at the moment is biomethanol and Maersk is in the market for 0.5 mt of green methanol. Maersk would like to see a carbon price/tax of $US150/t.

Rio Tinto: World’s biggest non-Chinese corporate electricity customer

Jonathon McCarthy, head of energy development for Rio Tinto, also made a number of interesting points.

He observed that on Rio’s calculations, Rio is the largest corporate electricity buyer in the world – at least outside of China. Obviously, and he didn’t say this, that makes them influential.

Jonathon noted that Australia has an excellent renewable energy resource but has two disadvantages. Firstly our firming cost is relatively high. That’s not news to me, I’ve been saying the same thing for years, but glad to see we are on the same page.

At least prior to the energy shortage emerging in Europe this year, hydro firming might only add about €3/MWh to a wind portfolio and that’s what underlies, say, NorskHydro’s wind for aluminum smelting contracts and equally Denmark’s ability to have so much wind in the mix.

The second relative disadvantage for Australia is policy – if we have all heard that once, we’ve heard it 1000 times.

Space does not permit the required discussion here, but should the ALP end up forming government – and no one will count any chickens till post the result – in my opinion the most useful thing Chris Bowen could do is make the NEM a viable entity once again, instead of the fractured loose coalition of competing interests it has become.

The Finkel reforms have failed. The Energy Security Board (ESB) is largely useless as in practice all the power lies with Australian Energy Market Commission (AEMC), Australian Energy Regulator (AER) and the Australian Energy Market Operator (AEMO); and the direction is provided by the individual states and whatever passes for COAG.

The Finkel design was always likely to fail because there is no real accountability, and there is no CEO entrusted with, say, delivering the Integated System Plan (ISP).

Of course, there is no carbon objective in the National Electricit Law (NEL), so such policy as there is has to dance around a shadow target. This is dumb and will end up costing consumers. Indeed it already is.

So what we need is more execution and less analysis. Put someone in charge and adopt the best of Russian policy – i.e. keep shooting the generals until someone gets it done. Quickly.

McCarthy also noted in response to a question about getting there ahead of 2050 targets that, in his opinion, the targets were somewhat irrelevant because everyone he spoke to, whether in China or Australia, was getting on with decarbonising ASAP, irrespective of official targets.

ITK has for some time believed that Rio will end up driving the energy supply of Boyne Island and Tomago smelters and therefore Gladstone power station. Both smelters have power contracts that end in 5-6 years and decisions about replacement power are looming ever more urgently. I look for news on both smelters over the next 12 months.

BCG: 

Brognaux is the global leader of BCG’s power, renewables and utilities sector and leads BCG’s internal research on energy. As such, he is one of the most knowledgeable and influential figures globally in this space.

It was an absolute pleasure to hear him speak. Indeed, it is a privilege to hear talented people present at any time. Sure as heck gets you out of bed in the morning.

Experience has taught me that big management consultants are staffed with highly talented people but they are nevertheless not always correct.

BCG “invented” the Boston fade, an earnings fade for comparative advantage in IRR models, but are most remembered by me for advising the James Hardie Board to shut down the at the time loss making fibre cement business in the USA.

That business now is the world leader in building materials with outstanding returns on capital. Still as I know only too well, no one bats 100%.

Brognaux made two main points. Firstly was the pessimistic one that the world will overshoot the 2°C target. This is a natural conclusion to reach when you realise that only 10% of world total electricity supply comes from wind and solar despite a lot of investment.

Brognaux is essentially pessimistic about the scale of the target given the politics involved. He noted that it would be one of the greatest transformations of global production ever. And yet, although I personally fear he may well be right, I am not quite so pessimistic.

To decabonise electricity requires a compound growth rate of about 20% from here. In fact that is not impossible, but it’s obviously a bigger number every year.

It means that, globally, in four years time we need to be producing two times what was produced last year and then to double again in the following four years.

Brognaux would say that the political will is not there to do that. He would look at the inability in Europe of policy makers to even require households to turn their heating thermostats down a couple of degrees.

Unfortunately that’s just electricity, which globally cannot be any more than 30% of total emissions.

Fit for 55 advances

Amidst all the noise about high gas and coal prices and energy shortages it’s worth noting:

Takeaways from Intersolar 2022 (courtesy of GerrardReid’s LinkedIn comments)

– In terms of solar, global demand is likely to be higher than supply this year, which could reach 250GW, up an amazing 38% from 180GW last year.

– The Chinese market is likely to be the biggest, at about 100GW, followed by Europe at 26GW with the major EU markets being Germany (6.5GW) and Spain (5GW). The German market is booming, particularly the rooftop market, with most households also putting in place batteries.

– The big unknown is the US solar market which is expected to installed 25GW this year, but that number could be halved given the ongoing trade investigation into Chinese solar-panel suppliers.

– In terms of energy storage, the market is buoyant with solid growth expected across all markets but in particular the United States, China, UK as well as the German residential market which could hit a record 1GW this year, if enough so called hybrid inverters (for solar and batteries) can be delivered.

– Global installations are expected to be around 18GW, up from 10GW last year.

Wind and solar permitting times to be halved in Europe

Next week the European Commission is looking to increase the EU’s renewable energy target for 2030 as part of the “Fit for 55” target to reduce reliance on Russian energy.

Leaks of this plan have noted policy proposals to add 42TWh! of new solar rooftop energy by 2025, including possibly making solar compulsory on new builds.

Proposals aim to halve the permitting time for renewables to one year in “renwable go-to areas” and two years elsewhere. It also requires EU countries to identify within one year specific land and sea areas for renewable infrastructure.

Zero carbon transport policy advances in Europe

The European Parliament’s environment committee voted to require carmakers to cut their average fleet emissions by 20% in 2025, compared to 2021, by 55% in 2030, and by 100% in 2035. Conservatives and even some progressive MEPs rejected a new interim target in 2027 and a higher 2030 goal, which would require manufacturers to ramp up sales of electric cars.

The European Parliament plenary will vote on whether to adopt the car CO2 standards on 7 or 8 June. MEPs would then begin negotiations with EU governments on the final law.