May 2019 saw Australia’s latest opinion poll-defying election result, when the Liberal-National Coalition held off the opposition Labor Party in the federal election, thus securing a majority government in the process.
One of the main differences between the parties was their stances on climate change and energy policy. Labor had promised it would reduce emissions by 45 percent on 2005 levels by 2030. The coalition was sticking by its 26-28 percent target after abandoning the National Energy Guarantee, the resulting turmoil having triggered the downfall of former prime minister Malcolm Turnbull.
The opposition was also equivocal over supporting a new coalmine in Queensland but unequivocal in opposing new coal-fired generation. The coalition, in some quarters at least, seemed to favour both. It also proposed passing legislation to give it divestiture powers over energy companies that were unable to cut wholesale prices and guarantee supply – its ‘big stick’ policy.
Although some urban areas swung towards Labor, many more rural and diverse seats surged towards the coalition. Many people put this, at least in part, down to Labor’s campaigning on climate change and renewables, with some arguing the coalition’s simpler (and perhaps vaguer) message won the day.
Another former premier, Tony Abbott, who lost his Sydney seat of Warringah to an independent candidate who had campaigned fiercely on climate change, put it succinctly in his farewell speech: “Where climate change is a moral issue, we Liberals do it tough. Where climate change is an economic issue, as tonight shows, we do very, very well.”
What the election means
The lack of a coherent federal energy policy has been a headache for investors for some time. So where does the surprise result leave us? “We would have seen a shift had we had a change in government,” says Andrew Tipping, general manager – clients and business development at energy consultancy Energetics. “But the fact we haven’t had that means it’s business as usual.”
For now, the coalition’s pre-election emissions reduction target of 26 percent on 2005 levels remains in place, with little prospect of change during this three-year parliamentary term.
“The federal government feels like it got a mandate at the last election, so in this current term we aren’t going to see much change,” says John Martin, chief executive of New Energy Solar. “But I often say that by 2030 we’re going to get to 50 percent renewables anyway. It’s just [a question of] how we get there. We quite liked the NEG idea because it would have provided quite a nice glide path to the introduction of renewables. Now, I think it’ll be more sporadic.”
The NEG in its previous form is off the table, despite calls from state politicians for it to be revived. The focus is on trying to work within the existing framework, with the possibility that a change of government in three years could see that efficiency target ratcheted up.
One market source said they expected to see a slowdown after the coalition won, with some participants re-evaluating their involvement in the market, but that this has not happened. Rather, the source sees the energy transition as a “long-term issue”. They believe their firm will be well-positioned following a change of government or when the transition takes full effect.
With little prospect of major change on the policy front, there is little sign of a shift in investors’ approach. “We take a global view, and in Australia we haven’t had investments in large-scale renewables for some time,” says Michael Cummings, AMP Capital’s head of Australian and New Zealand Infrastructure Equity Funds. “We like the energy sector and we’re very experienced in it, but we do not see opportunities here that, in our view, offer adequate risk-adjusted returns.”
Energetics’ Tipping says Australia is “a tough place to be a developer” in renewables, because of risks related to marginal losses, congestion, grid connection, contractors and other factors. “It’s very competitive and very challenging,” he says.
Peter Holt, general manager – strategy and policy at Energetics, says some clients are shifting their focus away from Australia as they search for more certainty in revenue streams and policy decisions. “At the moment, capital flows are frequently diverted overseas and avoiding Australia, when there’s still significant potential for us to accelerate investment here,” he says.
New Energy Solar has set up a UK-listed vehicle to invest in US renewables projects, called the US Solar Fund. Aside from this, around 80 percent of New Energy Solar’s portfolio is in the US, with the remaining 20 percent in Australia.
“We have 30 big institutions on board with the US Solar Fund,” says Martin. “When we started, we asked if they wanted us to invest in Australia, and to a person, they said no. They were well-informed and they thought Australia looked high-risk. They liked the idea of US investments because it was hard to get access [to that market]. They didn’t want any exposure to Australia, which is I think pretty telling.”
He adds that the main queries New Energy Solar receives from investors about the country reflect confusion about where energy policy is heading: “There is generally a sense of concern and disappointment, almost looking for a pathway.” He contrasts this with the US, where the story around the transition from fossil-fuel generation to renewables has been more clearly articulated.
How can that story be better told in Australia? And does it need to be?
“One area we feel needs more focus is getting the policy setting right on technology,” says Cummings. As a director of Endeavour Energy, the electrical distributor for western Sydney and the Illawarra region in which AMP Capital invested as part of a consortium in 2017, he argues that the default position in Australia is to keep new technology development outside regulated utilities – in contrast to the more agnostic approach taken by regulators in New Zealand. “A more engaged consumer plus technology will lead to change [and greater uptake of renewables] more quickly than any policy or regulation,” he says.
Martin also says change in the sector will come from market participants: “It’s the utilities that sell power to customers who have to replace an ageing coal-fired unit. They’ll do some analysis that will tell them a bundle of renewables, plus gas and maybe some storage, [will be cheaper]. It’ll just happen naturally through new investment decisions.”
Holt believes policy exists to “smooth out” changes that are foreseeable, such as the energy transition: “In the absence of policy, we’re seeing that astute and informed investors are taking consideration of climate change risks and integrating them into their decision-making processes.” This trend will continue, no matter what policies the government does, or does not, enact.