Can markets front-run the govt on climate? Special EP.

HOST Thomas|24 November, 2021

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  • Thomas

    Thomas, the economist, is the brains of the outfit. He studied economics and game-theory at the University of Queensland and cut his teeth as an economist at the Reserve Bank of Australia. He now runs his own economics consultancy, with a particular focus on the property market. He lives with his wife and two kids in the hills outside Byron Bay.

Adam is bludging this week, so Thomas has his mate Tim on, who’s an expert in energy economics. They take stock of COP26 and see where markets are front-running the governments (lack of) action. And what does Australia as a Clean Energy SuperPower look like?

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Thomas: [00:00:26] Hello and welcome to Comedian versus Economist where we demystify the world of money and give you a handle on the bigger picture. My name is Thomas and I am not joined by my big little brother Adam this week. Instead, I'm joined by my mate and real life economist Tim. Now, this week got a bit of a special show. Adam's away, as I said, which gives me a chance to sit in the captain's seat, which I'm enjoying. And I wanted to look a little bit at the energy markets. So a couple of weeks ago on the show I sang, I was a bit depressed. It felt a bit grim about the outlook coming out of COP26, about the climate change negotiations and where we were tracking, and particular how Australia was performing. And I was feeling a bit grim about all of that. But then I met Tim, reached out to me and said that actually. Yet there are some things to feel grim about, but there are also some things to feel a bit optimistic about, particularly in the way that the markets are front running the government on climate action. And I just wanted to pull that into a conversation. So that was an interesting point that to me didn't feel like was well understood. I didn't understand it well, so I thought that if I don't get it, then maybe this other people who don't. So that's the conversation that we want to have today. Thanks for joining us on that and let's see how we go. So, Tim, give us a bit of a rave about why you're interested in this and where your expertise comes from. [00:01:48][82.3]

Tim: [00:01:49] So I have been working as an energy market economist for a couple of years now, currently doing a Ph.D. in physics at Sydney Uni, looking at the macroeconomic impacts of energy investment. So renewable energy versus gas fracking versus coal mining, what the employment and environmental impacts of those different types of investments are. [00:02:13][23.9]

Thomas: [00:02:14] Mm-Hmm. Oh, fantastic. Let's let's start with COP26. I'm aware that I'm in a particular media bubble. What I was seeing seem to be seeing was suggesting that Australia hadn't done very much, had committed to do very little, had undermined a lot of the the push for real action at COP26. Is that a realistic take on things? [00:02:34][20.5]

Tim: [00:02:35] Yeah. So we did end up signing the final agreement of COP26, which was the Glasgow pact where, you know, formally the the goal of the likes of Boris Johnson was to have the final agreement that globally countries would agree to phase out coal usage by 2030. And instead, we are now talking about phasing down coal usage by 2030. The good news about that is that is happening in a significant way in Australia anyway, largely due to market forces. So essentially a coal fired power stations are no longer profitable to operate a lot of the time because renewable energy generation has just become so incredibly cheap. So, yeah, to give you some context on, that's the cost of renewable energy investment in terms of like the capital costs per unit of electricity generated decreased over 2010 to 2020 by a factor of five, so it now costs 20 percent of what it would 10 years ago to generate renewable energy. So that's for that's for solar. The price of wind generation has roughly halved in that time as well. And when it comes to hydropower, which is the other big energy generation source, as you can imagine, there's there's not too much technological innovation happening and driving massive turbines. So that's around about the same price. But the the price of solar has cracked down significantly, and that means that, like a lot of coal fired generators in Australia, are simply no longer looking economical in the long term. We already seen two major coal fired generators in Australia closed down those, you know, the large ones in Victoria. So Hazelwood was one of those that had some pretty significant effects on electricity pricing. But that has since come down, and we are now looking at cheaper energy prices than before those coal fired power stations closed down simply because renewable energy has become so cheap. So that's that's the good news. Yeah, the bad news is that internationally we didn't agree to much in Cop 26. [00:04:52][136.7]

Thomas: [00:04:53] So can I. Can I just ask on that? So I've seen similarly so renewables is becoming cheaper at a much at a rapid rate. It's now a cost competitive with coal. So, so why? What's the role of government then? Like, why are we pushing if that's it seems to me, sounds like the market is sorting it out? What's why are we? Why are we pushing the governments for climate action? There isn't, it won't. Most market forces just take care of this for us? [00:05:19][25.6]

Tim: [00:05:19] Well, so the market forces could unambiguously take care of it. In Australia, it's a little bit different than. The international scene, so in Australia, we've got, as you know, sunburnt country, incredible solar and wind resources and land resources as well. So we've got all of the space to set up, kind of like giant energy farms and that kind of stuff. If you think about a country like Japan, Singapore, there's a lot less opportunity for generating their own renewable energy. And so they may might need kind of like significant government incentives to transition away from, you know, coal fired power generation or gas fired power generation. But when it comes to Australia, the major action that needs to be taken by governments in order to facilitate further renewable energy investment and therefore, you know, the phase out of coal is investment in transmission infrastructure. So power lines essentially. So the major thing that blocking renewable energy investment from accelerating at the moment is that there simply aren't enough power lines to connect it all up. So we've got, you know, if you think about the sources of renewable energy where the best solar and wind resources are, they're not where coal fired power stations located, coal fired power stations tend to be, you know, in small towns adjacent to the major cities like a roaring, for example, in New South Wales. So but the solar and wind resources are often more marginal lands that you don't you know that on, you know, suburbs, towns or farms or anything like that. And so we need to build grids in order to connect those up and those grids. The investment in those grids centrally controlled by the Australian energy regulator. And so and they basically get given the approval to allow these kind of networks to expand from the federal government, according to what the the federal government is allowing to be spent on electricity networks. [00:07:30][130.3]

Thomas: [00:07:31] So you're saying they're like, if I'm a if I'm a private company and I want to raise capital and build power lines and energy infrastructure, I can't I may or may not, depending on whether the regulator gives me approval. [00:07:43][11.9]

Tim: [00:07:44] Yeah, exactly. Because as we privatised our electricity networks, because they essentially operate in network monopolies like you have to connect to this one grid, there's no economic competition happening there. So if you tried to like connect to the grid and there was like a monopoly private entity, they could essentially charge you the price that they liked until you had no more money in order to get to get your electricity. So they have the essentially a determined level of return that they can make on the capital investment they put into the network. And so they don't just kind of like build an enormous gold plated network and make whatever return they like by scale. The government says, OK, you can build, you know, essentially $100 million of infrastructure this year. And you know, it's generally set out in kind of like, yeah, five year determinations as to like what can be built in the network and what can't be. So, yeah, they can't like even if it was kind of like economically rational for them to connect up these renewable energy generators, they can't do that because the government, you know, is kind of like containing the level of investment that they're able to put into the network. [00:09:02][77.3]

Thomas: [00:09:03] OK, so we're saying that the poles and wire, that's that's the bottleneck for Australia to move to renewables. Is that? [00:09:08][5.5]

Tim: [00:09:09] Yeah, yeah. Yeah. So so that's that's what like there's a couple of other like quite complicated things that need to go into the energy network as well, like, you know, synchronous converters and inverters and all of that kind of stuff, basically to turn kind of like the direct current that you get from solar and the like alternating current, there needs to be something called inertia in the system as well. But the main thing that you just need is more power lines. The other thing that happens with the renewable energy as well is that it tends to be generated in quite short spurts and then you want to store it for use later. So like when the sun's not shining, if you're generating most of it through solar, and that means that an awful lot of capacity kind of like gets shoved into powerlines all at once. And if you don't have, like, enough power lines to take that load, they'll start doing creepy things like melting and catching fire. [00:09:59][49.9]

Thomas: [00:09:59] And, you know, that doesn't sound good. [00:10:00][1.2]

Tim: [00:10:01] So at the moment, there's a huge pipeline of renewable energy investments, which are economically rational. So you know, they could make money and bring down power bills essentially like lower the cost of electricity because they are producing at a lower cost. But they can't connect up to the grid because that grid either doesn't exist or doesn't have the capacity to handle them at the moment [00:10:22][20.8]

Thomas: [00:10:22] is is it a substantial amount waiting in the. Wings there, [00:10:25][2.8]

Tim: [00:10:25] yet, like, utterly enormous, so 55 gigawatts, I think, was the estimate put forward by a imara. And so to give the listeners some context as to the size of that, that's about the same size as the entire national electricity market as it stands in terms of generation capacity. So. And, you know, forgetting about air because they're not in the national market, you know, they're their own beast as they always have been. The entire generation of capacity of like the East Coast and the south of Australia is waiting in the wings to connect up to the network. [00:11:02][36.5]

Thomas: [00:11:03] Essentially, that's that's wild. [00:11:04][1.4]

Tim: [00:11:05] Yes. Well, it's [00:11:06][1.0]

Thomas: [00:11:06] huge. And then so then the the decision on whether to invest in the poles and wires and those other things, you mentioned that I've now forgotten that's sitting with the government. And so is that the criticism point that the that's where the government's dragging its heels? [00:11:19][12.5]

Tim: [00:11:19] Yeah. So I don't think the lack of capacity and transmission infrastructure has received enough media attention outside of like deep renewable energy nerds like myself and energy market analysts. [00:11:32][12.3]

Thomas: [00:11:33] You heard it here first on commuting. [00:11:34][1.0]

Tim: [00:11:38] But that doesn't mean to say that, like, nothing's happening on that front. So, you know, there are I think there is about like five gigawatts of investment infrastructure that's been approved to be built in the near future in terms of these things, called interconnectors. So they're really large kind of transmission interconnectors between states, which allow for power sharing between states, which is something you really want and kind of like a distributed renewable energy grid. Because, you know, if the Sun's not shining in Sydney, it might be shining in South Australia. So you want to be able to distribute your generation risk like that. And the New South Wales government has said it would want to see 12 gigawatt of transmission infrastructure built over the next 15 years. So, you know, that's about another quarter of the size of NEM, and that's just happening in New South Wales, which is really exciting. But yeah, there's there's been no kind of like dialogue forthcoming from the government as to like the need to significantly scale up our transmission network to be able to deal with a high load of renewable energy generation or anything like that. It's just been like silence on that front. Mm-Hmm. [00:12:55][77.9]

Thomas: [00:12:56] Mm-Hmm. In terms of like what? Like something at COP26 works. You know, if you know, if you're pro renewables and want to see Australia reduce its emissions and pull its weight, what's what would what would we be looking for from something like COP26? [00:13:12][15.8]

Tim: [00:13:13] So ideally, if I was, you know, involved in this space, you would want to be saying things like, OK, here's a concrete plan to bring this capacity of renewable energy generation online and have it kind of like firmed with things like batteries. This is the amount of money that we are going to allow to be spent on that transmission infrastructure to support this renewable energy generation. And this is how quickly it's going to phase out coal fired generators and this is how much our emissions will be reduced by as a result of that. Yeah, that's that's ideally what you would want to see. [00:13:56][43.0]

Thomas: [00:13:57] Mm-Hmm. If so, if that's if that's a 10 to how do we go in at COP26? [00:14:01][4.4]

Tim: [00:14:02] So the Climate Change Performance Index ranked countries from one to 60 in terms of their climate policies that they brought to COP26. And Australia ranked last. So we came 60 out of 60. And yet our goal was zero. We were zero. Yeah, we were the only country to get a zero. [00:14:28][26.2]

Thomas: [00:14:29] Really the only country to get zero. Wow. OK, that's a bit grim. [00:14:33][4.7]

Tim: [00:14:34] Yeah, exactly. But what's less grim? Because it's know it's really easy for two of us dismal scientists to kind of like stare into the abyss, especially when we're talking about climate change. I mean, that's the dismal science of the dismal sciences of climate change economics. As much as kind of like federal policy doesn't seem to have a lot of detail on this yet and doesn't seem to have committed to any kind of. Concrete way of reaching its net zero by 2050 goals. The state governments, for example, are doing a lot, a lot of work in this space. So hang on, I'm [00:15:15][41.3]

Thomas: [00:15:16] going to put you there. We're going to take a quick break from our sponsors and we'll jump back into the states just after this. All right. Welcome back to comedian versus economist, I'm here chatting with my mate, Tim, a energy market economist. Disney insisted just days it was on. And we're talking COP26, what's happening out of that? So we got zero on our scorecard for at the federal level, but the states are running a better story. Tell us about that, Tim. [00:15:45][29.5]

Tim: [00:15:46] Yeah. So I think I mentioned to the New South Wales Energy Infrastructure Road Map a little earlier. Yeah, so this was put forward by the Energy Minister Matt Kean, who's always problem at easing my relationship to the New South Wales government. He often comes out with initiatives that I actually think are a pretty wonderful idea. So essentially, this plan, as I mentioned earlier, looking at 12 gigawatt of investment in renewable energy or about one quarter of the capacity of the national electricity market at the moment over the next 15 years, three gigawatt of that is going to be what's called firmed renewable energy, which is essentially renewable energy plus batteries or pumped hydropower storage. So pumped hydropower just for the listeners. When you pump water up a hill, so sun is shining, you pump water up a hill, you let her run down during the day to drive a turbine, and that's how you store energy. And that plan is going to see four out of the five coal plants in New South Wales close in the next 15 years. So which is, yeah, four out of five? Wow. Yeah, yeah. And some of the largest ones as well. So we're going to go from 10 gigawatt of capacity in coal fired power generation in New South Wales to about one point five over the next 15 years. Wow. And yeah, that's going to be replacing about three quarters of the energy generated in New South Wales with renewable sources over that period. So, yeah, because currently these coal fired power stations generate about three quarters of the electricity in New South Wales, so completely replacing those with zero emissions tech, which is pretty exciting. And then there's [00:17:31][105.6]

Thomas: [00:17:32] so so does. Does the state government own the generators? Is that how they have the capacity to shut them down? [00:17:37][5.5]

Tim: [00:17:38] No, no. So the state government don't tend to own the generators. That would be like your large power companies generally like, you know, the likes of Origin AGL. But a lot of these companies have signalled that these plants are ending the nearing the end of their usable life. And it's no longer economic because of the current low prices of electricity, which are driven by renewable energy generation, no longer economical to refurbish them and keep them operating. And so they're going to phase them out. And what the government can do is kind of like coordinate this in a structured way like, OK, you know, this coal fired power plant tends to, you know, be economical at this level of price. And so then kind of like forecasters who are working for governments can go, OK, after we build as much renewable energy generation, we would expect that power plants and no longer be operational. And so the power company will have to retire that. I'm not so and so much bad news for the power companies because like they will also be building a lot of those renewable energy generation assets anyway. So, you [00:18:46][67.8]

Thomas: [00:18:46] know. Mm-Hmm. Mm. Mm-Hmm. Can I pick up on the question? One of the phrases I'm hearing a bit is about Australia becoming a green energy superpower. Yeah. Is that is that hype? Is that realistic? And what what what would it look like to be a green energy superpower? [00:19:00][14.5]

Tim: [00:19:01] Yeah. So I I don't think that's hype at all. So, for example, there's a very large green energy hub being developed in WA. It's called the WA Green Energy Hub or the Western Green Energy Hub button, and that's about 50 gigawatts in capacity looking to export renewable energy overseas. I think the last time I checked A. I think a large proportion of that is going to be renewables green hydrogen. So hydrogen that's formed through electrolysis, essentially sticking electrodes in water and letting hydrogen bubble off one of the electrodes. And you capture that and you sell it. When you burn the hydrogen, it becomes water. It doesn't release any CO2. Yeah. So they're looking at building a plant that's about 50 gigawatts in capacity. And I think an undersea cable to Singapore is in the works for that as well. And again, to give the listeners a scale of what 50 gigawatts is again about the size of the entire national electricity market of Australia in terms of generation capacity. So. [00:20:03][62.0]

Thomas: [00:20:04] So that's just out of one plant. [00:20:05][1.3]

Tim: [00:20:06] Yeah, yeah. Yeah, that's that's just out of like one project in Western Australia. Yeah. And the New South Wales government has also decided to push really heavily into the hydrogen space as well. So there? Writing about I think three billion and incentives are out till 2030, and they projects that they'll have green hydrogen being produced at about $20 a gigajoule. So to put that in context, that's currently cheaper than the price of LNG on on global energy markets at the moment. That's that's kind of like cheating a little bit from the renewables angle because the price of LNG like recently quadrupled. But still it's within, you know, it's within kind of like cost competitive range at the moment. And the thing about renewables tech is it's always really quickly outstripped everyone's projections on its decreasing costs just year after year. It's always become far more cheaper than us economists have been able to forecast because we are really awesome at forecasting cost. [00:21:17][70.1]

Thomas: [00:21:18] Forecasting is difficult. I have this conversation with Adam, a lot of forecasts. The people just don't understand how difficult forecasting is. It's very difficult, very difficult work. Yeah, it's [00:21:26][7.9]

Tim: [00:21:26] it's almost like the planet in the entirety of human civilisation is a really complex beast. Yeah. So forecasting the behaviour of societies on masses is just an exercise in chaos. But anyway, we take good stabs and sometimes we get it right. [00:21:41][14.9]

Thomas: [00:21:42] You had a stat about how quickly solar tech is advancing, like, is that also going to be true of like nuclear tech or carbon capture storage? Like, should we be backing all the horses in this race? [00:21:53][10.9]

Tim: [00:21:53] Yeah. So there's certainly going to be technological progression and all of those fronts. What makes renewable tech plummet and price so much? What makes it decrease in price so quickly? Why it's technological learning curve is so steep is the fact that it's a modular technology. So to build a, you know, a test nuclear reactor, for example, you need to do that at scale. You need to have kind of like a certain mass of uranium reacting in order to generate the energy to power the nuclear fired power station with, you know, solar panels, you can build like a one centimetre by one centimetre test module and that low cost of experimentation when it comes to renewable technology is what makes it so rapid to develop. And that's the same with batteries like the large scale batteries that you see in grids are essentially working off the same kinds of chemistry developments that you've seen in your phone. Batteries like phone batteries have, you know, increased in kind of like shelf life. Remarkably, from the 15 years ago when we were using Nokia's and seeing those can like, you know, die three hours after charging them, after you owned them for six months and that kind of stuff. Yeah, yeah. No shade on Nokia. I love my Nokia phone, but yeah, essentially because there's such wide scale applications for these, you know, batteries and solar panels. So like this huge market for them, once you develop kind of like a small kind of incremental improvement in the technology behind them and because they're so easy to experiment on, you can just do it on, you know, tiny scale. That means that they progress incredibly quickly as opposed to, you know, a carbon capture and storage facility where you need kind of like a giant underground void like, you know, pump carbon dioxide, you know, under the ocean or kind of like, you know, into the Earth's crust in order to be able to test its efficacy. Yeah. And also if you develop like an incremental improvement in that technology, like it'll just work for the next, you know, plant as opposed to, you know, just the next kind of like, you know, million solar panels produced, for example. So, yeah, yeah, it's it's it's more kind of like economically rational for solar panel producers and that kind of stuff to adopt, kind of like new technology. That's just an incremental improvement really rapidly because they can they have the economies of scale available to them really quickly to make that kind of capital improvement that's required to make cheaper energy economically rational for them. So, you know, they can they can upgrade their factory and just immediately start being able to sell, you know, new and improved solar panels. [00:24:47][173.7]

Thomas: [00:24:48] So, OK, so I'm hearing a few things to be hopeful for that. There's a lot of renewable tech in the offing. The it's advancing quicker than economists are expecting. There's some gains to be made. It is possible for Australia to be a green energy superpower so that, yeah, so we're looking like it's kind of sounding like, say, the question I wanted to finish with is how do you rate our species chance of survival? [00:25:13][24.5]

Tim: [00:25:14] Well, yeah. So on the technology and renewable energy investment side in Australia, I think that's that's looking pretty good. So, yeah, like I think. Our prospects for survival as a species are really contingent on how we manage the geopolitical tensions, which are going to arise from rapidly declining agricultural production as a result of climate change, which is already baked in from our current levels of emissions. Like, I don't see any kind of scenario where the human species is completely wiped out, like where we turn into the planet Venus or anything like that as a result of our emissions kind of lights completely making the landscape. But, you know, I can see scenarios where there are significant constraints on resources and that causes geopolitical conflicts similar to what we saw in Syria, where, you know, we had kind of droughts that were made multiples more likely by existing climate change, leading to forced migrations of populations into urban centres that were of, you know, different religions, Shia versus Sunni that caused conflict and that, you know, led to refugee flows into Europe, which then motivated a lot of the rise of right wing populism in Europe. That kind of like escalated like geopolitical tensions in Europe as well. So I think a lot of it is going to depend on whether we, as people and our governments can kind of like manage these, these geopolitical tensions in a humane way and work on protecting the biodiversity and the productivity of the landscapes that we have left. And yeah, that's that's an open question. It's very difficult to predict human behaviour in the long term, as you know. [00:27:15][121.6]

Thomas: [00:27:16] All right. That's a great night to end on. Thank you, Tim. No worries. We'll see you next week back in the capable hands of Adam on comedian versus economist. Thanks, everyone. [00:27:16][0.0]


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