Investing in the energy transition

The world is in the throes of an energy crisis. In Australia, electricity generation prices are around 115% above the previous highest average wholesale price, according to the Australian Academy of Technological Sciences & Engineering’s (ATSE’s) latest report Here and now: The state of low emissions technology in Australia.

The report was released ahead of the Sydney Energy Forum, held on 12-13 July, co-hosted by the Australian Government and the International Energy Agency with the support of the Business Council of Australia. Indo-Pacific ministers and business leaders discussed how to secure clean energy supply chains in the region and support global energy transformation.

In a related briefing on the current energy crises, the experts said Australia will need a portfolio of low emissions technologies which act in concert, supported by a clear research agenda and policy framework to provide an environment for industry to act with confidence.

The technology mix

Katherine Woodthorpe AO FTSE, former Chair of Natural Hazards Research Australia and former Director, Australian Renewable Energy Agency (ARENA) and Vast Solar said, “Australia is the envy of the world in per capita deployment of solar and wind power. Solar is by far the leading contender to decarbonise global energy systems". 

Renewable energy is tracking towards 50% of Australia’s electricity generation by 2025, when the Australian Energy Market Operator (AEMO) expects Australia’s electricity grids to be capable of running on 100% renewables, according to the report.

“By 2030, it is expected that renewables will supply 69% of Australia’s main electricity grid. The critical technology mix for Australia includes solar power, wind, pumped hydro and batteries, electricity transmission infrastructure, and electrification of transport and heating,” the report said.

A truly modern energy system

Alex Wonhas FTSE, Advisory Board Member NSW Energy Corporation and Former Head of Engineering and System Design, Australian Energy Market Operator (AEMO) said, “Australia has the technologies to avoid a future crisis, but we must act now to lay the foundation of a truly modern energy system. Immediate investment in the deployment of mature technologies, demonstration of emerging technologies and development of grid infrastructure capable of running a renewable energy system is necessary to ensure Australia can meet its unique challenges.”

To meet net zero emissions by 2050, Australia will need a portfolio of low emissions technologies which act in concert, supported by a clear research agenda and policy framework to provide an environment for industry to act with confidence, according to the report.

Where to look for energy-related opportunities?

What does the energy transition mean for the wind, solar, hydro, gas and battery markets? How will the grid evolve and what will be the role of grid technologies in the net zero transition? Where should investors look for opportunities?

Martin Marais, Analyst, Wentworth Williamson said, “Solar generates power in the middle of the day when demand is low, therefore the price of electricity during this time is low or even negative which will make it hard for investors to earn a decent return. Wind looks similar to me, generation is highest during the morning when demand is not very high. In the absence of subsidies, I think solar and wind have challenging economics. They generate power when demand is low and the barriers to entry in this space are limited.”

Is gas the answer?

The opportunities, according to Marais, exist for producers that can provide power during the evening when solar provides limited power and when demand is at its highest.

“In this category are gas power stations and hydro (if it can take advantage of cheap solar power during the day). Since gas is a fossil fuel, investment has been limited over the last few years, as such there are many market gaps that investors can take advantage of. It is important to realise that gas is going to be a key transition fuel to a fully renewable grid,” Marais said.

While the amount of installed solar and wind is expected to increase over the coming years, these projects will struggle to earn a decent return on investment, according to Marais.

“While I don’t expect the amount of installed gas generation to increase substantially, I think gas will have the most attractive financial return, with hydro coming in second place if it is able to take advantage of cheap solar,” he said.

The ATSA report noted that gas is useful as a transition technology, as the nation constructs the wind and solar infrastructure that will be required for a renewable energy future.

“Capacity factors for gas turbines are generally low since they are used infrequently, this means a gas plant may only be used to produce a small fraction of its energy generation potential. This limited use means that the cost of the electricity generated is high (when both the capital and operating costs are considered). Gas turbines would therefore likely only be used when electricity prices and electricity demand are both high, and/or when Frequency Control Ancillary Services (FACCS) or capacity are required,” according to the report.

The stumbling blocks

“One of the key stumbling blocks to the green transition and hence my reason for bullishness on the gas sector is that the current battery technology has a lot of challenges that won’t overcome the inherent issues with wind and solar," said Marais.

"Batteries are expensive to build, degrade over time, won’t have charge on a cloudy day and don’t provide a large amount of storage to keep the grid stable if there are consecutive days of adverse weather. A lot of the challenges I mentioned are currently being experienced in Germany and now they have had to resort back to coal power when renewables are not performing to the level the government thought they would,” Marais concluded.