Can we turn green to gold? The future of the Australian renewable energy market: Part One
Market Insight 02 September 2022 02 September 2022
Insurance & Reinsurance
In this series ‘Can we turn green to gold?’, we explore the changing energy mix in Australia and assess the insurance implications of the energy transition. This article is the first in the series and explores the tension between Australia’s position as the world’s third largest fossil fuel exporter, and its simultaneous unlimited potential as a key producer of green energy. We review the government’s approach to energy policy and how this has characterised Australia’s international reputation on the climate stage.
Australia is one of the sunniest and windiest continents in the world and should be uniquely placed to benefit economically from its abundant natural resources. Renewables are an obvious solution for Australia to improve national energy security and assist in its decarbonisation goals.
Australia, the Pacific Islands and the Southeast Asian region are some of the most vulnerable regions in the world to climate change with coastal communities in low-lying islands most at threat as sea levels rise and potential freshwater shortage issues emerge. Extreme weather events in recent years and months have increased in frequency and severity, including bushfires, floods and cyclones. As such, the Australian electorate has become markedly more attuned to climate risks and the social pressure on a fast transition to green energy has never been felt more acutely.
The successful functioning of the Australian energy market will depend partly on whether the new Labor government is able to unite the states with a clear roadmap on the energy transition and decarbonisation plan. Climate diplomacy will also influence Australia’s role as a renewable energy producer as the opportunity for Australia to be a global export leader is partly dependent on its international reputation and relationships with key players in the Indo-Pacific.
The 2022 ‘climate’ election
Anthony Albanese as the head of the Labor party was elected 31st prime minister of Australia on 21 May 2022. The significant swing against the former Morrison government is thought to be reflective, amongst other things, of voters’ rejection of the Coalition government’s delay in addressing climate change.
The election was billed the ‘climate election’, with a historic move of the electorate towards independent and Green Party candidates who campaigned on a stronger response to the climate crisis. The link between climate change and extreme weather events has become harder to ignore, with floods, earthquakes and cyclones having had devastating effects across Australia in recent years and months.
Even though the Labor party achieved a parliamentary majority the following week, the Greens and independents are still likely to have sway over the energy policies that are debated under Albanese’s leadership, where Labor will need the Greens and Independents (namely, climate activist David Pocock) to form a Senate majority. It is the highest ever Senate representation for the Greens.
In his first speech as prime minister-elect, Albanese proclaimed that Australia will become a “renewable energy superpower”, with commitments made for the proportion of renewable energy in Australia’s national energy market to increase to 82% by 2030. The Albanese government’s emissions reduction target of 43% by 2030 is a significant improvement on the Coalition’s previous target of 26-28%.
In their first week of office, Albanese and Foreign Minister Penny Wong took important steps to boost climate change diplomacy, stating in their address to ‘Quad’ partners (a strategic security network comprised of Australia, the United States, India and Japan) that the new government would build “a stronger and more resilient Indo-Pacific region”.
It is hoped that Labor’s plan to reinstate the position of Ambassador for Climate Change to the United Nations, and its bid to host the annual United Nations Climate Change Conference in 2024, will also assist Australia’s global profile as an actor on climate change.
The Labor Party has however insisted that it will maintain a coal export industry (coal is the country’s second-biggest export) and has not ruled out opening further coal mines. Forecasts for 2022 estimate there to be 69 new coal projects in the investment pipeline.
Which resources fuel Australia’s energy market?
Coal is still the largest generator of electricity in the National Electricity Market (NEM) and is a major export resource in Australia. Australia is the world’s second largest thermal coal exporter, with only Indonesia exporting more. Around 80% of Australia’s thermal coal is exported, its largest export markets being Japan, China and India.
Coal fired generators are increasingly unprofitable, driven largely by more frequent and longer, unplanned outages, together with higher operating and maintenance costs associated with the ageing plant and machinery. A number of Australian coal plants have recently been retired for these reasons.
Current predictions from the Australian Energy Market Operator (AEMO) are that coal-fired generators will be retired two to three times faster than previously anticipated, completely disappearing from the grid by 2043 and leaving a market gap for mining of critical minerals and renewables.
Australia’s thermal coal export earnings have however risen in the past two years as global supply disruptions linked to COVID-19 intensify. The Russia/Ukraine crisis has also increased thermal coal demand from Western nations as Russian Liquefied Natural Gas or ‘LNG’ on which those countries previously relied has been rejected and sanctioned.
The increased coal demand as a result of the Ukraine war may only be a short-term trend. Longer term, the war is expected to encourage economies to faster decarbonise and to look to alternative energy sources as part of the ongoing energy transition, such that the demand for coal will eventually decrease. China’s demand for Australian coal imports in particular is expected to drop significantly in coming years as China prioritises decarbonisation and focusses on boosting its energy security.
Australia’s mining sector contributes to around 10% of GDP and directly employs more than a quarter of a million people.
Even as there is a global switch to renewable energy, minerals will remain a key part of the revolution.
Australia is currently the world’s biggest exporter of lithium and a major exporter of rare earth elements, which are highly sought after in global supply chains for construction of assets like batteries, wind turbines and electric vehicles. Australia has a ‘Critical Minerals Strategy’ in place which seeks to capitalise on the growing global demand for critical minerals by de-risking projects to attract investment and generally creating an enabling environment through clear industry standards and the creation of dedicated production area ‘hubs’.
Oil and gas
Australia is a net importer of oil with only around 12 per cent of refinery feedstock domestically produced. The oil that is produced domestically comes from fields in offshore north-western and south-eastern Australia.
Given that almost all of Australia’s oil supply is imported, the country is vulnerable to oil shortages and price fluctuations, such as those caused recently by supply chain issues and the war in Ukraine.
Conversely, Australia is one of the world’s largest exporters of LNG, exporting around 80 million tonnes per year - in 2020-2021 LNG was Australia’s third-largest commodity export with a value of $30.5 billion.
The current government does not plan to cease LNG production, referring to it as a “key part of the Australian economy”. However, in order to meet the net zero emissions target by 2050, there are plans to decarbonise Australia’s natural gas industry by using carbon capture and storage (CCS) projects, and developing the clean hydrogen industry.
Australia’s gas networks have developed a high-level plan titled ‘Gas Vision 2050: Delivering the pathway to net zero for Australia – 2022 Outlook’ to achieve at least ten percent renewable gas in networks by 2030 and to reach net zero emissions between 2040 and 2050. The plan relies heavily upon blending biomethane (the renewably produced equivalent of natural gas) into the gas network to replace the current volumes of natural gas, with the eventual aim of achieving 100 per cent hydrogen in gas networks.
As at 1 April 2022, the penetration of renewables as a proportion of electricity generation nationally was 32.5%.
As at the end of 2021, there were 68 large-scale renewable energy projects under construction or financially committed, totalling more than 9GW of new capacity. Of those 68 projects, there were 42 solar projects and 19 wind projects; the remainder are bioenergy plants, hydropower projects and hybrid wind/ solar projects.
At the end of 2021, there were two major hydropower projects under construction, being (i) the Snowy 2.0 - an extension to the existing southern NSW system of nine power stations, 16 major dams, 80 kilometres of aqueducts and 145 kilometres of interconnected tunnels, with an added 350,000 megawatt hours of large-scale storage; and (ii) Tasmania’s ‘Battery of the Nation’. The latter aims to develop pumped hydro across sites in Tasmania, and to offer stability to the Victorian grid by providing energy through a subsea interconnector cable across the Bass Strait.
Grid-scale batteries, also known as ‘big batteries’, provide a way to store excess energy to be later used at peak times of demand. They also assist in responding to frequency disruptions. Investment in batteries is critical in accelerating the build-out of solar and wind resources and in ensuring grid stability.
The Victorian Big Battery is one of the world’s largest batteries, which enables an additional 300MW of electricity to flow through the Victoria-NSW interconnector cable. It was delivered in partnership with Tesla. Other grid-scale batteries currently being built are the Torrens Island Battery in South Australia, the Hazelwood Battery Energy Storage System in Victoria, and the CS Energy battery in Chinchilla, Queensland.
It is anticipated that there will be a six-fold increase in global demand for batteries as countries strive to achieve net zero emissions, with global battery sales set to surge to more than AUD 200 billion by 2030. Where half of all materials used in battery production are already mined in Australia, (including lithium, vanadium, cobalt, and other essential materials) Australia is well-placed to be able to secure a larger share of the growing battery market. By 2030, batteries could contribute AUD7.4 billion a year to the Australian economy and create up to 34,000 jobs.
Batteries however are a relatively new sector, and may be susceptible to risks that are yet unknown or insufficiently researched. In July 2021, a fire destroyed two Tesla ‘Megapacks’ at the Victorian Big Battery; a technical report made public in May 2022 attributed the fire to a liquid coolant leak causing thermal runaway in battery cells.
Insurers need to understand how a battery system is constructed, the protocol of its battery management system, minimising a thermal runaway risk, and whether the system adheres to international certifications around fire safety.
Australia has historically been reliant on non-renewable energy sources and has struggled to shake its unenviable position as one of the world’s largest greenhouse gas emitters. However, as political landscapes shift, both domestically and globally, and given Australia’s vast potential as a renewables producer, Australia’s transition to green energy and its new reputation as a recognised actor on climate change is imminent.
The next article in our series will explore the biggest insurance and logistical challenges to a successful transition to renewables in the current economic climate.
With over sixty offices and associated offices worldwide, Clyde & Co’s global network is represented in all key markets for renewables and is therefore well-placed to assist insurers in relation to renewables losses wherever they arise. Please contact the authors below if you require any assistance in this space.