Podcast | Ep.63 Economics of the energy transition

Maria Rampa: Hi, I’m Maria Rampa and welcome to this episode of Engineering Reimagined.

To keep global warming to 1.5 degrees Celsius, as set by the Paris Agreement, emissions need to be reduced by 45 per cent by 2030 and reach net zero by 2050. As many economies transition away from fossil fuels and adopt renewable energy to help reach these targets, there is a realisation that it’s extremely challenging and we aren’t progressing fast enough. In 2023, global warming reached 1.5 degrees, so we are already playing ‘catch up’ when it comes to reducing the impacts of carbon emissions.

In this episode of Engineering Reimagined we hear from Tony Wood, Energy and Climate Change Program Director, at the Grattan Institute, who spoke to Aurecon professionals, including Paul Gleeson, Managing Director, Energy ANZ and Group Director, Sustainability, about the economics of the energy transition – the challenges and opportunities for Australia and beyond.

Let’s hear first from Paul who sets the scene for the energy transition, particularly for Australia. When he mentions the federal emissions reduction target he is referring to the Australia-wide target as set by the Federal Government and when he mentions NEM he is referring to the National Electricity Market.

Paul Gleeson: So the transition itself is massive. It's a level of capital deployment or capital flows that none of us have seen or none of us have really experienced anything of the scale. And it's a little bit hard sometimes to get your head around. I know for me, looking back to where I started my career, when something that was a couple of hundred megawatts was very large, to now be talking to multiple clients who are each talking about multiple gigawatts. It's a bit of a reality check for me to just keep thinking of the scale of what we're trying to do here.

But one key message I want to give you is, though, the transition is real, it is underway, it is happening right now. The bulk of the technologies we need for the transition are available to us, certainly for the decarbonisation of the electricity sector, many of the technologies are proven, bankable and economic. And so it's really not a question of whether we're doing this thing or not. It's how fast are we doing it? Can we hit the targets that have been set? Can we overcome the challenges that are starting to emerge now?

The reality that most of the challenges that I see are not really technical anymore. That's not to undermine the big technical brains whom I know very well are going deep on our systems and other tricky things. But we know how to solve those things. Whereas the challenges around community acceptance or rejection of new transmission lines or wind farms, local environmental impacts, trying to be traded off against global environmental outcomes, these things are the real challenges that the transition is facing now.

And I do think that we can overcome them the way we have the technical and the economic. But I think it's going to be complex. We've now got a target that's been set federally of 43% emissions reduction by 2030, which roughly means you need to get the NEM to be 82% renewables in that time frame. But then to realise that that pathway in itself doesn't even get you aligned to a 1.5 degree or Paris Pathway is a really good reminder for me every morning that we have to keep pushing, we have to keep trying. And if that date is out of reach now, then so be it. But then how do we not let it be ten years out of reach? How do we try and get it as close to that as we can? Alternate pathways or alternate solutions that can't get us anywhere near that timeline are not really particularly useful to us at this time. This is the decade that matters, certainly for the electricity sector, I think we’ll decarb other sectors perhaps more in the thirties, but this decade in Australia for decarbonising the electricity sector is the big one.

So I'll wrap it there and I'll hand over to you Tony.

Tony Wood: Thanks, Paul. The first thing is that there is no partv of our economy that isn't going to be affected in some way by changing climate or by the responses to the changing climate. Things that have been in place like our gas industry. We've had a gas industry in this country for almost 200 years. We're going to just shut it down basically in the next 20 or 30 years. We're going to turn the electricity sector on its head. Transport is going to change fundamentally. Major industry, which is one of the more difficult to decarbonise sectors have got some challenges ahead, but they're up for it. They see the opportunities and they see the potential, but there are some significant challenges.

I think the reality is, that it's proving to be much harder than those who would like to have thought otherwise. But also there is no choice. And the way forward is becoming more clear. At the same time as the things that were too optimistic have become also increasingly clear. Some of them, as Paul said, are not basically about technical issues. They're mostly about social issues and environmental issues.

The developed world needs to be at net zero by 2045. We're probably heading towards something at least 30, 35 if not 40% emissions reduction by 2030. The electricity sector has significantly reduced emissions. The challenge is that we've done the easy bits. Things like agriculture and transport are difficult and Australia might, in the next little while have some sort of emission standards, unlike vehicles.

We went from 10% renewables in Australia for the first ten years of this century. And then we started to make some progress. Because we had the renewable energy target, it got us to 35% renewable energy by the middle of 2023. So we've gone from 10 to 35 in about 20 years. The problem is we want to go from 35 to 82 in the next six years. That sounds a little bit more difficult. Just two comments about gas. The first thing about gas is that even though it's sort of arithmetically obvious, the consequences are quite significant that people use gas very differently across the country. What it means is when you think about if you want to start to decarbonise you wouldn't do the same thing across the country. The emissions from the coal-fired power stations occur at the generator. The emissions when we use gas occur in our homes and we are the ones that are going to have to change. It's possible, right. Most people who use gas today would be financially better off if they were using electricity even after paying for new appliances. It'll be cheaper, it'll be cleaner for the environment and be better for their health.

The gas industry is arguing that we should be putting renewable gas through our gas network. And there are pilots in Australia doing just that. The problem is that what is this renewable gas we talk about, some people would say should be biomethane. Well, it's expensive. There's not much of it. And you'd be better off using it for something else like aviation fuel, which is really hard.

Hydrogen is the great hope. Problem is the best you could hope for on any current numbers suggest that the cost of hydrogen converted to energy is it might get somewhere close to parity with electricity by 2040. Part of the reason is because the biggest proportion of the cost of hydrogen is the renewable energy that goes into making it. So if the renewable energy gets cheaper, hydrogen gets cheaper but so does electricity. So why convert it to hydrogen in the first place? Now there are some other places where that's not true, where hydrogen is a very sensible thing to use. We do think that we're going to have to revisit the idea of some sort of policy to reduce emissions and increase renewables in the electricity sector if we seriously want to get to the 82%. Remember that the government legislated a 43% emissions reduction target. The way it proposed to achieve that was the safeguard mechanism and also the renewable energy target.

So the safeguard mechanism is a perfectly fine emissions trading scheme. That's what it is. It's what's called a baseline and credit scheme. So instead of paying for every ton of emissions you put in the air you're always given a baseline which reduces over time, and you've got to meet that baseline, or you've got to pay and people who are above their baseline have to pay, and those who are below can get credits for doing it. That's the way that one works. The problem with baseline systems, you've got to work out the baselines and so you spend ten years arguing about what your baseline should be and not actually doing anything about it.

So, renewable energy target is a different sort of carbon mechanism, but it was never intended to be a carbon price. It was always intended to be industry policy because we thought when it was introduced it would be the thing that would give the renewables a boost so they could get up and running in Australia and then the carbon price would take over. But when you look around, when you got to that point, there was no carbon price. So the renewable energy target was left standing as the only mechanism in place for carbon emissions reduction. So what we're going to see in the next year is the Climate Change Authority is going to recommend to the government, not only what our target should be for 2035, but also they're going to be talking about sector pathways.

The targets by themselves are important, but not sufficient. And so what we don't have, is the policy to reduce emissions in the electricity sector. We do think the reliability issue has to be addressed. And that's the second point. And transmission is really hard.

We are going to need plans with degasification. There are no constraints on emissions from gas at the moment, even though gas is responsible for 20% of our emissions.

Heavy industry – There is the safeguard mechanism in place, but I think there's going to need to be more done in that area and that's where maybe hydrogen will play a role.

Transport – The first step is to put some sensible standards which tighten ovem, r the next 10 or 15 years to reduce emissions from light vehicles. Heavy vehicles is more difficult. Whether or not hydrogen-based fuel cell electric trucks is the right answer, nobody's really sure yet. A lot of people are doing trials. That's probably what we have to keep doing.

Agriculture – There’s a lot of R&D going into the on-farm stuff like tractors and the use of manure and so on. Obviously, the biggest source of emissions in agriculture is burping cows and sheep basically. There are some things you can do about it. There's a seaweed additive that you can feed to cows. I know some people who are working on genetic with livestock and they reckon that can reduce the emissions from cows and sheep by 50% through genetic breeding.

And then the world of offsets. Offsets is a big deal. When you hear a company say, we're committed to net zero by 2050, we're going to reduce our own emissions and offset the rest. Be very careful. It's a dangerous term. It's full of claims and false claims, but there's reality to it. The problem is that the demand for offsets may very well quickly outstrip the supply.

Could you design a system in which you had infungibility across those economic sectors? Ideally, if you have sector-based policies, what you should be doing is thinking about how they could transition to be economy wide carbon pricing.

Paul Gleeson: Just a question related to what we touched on and you did as well around the challenges being less about the technical and maybe slightly less about the economics now and very much being in the regions. What's the community reception towards new transmission lines, wind farms, solar farms? Do you see any possibility for a change in either approvals processes or even policy? Or will the new climate authority play a role in this, do you think? Or are we going to have to keep going on the very slow, tortuous path that we are at the moment?

Tony Wood: Basically the problem at the moment is with the price of renewables is that we don't have any space to put them anymore. There's no transmission line. The cost of finance wasn't the major impediment to transmission. It was the fact that all the regulatory processes get in the way. And then you've got all the community pushback. So putting more money into it isn't going to help.

There's two big pseudo technical problems. The challenges of putting underground is just too expensive for most of the transmission lines we want to build. The second big problem, by the way, is that the last 10% of the electricity system transition will cost more than the first 90%. If we don't find some interesting solution to it, and we still want to try and meet these emissions reduction targets, you don't get the emissions without the renewables, you don't get renewables without the transmission, then we're going to have to do something about it. I don't think the regulatory issues have been bad and I don't think we've done community consultation well at all.

So, Australia is in a very good position. We have got the world's biggest opportunity. But we've got these challenges to get through and we've got to do both. And that's why it has become very challenging. But it's also why it's exciting. I do buy into most of the energy superpower story.

Wrap up

Paul Gleeson: I agree that Australia is in a great position to implement the energy transition in a way that is beneficial from an environmental, social and economic perspective, and potentially to role model an approach for others. We have to be brave, we have to make some tough decisions and we have to move quickly. But if we get this right, we will gain an economic advantage when it comes to producing commodities and goods for the global market, and we will have provided opportunity in our regions, and we will have looked after the environment locally and globally in a way that is sustainable for the future. Thanks so much to Tony Wood for this great discussion on the Economics of the Energy Transition.

Maria Rampa: We hope you enjoyed this snapshot of the challenges and opportunities for the energy transition, particularly for Australia.

Please leave us a comment and don’t forget to subscribe and keep up-to-date with upcoming episodes on Aurecon’s social media channels.

Until next time, thanks for listening!

Decarbonising electricity for a sustainable future

To limit global warming to 1.5°C, as set by the Paris Agreement, emissions need to be reduced by 45 per cent by 2030 and reach net zero by 2050. Many economies are transitioning away from fossil fuels and adopting renewable energy to help reach these targets. But this is extremely challenging, and we are not progressing fast enough.

Tony Wood, Energy and Climate Change Program Director, at the Grattan Institute, talks about the economics of the energy transition – the challenges and opportunities for Australia and beyond.

“There is no part of our economy that isn't going to be affected in some way by changing climate or by the responses to the changing climate,” Tony says.

“We're going to turn the electricity sector on its head. Transport is going to change fundamentally. Major industry, which is one of the more difficult to decarbonise sectors have got some challenges ahead, but they're up for it.”

Joining Tony Wood for this episode of Engineering Reimagined, is Paul Gleeson, Aurecon’s Managing Director, Energy for Australia & New Zealand and Group Director, Sustainability.

The greatest sustainability impact that can be achieved is to limit climate change through the decarbonisation of electricity. What does it take to deliver the energy transition?

“We have to be brave, we have to make some tough decisions and we have to move quickly,” says Paul.

“If we get this right, we will gain an economic advantage when it comes to producing commodities and goods for the global market, and we will have provided opportunity in our regions, and we will have looked after the environment locally and globally in a way that is sustainable for the future.”