The $7 trillion question

Thursday, 15 December 2022

Australia has now committed to a net zero emissions economy by 2050, or sooner. 

This is expected to cost 5% of the country’s annual GDP over the next 28 years.^[1] That is estimated to be $7 trillion^[2]. Private investment is critical to funding the objective, so state and federal governments must reassess how to make the investment more attractive for the private sector. Achieving the 2050 target will also, in large part, rely on the willingness of Australia’s energy sector to invest significantly in technology, infrastructure and securing the experts needed to implement the technology.

While the current National Electricity Market (NEM) is widely regarded as a case study in successful microeconomic reform, its continued success remains uncertain. This was highlighted by the work of the Energy Security Board’s (ESB) Post-2025 market design work which set out an ambitious pathway to transition the NEM into a modern energy system fit to meet consumers’ evolving wants and needs.^[3] Change is inevitable. However, change on the scale envisaged by the ESB and as forecast by the Australian Energy Market Operator (AEMO) in its 2022 Integrated System Plan (ISP), may eclipse that which we have seen in the last half century. A big part of this change has been, and will continue to be, led by the rapid growth of both large- and small-scale variable renewable generation and battery storage technologies.

In 2008, only 14,000 solar PV systems were installed on our rooftops in Australia. Now, it is estimated 3 million (30% of all residential rooftops) have a PV solar system providing the grid with 15GW of solar generated capacity.^[4] But as we know, most of our daily power usage is during the early evening as the sun goes down when people are at home. Similarly, the original Tesla home battery made available in 2015 has since had 140,000 installations in Australia. This is expected to climb to over half of all new homes by 2032. These two technologies alone have changed energy consumption behaviour and will continue to change consumption patterns as more consumers invest in solar PV and battery storage systems. AEMO’s 2022 ISP forecast the NEM’s daily operational demand pattern to change as distributed storage helps soak up excess distributed PV during the day and reduce peak demands in the evening.^[5] Consumption patterns will continue to evolve as we see improvements in energy efficiency and increasing electrification of the economy. Electric vehicles being just the start as they gain in popularity and are engineered to act as a secondary battery for the home.

With substantial cost reductions, investing in such technologies enables more consumers to directly contribute to meeting our net zero emissions objective. However, the power system and regulatory frameworks supporting it were not necessarily designed with two-way energy flows in mind. Reforms must provide for greater integration of distributed energy resources. Delivering value for all Australians, not just those who can afford Tesla batteries, and improving the accessibility of electric vehicles are just two of several key strategies.

For institutional power generation, large-scale solar and wind are the cheapest form of new electricity and form a critical part of AEMO’s ISP.^[6] For this power source to be a long-term contributor to the Australian electricity network, we must be able to generate and store solar and wind generated power and integrate it into the network’s dispatchable generation (i.e. on-demand power). This will require substantial investment from public and private sectors. Significant investment in critical new transmission infrastructure (some 10,000kms worth), connecting geographically and technologically diverse generation sources, is also important. Enabling this transition at rapid speed and while ensuring Australians continue to enjoy secure, reliable and affordable power is equally challenging.

Former AGL CEO-in-waiting Christine Corbett recently discussed some key aspects of navigating through the energy transition. In addition to the challenge of staying motivated over the next 28 years, meeting the 2050 targets will, realistically, involve some compromise.^[7] Stakeholder management and negotiations will be key. Ms Corbett also highlighted:

• Private enterprise and government cooperation is essential: Private investment is compulsory to meet our net zero emissions objectives. The renewable project feasibilities need to stack up, so pricing into the energy market must better reflect cost of production and connectivity to the grid must be streamlined. Whilst the Federal Government is trying to set the targets and initiatives, the states are customer and retailer facing. So, they need to ensure that the plan is customer centric and affordable. There will be times where state and federal government roles and responsibilities between will converge. Clarity on responsibility and accountability will be critical for success. The governance framework must be set early and remain somewhat flexible as the plan evolves. Critically, the framework must also have a final decisioning power to limit dissension.
• Human resource planning must start now: The number of experts in the world who can do this type of work is finite, and they are in demand globally. The current generation of experts may set the strategy, but we need the next generation to execute and complete. To bolster a domestic talent pool, the government should consider subsidised specialty study focussed on training the workforce required to realistically achieve our 2050 objective. We must also consider how to utilise or re-skill current employees at traditional energy facilities that have been given an end-of-life target date.

Australia’s aggressive decarbonisation plan also provides opportunities for growth and evolution in many sectors. For example, we need study programs focussed on supporting and evolving the technology required to safeguard the reliability of supply as new renewable energy initiatives are discovered. We also expect to see significant benefit from the required infrastructure investment.

The 2050 de-carbonisation target is an unprecedented infrastructure plan, and one that will impact every Australian. Whilst most Australians would support the transition to more sustainable power generation, the funding of the $7 trillion price tag is still very much uncertain. If the government want significant private sector investment, they will have to underwrite grid connectivity and pricing to make the investment more attractive. Private enterprise, with its significant collective weight, may be the ideal stakeholder group to campaign realism into the state and federal governments’ plans, drive the importance of affordable electricity and push for educating and upskilling our workforce to be able to tackle the 2050 objective head on. With energy costs increasing and this opportunity looming, we currently have the luxury of time, but it cannot be wasted.