Three simple, low cost actions that can accelerate transition to zero emissions

Personally I think a fight about climate change would continue to be a winning strategy for the pro-action lobby. But here’s a list of stuff that should be relatively uncontroversial, starting with the lower cost actions to the higher cost.

The first three points just seem so obvious.

• Encourage AEMO to adopt “Step change” as the base case ISP scenario;
• Get Treasury or a decent modeler, (not McKinsey, they seem to have lost the plot in recent years, and not Brian Fisher), but someone with independent credibility, maybe Acil Allen or Blueprint or Grattan to produce an abatement curve for Australia. Treasury would be the most trusted.
• Get Treasury to do the overall costs and benefits modelling of climate change for Australia including producing a net zero by 2050 carbon emissions line. If it’s bipartisan official policy then let’s see what Treasury makes of it. This is ALP policy, and if it’s Jim Chalmer’s idea he is to be congratulated. It’s clearly appropriate and that’s all there is to say.

After this, the list gets harder and for some more controversial.

• Adopt EEC fuel emission standards;
• Toughen the safeguard emission standards and allow RECs to be used to acquit safeguard emission liabilities
• Introduce a carbon price. A carbon price is widely regarded as the lowest cost way to achieve an emissions target. It encourages the private sector to innovate and get the job done.

Thinking fast and slow

Now that the Federal Government has agreed to a “net zero” 2050 target, a good question is what that means for Australians, not just Australians in general but also the special interest groups who are directly impacted in regards to jobs, or their business.

Since the Gillard/Rudd Govt lost office there really hasn’t been much official work done on what decarbonisation means. Never mind, it won’t be that hard to dust off the old reports.

AEMO needs to set  decarbonisation as the ISP central scenario

Now that decarbonisation by 2050 is the official Government target it seems appropriate that the decarbonisation by 2050 scenario is the absolute minimum  ISP base case, and based on what’s actually happening in the market the “step change” scenario is the actual baseline.

Yet right now it’s “steady progress” which is the baseline. We are way beyond that as recognised by Kerry Schott and lots of others.

Adopting step change as the default might result in some different outcomes. Specifically, it might bring forward some transmission investment. After all the main output from the ISP is a set of “authorized” transmission recommendations.

In the default “steady progress” coal is 20-25% of the mix in 2040. In ITK’s view this is unlikely. In “net zero by 2050” coal generation is still 15-20% by 2040.

It’s the “step change” that has coal generation at 5% in 2040.

I reckon if you ran a book in amongst  electricity industry participants about the percentage of coal generation  as a share of total generation in 2040, that under 10% would be a pretty much unbackable favourite.

So why not set the base case  scenario at what is, in my opinion, the strong majority consensus view?

Note that the federal government’s hydrogen scenario isn’t needed in a “net zero” scenario in AEMO’s view. In that scenario only 2TWh goes to domestic hydrogen and nothing to export. This might disappoint the likes of Andrew Forrest.

In short, even the Net Zero scenario is too conservative based on where we are today. A draft ISP is due in December. The 2022 scenario descriptions are summarized by AEMO as follows:

Figure 1 2022 ISP scenarions. Source: AEMO

Unfortunately the central or “steady progress”  scenario of the  ISP is currently used by financiers in decisions about how “financeable” a particular project is, and is also an assumed inputs into various other decision making processes.

The market overall, driven in part by state policies and in part by individuals and businesses, is already a long way in front of the 2020 “central scenario”. This means that various decisions made on the basis of the central scenario are in fact using wrong information.

Adopting a Step Change scenario would also facilitate identifying the cost of electricity in that scenario and the investment required. It would enable thermal generation to better plan for the future.

The Federal Government would facilitate this if it was actually interested in low electricity prices and the future prosperity of the country

There is still time for the step change to become the central scenario for the 2022 edition of the ISP. At a minimum adopting Government policy of “net zero” would be a start. The Federal Government could suggest this to AEMO at zero cost. Indeed, we argue it would result in lower costs to consumers.

Encouragingly, adopting  this Federal Govt policy into the central scenario would likely bring an element of self fulfilment, thus aiding the Government to achieve its stated aim.

Feds could ask Treasury to build an abatement curve

Part of the work that Treasury will do, but which could perhaps be addressed early in the piece, would be an economy wide abatement curve. Like everything else in the sector though our understanding of abatement curves has advanced over the past decade.

Originally consultants such as Mckinsey produced abatement curves that people such as myself adopted without too much thought. For instance, this was how they saw the opportunity back in 2007 for the US.

Figure 2 Source: USA abatement curve by McKinsey, reprinted: Evolved Energy Research

 

The width of the bars showed the size of the abatement and the vertical axis was the cost.

A recent report from the USA Environment Defence Fund showed a different way to think about the USA abatement  curve. I might not agree with some of the numbers but the policy implications are much more obvious.

Figure 3 USA abatement curve: Evolved Energy Research

This development of the abatement cost allows for cost of abatement to change over time, eg with EVs; and how one form of abatement, eg solar, might require other costs like storage; or how new technologies like green hydrogen require other technologies like wind and solar to fall in cost before they in turn become cost effective.

The immediate relevance of the US abatement curve to emissions in Australia is what we already know. We can do a lot of abatement at relatively low cost.

Figure 4 Source: Government. Year to Jun 21 except transport year to Mar 20.

A standard path dependency issue is assuming EVs are charged from a fossil fuel dominated  grid and therefore don’t create much abatment (but still some). If you assume a green grid then EVs create a lot more abatement.

The upshot is that the abatement curve is path dependent, more complex and ultimately needs to be remodelled itself.

This then is the sort of economy wide modelling that could inform choice. In Australia, Climateworks 2020 report “Decarbonisation Futures” covers similar ground without producing an abatement curve.

Nevertheless the US abatement curve hows how much cheap abatement is available from wind and solar in the electricity system.  What is true in the US is even more true in wind and solar rich Australia.

Emissions implied in ISP scenario

If we use the Step Change scenario and make the crude assumption that a fall in fossil fuel generation from 75% to 5% means CO2 emissions reduce at the same rate to 2040, and that road transport is 85% of transport sector emissions, we could get about a 40% reduction by 2030, but that would require EVs to get a wriggle on pretty quick smart.

Figure 5 Emissions potential using ISP step change. Source: ITK

 

Figure 6 Emission components, ISP step change and guess work. Source: ITK

There is almost enough policy in the electricity sector

A combination of the LRET (originally introduced by the Howard Government, but greatly expanded by Rudd and then reduced by Abbott), the SREC (introduced by Rudd) and the various State schemes will certainly drive a share of renewables of more than 50 per cent by 2030. You could also credit the transmission sponsored by the States and even, if you are so inclined, Malcom Turnbull’s Snowy 2.0.

The next step to speed things up further will almost certainly require more transmission, and so there’s the need for the ISP to step up. Equally, some more demand would make the whole thing more palatable.

Costs and benefits modelling to be done by Treasury

The ALP has said it will get Treasury to be responsible for costs and benefits modelling of decarbonization. I think this is an unarguably good idea. Treasury is independent, and authoritative and has the resources and trust of Australians.

A sector by sector analysis of costs and benefits and the overall impact is just what we need to properly inform Australians. The appropriate policy choices will immediately be clearer.

Of course Treasury’s modelling will likely not be any more accurate than any of the modelling it already does.

Budget forecasts are generally way off the mark and forecasting is inherently inaccurate, especially for events in the distant future. But since the model would likely be revised regularly it will still be the defacto information source of costs and benefits and inform policy choices.

Queenslanders love to trumpet how QLD does it better. But …..

Recently I listened to the Powerlink 2021 presentation which included a speech by Minister Mick de Brenni, who mentioned how he was charged with developing a 10 year plan to get QLD to its 50% renewable energy target by 2030.

The general theme of the speech was how Queensland does it better, how it will all be done by Queenslanders for Queenslanders.

Paul Simshauser, the CEO of Powerlink, followed up with a flashy and suitably reverential if not deferential nod to the wonders of the Queensland system and seemed in no doubt that the 50% target would be reached with time to spare.

And indeed Queensland must be a superior place because if they are going to hit the 2030 50% renewable target they will have tripled renewable energy production, including rooftop, compared to the level over the past 12 months and at the same time closed pretty much half the coal generation.

All this has got to be done whilst competing with Victoria for a likely shrinking share of the NSW market.

The only way things could be different is with a big increase in demand. But, and it’s a big but, getting a big (it is Queensland) hydrogen industry going in 8 years will be a challenge.

Just as with the submarines Queensland doesn’t even have a plan yet. Unlike the submarines, the target date for Queensland is just 8 years away, whereas with the submarines it’s probably never. On top of this, Cleanco has lots its CEO.

What was announced in terms of Queensland REZs is clearly totally inadequate to achieve the target. Time will tell but my bet is that NSW will make a lot more progress than Queensland over the next decade. A lot more. I’ll be happy to be proved wrong.

What is clear is that all the action is going to be in the Central Queensland Zone. That’s where Rio’s announcement its looking to go green at Boyne Island sealed the fate of Gladstone power station, not really in much doubt anyway.

Closing that station will open up lots of transmission and replacement opportunity. Gladstone has potential to be a great REZ. There’s heaps of industrial load and it’s a lot closer to Japan than Tasmania.

But it won’t be enough on its own and it will take a long time to make it happen, especially at the crawl pace currently exhibited.

Carbon price/tax – Still the best option

Australia would be better off with a carbon tax or a carbon price. That’s because an economy wide cost of carbon will allow individuals and businesses to find the most efficient way to meet the target. That is good govternment: Set a goal for society, put in place a set of rules, then get out of the way.  Let the executive administer and the legal system referee.

The appropriate goal is a carbon emissions line that starts in 2021 and goes to zero in 2050. It’s a simple line on a graph, how can that be such a bad thing?

A carbon price is theoretically superior but a carbon tax is administratively cheaper and provides more investment certainty. But we don’t have that because Australia’s politicians don’t have the stomach to fight for what’s right.

In this regard it’s interesting to observe that the GST was first raised by Gorton Government in 1970, revived by Keating in 1985, revived by John Hewson in 1991. John Howard won an election in 1995 pledging “never ever to introduce a GST” but went to the 1998 election promising to introduce a GST.

He only just won, but regarded that as a mandate and the GST after further Senate negotiation became law.

So, I still think personally a carbon price could be reintroduced now that both major parties agree that decarbonisation is the goal. That goal is common ground. So the question is how to walk the walk without losing every one.