May 2019 saw the latest instalment of a run of opinion poll-defying election results: against nearly all predictions, the Liberal-National Coalition in Australia held off the opposition Labor Party in the federal election, securing 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, while the Coalition was sticking by its 26-28 percent target after abandoning the National Energy Guarantee, in turmoil that led to 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. By contrast, the coalition was, in some quarters at least, seemingly in favour of both. It also proposed passing legislation to give it divestiture powers over energy companies if they were not able to cut wholesale prices and guarantee supply – its ‘big stick’ policy.
In the end, while some urban electorates saw swings towards Labor, many more rural and diverse seats surged towards the cooalition. Many people put this, at least in part, down to Labor’s campaigning on climate change and renewable energy, with some arguing that the coalition’s simpler (some would say vaguer) message won the day.
Another former Prime Minister, Tony Abbott, who lost his northern Sydney seat of Warringah to an independent candidate who campaigned fiercely on climate change, put it succinctly in his farewell speech on election night: “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 in Australia has been a headache for investors for some time now. So where does this surprise result leave us?
“We would have seen a shift had we had a change in government. But the fact we haven’t had that means it’s business as usual,” says Andrew Tipping, general manager – clients and business development at energy consultancy Energetics.
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.
“I think 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 ASX-listed 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 recent calls from state politicians for it to be revived. The focus now is on trying to work within the existing framework, with the possibility that a change of government in three years’ time could see that efficiency target ratcheted up in some form.
One market source told Infrastructure Investor he had expected to see a slowdown after the coalition won, with some participants re-evaluating their involvement in the market – but this hasn’t happened. Rather, the source sees climate change and the energy transition as a “long-term issue”, so is happy to remain involved in anticipation his firm will be well-positioned when the time comes, whether that’s a change in government or the transition to renewables taking full effect.
Time to invest?
With little prospect of significant change on the policy front, there is little sign of a change 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, head of infrastructure at AMP Capital. “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 for our investors.”
Energetics’ Tipping says Australia is “a tough place to be a developer” in renewables right now, thanks to Marginal Loss Factors risk, congestion risk, grid connection issues, contractor risk, and other factors. “It’s very competitive and very challenging,” he says.
Peter Holt, general manager – strategy and policy at Energetics, says that some clients are shifting 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 recently set up a UK-listed vehicle to invest in US renewable energy projects, called the US Solar Fund. Other than the US Solar Fund, 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. 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,” Martin says.
The main queries that New Energy Solar get from investors about the country, Martin adds, reflect confusion about where energy policy is heading. “I think there is generally a sense of concern and disappointment, almost looking for a pathway,” he says, contrasting that 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,” Cummings offers. As a director of Endeavour Energy, the electrical distributor for western Sydney and the Illawarra region that AMP Capital invested in as part of a consortium in 2017, Cummings argues in Australia the default position 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 argues.
This is echoed by Martin, who argues that 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,” he says.
As Energetics’ Holt puts it, policy arguably exists to “smooth out” transitions that are foreseeable – like the transition to renewable energy.
“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,” he says.
And that’s a trend that’s not going to change, no matter what policies the Australian government enacts – or does not.