21 OCTOBER 2023

AS ELECTRICITY PRICES & DEMAND PLUMMET, HERE COME THE LUDDITE SHILLS

After 24 months of hyper fossil fuel commodity price inflation, brilliant news for Australians out this week: 3QCY2023 wholesale electricity prices are down 68% year on year!

The Australian Energy Regulator’s (AER) Wholesale Markets Quarterly report shows that electricity prices in Australia are collapsing as renewable energy production surges and demand declines, resulting in coal power share plummeting to the lowest ever on record (so far!).

The AER reports demand in 3Q2023 was the lowest ever for a 3Q, down 5% (or 1,200 MW) over 3Q2022.

This should act as a cautionary note for the Australian Energy Market Operator (AEMO) to fact-check its overly optimistic modelling of electricity demand, which inexplicably flags a surge every year for the next few decades when actual demand has been flatlining for the last few decades. 

These unreliable demand forecasts fuel misinformation of a purported "reliability gap", enabling rampant fear-mongering by climate luddites – e.g. Murdoch acolytes parroting warnings of a summer of raging blackouts – and underpinning calls for mythical solutions such as SMRs (by the likes of nuclear spruiker-in-chief Ted O'Brien MP), a tactical ploy to yet again derail our accelerating transition to cheap, clean, domestic, reliable, deflationary firmed renewables.

Retail electricity consumers across Eastern Australia can now look forward to lower retail prices come 1 July 2024, as the December 2022 intervention by PM Anthony Albanese and Energy Minister Chris Bowen to cap prices and break the stranglehold of the price-gouging fossil fuel cartel – which has enjoyed hyperinflated war-driven superprofits as it sticks it to consumers –  is roundly vindicated.

We know the permanent solution to ease power prices and cost of living pressures: accelerate the deployment of wind and solar, rooftop PV, batteries-on-wheels, ground heat pumps, smart meters and energy / building efficiency measures as reported recently by Dr Gabrielle Kuiper – and “electrifying everything” at speed and scale, as Dr Saul Griffith has long argued. Great to see Aware Super allocating $300m of funding for distributed energy and storage solutions by Birdwood Energy, with scope to expand to $2bn.

We have everything to gain from accelerating the transition. The AER Quarterly demonstrates now is not the time to entertain fantasies about nuclear, nor is it acceptable for the NSW government to contemplate spending hundreds of millions of dollars on taxpayer-funded life support to prolong the operation of failing, near-death coal clunkers like Eraring. The NSW government should replicate the ambitious efforts of Queensland, where CleanCo just released a 3GW tender. 

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ALBO DOES WASHINGTON, PRESSURE MOUNTS TO DELIVER AUS IRA

PM Albanese will be in Washington next week for a state visit hosted by US President Joe Biden. In parliament this week, he flagged the purpose of the visit:

“We'll be discussing our shared interests in climate action and clean energy. In May we announced the groundbreaking Climate, Critical Minerals and Clean Energy Transformation Compact, and there will be some announcements next week about the next steps… We're also working to promote Australian business, industry and innovation… Whether it's about the economy, climate change, energy, resources or the battle against global inflation, being part of these conversations means that Australia gets to shape the solutions…”.

As CEF reported in May, the US-Australia Climate, Critical Minerals and Clean Energy Transformation Compact is a critically-important development in the context of the Inflation Reduction Act, which is turbocharging the energy transformation in the US with upwards of US$800bn of federal investment in clean energy initiatives. 

Short of a policy and investment response by Australia that is commensurate with the massive scale of our opportunity, the IRA has the potential to pull capital away from Australia at a critical inflection point in the global energy transformation. Since it was passed in August 2022, the IRA has already begun attracting a massive influx of global investment into the US, as Tim Buckley and Climate Capital Forum founder Blair Palese wrote.

The key significance of the Compact is that it proposes that Australia be treated as a domestic US supplier under the IRA (subject to Congress approval), opening up new investment and export possibilities for Australian critical minerals, clean tech, energy transition materials and renewables supply chain. This massively boosts our reindustrialisation potential as a global renewable energy superpower.

When they met in May, the two leaders committed to release a new action plan on the Compact by end 2023, suggesting the Compact’s headline statement of strategic intent would be embodied in a concrete form for implementation.  

Australia is one of the world’s leading suppliers of the critical minerals, metals and energy transition materials necessary to global decarbonisation and cleantech supply chain, and enjoys a superabundance of the renewable energy needed to power processing and manufacturing of these onshore pre-export. We are the world’s number one supplier of lithium and iron ore, for example, but we must do more than just dig and ship.

CEF sees this visit as a critical opportunity for PM Albanese to leverage our diplomatic, security and economic relationship with the US, and make significant progress, in partnership with our closest ally, toward securing our strategic positioning as a zero emissions trade and investment leader. Time to bring home the bacon!

Domestically, CEF and our partners the Climate Capital Forum, ACF, ACTU, SEC and others urge the government to invest strategic national interest public capital of ~$100bn to drive Australia’s transformation, and to attract ~$200-300bn of private domestic and foreign capital investment in new economy industries.

We are seeing moves towards this – including, for example, this week’s commitment of $12.6bn to a National Skills Agreement to rebuild our TAFE system and deliver trained workers for critical and emerging industries, such as the priority areas of clean energy, the net zero transformation and Australia’s sovereign capabilities in advanced manufacturing. 

CEF applauds this initiative. Skilling up workers is a vital and underdeveloped element of our accelerating energy and economic transition to a zero carbon economy. However, it is one element among many.

For more detail on the scale and breakdown of the public capital investment needed  – and the necessity to act now to respond to the challenge of the IRA or miss our once in a century window of opportunity  – see the comprehensive CEF/Climate Capital Forum analysis An Australian Response to the US IRA.

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MASSIVE GREEN IRON OPPORTUNITY NEEDS STRATEGIC CAPITAL &  DECARBONISED GRID 

With Sweden’s H2GS building the world’s first large-scale green steel plant and Europe’s first giga-scale electrolyser, our new analysis out this week looks at the massive opportunity for Australia – by far the world’s biggest exporter of iron ore (A$124bn in 2022/23) – to capture its share of green steel supply chain and lead the world in green iron.

The financing of the H2GS plant is the largest equity placement in Europe this year. H2GS has assurances of €3.5bn in debt financing underpinned by a pledge from the Swedish National Debt Office of a ​€1bn “green credit guarantee”. Equity leverages debt, public capital leverages private.

In Australia, substantial patient public capital is needed to help kickstart the development of a green iron industry. As the ~$800bn US Inflation Reduction Act crowds an unprecedented influx of private investment into the US economy, and China's global decarbonisation leadership continues, we are in an energy transition race. As noted above, CEF and our partners the Climate Capital Forum, the ACF, ACTU, SEC and others urge the government to invest ~$100bn to crowd-in the $200-300bn of private domestic and foreign capital needed to make Australia a zero-emissions trade and investment leader, including in green iron.

Australian iron ore majors should also be emphatically directing capex to decarbonisation, targeting credible reductions in their Scope 3 emissions. Only Fortescue has committed serious capex into decarbonisation, including green iron, reflective of its net zero Scope 3 by 2040 target. "World leader” BHP,  which has chronically failed to invest in decarbonisation and to value-add onshore, has no clear path nor associated capex spend to support its Net Zero Scope 1-3 by 2050 “goal”. Rio has no Scope 3 target at all.

H2GS now plans a multibillion Euro foray into green steel in Canada, but only if the government can guarantee zero-emissions power. This challenge equally applies here. A rapid decarbonisation of the Australian and/or Pilbara grids is a critical precondition for embodying decarbonisation in our No. 1 export.

On green steel, the federal government should be incentivising domestic steel firms to pivot from outdated coal-powered blast furnaces to electric arc furnace technologies. And it must resist caving in to luddites like BlueScope Steel, which has demanded Safeguard Mechanism exemptions so it can prolong its high emissions profile for decades by, for example, investing $1bn in relining its blast furnace 6, even as its European competitors invest in the future.

| Read our full analysis

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CHINA MONTHLY ENERGY UPDATE – COAL SURGE A BLACK SPOT IN RENEWABLES REVOLUTION

As our most recent China Monthly Energy Update by China energy policy analyst Xuyang Dong tracks, China’s renewables buildout gained momentum in August. Solar and wind continue to lead in the share of newly added capacity over the first 8 months of CY2023, adding 20GW per month in 2023, five times the install rate evident in the US. Zero emissions capacity represents half of China’s installed capacity.

In August, China added 24.4GW zero emissions capacity, 92% of the total newly installed capacity of 26.4GW. It brings the total added capacity CY to August to 199GW, up 106% yoy. Of this, 164GW is from zero emissions sources, 83% of total newly added capacity, up 115% yoy.

While China massively develops RE, climate envoy Zhenhua Xie said that “completely phasing out fossil fuels is unrealistic, we should build the new before discarding the old”, reinforcing that the central government prioritises economic development over speed of  transition. 

The black spot in China’s electricity grid modernisation remains that 34GW of new thermal power was added CY to August, 17% of total newly installed capacity, up 73% yoy. 2GW of new thermal power was installed in August.

China continues to dominate global RE supply chains. With China’s renewable production expansion far outstripping domestic installation needs and export prices of solar modules falling, EU solar manufacturers are facing potential bankruptcies, even as the EU EV industry warns of a glut of Chinese imports. Solar module prices are down 40% year-to-date in 2023, on the back of a 75% decline in polysilicon prices, a return to solar deflation.

China’s 'World Bank’, the Asian Infrastructure Investment Bank, is set to triple its annual climate change lending to 2030. This is a good start to leverage accelerating solar, battery and EV deflation and excess manufacturing capacity, and to assist emerging markets and developing economies (EMDEs) to build out domestic clean energy capacity, in turn assisting global decarbonisation.

China is well positioned to demonstrate outbound clean energy investment leadership – we cannot tackle the global climate crisis or accomplish decarbonisation without greening EMDEs. Other advanced economies, likewise, should mobilise capital to assist EMDEs' transition if we're to prevent catastrophic climate change.

| Read our full analysis

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GOVERNMENT RECOGNISES CLIMATE CHANGE AS SYSTEMIC RISK TO SOVEREIGN BOND VALUES 

A landmark Federal Court action brought by bondholder and law student Katta O’Donnell, 26, represented by the brilliant team at Equity Generation Lawyers, was settled last week with the Commonwealth agreeing to acknowledge that climate change is a systemic risk that may impact bond values. The acknowledgement, published on the Treasury website, reads:

"Climate change is a systemic risk that presents significant risks and opportunities for Australia's economy… Achieving Australia's emissions reduction commitments and realising the opportunities [of] the transition will require significant investment by governments and the private sector. Uncertainty around the magnitude and timing of the physical impacts of climate change and the global transition to net zero emissions translates to uncertainty about the fiscal impacts of climate change. And, as a consequence, there is uncertainty about whether the fiscal impacts of climate change may affect (if at all) the value of Australian Government Bonds." 

The Commonwealth also agreed to “engage with asset owners and relevant stakeholders to ensure that investors are informed” of the risks of climate change, while the presiding judge remarked that global warming would likely be “a huge drain on Commonwealth resources” that should be reflected in financial and economic forecasting as climate change-driven extreme weather disasters escalate. 

The ruling is significant in that this is the first time a AAA rated economy has acknowledged climate risks to bond value. It takes place in the context of increasing pressure on the finance sector and in fiscal policy for disclosure of material impacts of climate risks, through, for example, mandatory climate-related financial disclosures  proposed by Treasury for an initial cohort of large listed and unlisted entities from FY25. 

The Federal Government is also undertaking a National Climate Risk Assessment to better understand how climate risks affect the economy and expects to identify priority risks by the end of 2023.

The Treasurer’s Sustainable Finance Strategy and Taxonomy are additional tools targeted at seizing the opportunity of transition to a decarbonised economy, but only if we can ensure integrity and credibility of ASFI, free of consultants, big bank and fossil gas vested interests and aligned with the climate science. We look forward to board renewal to bring more independence.
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UK CMA EXEMPTS INDUSTRY-WIDE ESG AGREEMENTS FROM COMPETITION LAWS

In new guidance released last week, the UK Competition and Markets Authority (CMA) greenlit certain collective ESG related agreements on climate change exempting these from laws prohibiting anti-competitive practices where they meet public interest tests and comply with Green Agreements Guidance principles. This applies to: 

• agreements about corporate conduct (e.g., to eliminate workplace single-use plastic)    

• agreements to run joint environmental sustainability awareness campaigns

• agreements to set non-binding industry-wide environmental sustainability targets  

• agreements to better enable businesses to monitor and report on their own environmental sustainability targets  

• agreements to participate in an environmental sustainability standard (such as a green labelling initiative) or to phase out unsustainable products 

Any action where the benefits consumers receive from the agreement outweigh the harm caused by the agreement may also be defensible under the new guidance. 

This is excellent news that markets and regulators are waking up to the systemic risk of climate change and the need for collaboration and collective action to address these risks. We need to see Australian regulatory institutions adopt a similar approach.

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COMING SOON:

QLD ELECTRICITY GRID MODEL TO DRIVE COAL POWER PHASE-OUT

An upcoming major report by CEF’s Matt Pollard will analyze and showcase the speed and scale at which the QLD Government is shifting capital to reach its renewable energy and emissions reduction targets. Maybe some lessons for NSW as the government contemplates the return of Coalkeeper?!

QLD has set an ambitious target of 70% by 2032 and 80% by 2035. Whilst addition of VRE capacity has increased by over 20% in 2023, coal-fired plants still power 67% of QLD’s current grid, so Qld is starting from behind. As part of its $62bn Energy and Jobs Plan launched in September 2022, Queensland aims to end its reliance on coal-fired generation by 2035. 

Currently, QLD has 8 coal-fired power plants totalling 8GW of capacity. The government’s electricity market modelling highlighted that investment in clean energy, storage and transmission will reach $76bn by 2040  to deliver the 25GW of large-scale wind and solar and 3GW of grid-scale battery storage required to end coal power by 2035.

CEF’s report, out in late November/December, models QLD’s energy demand to FY2036, identifying the rate of renewable energy adoption required to meet demand. It demonstrates how accelerated deployment of Distributed Energy Resources (DER) (rooftop PV, behind-the-meter battery storage, smart meters, Virtual Power Plants (VPPs) and Demand Response Mechanisms (DRMs)) will expedite the coal power phase-out. 

Advancing QLD’s renewable energy capacity and transforming the grid is key to solving cost of living pressures, mitigating risks from inflationary fossil-fuel imports, alleviating exposure to singular points of failure, helping drive energy deflation and decarbonisation for QLD industry and mining value-adding, e.g. copper and zinc smelting, alumina and aluminium.

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CHINA’S STATE OWNED ENTERPRISES SHIFT CAPEX IN LINE WITH CLIMATE AMBITIONS

While the likes of Shell are backtracking on decarbonisation and pivoting to invest $4bn a year in LNG projects to 2025, our forthcoming major report focussing on China’s State Owned Enterprises (SOEs), by CEF'S Xuyang Dong, shows they are pivoting to meet the country’s national renewable energy targets. 

The SOEs, which play a key role in contributing to China’s national revenue and are the biggest component of China’s economy, are overseen by the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC), and as such are subject to the central government’s decarbonisation policy and targets.

We look at SoEs capex trends to unpack their interactions with national energy policies – principally the target for 50% of China’s capacity to be renewables capacity by 2025 – to better understand how Chinese SOEs are strategizing the transition to carbon neutrality. This target has already been met.

Our report reviews 5 of the largest Chinese energy SOEs and their subsidiaries: China Energy Investment Group, State Power Investment Corporation Limited, China Datang Corporation Limited, China Three Gorges Corporation, and China Huaneng Corporation. We find that all of 5 SOEs’ capex investment trends are aligned with China’s national energy policy. The report also unveils the unique characteristics of the strategic “greening” of China’s SOEs, as the global leader on energy transition undergoes a momentous program of economic decarbonisation. 

Stay tuned for our detailed analysis, out next month.

OUR MEDIA |

See our latest media, including TIME magazine on India/Adani and SCMP and Bloomberg on China.

OUR WORK |

See more of our latest work, including presentations on global decarbonisation and capital shifts the the Asia Investor Group on Climate Change, Northcape and Ethinvest.

PREVIOUS NEWS UPDATES |

Our previous newsletters covering major energy news can be accessed here.

Our highlights tracking decarbonisation progress in 2022, and our 2023 wishlist, are here.

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This newsletter is not intended to provide, and should not be relied on for, tax, legal, investment or accounting advice, nor is it an offer or solicitation of an offer to buy or sell, a recommendation, endorsement, or sponsorship of any security, company, or fund. CEF is not responsible for any investment decision made by you. Unless attributed to others, any opinions expressed are our current opinions only. Certain information presented may have been provided by third parties. CEF believes that such third- party information is reliable, and has checked public records to verify it wherever possible, but does not guarantee its accuracy, timeliness or completeness; and it is subject to change without notice.