Australia’s energy transition faces headwinds

New renewable energy commitments Down Under sound great on the surface – but can they be delivered in time without costing consumers dearly?

The perception around the pace of Australia’s commitment to the energy transition has shifted since the 2022 general election, with the new Labor government following through on its campaign promises to legislate a more ambitious emissions reduction target earlier this year.

This has been followed by a series of major commitments to reaching net-zero emissions, and the announcement of other targets, by both state governments and major Australian corporations.

Among them, the Queensland government in September revealed a target for 70 percent of the state’s energy generation to come from renewable sources by 2032 and 80 percent by 2035 – no small task for a state whose economy is inextricably linked to fossil fuel extraction at the moment.

Then in the same month, generator and retailer AGL Energy (which has been the subject of interest from infrastructure investors this year) announced it would accelerate its exit from all coal-fired generation – up to 10 years faster than previously planned – with a total investment of up to A$20 billion ($12.6 billion; €12.8 billion) required to build new generation and firming capacity to replace it, much of which will inevitably be renewables.

So in the space of a couple of weeks, Australia saw two major decarbonisation plans announced from the public and private sectors, landing on top of the numerous other state government renewable energy targets and plans previously announced by AGL Energy’s competitors such as Origin Energy and Alinta Energy to transition their own portfolios away from fossil fuels.

But what these plans fail to adequately address is the delivery risk associated with them.

Australia dragged its heels for too long on setting a coherent federal government energy policy, leaving it up to the states and the private sector to pick up the slack – leading to a situation where coal-fired generation is set to be phased out without adequate generation capacity to replace it, renewable or otherwise.

This ended up being a major topic of discussion at the Australian Financial Review’s recent Energy & Climate Summit in Sydney, with Alinta Energy chief executive Jeff Dimery telling that newspaper: “I’m sure I’m not the only one just observing the gap that’s really opening up between the certainty of what’s coming out and the uncertainty of what’s replacing it and going in.

“I personally don’t believe we can achieve the transition based on what we’re seeing to date that is going to be delivered; I think we’re headed for failure unless things change significantly.”

These targets are almost all aimed at achieving their aims by 2030 or thereabouts, meaning that a huge amount of new capacity must be built in Australia, plugging into an electricity grid that will not be up the task without major changes.

And it isn’t happening in a vacuum. The Biden administration’s passage of the US Inflation Reduction Act has suddenly ensured the US is likely to draw a lot of supply chain capacity for the delivery of renewable energy, while Russia’s severing of gas supplies to Europe has nations there scrambling for alternative energy sources. There are plenty of other nations also looking to up their renewable energy capacity amid global pressure to decarbonise.

This is almost certainly going to result in higher prices for consumers. And it remains to be seen what it means for investors in Australian energy.

On the one hand, governments and corporations will need private capital more than ever to achieve these highly ambitious targets. But on the other hand, if projects become too costly or burdensome to deliver, will the risk-adjusted return be appropriate enough for infrastructure investors?

Time will tell – even though it’s fast running out.