Australian Manufacturing: Is it time to bring it home?

Australian Manufacturing - Wind Turbine

The English love their football (soccer) and no more so than Baddiel and Skinner who sang “It’s coming home” for the 1996 Euro’s. But with another wind project either being delayed or scrapped is it really time to consider if the Chief Operating Officer of AGL, Markus Brokhof is right “The manufacturing industry has to come back to Australia.”

The latest announcement from CleanCo last week which stated the company is pulling the pin in their investment in the Karara Wind Farm in the Southern Downs in Queensland, citing delays, not in connections or transmission but in turbine parts and rising costs, only acts to further strengthen Brokhof’s argument. This investment was part of the wider MacIntyre precinct and would or may still be, the largest wind precinct in Australia. However, this could be a blow to Queensland’s target of owning 50% of new renewable generation within the state.

This is just the latest in a string of windfarms to hit delays, the Clarke Creek wind farm has been hit with numerous delays between change in ownership from Goldwind to Andrew Forest’s Squadron energy, through to shutdowns for worker safety as well as project management changes causing equipment to be removed from site. With the offtake from the first stage of the project mostly going to another Government Owned Corporation, Stanwell could this be a further blow to the state’s advanced renewable targets, 80 per cent by 2035, and the existing 50% by 2030.

Another one of Andrew Forests wide array of companies is Windlab, whose own windfarm the Upper Burdekin project has not only lost its inaugural customer Apple, but has had to significantly downsize the output of the site from the proposed 193 Wind turbines to a reduced 136 and is now likely to only have 80 following significant opposition from wildlife conservationists who stated that the project was threatening already endangered species.

To further stoke the flames, AEMO has now come into the forefront of media, stating that not only do we not have enough investment in renewable electricity to compensate for the expected closure dates of coal generation, but the firming technology to support this renewable grid has not been fully funded or addressed, this year’s ESOO will certainly paint a bleak picture for the medium term in Australia. This sentiment is only exacerbated by the Australian former chief scientist and first Victoria State Electricity Commission CEO, Andrew Finkel, who last week quit his role at the SEC stating; not only was the capital investment not in place but investment has dried up and the “country is unlikely to reach its emission reduction targets.” I’m sure not a sentiment which was welcome news for the Andrew’s government whose election campaign was built on the premise the SEC would be both decarbonising the Victorian grid whilst reducing the cost for Victorians.

With the COP 28 due in November and Australia looking like it will miss it’s, late to the party but thanks for coming, 2030 targets, increasing international pressure will be placed upon Australia to ask how we will try and achieve some meaningful reductions? Rik De Buyserie, Engie Australia’s CEO implied to even get close to the 2030 climate targets Australia would need 10,000km of new transmission, 44GW of new renewables and 15GW of firming capacity. With components scarce, increasing costs and logistical issues of port slots to physically ship the parts to Australia, maybe it is time to turn our attention inwards and start upskilling and creating our own industry to de-carbonise ourselves?

Carbon Border Adjustment Mechanism gaining traction in Europe

Edge2020_Carbon Border Adjustment Mechanism

The European Parliament is introducing new climate legislation including a Carbon Border Adjustment Mechanism, in a bid to reduce greenhouse gas emissions.

The new package aims to reduce emission by at least 55% by 2030 and will include a series of measures which will have big impacts to many large industry customers who now will have millions of tonnes of carbon at risk.

The proposal will include phasing out of the free European Emission Trading Scheme (ETS) allowances after 2026, including maritime shipping within the ETS and a Carbon Border Adjustment Mechanism. The latter of these the CBAM or Carbon Border Adjustment Mechanism will impose a tariff on goods whose production is carbon intensive and shows the greatest risk of carbon leakage, in Australia the most vocal opponents of this scheme are unsurprisingly the cement, aluminium and steel industries.

As a quick digress the term carbon leakage is referring to the idea that you move the most carbon intensive parts of your production abroad, into countries with less stringent climate policies, and then import them back into Australia.

The idea of the CBAM is this will place a price on the carbon which has been emitted during this production phase. The price being derived from the price of carbon which was paid for the product to be developed and produced within Australia.

Those keen eyed amongst us will remember the Safeguard Legislation, which will come into effect on the 1st July 2023, cited a review would be undertaken to examine the feasibility of a CBAM within Australia, including a consideration for early commencement for those high-exposure sectors such as steel and cement.

Now with the EU making the leap and the likely follow on from the UK, Japan and Canada, amongst others, including the US via its own Polluter Import Fees Australia, we will surely have to comply to ensure both our own goods are being protected as well as meeting the requirements of the global expectations.

However, what is the cost of compliance. Whilst the legislation is quite straight forward the compliance cost will increase. Cradle to gate / grave accounting is complex and with auditors being stretched between, NGERs, Safeguard and now this, finding a resource to complete the calculations and data collection will be one thing, but looking to have these accounts audited will be another. With the CER having only 75 registered auditors on their books will the cost of this be wider than the government are imagining?

AEMO adds to the spooking of the Energy Market post Liddell Shutdown

Energy Market - AEMO _ Liddell Shutdown

On Thursday (25th May 2023) AEMO released their Scheduling Error notification (incident number 54) confirming they had incorrectly scheduled three of the Liddell units into one of their systems, post the Liddell shutdown, which caused price spikes across the NEM and forwards market on the morning of 1st May 2023.

As has been widely documented the last three Liddell units came offline on the 24th of April (Unit 4), 26th April (unit 2) and finally unit 1 on the 28th of April. This should have flowed through to the systems within the AEMO dispatch engines, however due to an error this was not the case, and the market was affected by the error between midnight and midday on the 1st of May 2023.

The error was cause by a mismatch of data used within the systems which feed the NEMDE (NEM Dispatch Engine) used by AEMO, whereby one part of the system removed the units from 00:01 on the 1st May. However, a separate part of the NEMDE’s data feed system, which controls the constraints still included the Liddell units at their “initial values” i.e. 500MW, not their real value of zero.

When the equations within the constraint tried to equalise, there was a “drop” of 1500MW on one side of the equation from the first interval on the 1st May 2023.

To rectify this AEMO reduced flow coming from Victoria into NSW and around 173MW of generation was dispatched down.

Prices reacted as expected with 6 periods between midnight and 6am having prices between $2,771.58/MWh and $2,964.04/MWh and increasing the daily average price by around 30% to an average of $288.86.

With a marketplace reacting to every cough of a power station, especially in the days following the Liddell closure the added constraint was enough to also strengthen the forwards market with the Q323 close price rising $5.50/MWh on the day in comparison to the day before across QLD, Vic and NSW and even SA was affected with an $8/MWh increase on the previous days close.

This strength continued into the next few weeks as outages came into the mix, a tube leak delaying the return to service of Bayswater 2 to the 3rd May, Kogan Creek, Eraring 2 and Tarong taking outages, the return of Callide being delayed and an unexpected interest rate hikes putting additional pressure on the market. Speculators were quick to act trading the spread between states thus increasing prices across the NEM.

This reactionary sentiment is one we feel will remain for a while, with the spot market quickly correcting however the futures continue to hold value down the curve.

News from Rewiring The Nation

Australian Power Lines

Over the last week Chris Bowen has been selling from everyone to industry to landowners on the government’s $20 billion “Rewiring the Nation” project. He has stated that “securing social license to build the transmission lines is the single most pressing issue for the Australian energy transition.

The proposal involves the development and construction of 10,000km of lines before 2030 and the key to achieving this will be community and stakeholder relationships, which are now being built into the regulatory investment test (RIT-T) process. To facilitate this the NSW and VIC government are offering $200,000 per km for the land crossed by these new infrastructure projects.

Ian Learmonth, the head of the Clean Energy Finance Corporation, said that Australia will need an estimated 29GW of large-scale renewables to meet our ambitious goals, which breaks down to around 3.6GW a year.

This compares to last year’s large-scale wind and solar where Australia only installed 2.3GW. The 29GW required to be installed is challenged by the slow progress in developing essential new transmission lines and therefore Australia’s targets are at risk.

Daniel Westerman, the Chief Executive of AEMO, has stated that “From our control room we can see that increasing amounts of solar and wind generation are being curtailed because there’s not enough transmission capacity to transport it.”

Despite this, the share of renewables in the grid is hitting new highs, averaging 37% in Q1, and peaking at 66% for a half-hour dispatch period. As a result, greenhouse gas emissions from the grid were at their lowest recorded ever in Q123.

Additionally, there is concern from AEMO that there is 14GW of coal powered generation capacity retiring by 2030, which exceeds the 8GW of renewables announced so far. The effect of this could be starkest in the short term. With Eraring (2,880MW) due to come off in late 2025, there are concerns of a significant short term firming capacity gap for first few summers in NSW.

However, with a new Capacity scheme expected to be announced in the next few months, and the next ESOO due in October expected to show the shortfall for NSW, the possibility of extension is one being seriously discussed.

With the VIC – NSW West Interconnector final drafts expected soon and Humelink approval expected early next year, the move to new transmission is starting. However, questions remain as to whether it is too late for the government to meet its targets.

2023 Federal budget: slight update SA and VIC named for cap scheme

Melbourne, Victoria

Further to Edge’s update on the 2023 federal budget shared last week, more information has become evident from Hon Chris Bowen’s MP office around the actual schemes to be introduced and their allocation of the budget.

There is no doubt Australia, as in much of the world, they are pinning their hopes on a Hydrogen Economy. The governments ‘modernised’ energy economy is being underpinned by a technology which yet is not to scale and is unproven, can anyone say carbon capture and storage (CCS)! Now I do not believe Hydrogen is another CCS boondoggle, but the amount being invested, and the legislation changes to allow it to occur are akin to those of its previous silver bullet government neighbour.

The budget has allocated half of the $4bn green energy package, $2bn, to the Hydrogen Fund. The idea is the investment will assist in the commerciality of these projects and allow for 1GW of capacity to be on the system by 2030. The allocation of this will come in the form of “production credits” and as was later confirmed these will be allocated via a ‘competitive process’ however details of this are scarce. The funding is likely to have come in part to keep up with our European and US counterparts who have signaled similar investment in the industry through their own budgets (the US giving a $3/KG (USD) tax rebate if it relates to H2 production.

This will be supported by the new REGO or Renewable Energy Guarantee of Origin scheme which was first floated in the papers released at the end of last year.  $38million has been allocated to the project which will be used to certify the energy and emissions from these projects.

The details around the controversial capacity scheme continues to be scarce. With ‘commercial sensitivities’ being touted as a reason for non-disclosure. However, we do expect these to be run state by state and through auctions, so we hope for more detail to be shared on this in the future, especially given SA and VIC have already been named to lead the charge on this later this year. The choice of these states is unsurprising given the high renewable penetration on those grids.

We have also seen a little more information come out around the function of the “Net Zero Authority” who received $83m on Tuesday. It is anticipated that they will be working with local state and territory governments as well as lobbyists and stakeholders to create a roadmap to net zero in those regions, focus will naturally sit in heavy mining regions such as Queensland, the Hunter Valley and Latrobe Valley. From the 1st July the executive agency will be established and they will be tasked with supporting those in heavy industry to transition into a low carbon economy, assist with policies around this and assist with investment in the regions. No small feat to say the transition is already well underway.

Federal Budget 2023 – A shock to the Gas Industry

Australian Parliament House

Under a tightly embargoed budget speculators and hedgers alike could be forgiven for worrying the 2023 Federal budget hid an unknown shock, on top of a Liddell closure, Bayswater trip and extended outages. Last week’s market uncertainty was definitely not dampened by the little information coming out of Hon Dr Jim Chalmers MP’ office.

However, there was good news to be had, in contrast to the October 2022 budget which forecast a deficit of $36.9bn for this financial year the Hon Dr Jim Chalmers MP was almost giddy to announce a surplus of $4bn, it is the first in 15 years, yet is everything that glimmers actually gold?

Little was made of the fact 20 per cent of the surplus came from increased commodity prices, a nod was made to the Ukraine crisis but little to the other drivers and opportunist behaviour which has been within our market for the past 12 months. There was certainly no mention of the huge windfalls the treasury gained from the commodity industry.

The Gas and Coal caps were mentioned but there has been no discussion of the Coal Cap either being extended or removed in December 2024 when it expires. In contrast, the Gas cap has been confirmed to remain until 2025 and as such the potential for a market move in the summer months is still possible.

Overall, the budget was light on Energy for large business, the most focus was on infrastructure for Electric Cars and cost of living relief for residential and small businesses. The creation of a National Net Zero Authority was predicted under the Chubb review and therefore no shocks were seen.

There was a slight nod to a new Hydrogen head start program, giving $2bn to the scheme and more investment in green industry, which was unsurprising. A curious section was on a Capacity Investment Scheme “unlocking over $10 billion of investment in firmed-up renewable energy projects up and down the east coast” as a throw away comment and I am sure a few more details will emerge over the next few days – this one did pique my curiosity.

Undoubtably in the commodity space the biggest losers this evening were the Gas companies, between the extension of the Gas cap at $12/GJ into 2025, increased taxes due to the extraordinary market conditions would follow, but a second stab at the inflated pie has come in the form of the Petroleum Rent Resource Tax. I think its mention was all of 3 seconds of the budget, yet this piece of legislation will increase the government coffers to the tune of $2.4bn over the forward estimates. On top of the Safeguard mechanism changes and power the greens had in ensuring many new gas projects do not get off the ground easily if at all, this is yet another cost to the industry. Yet in comparison to those enforced overseas, and especially in the UK, this was light touch, and it will be interesting to see if it is strengthened at all by the Greens, whom Labor will need to pass this through the house.

Overall, not a great deal of shock waves this evening, a budget which I am sure will be picked apart and a barrage of “inflationary pressures” will be dissected, yet overall, no real change to the status quo. Looking down the barrel of economic growth slowing to one and a half per cent in the next financial year, coupled with increasing wages it’s not the time to be throwing about cash, however hitting industry for half baked wins for those at the other end of the scale may not be enough to make any new friends and certainly could lose this government more.

NSW South West Renewable Energy Zone

Street lights at night

Last Friday, the NSW government released their draft declaration for the South West Renewable Energy Zone (SW REZ) access scheme to the public. This is one of five REZs which have been identified within NSW as part of the NSW governments Electricity Infrastructure Roadmap. The schemes are overseeing the volume of projects which will be granted to the transmission within these zones and co-ordinate the network and generation investments into the areas.

The SW zone is based towards the Victorian border and the proposed connection point would be in the Dinawan Substation. The access standards are very similar to those already proposed in April for the states Central-West Orana (CWO) region.

With the CWO attracting more than $35billion worth of proposed projects the SW REZ is hoping to attract significant investment for its 2.5GW transfer capacity, noting the location will not allow for offshore wind and as much Hydrogen investment as that seen in the CWO.

The NSW government has stated that the aim of the declaration is that “An access scheme provides an opportunity to control the connection of projects to the REZ. In the case of the South West, the proposed access scheme triggers the application of modifications to the National Electricity Rules (NER) open access arrangements as they apply to the access right network.”

The access granted projects will benefit from significant network upgrades including potential upgrades to the Project Energy Connect (PEC) interconnector which is being developed at the moment and is to run between SA (Robertstown) and NSW (Wagga Wagga), upgrades to the HumeLink which would connect that Wagga Wagga substation with Snowy Hydro and its increasing capacity and further strengthen the investment case for the proposed Victoria-NSW interconnector (VNI West). The latter is currently within the RIT-T (Regulatory Investment Test for Transmission) process.

These proposals will surely give investors’ confidence in providing the required project certification to be granted the access to that zone. They must not only show feasibility and prepare to sign onto the standards set out in this proposition, but must ensure they can manage voltage, frequency especially which there are potential disruptions within the system. However, the rewards of participating in a well-funded, transmission rich environment which has certainty of curtailment risk for the access rights holders, are surely going to outweigh the paper-work process of being accepted and given the over subscription of the CWO, you can imagine a similar uptake in this round.

The consultation for the South West Renewable Energy Zone (SW REZ) access scheme is closing on the 15th May 2023.

Possible extension to the gas caps

Image of Gas Stove

It is likely today that the Climate change and Energy Minister Chris Bowen will announce an extension to the $12/GJ cap on wholesale gas. Currently the gas caps will expire at the end of the year. Following the release of the draft mandatory code of conduct the market will have several weeks of consultation.

Energy producers are likely to be concerned over an extension or possibly permanent changes to the wholesale gas. Energy producers will also be concerned that changes will impact the pricing of long-term deals as it is likely a reasonable pricing clause will be included.

Under the reasonable price provision, gas companies could only charge a price based on the cost of production plus a reasonable margin. The reasonable price does not consider the capital invested during exploration and development of projects. Gas buyers will be able to challenge the price of contracts via a formal dispute process. The dispute process is designed to determine what the ‘reasonable’ price should be.

While the extension to the cap mechanism will provide certainty for energy users, energy producers remain in a holding pattern.

Gas producers are not finalising new gas supply contracts for 2024 until the government confirms what the impact of the code will have on pricing.

The federal government have also set the expectation that the federal budget will include a Petroleum Rent Tax. The Australian Petroleum Production & Exploration Association (APPEA) have shared with its members concerns that changes to the taxing of gas producers will add $100B of tax receipts to the government.

To appease the gas production sector, it is expected the new code will allow for exemptions. New projects that add supply for domestic use may qualify for exemptions from any specific pricing provision.

APPEA said the code “must recognise the importance of gas in a cleaner energy future, and the need to ensure settings which enable investment in new supply to avoid forecast shortfalls and put downward pressure on prices”.

Gas industry developers continues to warn the broader industry that deterring investment in new gas supply will harm the supply to manufacturers and reduce the secure of supplies of electricity across the NEM.

Beach Energy’s chief executive has said that getting the terms of the code wrong could imperil Australia’s transition to low-carbon energy given the role gas plays to support renewable energy.

At the end of the day changes to the industry need to benefit producers, end users and ensure gas and electricity security is achieved. While international cost pressures are impacting the gas and electricity industry. The continued development of gas resources are required to provide gas the opportunity to be the transitional fuel as Australia strives to its Net zero emission targets.

Next test in NSW for the transition to renewables

Hand turning off light switch

For over eight years, there has been talk of AGL shutting down Liddell power station. Finally, this will become reality today, with the next Liddell unit being shut down.

Liddell Unit 4 will be shut down today, followed by Units 1 and 4 over the next 10 days. The retirement of Liddell power station will make 10% of NSW’s availability being bid unavailable.

It would be expected that the permanent closure of 10% of NSW’s electricity generation would put the grid at risk and lead to higher electricity prices.

AEMO has alleviated market concerns by saying, “Supply is not at risk”. However, Edge2020 is not ruling out an upward pressure on prices due to a shock to the market, despite the market knowing the Liddell units would be shut down for many years.

The retirement of Liddell power station is the next big step for NSW as the state transitions from scheduled coal-fired generation to intermittent renewable energy and storage.

While the market has known about the retirement of the Liddell power station for years, Edge2020 expects the market to be firm on the reality of the closures. Spot electricity and forward prices in NSW and Queensland may increase in the short term; however, they will settle over time.

Following the retirement of the Liddell units, availability will still be relatively high in NSW. The capacity factors of the remaining coal-fired units will increase, and gas will fill the remaining gaps. As a result of this and generation from neighbouring regions, it is unlikely that the NSW region will incur a significant drop in availability resulting in a Lack of Reserve (LOR) notice from AEMO.

AEMO confirmed in February that the closure of the Liddell units would not breach the reliability standard; however, AEMO’s latest reliability report has raised concerns that reliability risks remain in NSW. AEMO’s biggest reliability concern has been the delayed delivery of Snowy Hydro’s Kurri Kurri gas-fired generator. The Kurri Kurri gas-fired generator has been delayed by 12 months. AGL has confirmed AEMO has not approached them regarding reliability levels following the closure.

Further to alleviate the availability and reliability concerns of the market as we approach to summer is the news that Energy Australia will have the 300MW Tallawarra B gas-fired generator online in December. Additionally, NSW imports additional electricity from Queensland and Victoria via the interconnectors.

AGL has plans to repurpose the Liddell site into a clean energy hub which will include a 250MW battery with room for expansion that could be linked to a nearby pumped hydro project.

After the closure of Liddell 4 on April 19th, followed by Unit 2 six days later, and then finally Unit 1 on April 29th, AGL will start demolition in early 2024.

The next few weeks will be an interesting time in the industry, particularly for NSW politics and the wider NEM. Edge2020 will monitor the market and provide updates over the next few weeks as the final unit retires.

Renewable energy storage road map released

Edge 2020 Brisbane City

The CSIRO released its Renewable Energy Storage Roadmap at the end of March 2023.

Their modelling suggested that while Australia leads the world in solar generation, and we have reduced emissions significantly, there is still a big task ahead of the country if we are to meet net zero emission targets and maintain affordable and reliable energy to end users. The CSIRO Renewable Energy Storage Roadmap report showed Australia will need significant amounts of storage to meet the transition to renewables.

Storage is the key to integrating renewable energy into the grid and reducing the dependency on coal and gas fired generation. Currently the electricity produced from renewable sources such as wind and solar is intermittent and is not easily dispatched into the grid when it is most needed. Storage allows the renewable energy to be generated when the natural resources are high and dispatching it into the grid when the electricity is needed.

Dispatchable storage is currently available in the grid in the form of pump storage hydro, such as Wivenhoe power station in Queensland and Tumut 3 in NSW. There are also various battery installations located across the NEM.

The dispatch of renewable energy may require different storage technologies to best suit an evolving NEM. Storage comes in various forms from electrochemical storage such as batteries, mechanical storage such as hydro, chemical storage and thermal storage. Each technology has its pros and cons, but a combination of technologies is likely to be required to meet the real time storage volumes and timings of the NEM.

For many years pumped hydro has been seen by governments as the solution to Australia’s energy storage needs, but timing is the limiting factor in this solution.

To enable the transition from coal and gas fired generation to renewables, storage is required now. On a typical day we have excess solar generation resulting in negative spot prices, however over the evening peak as demand increases the supply of renewable drops of coal and gas provide the generation to meet demand. Thermal generation is normally dispatched at prices higher than the cost of renewables resulting in higher spot prices. If storage could be used efficiently the solar energy produced during daylight hours could be used over the evening peak and into the evening resulting in lower electricity prices.

As coal fired generation retires between 2023 and 2035, new dispatchable generation needs to be brought online, the CSIRO report states, development timelines need to be accelerated to bring more projects online by 2030.

Pump storage hydro typically has a lead time of 10 years so either development timelines need to be accelerated or different storage technologies need to be employed in the meantime.

CSIRO chief executive said “there was a need for a “massive increase” in storage capacity to achieve the transition to net zero, with estimates of 11 to 14 gigawatts of additional storage capacity by 2030 alone.

2030 is not far away, to meet the transition targets should industry be focusing on storage rather than generation? Is storage an opportunity to utilise existing infrastructure like old mine pits for pump storage hydro or repurpose retiring thermal power station sites as storage hubs?