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9 Jul 2024
Insight
Q: How does private capital fit into the grand scheme of Australia's energy transition and the pursuit of net-zero goals?
David Ryan: Private capital is key to achieving the energy transition. The capital required for the energy transition has been forecast as up to $200 billion, and potentially a lot more. The vast bulk of this capital will need to come from the private sector (non-Government) investors but the settings need to be right for these investors to commit that funding.
Q: Could you paint a picture of Australia's current energy landscape and the shifts we can expect in the future?
DR: At present, coal-fired generation provides approximately 65% of Australia's electricity needs. However, this coal generation is at the end of its useful life and is projected to be phased out by the mid-2030s and completely eliminated by 2040. This means we need to replace that 65% with firmed renewable energy generation. Replacing one megawatt of coal-fired generation will require a mix of wind and solar energy (which operate during different periods), plus storage and firming capacity (gas, pumped hydro and batteries). This replacement generation needs to be in place before the retirement of coal-fired generation.
Moreover, AEMO is forecasting a doubling in Australia's electricity demand by 2050 due to factors like the electrification of various sectors such as transport and heating and the significant and growing electricity demands of AI and data centres.
Q: What implications does this have for the future of energy production in Australia?
DR: The immediate issue is that by 2035 we need to have replacement generation for the coal-fired generation fleet. By 2050, we need to build seven times the existing utility-scale wind and solar capacity, quadruple the existing amount of solar PV on people's rooftops, and increase the amount of storage and firming capability fourfold. There is likely to be a significant role for gas-fired generation as a firming technology, but gas supply and transportation are also difficult issues that need to be solved. This new generation and storage/firming capacity will also require significant investment in the national transmission network. This is a significant undertaking in a relatively short period of time.
Nuclear is currently very topical due to the Federal opposition proposing to build 7 small nuclear generation plant, but that proposal is no solution for the imminent retirement of the coal-fired generation fleet and will, even if developed, only meet less than 5% of Australia’s electricity needs in 2050. The cost and development timetable for nuclear means that it is unlikely to be viable in Australia in the next 20 years. It would also need to overcome Federal and State bans on nuclear energy, a lack of any expertise in Australia and some significant social licence issues.
By 2050, we need to build seven times the existing utility-scale wind and solar capacity, quadruple the existing amount of solar PV on people's rooftops, and increase the amount of storage and firming capability fourfold.
David Ryan, Partner
Q: What hurdles stand in the way of this ambitious energy transition? How can these be overcome?
DR: One of the main challenges is the need to significantly expand our transmission network assets. The strong spine of our current national transmission network runs from coal field to coal field, which doesn't necessarily align with where the wind blows or the sun shines - the locations for future utility-scale wind and solar projects. We need to develop the Australian transmission system into the interior and build greater interconnection between the States. This is a complex task that will require substantial government investment and coordination.
Another issue is that the National Electricity Market is not well suited to a predominantly renewables-based generation fleet. The NEM is currently an energy-only market based on the marginal cost of generation, which for renewables is often zero. It is likely that the NEM will need to be substantially restructured to better reward capacity and availability. Similarly, many of the existing regulatory arrangements need to be re-cut or side-stepped to ensure the energy transition can occur within the required timeframe.
Lastly, the role of Government in the energy transition is crucial. In addition to setting policy, Government is the only party that can plug the gaps in risk that exist to catalyse new transmission and generation investment. It has important roles in infrastructure planning and coordination, providing underwriting arrangements to allow projects to obtain project finance when commercial offtake arrangements are not yet available, and in removing some of the barriers such as port and road capacity, and approvals timelines.
One of the main challenges is the need to significantly expand our transmission network assets. The strong spine of our current national transmission network runs from coal field to coal field, which doesn't necessarily align with where the wind blows or the sun shines
David Ryan, Partner
Q: How is HSF involved in helping organisations make these shifts?
DR: We play a variety of roles, across all aspects of the sector, including working with State Governments to assist with market reforms such as the development of renewable energy zones, leading procurement processes for new transmission infrastructure, establishing access schemes and offtake/underwriting arrangements to catalyse projects and ensure their bankability.
Given the large capital requirements we are also seeing a surge of interest from Australian superannuation funds, Canadian pension funds and other infrastructure investors in the sector. However, there are still significant challenges to overcome, including development of a comprehensive and coherent national policy for the energy transition, clarifying Government support arrangements for new projects and addressing delays around approvals and social license issues for transmission lines and generation projects.
We are helping market participants develop, construct and finance wind, solar, battery and pumped hydro projects, helping clients develop interconnectors between jurisdictions and States and regulators to develop renewable energy zones and revised regulatory arrangements.
We're also working on managing the exit of coal-fired generation plants and rehabilitating the coal mines that have been associated with these plants for a long time.
Our work spans a range of areas, including corporate aspects of structuring, joint ventures and M&A, project development and construction, project financing, and land acquisition and approvals. Essentially, we're helping to rewrite the entire ecosystem for the energy transition.
We're also working on managing the exit of coal-fired generation plants and rehabilitating the coal mines that have been associated with these plants for a long time. Essentially, we're helping to rewrite the entire ecosystem for the energy transition.
David Ryan, Partner
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