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Capital investment into energy assets is increasingly vulnerable to policy and technology change and is at risk of being stranded due to the rate of renewable energy deflation.
The Paris Agreement, UN IPCC Report, increased frequency of climate-induced extreme weather events and a growing public contempt for pollutants all point to the likelihood of carbon policy implementation.
However, the timing and nature of such policy is almost impossible to predict. It could be a case of carbon ETS like Europe, or a progressively rising coal tax as evident in South Korea and India.
With such uncertainty, investment decisions and economic growth become threatened, particularly given the capital intensiveness and risk associated with long-life energy assets.
With this in mind we spoke with Tim Buckley of IEEFA – ahead of the Large Scale & Commercial Solar Conference 2019 – to hear his views on the latest developments in the global energy system transformation.
Tell us a little about IEEFA’s current focus
Given the longevity and magnitude of energy asset investment, part of IEEFA’s mandate is to explore developments within key Asian neighbours to better inform the decisions of energy financiers, corporates and government in Australia.
Our current focus is on analysing the scale and speed of technology development, and hence technology disruption, in electricity markets within these countries, particularly given the convergence of technologies across the energy and transport sectors as well as the built environment.
We see this as a crucial element towards supporting sustainable economic growth, given that the energy market is heavily influenced by financial market thinking and risk evaluation.
Another reason we are providing this analysis is that financial markets tend to be far more dynamic in their pricing and evaluation of assets and risks, when compared with the energy sector’s actual operation, in which the operating life of assets is measured in multiple decades.
Stranded asset risk is far more front-of-mind in a financial market perspective than it is in the operating environment of the electricity sector. When the risks become clear, the financial markets move precipitously.
As part of IEEFA’s mission, we have been talking to financial players to ensure that they understand the stranded asset risks that relate to long-life thermal power generation, given the as yet largely unpriced nature of air and water pollution plus carbon emissions. India is a clear leading example. The Indian banking sector continues to struggle under the suffocating weight of US$100 billion of non-performing loans to the thermal power sector.
Could you give an overview of key developments in Asia?
Technology disruption is being embraced by key Asian neighbours – China and India, and more recently South Korea plus Taiwan. They are very clearly driven by a need to resolve energy security issues, which are paramount to most countries globally.
This is being brought home by the expanding current account deficit that many of our Asian counterparts are witnessing on the back of fossil fuel imports, particularly as coal, LNG and oil prices have rallied in over 2018.
However, 2018 is likely to prove a pivotal year in Japan’s electricity market position. We have seen huge financial institutions like Dai-Ichi Life and Nippon Life announcing coal divestment programs.
This has been followed by even more dramatic coal exit announcements by Marubeni Corp. and Mitsui & Co., both of whom have unexpectedly announced plans to exit coal power plant and thermal coal mining development respectively.
Marubeni also has an explicit target to double renewable energy investment to 20 percent of their portfolio by 2023; and Mitsui to double its renewables investment to 30 percent by 2030.
This was then backed up by Prime Minister Shinzo Abe publishing a Financial Times Op-ed in September, acknowledging the rising threat of ever more extreme weather events and confirming his intent to make climate change a core focus of his 2019 leadership of the G20.
These same trends that are happening in Japan also appear to be happening in China, South Korea, Taiwan and India for a variety of similar reasons, primarily excessive reliance on fossil fuel imports, rising pollution pressures and renewables deflation.
What about Australia?
In Australia the same energy transformation is now very clearly underway, notwithstanding the lack of government policy.
And that is being driven home by the ever low cost of solar, and expectation of significantly lower costs of storage and pumped hydro storage.
At the Senate estimates in November, the CEO of Snowy Hydro confirmed that, even adding in the price of firming, variable renewable energy is now the lowest cost source of new supply for Australia.
Their 888 MW tender was almost 20 times over-subscribed at record low prices, which forced Snowy to reconsider its support for new coal.
Our Federal Government just spent $6 billion to buy the equity in Snowy Hydro and now less than six months later the CEO is saying he can no longer support coal.
Another notable development was the NSW government’s emerging energy program launch in November. Energy Minister Don Harwin acknowledged that the NSW government has $28 billion worth of low emissions new investment proposals currently under evaluation (at a time when they haven’t really got an energy plan).
But what he did say (and this is really telling) is that if NSW doesn’t embrace low emissions technology, we will just miss out on the investment and jobs and instead import cheap renewable energy from SA, VIC and QLD.
It’s going to happen. It’s now up to the NSW government to get their fair share of investment in our home market.
You can hear more from Tim Buckley on international developments and their implications for Australia at the forthcoming Commercial & Large Scale Solar Conference – due to take place 25-26 February 2019 in Sydney.
