Hamilton Locke New Energy Expert Insights: The Global Energy Crisis and Hydrogen’s Opportunity

Expert: Mike Jefferies, Octopus Investments Australia

In this two-part New Energy Expert Insight series, we spoke with Mike Jefferies, Investment Manager with Octopus Investments Australia, to discuss the current state of play in the energy markets six months on from the beginning of the Ukraine crisis.

A long-standing member of the Octopus Investment team, Mike has experience across several areas of renewable energy, contributing to over $1 billion of utility-scale renewable generation equity and debt financing across retail and institutional funds. Octopus is one of the largest owners of renewable energy projects in Australia and Europe, managing some 300 assets for wholesale and institutional investors. In Australia, the firm oversees $1 billion in assets across construction and operational industries.

In this part one, Mike explains how the global energy crisis is impacting the adoption of renewables. 

Part I

The Ukraine Crisis has upended long standing assumptions about energy security and the global energy markets. Now six months on from the beginning of the crisis, what in your view has been its greatest impact on the global energy markets and has this had any effect on the Australian energy market?

Clearly, the energy crisis is front of mind for a lot of people worldwide as it’s a substantial input cost to everyone’s daily lives and the cost of living. As a society we take energy for granted and always assume it will be there and will be affordable. The energy crisis has largely been driven by high global commodity prices, exacerbated by supply chain issues and sadly the conflict in Ukraine. All of this has certainly shifted the mindset of continents with regards to their energy mix as seen by Europe’s pivot away from reliance on Russian natural gas. Before the crisis, Europe imported 40% of its gas from Russia. Now, Europe is showing a clear commitment to diversifying its energy supply mix and is seeking long term energy security from other global sources which have less sovereign risk and greater certainty, even if it’s more expensive.

The key question for Europe is where do they go to meet fuel demand? Currently, the volume of natural gas flowing into Europe has been largely reduced from Russia and markets are showing that liquified natural gas (LNG) imports from Asia have increased over the last six months to combat this supply shortfall.

This is relevant to the Australian energy market for several reasons. The Australian LNG Market is largely organised through long-term contracts (~80%) which is probably why we are seeing a large delta between LNG netback prices vs domestic prices (~$60GJ vs ~$35/GJ) as European demand has helped push up Asian spot prices as they look to fill their storage capacity ahead of winter.

Figure 1 Historical and forward short-term LNG netback prices1

Also, the world is now clearly in the transition to renewables and the balancing source of energy is currently gas. So not only is there added pressure coming from Europe but retailers also need to access the gas spot market to cover any short fall in supply, creating further volatility simply through supply and demand.

What’s interesting is a lot of the long-term LNG contracts in Australia are set to expire at the end of the year and therefore suppliers looking to re-contract will become fully exposed to the spot market until they re-contract.

Accordingly, key factors in the Australian energy market will be:

  • how big of a role Australian LNG plays in Asia and Europe;
  • what global options counterparties who are looking to re-enter new LNG contracts have, noting that typically these large LNG plants have been highly contracted in the past with multi-year tenors to provide greater certainty to their owners;
  • what prices will the new contracts get locked in at; and
  • how much will be supplied and for what tenor.

Theoretically this should impact LNG netback prices which in turn could flow through to sustained high energy prices in Australia, particularly with coal exiting the market and the supply gap widening.

I think the impact of these contracts coming to an end, coupled with high European demand will be important to watch in Australia over the next six to twelve months.

How is the recent volatility in global LNG spot prices impacting the adoption of renewables, particularly hydrogen?

The rollout of renewables is primarily driven by shortfalls in supply and rising energy price expectations. Renewables are the lowest cost and quickest form of new generation capacity. The energy crisis has also certainly thrown the diversification of the global energy supply into high gear, illustrated by various countries recently announcing either recalibrated supply strategies or new ambitious renewable supply targets. So, in short, these high commodity prices should be driving more adoption.

We are also seeing more support come through in the hydrogen market. For example, you have the European Union scheme to provide financial support to make up the difference between the market contract price for hydrogen and the price of hydrogen itself. In the United States, the tradable carbon tax credit performs a similar function – both make hydrogen commercially competitive. I believe more schemes like these will be seen globally.

There is also the time element. Currently, Europe is capping energy prices for individuals and corporations. This is applying a short-term answer to a long-term issue. However, there is also robust support across the continent not just for hydrogen development but for creating a market that can sustain it. So, what we’re seeing is government intervention addressing short-term fiscal issues lending itself to long-term renewable energy development. Should this continue, energy diversification will happen at a quicker pace.

Australia is well placed to capitalise on this, not only because we have access to an abundance of land, water, shipping and ports, but Australia also provides an option of low sovereign risk and a history of providing long-term energy contracts to other countries with certainty.

How do you see that global diversification trend playing out in Australia? Do we have the right policies in place to drive growth in renewables?

As I mentioned earlier this year2, it’s tough to deny that an energy market working in perfect harmony with 100% renewables would supply lower costing and greener energy to consumers vs the energy markets we see today, which are still heavily reliant on fossil-fuels. The delta in the falling levelized cost of electricity between renewables vs their fossil-fuel counterparts is a clear reflection of this, as higher commodity prices translate to a stronger investment incentive in clean energy. This understanding coupled with a current environment of high wholesale energy prices, supply chain constraints and the over reliance on others to meet domestic energy needs, are all clear drivers towards a well-diversified domestic energy supply mix for any country. 

For Australia, we are certainly in the transition phase with both the State and Federal government putting policies in place to help drive growth in renewables. However, the issue really becomes the speed and connectivity between State and Federal policies. In an ideal world it should all work in unison.

Focusing on the hydrogen market, I think it goes beyond just supporting decarbonisation targets – we also need government to actively step in and support the industry by creating stable market conditions for suppliers and helping buyers determine whether the hydrogen they are buying is of a certain standard. From an investment point of view, this is critical. Setting development targets, underwriting procurement, enabling infrastructure development, utilising skilled labour, incentivising electrification and driving down the levelized cost of energy to make it more competitive – these are essential to supporting the bankability of projects, the growth of the market and allowing for countries to push their energy diversification strategies.

Here in Australia, how do you think the Reserve Bank’s multiple rate rises will impact domestic renewable investment?

Rising interest rates are having an impact on investment in projects in Australia. However, from a global perspective I am not sure the rate increases are being considered a significant hurdle to investment. Investors are happy to take on known equity risks with a view that the markets will eventually unwind in the coming years, at which time they can refinance at a lower rate.

However, it is important to remember that the forces impacting the cost of financing projects are all interconnected. Higher rates are going to drive up the general cost of business, which in turn results in higher CapEx costs and tighter economics. This, coupled with continuing supply chain constraints, will impact the flow of capital into new projects over the next couple of years.

Join us for Part II as we examine what impact the changing energy landscape will have on the scalability and adoption of renewable hydrogen.

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.

1LNG netback price series | ACCC

2Could Russia’s actions in Ukraine accelerate renewables investment? – pv magazine Australia (pv-magazine-australia.com)


Senior Associate