The ‘Business’ of Australia’s Green Recovery – Part 2 – Decreased Cost of Generation and Energy Security Driving the Green Economic Recovery

Australia’s climate commitments have come under intense scrutiny once again following the recent floods in Queensland and New South Wales. This came on the back of COP26 (the UN Climate Change Conference in Glasgow) in October and November 2021, at which the Australian Government, despite setting a target of net zero emissions by 2050, received criticism from many nations for declining to revise its existing interim target of reducing emissions by 26-28% by 2030 to a level necessary to meet the Paris Agreement goal of limiting global warming to 1.5°C by the end of this century.

While important, the reality is that the commitment to net zero emissions and the transition to a lower carbon economy is no longer primarily driven by governments.

This has been a distinct shift which has occurred largely in the last 24 months – a hidden transition as COVID-19 has dominated global attention. At the same time, however, the pandemic has itself accelerated this shift, as governments and businesses collectively focus on ‘building back better’ in a new world.

We attribute the role of business in the green economic recovery to:

  1. environmental, social and governance concerns (ESG);
  2. decreased cost of generation; and
  3. energy security.

This series is divided into three Parts. Part 1 deals with the ESG concerns and Part 2 deals with the decreased cost of generation and the necessity for energy security. Part 3 demystifies the Australian carbon market and focus on the distinction between net zero and carbon neutral, greenwashing and Australia’s potential as a carbon sink.

PART 2 – Decreased cost of generation and energy security driving the green economic recovery

Traditionally economic growth and energy demand went hand in hand. This means that the wealthier a country, the more electricity it generated and the more CO2 it emitted.1 This culminates in the world’s two energy problems. Firstly, that the bulk of our energy generation produces carbon dioxide emissions, with Asia Pacific accounting for 52% of global emissions in 2030. And secondly that about 770 million people still lack access to electricity, which means that we will see an 80% increase in generation capacity by 2040.

Addressing these seemingly opposing energy dilemmas of increasing electricity supply and decreasing CO2 emissions creates a tremendous opportunity for business, especially as the cost of renewable generation technology have decreased significantly in recent years. For example, the cost of solar generation has fallen by a staggering 80% since 2010.2 This has accelerated the uptake of renewable energy by generators in large scale generation, and also by households installing rooftop generation.

The realisation of business opportunities in renewable energy is evident. The NSW New England Renewable Energy Zone for instance attracted 4 times more applications than it can accommodate, and the NSW hydrogen hub scheme eight times the state’s target.

The effect of this high uptake of renewable technologies have however caused a substantial shift in the NEM’s energy demand profile. As explored in our article on the electricity duck curve, there is now a time of day when electricity is, for all practical purposes, free.

While this predicament erodes profits for some generators, it does lead to lower electricity prices benefitting parts of the economy. It also holds a tremendous opportunity for generators willing to innovate. To a large extent we are still operating in an energy market where generators were designed to follow load, but we are transitioning to a market where load can follow generation. In such a market the ability to shift one’s demand profile is key, and possible due to technological advances and storage solutions.

The message to generators is clear – there will be a point in time for somewhere the business of generating electricity alone will not be enough. Generators will have to explore the synergies that their generation facility has with other industries, determine what opportunities exist beyond their core business and find their Power PLUS. This sees an abundance of energy move an economy from selling electrons to selling tomatoes, from selling iron ore to selling steel and from selling wool to selling cloth. Keep a lookout for our New Energy Quarterly on Power PLUS where this theme I explored in greater detail.

A discussion on the drivers of the green economic recovery would however not be complete without mentioning the European energy security crises, created by Russia’s invasion of Ukraine. While the EU has responded by implementing various sanctions on Russian oil and gas exports, the world has witnessed the limitations of international diplomacy when energy security is involved. In a world where countries are dependent on the importation of energy to sustain their economies, the exporter of energy often has the upper hand.

One can only speculate what the international response, and the outcome of the invasion, would have been if the EU was reliant on itself for its energy security, or it had a greater choice of where to purchase energy from.

In a market where cheap, decentralised solar and wind generation can be coupled with storage solutions and hydrogen transport, international alliances may look different in the years to come. This is especially true as the COVID-19 recovery measures that heavily invested in renewable generation and hydrogen development can now benefit from the creation of a European offtake market

Up to now, the EU relied on Russia to supply 25% of its oil and 40% of its gas requirements. In a bid to make Europe independent from Russian fossil fuels, the European Commission announced the RePowerEU plan on 8 March 2022 which will, amongst others, quadruple green hydrogen supplies by 2030.

Business is alive to this shift, as the industry is increasingly looking at methods to secure their own sources of electricity generation. This is evident through the various projects announced in recent weeks where European businesses are planning to purchase electricity from independent renewable power producers or develop their own generation facilities.

As evident from the above, the COVID-19 recovery has created the perfect market conditions for businesses to accelerate the shift to a carbon neutral world – and it is heartening to see that we are building back greener.

The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.