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The trouble with big targets … it’s exports versus the NEM

Leaping ahead to build massive amounts of renewables to secure green energy exports will only make the job of fixing the NEM more puzzling. Jeremy Chunn reports.

Clean energy targets are useful but does it help when they are very big and very far away? As Canberra avoids clear commitment to change, many of the states and territories have declared strong intentions. Tasmania is pitching for 200% renewables by 2040 and South Australia 500% by 2050, both hanging their hopes on establishing strong green energy export links.

Ambitious state targets linked to clean energy exports are a good thing for the country, unless it means disruptions to the primary task of fixing the National Electricity Market. With state targets that rely on enormous capacity of intermittent wind and solar generation, which will generate when it wants to, powering the manufacture of exports in a world of commodity pricing and trade volatility – what can go wrong?

“I would hope that addressing local markets and local demand would be a safer bet for investors than export opportunities,” says Bjorn Sturmberg, research leader on the Australian National University’s battery storage and grid integration program.

There are much greater efficiency losses in sending power through undersea cables or creating hydrogen, then condensing it and shipping it overseas, than using the same electricity locally, Sturmberg says. Besides, local demand is much easier to forecast than export demand. “[Building clean energy generation to supply local demand] should be a much lower risk investment proposition,” he says. “You would hope that would be the place to start.”

Transmission is a further complication. Tasmania’s plans for 200% clean energy will rely on a second interconnector with Victoria, the Marinus Link. “Who pays for that and how that works are still very much a contentious questions,” says Dylan McConnell, research fellow energy systems at the University of Melbourne’s Energy Transition Hub.

Under the current rules Tasmania and Victoria would be expected to pay for the link, but Tasmania in particular figures that because the entire NEM will benefit that the bill should be shared around. Similar anguish clouds the EnergyConnect project that will link NSW and South Australia, where projected costs have increased from $1.6 billion to $2.5 billion over the past year (estimates included in AEMO’s 2016 National Transmission Network Development Plan ranged from $500 million to $1 billion).

“The question around who benefits, who pays and what is the right allocation is still very much up in the air,” McConnell says.

The energy sector has been finding its way without clear policy direction from the Commonwealth.

Federal fog

If the states appear aggressively ambitious in their targets it could be because there has been no clear direction offered by the federal government in how to achieve a clean energy transition, says BloombergNEF head of Australia research Leonard Quong. “Some have been more ambitious than others, some have been more direct than others, some have offered different types of strategies pursuing different pathways, desiring different outcomes,” he says. “With that sort of policy patchwork there are challenges with the developments becoming efficient for consumers, efficient for industry, efficient for investors. But what we see is, by and large, some direction is better than no direction.”

As far as transitioning the NEM to renewable energy, state targets well beyond 100% are surplus to requirements. With adequate interconnection, yes it makes sense, especially if neighbours are taking longer to turn down their reliance on fossil fuels. But a connected NEM that solely relies on solar, wind and storage still only exists in theory.

Electricity is a fundamental service, Quong says. “It’s a requirement; it keeps the lights on and it keeps businesses going.” Beyond 100%, it can only be useful as an export. If our trading partners are thinking the same way, then “Australia deserves a seat at the table,” he says, whether it be as a producer of hydrogen, ammonia, steel or aluminium created using clean energy that is surplus to domestic demand.

Whether or not a 500% target like South Australia’s should be taken seriously is another matter. The implications for business and consumers are too remote and unknown to speculate over. Such announcements are more than just green window-dressing, however, if they turn out to be harbingers of change to mechanisms and policies required to reach the destination.

“All change begins with a little bit of hot air, typically,” Quong says.

Some states are banking on a booming export market for green hydrogen … but at what cost to the NEM?

1,000% renewables

Australia, unlike any other country in the world, has the opportunity to decarbonise the world from its vast renewable resources – or so says H20hm Engineering and Consulting Services general manager and founder Warner Priest. “To do that it would need to increase its renewable penetration from what it is today, around 22%, to in the region of 700-1,000%, just to be able to export its sunshine, its wind,” Priest says. “In doing that, [Australia’s] domestic use of energy is really a parasitic use – it’s a fraction of the electricity needs that can be generated by this country to serve other countries.”

As the local industry becomes more expert at installing and running clean energy generation, electricity prices will fall to be among the lowest in the world. “We will have the lowest energy cost of any of the other countries,” says Priest, with obvious benefits for manufacturing, mining and steelmaking, among other sectors. “We’ll be able to compete with low-labour-cost countries on the back of very low energy costs.”

None of this will happen, of course, without offtake agreements with major trading partners. Priest points to Japan’s recent habit of signing offtake agreements in return for the opportunity to invest. “They’re basically servicing both ends.”

Surplus to requirements

The temptation to announce targets as multiples of 100% is misleading and potentially unhelpful when voters are slowly getting used to the language and mathematics of the energy market they rely on every day. For a start, you cannot run a system on 100% capacity because there is always the risk that maintenance, failure or lack of fuel or resources would see supply fall short of demand. Secondly, no state should host too little capacity in the expectation that shortfalls will always be supplied by surplus from neighbouring states.

In a connected NEM, however, can ambitious targets of 200% to 500% in some states distract neighbours from their plans to replace coal and gas generation, not to mention scare off investors? An overbuild of wind, say, in South Australia would keenly affect prices for wind generation in a more strongly interconnected NSW. That might influence an earlier exit of coal generators from the market, but until that happens it would also be bad news for wind developers planning new generation in NSW.

“Investors have learnt a lot about the energy transition in the past five years,” Sturmberg says. “The effect very cheap renewables have had on market prices will be significantly intensified if we get to 500% wind in South Australia, or similar. Investors have to go into these schemes eyes open.

“There is some uncertainty about what kind of a market will be suitable for a system that has a huge amount of renewables.”

The west wind

Western Australia may not have declared its clean energy intentions in multiples of 100% but that’s where the largest export projects have been proposed. Massive wind and solar projects linked to hydrogen exports include the 26GW Asian Renewables Energy Hub in the Pilbara, the 5GW Murchison Renewable Hydrogen Project and 1.5GW project in Oakajee. At Bell Bay in Tasmania it is proposed electrolysers will run up to 24 hours a day. “One of the problems with solar is your utilisation is only five to six hours a day,” Warner says. It remains to be seen whether SunCable’s proposal for 10GW of solar in the baking centre of Australia, not ideal conditions for solar, will pass go.

Net-zero announcements from major economies China, South Korea and Japan augur well for hydrogen, although it’s still unclear which sectors will adopt it, when it will start to be used in earnest and the volumes that will be required. Until then, it’s important that mechanisms are developed to support the transition. Corporate targets for sustainability are another good indicator of the market’s intentions to adopt the clean fuel, so long as they are acted on.

BloombergNEF has seen a growth in clean intentions – very obvious in 2020 – across resources, utilities and investors. To understand whether words will relay into actions, the analyst attempts to measure momentum towards green targets. “Is there movement, is there inertia behind this growing direction to decarbonise,” Quong says. “I think the answer to that is a very clear yes.”

Hydrogen production is the much-touted end use for all this excess clean energy that’s been mooted, without too much detail on demand, storage, transport and which sectors it is meant to serve. “Some of those questions cannot be answered by the state governments alone; they rely on international governments to develop policies to drive decarbonisation of industries,” Quong says. “These are questions global governments are grappling with themselves.”

In the meantime, the clean energy generation sector will be waiting to see when and how investment will be triggered, through formal policy announcements and reverse auctions or via institutional and private finance.

“Is it up to governments to decide where investment goes or is it up to the market? At the moment we have a pretty messy blend of both,” says McConnell. “That’s a challenge I don’t think is going away any time soon.”

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