18 AUGUST 2023

THE US IRA: 1 YEAR OF HISTORIC "GREEN NEW DEAL"

One year ago this week US President Biden introduced the historic Inflation Reduction Act (IRA), the "Green New Deal" that has transformed the energy landscape. 

The US$800bn IRA, Department of Energy Loan Program Office and Infrastructure and Jobs Act – key to “Bidenomics”– are an unprecedented open-ended stimulus into decarbonisation of the US economy.

These all-carrot, no-stick subsidy programs are turbocharging reindustrialisation and cleantech there – battery manufacturing, solar, wind, electrification – boosting GDP, and driving massive job creation. They've also triggered a global decarbonisation ‘race to the top’ amongst Australia's partners and competitors in response to China's dominance. 

In the domestic context, May saw a significant shift in geostrategic energy dynamics, with Prime Minister Albanese and President Biden agreeing on a Climate, Critical Minerals and Clean Energy Transformation Compact. If approved by Congress, Australia will be deemed a domestic supplier under the IRA. This will make Australian companies and projects eligible to benefit from the ~US$800 billion of decarbonisation capital.

This week’s MoU between Australia and California on climate and clean energy builds on the Compact in the broader context of the IRA.

To mark the one-year anniversary, CEF produced a guide to the Top 5 impacts of the IRA a year in, and the Top 5 things Australia should do to respond, co-written with Climate Capital Forum founder Blair Palese.

"In short, the IRA signals Australia needs to get on the field and play hard to leverage its competitive advantages in a rapidly decarbonising world."

– Tim Buckley

We should:

1. Implement a priority national renewable energy & critical minerals superpower strategy, as thought leaders including Ross Garnaut, Rod Sims and Dr Alan Finkel have argued: We can leverage our leading RE resources, trusted global energy supply profile and strong capital markets to onshore value-adding of Australia’s world-leading critical minerals and energy transition materials. It's past time to act: we exported 50% of the world’s lithium in 2022, but did no onshore value-adding.

2. Invest $100bn of strategic public capital: To seize the magnitude of its investment, employment and export opportunities Australia needs another $100bn of patient public capital and incentives – eg advanced manufacturing tax credits supporting domestic supply chains – to derisk decarbonisation and crowd-in $200-300bn of private capital.

3. Roll out a national plan to electrify everything: Fossil fuel hyperinflation has driven a cost of living crisis and destroyed the gas cartel's social licence, triggering initiatives such as Victorian Energy Minister Lily D'Ambrosio’s Gas Substitution Roadmap. The deflationary merits of electrifying everything, as shown by the work of energy advocate and entrepreneur Dr Saul Griffiths, are clear.

4. Price carbon emissions: The safeguard mechanism, in establishing a ratcheting-up price on carbon, is an important step to price-in this key externality, make polluters pay, and unlock capital for decarbonisation solutions. Federal Energy Minister Chris Bowen’s Australian CBAM proposal is a second step in building the policy framework to incentivise investment in zero-emissions industries.

5. Collaborate with world leaders in zero-emissions manufacturing: Australia needs to rapidly rebuild domestic manufacturing, including via the $15bn NRF chaired by Martijn Wilder, emphatically moving from world top 3 dig-and-ship petrostate to exporter of green iron, lithium hydroxide and cleantech supply chain. Key here are bi/multilateral trade and investment agreements and partnerships with zero-emissions tech leaders.

>>>Read our full analysis in Renew Economy.

>>>Tim Buckley’s presentation to the ALP National Conference in Brisbane this week, the party’s key policy setting forum, also sets out the challenges and opportunities for Australia around the IRA and our trading partners’ energy transition policies, reviews the global dominance of China in decarbonisation, and outlines what Australia needs to do to.

See Tim's ALP Conference presentation here.

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FINALLY, A BIG 4 BANK RULES OUT NEW OIL & GAS – BUT STILL SOME WAY TO GO

CBA, Australia’s biggest bank by market cap, has released a watershed fossil fuel financing policy that rules out project finance for new oil and gas (O&G) extraction and for expansions of existing O&G extraction.

CBA's fossil fuel clients will need to commit to verifiable transition plans by 2025 including Scope 1, 2 and 3 emissions and aligned to a Paris “well below 2 degrees” pathway. Where transition plans do not meet CBA’s expectations, the bank may end the relationship. This spells trouble for chronic climate laggards like Santos and Woodside busy detonating climate bombs and raking in superprofits as the world burns.

As CEF's new analysis shows, CBA's shift brings it into closer alignment with leading international counterparts, such as HSBC, which has also ruled out financing of greenfield O&G and will decline corporate finance to clients without credible transition plans.

There is room for improvement, e.g., CBA’s policy does allow for funding of LNG infrastructure, and for financing of fossil fuel clients where the Australian Government or regulator deems that supply from a certain asset or client is necessary for "energy security", a caveat open to abuse given the climate crisis unfolding in real time (e.g. Hawaii in flames, the advent of "global boiling"), and the Federal Government’s failure to yet align fully with the climate science.

It's past time for the remaining Big 4 domestic banks to urgently up their decarbonisation ambition, an imperative only heightened by Australia’s outsized contribution to climate chaos as a top 3 export petrostate alongside Saudi Arabia and Russia; to pivot finance to our once in a century opportunity to be a zero-emissions trade and investment leader, leveraging our abundant RE to process and manufacture our world-leading energy transition materials pre-export.

CBA's ambition also throws into the spotlight continued federal and state government policy and funding support for Australia’s program of major gas expansion, ignoring widespread community dissent, and indefensible in light of the IEA’s 2021 declaration that there can be no new fossil fuels if we are to retain a liveable planet.

In this context, CBA’s play looks a lot like business demonstrating leadership on climate which our governments have abdicated.

“State and federal governments and the finance sector must collectively commit to no new fossil fuel developments or new enabling infrastructure, and subsidies must end. 

The climate emergency means time's up.” – Tim Buckley

>>>Read our full analysis by CEF’s Nishtha Aggarwal.

>>>Our analysis of CBA’s full FY2023 report is forthcoming, followed by Westpac, NAB and ANZ, continuing our series on the Big 4’s climate finance progress begun last year.

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REPORTING SEASON – AGL AND ORIGIN ENERGY

Origin Energy and AGL released their FY 2023 results this week.

ORIGIN ENERGY 

There was some interesting international context here, with the Octopus Energy software platform orchestrating increasingly total UK electricity system disruption, showing how consumer facing software can optimise variable demand and variable supply to best incorporate lower cost, variable renewable energy (VRE), time of use tariffs, plus EV and behind-the-meter storage value from two-way power flows. Origin is rolling this out across Australia as well.

Origin Energy’s virtual power plant (VPP) connections trebled to 815 megawatts (MW), with a new target of 2 gigawatts (GW) by FY2026. That is the sort of controllable distributed energy resource management the national energy market (NEM) totally needs. This gives the “ability to move load to times of lower prices for a portion of assets. Near zero capital and low short run marginal cost, benefits share with counterparties.” Origin’s fleet of managed consumer EVs quadrupled to 400 in FY203, with a target to double again. Small start, but strong progress.

On Eraring: “Origin has submitted notice to AEMO to retire Eraring Power Station, potentially as early as August 2025. Origin will continue to assess the market over time, and this will help inform any final decisions on the timing for closure of all four units.” Eraring’s short run marginal costs in the second half of FY2023 were ~A$70/ megawatt hour (MWh), thanks to the coal cap of $125/t from December 2022.

Origin’s Energy Markets (gas and electricity) made a record $1,038m EBITDA, up 2.5x on zero volume growth, but note "increased fuel costs, primarily coal (-$303 million)” were more than covered by higher electricity prices, obviously.

Origin flags retail electricity tariffs likely to decline from July 2024. CEF agrees given the NEM prices is $78/MWh in the first 6 weeks of FY2024 vs $145/MWh average in FY2023, and the two-thirds collapse in coal prices in 2023 to-date.

One good sign is that Origin flags much more competition in retail markets with discounts of 15-20% off the default market offer (DMO) in the last few months, that is giving real consumer price relief when most needed - showing the dramatically improved retail electricity margins on offer now. 

AGL

There was lots of talk of underlying profit growth, but this needs to be considered in the context of a net loss after tax in FY2023 of $1.3bn.

AGL reports good progress with 316MW of decentralised assets under orchestration, +47% year on year (yoy).

120k peak energy reward customers, +20% yoy, is good news for peak shaving.

The disruption of solar is clear, at peak solar generation, ongrid demand is approaching zero, and wholesale prices negative. The trough to peak is often $300/MWh, far more than sufficient to justify accelerated investments in battery energy storage systems (BESS) to solve this problem. 

AGL reported no material public progress on building up the RE portfolio, despite the 12GW by 2035 target – very back-end loaded, a reflection of the lack of investment in inhouse capacity during the wasted five years under the previous luddite board and CEO.

Existing BESS at Torrens Island (250MW) and Broken Hill (50MW) under construction. The capex guide for FY2024 includes $300m for the Liddell battery (yet to reach final investment decision (FID)).

AGL is spending $400-500m pa sustaining capex to keep its coal and gas power plants open. A lesson in the fact that old clunkers take an ever increasing ‘investment’ just to stay open.

AGL is starting to talk about Industrial Energy Hubs and signing up industrial customers. We note that this new precinct initiative makes strong commercial sense. 

>>>Tim Buckley provided commentary on AGL’s results for ABC Radio’s PM program.

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IN THE PIPELINE… |

For our forthcoming work on capping the diesel fuel rebate to raise >$25bn by 2030 for reinvestment in building out Australian mining EV heavy haulage manufacturing onshore;  the Australian Sustainable Finance Institute taxonomy; and reform of Your Future Your Super benchmarks, please see our 21 July newsletter.

MEDIA |

We were active in commentary on a range of energy topics. See our other media here, including an extended interview with Tim Buckley on the Utopia IS Now podcast on climate finance and its key role in tackling the climate crisis and catalysing decarbonisation.

OUR WORK |

See more of our latest work.

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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