Among the consequences of the storm that cut power in Victoria late last year was Alcoa’s closure of one of two potlines at its vast Portland smelter. Although the disruption lasted just a few hours, it took months to get the line up and running. The outage was a stark reminder that we need to act now to secure Australia’s energy future.
As reliability has declined, electricity prices have soared. Earlier this year, some businesses faced price hikes of around 20 percent.
These two elements – cost and the reliability of supply – lie at the heart of the challenge. Also, there is sustainability, with corporates expected to consider their carbon footprint and how they source energy. The challenges in getting this right are significant; larger still are the costs of getting it wrong.
Australia’s ongoing energy transition will eventually see zero-carbon renewables such as solar, wind and hydro provide the bulk of its energy requirements.
Gas has a vital role to play as a bridge – but the rapid rise in gas prices coinciding with the shutting of nearly 15 percent of Australia’s ageing coal-fired generation recently has undermined that, with more to come (for example, the Liddell power station in NSW).
An inconsistent approach and lack of consensus on the way forward between federal and state governments has complicated efforts.
The recent Finkel Review tackles these issues with a multi-decade blueprint focusing on four areas: increased security, future reliability, rewarding consumers, and lower emissions.
The paper foresees a reduced role for coal by 2050, and a vast increase in the use of renewables – from 28 percent in 2020 to either 73 percent under a Clean Energy Target policy or 70 percent under an Emissions Intensity Scheme. As the paper points out, wind power is now cheaper than coal, and solar is closing fast.
When it comes to energy development, dozens of countries are ahead: Australia ranks 53rd in the World Economic Forum’s 2017 Energy Architecture Performance Index, just behind the US and Israel.
Switzerland, Norway, Sweden, Denmark and France lead the way, with Sweden’s investment in renewables helping it to reach its target of 50 percent of consumption from renewable energy ahead of schedule.
The index assesses each country based on three factors: how well its energy architecture meshes with its economic growth; the impact of its energy supply and consumption on the environment; and the extent to which the energy supply is accessible and diversified. It is the second of these factors in which Australia fares particularly poorly.
The Australian government’s acceptance of 49 of the Finkel Review’s 50 recommendations is a welcome step to building a more secure, reliable and lower-cost energy future. But without the 50th recommendation – the clean energy target – this will not provide the clear direction and investment certainty required to ensure an orderly transition.
Improving Australia’s energy mix will require investment in new energy assets.
Uncertainty has seen some companies implement their own solutions. The road to self-reliance is not straightforward but the benefits – reduced volatility and operational risk; improved sustainability and reputation – are worth the effort.
There are three common solutions: embedded networks; commercial and industrial solar; and corporate power-purchasing agreements.
Among the first group are embedded networks that use a tri-generation plant: these take in gas, and simultaneously output power, heating and cooling. Melbourne Airport installed an 8MW tri-generation facility in 2014, for example. Sydney Town Hall began running a 1.4MW tri-generation system last year to manage peak demands, and will sell excess power to the grid.
Secondly, commercial or industrial solar allows a business to cut its operating expenditure and boost supply reliability, particularly when combined with storage and an energy management system. Examples include Sydney’s International Convention Centre, which installed a 520KW solar array on its rooftop that will provide around five percent of its energy requirements.
Thirdly, a number of larger energy users have explored using corporate PPAs to underwrite the supply of electricity. Corporate PPAs – in which a company either buys renewable energy from an independent generator or itself invests in energy generation – have become increasingly popular. The trend is led by the US, where Facebook, Amazon and Alphabet were among the first entrants.
However, corporate PPAs are complex agreements and they require a far longer-term commitment, typically a decade and ideally longer, to underwrite a project. Yet they are finding traction in Australia as organisations looking to ensure their infrastructure energy needs become more self-reliant. In May, for instance, Telstra signed a PPA with RES Australia to buy the output of the latter’s 70MW solar farm being built in Queensland.
Also in May, Sun Metals began work on a 125MW solar farm to supply energy to its zinc operation outside Townsville. And earlier this month Newcrest Mining said rising electricity prices meant it was assessing whether to install a solar farm at its Cadia mine in NSW.
Universities are going down the self-reliance path too: Monash University, which recently put out an RFP for an annual 55GWh renewables project, expects all its energy needs will be met by renewables by 2030.
Corporate PPAs allow companies to access the power and green certificate without needing to own the asset. That has benefits for the balance sheet and takes advantage of the supply of competitive capital seeking exposure to renewable energy assets.
But what works for organisations like these might not work for all. Other factors to consider include: consumption levels and the shape of that consumption over a 24-hour period; whether the organisation has an investment-grade credit rating, which is key for obtaining financing; and whether it has the internal capability to manage the risks associated with a PPA on an ongoing basis or is prepared to set up such a capability.
The complications don’t end there: for example, if a company is contracting with a renewable supplier, it also needs to consider issues around supply fluctuation – also known as “firming” – that are inevitable in a variable energy generator.
Decentralising energy assets
These changes in organisational (and indeed in household) self-reliance fit a broader pattern in the energy sector: the decentralisation of energy assets. Take solar PVs – a decade ago, Australia had just 9MW of installed capacity; today it stands at a little over 6,200MW.
There is a movement towards sustainability in social infrastructure too, as we’ve seen in hospitals, schools, prisons and low-cost housing. The best time to incorporate on-site generation assets is during the initial design and construction: that ensures lower costs and future-proofs the structures.
We expect self-reliance will become increasingly sophisticated, with declining battery costs and the ability to use energy management software to trade surplus electricity from solar, creating localised trading markets. Peer-to-peer trading, virtual grids and demand management will further disrupt the industry, bringing changes to the existing centralised energy model.
The journey towards self-reliance – distributed generation – is only going to accelerate.
We’re at a critical juncture of energy transition and Federal and state-based policies must work and complement each other. Clearly that’s a significant challenge, but it’s also a real opportunity for Australia. Our access to plenty of sun, wind, and land should ensure Australia plays a leading role in energy development for the foreseeable future.