Australia’s clean energy transition facing a string of setbacks | 7.30

Key Concepts

• Net Zero Transition
• Green Hydrogen Projects
• Renewable Energy Targets
• Gridscale Solar and Wind
• Capacity Investment Scheme
• Renewable Energy Target (RET)
• Carbon Price/Tax
• National Energy Market (NEM) Review
• Marinus Link
• Grid-Scale Batteries

Challenges to Australia's Clean Energy Transition

The clean energy transition in Australia faces significant hurdles despite government ambitions and investments. Several high-profile green hydrogen projects have been cancelled due to high costs, regulations, and weak demand. Examples include:

• The $14 billion central Queensland hydrogen project (scuppered by the LMP state government).
• BP walking away from a $54 billion mega project in the Pilbara.
• Billionaire Andrew Forrest halting taxpayer-backed plans to make electrolyzers in Gladstone.

Costs for vital new transmission lines are also surging, and offshore wind projects are struggling to progress. Australia is currently on track to miss its renewable energy targets due to low investment and output in grid-scale solar and wind.

Government Policy and Market Signals

The government's primary policy levers, the Renewable Energy Target (RET) and the Capacity Investment Scheme, are considered temporary and insufficient to drive long-term investment.

• Renewable Energy Target (RET): A subsidy to power companies that ends in 2030.
• Capacity Investment Scheme: A government underwriting program that incentivizes investment but may not continue in its current form after 2030.

Allison Reev argues that the government isn't sending the right market signals, hindering private investment. Many economists advocate for an economy-wide carbon price as the best solution to incentivize investment in the grid.

The Carbon Price Debate

The introduction of a carbon price or tax is a contentious issue.

• Arguments for: Ross Gho argues that a carbon price can add about 1% of GDP (approximately $25 billion) to government revenues, with only a small proportion needed to compensate households for power price increases.
• Arguments against: The government is reluctant due to negative experiences from the Gillard era, where a carbon tax was dismantled by the subsequent Abbott government. The government argues that some countries with a carbon price aren't performing as well on renewable energy as Australia.

The government's reluctance has led to "second-best policy solutions" like the underwriting scheme, which places much of the risk on taxpayers without transparency. The lack of transparency around price floors and ceilings in these contracts makes it difficult for other investors to assess risk and adjust their strategies.

Investor Bottlenecks and the NEM Review

The government's approach may be creating investor bottlenecks, as companies are hesitant to invest without a government deal. This slows the pace of investment to the rate at which the government can award contracts.

To address these issues, the government released an interim review of the National Energy Market (NEM) with a proposal to replace the existing scheme with one that guarantees longer-term revenue to investors while potentially making money for the government. The NEM review aims to solve risk sharing beyond the typical 5-year period for electricity purchase agreements between retailers and large market customers.

Progress and Ongoing Projects

Despite the challenges, there has been progress in certain areas.

• Marinus Link: A $5 billion transmission project connecting Tasmanian hydro and wind power to mainland customers has received federal environmental approval.
• Grid-Scale Batteries: Batteries are being integrated into the grid at an unprecedented rate through initiatives like the Labour's home battery scheme and mega projects such as the Warar Super Battery and the ACT's Williamsdale storage system.

Conclusion

Australia's clean energy transition faces significant challenges related to policy uncertainty, investment bottlenecks, and the need for a clear market signal. While progress is being made in some areas, such as grid-scale battery deployment and transmission projects, a more comprehensive and enduring policy framework is needed to achieve renewable energy targets and ensure a reliable and affordable energy system. The debate over a carbon price continues, with proponents arguing for its efficiency and opponents citing past failures and potential economic impacts. The NEM review represents an attempt to address some of these challenges by providing longer-term revenue certainty for investors. The fundamental issue is the need to replace aging energy infrastructure, which requires substantial investment regardless of the chosen energy mix.