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Navigating the new energy transition

Change is scary... especially when it’s not under your control. One of the most rapid areas of change that the world is experiencing is in our energy systems which, until very recently, have remained essentially unchanged for the best part of a hundred years.

Matthew Robinson

by Matthew Robinson

Principal and Energy and Water Sector Lead, Melbourne

23 August 2017
Wind farm

While there is a great deal of excitement around renewables and distributed generation, we are only just at the tipping point for those technologies entering the mainstream. The fact that we have progressed this far on the energy journey is incredible enough, and though it seems to have been a sudden shift, this transition will most likely not be a smooth one, with a long way to go yet.

Change is happening whether we like it or not

For many countries and their governments, particularly advanced economies, this is a fundamental shift from what they know and have grown to trust. It’s impacting energy security and consumer choice in equal and opposite ways.

We are seeing the reaction to that situation playing out today in Australia and the US as leaders seek to revert back to the perceived safety of more traditional methods of energy production when faced with difficulties in the transition.

It's not just the technology that's changing – we've had those changes at various times before and not seen such disruption – it is the balance of power. Distributed energy systems are now providing consumers of energy with a credible set of options that lie outside the traditional supply chain of utilities.

The fact that we have progressed this far on the energy journey is incredible enough, and though it seems to have been a sudden shift, this transition will most likely not be a smooth one with a long way to go yet.

The change is not under the control of governments and their agencies as it once was and consumers and industry want the transition to choice. An example of this is the statement to government written by major industry associations in Australia calling on the government to progress the development of bipartisan policy and not keep looking backwards.

This is creating a major juxtaposition for government policy makers – two central pillars of policy are now opposing one another: energy policy and consumer/free market policy.

The quandary is reconciling energy security with consumer demand without falling back into a regulatory dilemma or facing the possibility of having to reenter the power supply market themselves.

Renewable energy is starting to look more attractive

To add to their woes, capital markets now prefer solar, wind, and batteries to coal and, in some places, gas. Why? Rate of return on capital.

A solar battery plant can be deployed in around 12 to 18 months from financial close whereas an Open Cycle Gas Turbine (OCGT) plant takes around three years. For coal, you are looking at five to seven and, in some jurisdictions, maybe 10 years. That means capital is committed but not working for that period and when the operating costs are taken into account, the return on investment (ROI) on solar is just more attractive in many places, especially when you consider that most developers don't operate, they develop then sell-down almost immediately.

A major issue for government then, and which the Australian Federal Government encountered in February, is if they want to build a new coal plant, they're paying for it themselves. Likewise, western power plant operators, although not taking as pervasive a position as in the institutional investor market, don't want to add coal to their portfolios.  

Rate of return on capital Rate of return on capital

Firstly, they can't get cheap debt to pay for it and secondly, but related, they see major future liabilities around both carbon and remediation. Remediation costs alone for a coal-fired power plant and mine can easily run into tens, if not hundreds of millions of dollars.

Leapfrogging

Developing economies, such as Southeast Asia, are seeing distributed technologies as a "leapfrog" option to the legacy grid-based, centralized systems. They're familiar with the leapfrogging concept from their experience with telecoms and going straight to a wireless system.

Grid infrastructure is the major cost for power system expansion, especially as electrification moves away from urban centers, which is essential, politically, in Southeast Asia. Microgrids and distributed generation enable that grid cost to be drastically reduced or even deferred indefinitely. The major issue in these jurisdictions is capacity and capability which tends to hold back new technologies in favor of traditional ones for which they have a better understanding and skill set.

Will government policy keep up?

While the technology is directly competitive with traditional power and has the preference of investors, governments are struggling to set policy in this rapidly shifting environment. This is creating additional risk perceptions in the markets and, without any lower risk alternative, investment in this case simply ceases.

The market seems to be moving faster than policy makers and regulators can or want to, and this is, at best, slowing down progress and at worst, halting it completely. We know change is scary, but the world needs to move forward.

Advisian has been working with the energy market actors, policy makers, and regulators to facilitate discussion and understanding on the New Energy Future. We recently published the first two chapters in this series – for more please visit: www.advisian.com/newenergyfuture

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