COP26 and the European Energy Crisis - Lessons and Implications for the Australian Energy Transition

You can date the change in the politics of climate change in Australia to the bushfires that swept the country in the summer of 2019/2020. In the wake of fires larger than medium-sized European countries burning for weeks, the Australian public decided that it was ready to act on climate change. The rain came. We got lucky this time.

Surveys of businesses across the country consistently reflect the importance of this issue. They show that everyone from Board members down to the employees want to change.

 This month the Australian Retailers Association has released research indicating that 63% of their members agree that urgent action is needed to mitigate the impacts of climate change. This strength of this finding prompted ARA CEO Paul Zahra to call on the government to heed the message and get serious about climate action.

The ARA research is corroborated by research from Energy Action, an energy management business that has been helping Australian businesses simplify, clean and lower the cost of their energy spending for more than 20 years. Energy Action released research in August this year revealing that 85% of employees of Australian businesses believe that regardless of what the government does, businesses need to act on climate change.

As we hurtle towards the last chance saloon of COP26 in Glasgow in November, we are watching the spectacle of the minority coalition party hold sway over the Federal Government as our Prime Minister belatedly fixes a binding - but not legislated- target of net zero emissions by 2050.

Based on reports from the National Party room this week, it appears that a strengthening of the existing 2030 commitment of a 26-28% reduction on 2005 emission levels has been taken off the table. This will be problematic for the Australian delegation in Glasgow. It conflicts with the widely accepted projections that Australia will deliver a 35% reduction by 2030. It also conflicts with the emerging consensus across business leaders that the next 10 years will shape Australia's opportunity to become a renewable energy powerhouse.

To be fair, however, the past 14 years of federal politics in Australia leaves us with no doubt that selling the vision of a cleaner world with a clear pathway to get there, is more difficult than you might think.

The politics are contentious: big changes create uncertainty, which amounts to uneven distribution of costs and benefits. The proposed changes mean new engineering solutions are required, as are social and demographic changes.

The sweep of changes is immense, from closing mines and generation assets that bring benefit to communities and the nation, threatening both regional towns and the GDP, to driving change in the skills mix that powers the workforce. The stakes are high: the process of change in our 21st-century economy inevitably creates winners and losers, which may take years or generations to unwind.

Looking beyond the politics, we have the science. Scientists have anticipated the possible increase in temperatures that carbon emissions will cause. It's been articulated time after time that these temperature changes will and are impacting people’s lives. The 2019 bushfires that wreaked havoc in Australia came from years of drought and poor forestry management. This was predictable; however, the scale and ferocity of the fires were not.

Meanwhile, in Europe and across Asia this week, economies are bracing for severe winter and a real prospect of energy shortages. Short term wholesale LNG prices in London, Amsterdam and Tokyo are tipping $AUD 40/GJ. Windfarms are failing as weather patterns change. There are predictions of people dying and factories halting production. If shortages in energy supply eventuate, they will magnify frustration, fuel inflation and cause decision-makers to turn back to emission-intensive fossil fuels to generate electricity. The politics that have allowed progress to date, may change.

In short, engineering a path of significant social and technological change against a volatile change in climate is more difficult than we all expected. In the next breath, it is obvious that delaying the change is not going to make it easier.

So, with the political and climate stakes so high, what can Australians expect out of COP26?

Australian businesses are well integrated to the global economy. We have our significant supply chain and market exposure to the US, Asia and Europe. This integration, coupled with local exposure to energy costs mean, COP26 is looming for all businesses, and many are not prepared.

The two biggest issues likely to arise from COP26 are:

1. the increased pressure on Australia to announce a plan towards net zero in 2050 (or earlier)

2. the beginning of the establishment of an international Cross Border Adjustment Mechanism (a carbon tariff).

Let’s take a moment to look at what each of these means for Australian businesses:

Pressure to adopt an aggressive trajectory towards net zero.

COP26 comes five years after the 2015 Paris Agreement, at which 190 members of the 197 original signatories to the 1994 United Nations Framework Convention on Climate Change (UNFCCC), agreed to do 2 things:

1. work together to limit global warming to well below 2 degrees and to aim for 1.5 degrees, to adapt to the impacts of a changing climate

2. meet every 5 years to review their commitment to this goal and update their plan to reflect their highest possible ambition at that time.

A recurring issue in Australian politics since the ratification of the Paris Agreement in 2016, is whether our commitment to a reduction in greenhouse gas emissions of 26- 28% below 2005 levels by 2030 is enough to limit global warming to less than a 1.5 degree increase on pre-industrial levels.

As we can see playing out in federal politics in Australia this month, pressure will be required at COP26 to push leaders to do today what can be put off to tomorrow. Collectively setting the bar at the lowest common denominator will not deliver the outcome that the planet needs.

Significant and continuous investment will be required over the coming decades to get us there. The IEA estimates the phenomenal sum of $USD 5 trillion per year will be required by 2030, and ongoing to 2050, to convert global energy systems to low emission systems.

The good news is that IEA thinks that energy systems globally can do this without carbon offsets. The bad news is that this will translate into higher energy input costs globally, and replacement costs for end-use equipment as well. Expect to hear a lot more of the buzz phrase “electrify everything” (and then combust hydrogen for what’s left).

In Australia, there are fewer constraints than some nations to supporting an entirely renewable and zero-emission energy system.. The key question is what is the pace of change that the system (including consumers) can support? On the eastern side of the country, State Governments have initiated renewable energy zones to target upgrades in transmission and distribution systems required to support intermittent power and storage. But gas is likely to be a transition fuel, even if we can wean ourselves off coal faster than predicted. As new energy storage comes online (including Snowy 2.0 in 2026 onwards), and the pace of investment ebbs and flows with access to rare earth minerals and engineering skills

We can expect one constant: international LNG prices will set the price for the firming of electricity supply for at least the next decade.

In the background, we can also see as an outcome of pressure to do more sooner at COP26 that the trade-in carbon offsets will increase in value, as will obligations on businesses to purchase them to acquit their emissions. COP26 is seeking to engage finance and develop carbon markets to further support a transition to a zero-emission global economy. The contentions around the claims of what does and does not constitute a high-quality carbon offset will also increase. This development will go hand in hand with an increase in reporting obligations to increase transparency in carbon reporting globally.

Carbon Pricing: the EU proposal for a Cross Border Adjustment Tariff

A significant proposal that will be discussed in detail at COP26 is the European Union’s proposal to implement a Cross Border Adjustment Mechanism (CBAM): a carbon tariff.

The intent of the CBAM is to reduce carbon leakage by equalising the direct carbon costs embedded in products that are produced in jurisdictions that have implemented a carbon price, with products that are exported from a jurisdiction that has no such cost impost applied.

This issues a threat to all Australian exports. The fact that Australia does not have a mandatory carbon price will leave Australian exports at a price disadvantage in those markets. As an obvious, Australian coal exports are vulnerable. If coal buying countries are required to account for the carbon embodied in the products they produce, this puts Australian coal at a price disadvantage compared to the less emissions-intensive energy generation sources.

It is also an opportunity for consideration for all Australian manufacturers. Where previously high energy costs have hampered Australia’s onshore manufacturing industry, a CBAM offers the prospect that energy costs will be equalised around the world, providing Australia with a natural advantage if we can make the leap to a low cost, reliable and renewable energy system.

The matter of carbon leakage is one that COP26 will seek to implement new rules on. However, it is unlikely that the EU CBAM will be accepted at COP26. This is partly because its principle of discriminating between products based on their input costs is at odds with a number of the key principles of the World Trade Organisation (WTO), regardless of how they may have been produced. Indeed, it is unlikely that the EU has proposed the complex set of rules with an expectation that they would be accepted at COP26.

More likely is that the EU has proposed the CBAM system, replete with blank schedules on carbon pricing methods and exempted countries in order to spur negotiation on the issue. Whether this can be achieved over 10 days in Glasgow, remains to be seen.

Find out more as it happens

Join us for an early wrap of COP26 on the 11th of November, as we discuss with Alfa Energy, our partners in the UK, the up-close view of COP26, and also European energy pricing. We will try and dig into the news from Glasgow, and the lessons we can draw from the UK energy transition.  You can register for our free webinar by clicking here.

Net Zero: How to Move Intentions into Action

As more businesses chart a course towards net zero emissions, we look at some of the steps to actually get there.


Almost a third of Australia’s 300 largest listed companies have now committed to net zero carbon emissions. The rate of business-led net zero commitments has also accelerated in the light of the alarming report delivered by the UN's Intergovernmental Panel on Climate Change (IPCC).


Pledging to net zero emissions is an encouraging step, following up with an action plan is the hard part. We look at five key elements of implementing net zero plans to help businesses take the next steps.


Measure


Achieving net zero emissions by the intended target date starts by understanding your business’ current carbon footprint. This means measuring your energy and emissions data across all sites and energy suppliers.
There is a difference though between energy intensity and emissions intensity. For example, a building may have low energy intensity as measured by the NABERS energy intensity framework and benchmarking tool. However, if the same building is heavily reliant on coal-fired energy sources, it will not have low emissions intensity.


Reduce


As Dr Alan Finkel noted in the July edition of Quarterly Essay that 82% of Australia’s emissions in 2020 are related to fossil fuel combustion. This included electricity (34%), stationary energy (20%), transport (18%) and fugitive emissions in fossil fuel extraction and transport (10%). Businesses must thus examine energy usage, including when and where it is being used. Simple changes like motion-sensing lighting and opting for cost-effective, energy-saving equipment can reduce both emissions and running costs.


Renewable energy


Replacing energy generated by fossil fuels with renewable energy should be a cornerstone of businesses’ net zero plans. Our clients have recently discussed how current low pricing large-scale generation certificates can help them to reach their net zero energy targets ahead of schedule.


Renewable energy options include onsite solar. Because these don’t have standard network supply charges, again, they can reduce both emissions and running costs. Through our Solar Auctions, businesses can have reputable suppliers bid competitively for their required system spec delivering further cost efficiencies.


Procurement


Innovative low emissions procurements options are emerging. For example, we have launched Green Auctions, a cost-effective way for businesses to secure a renewable-backed energy supply agreement (RESA) and speed up their transition to net zero. Businesses can now leverage a standard energy supply agreement to access 50% to 100% firm priced renewable supply.


Some of our clients say that the type of energy they purchase and their upgrades to property and equipment are also opportunities to drive change through their investments and to signal to the energy market that emissions reduction is the intent.


Offsets


Many businesses may have some residual emissions that are either very difficult to eliminate or outside of their control. This is where carbon offsets may help. These involve buying offsets from companies planting trees to absorb carbon or installing renewable energy, for example.


However, the price of carbon offsets remains low due to supply outpacing demand in previous years. This, it is argued, can make offsets more appealing than other more impactful pathways to deeper emissions reduction.
While carbon offsets can also help channel money into new technology, it is important to scrutinise their credentials. For example, would these projects have been financed without an offsets market and therefore do not offer additional environmental benefits?


Stakeholder engagement


Energy Action’s net zero plan also captures waste, paper usage, business travel and catering. Eventually, it will extend to events and conferences and our employees’ commute to work. But to ensure that energy initiatives are ongoing, stakeholder engagement and strong governance are imperatives.


Energy management policies that guide procurement teams through minimum performance or emissions reductions standards are emerging as one way to achieve organisational alignment. If you are considering how to formulate and implement these policies, we encourage you to attend our energy management webinar on 7th October.

The Time is Now - Why You Should be in the Market for Solar Today

The time to contract for solar energy is now. Rebates for installations in Victoria will reduce for solar installations completed after January 2022.

There has always been a compelling argument in favour of installing solar panels sooner rather than later: the sooner you get your system installed, the sooner the price of your energy bill will drop. Your carbon emissions are also reduced immediately.

Also in the mix is the volatile value of the various Government rebates available for your project. There are various state and federal rebate and subsidy programs that may be available to support your solar projects. The specific issue of timing differs from state, but the theme is the same: the longer you wait, the lower the value of the rebates available to support your project.

Solar in Victoria:

The Victorian Energy Efficiency Certificate (VEEC) scheme, which provides substantial funding for solar installations, will reduce for installs completed after January 2022.

This presents Victorian customers with a once-in-a-decade opportunity to implement large solar systems on their roof (or ground) this year. Due to the skyrocketing price of VEECs, we are now seeing the payback on a large solar system (>500 kW) of 3-4 years.

The VEEC rebate drops by 20% on 31 Jan 2022. This reset is expected to decrease the net payback on projects installed after January next year by up to 10 per cent. To make the most of the rebates, you must contract now to complete your installation before the reset comes into effect.  

Beyond Victoria, the Federal Government rebate supports solar installs below 100KW, the upfront Small-scale Technology Certificate (STC), and the certificate scheme supporting installations greater than 100KW and the Large Scale Generation Certificate (LGC) will be one year closer to their sunset date of 2030. The way both of these schemes work is that your project is rewarded for its deemed or actual solar production over the scheme's life so as each calendar year ticks over and the reward period is shortened, the rebate opportunity is reduced.

Other incentives to move now to contract include the opportunity businesses now enjoy to claim solar as a tax deduction. Where a small business is operating remotely, a solar system under $20,000 can be claimed under the instant asset write-off scheme.

The Outlook for Solar Remains Hot

The Australian Energy Regulator (AER) released its 2021 State of the Market report earlier this month. Observing that in 2020 more than 2500MW of behind-the-meter solar capacity was added to the market. A statistic that really indicates scale to this number is that in  2021, 24% of energy consumers across the National Energy Market have installed behind-the-meter solar.

This growth in the market is projected to continue on this steep trajectory, even as the rebates roll off. According to the AER, there is an estimated between 13 and 24 GW of behind-the-meter solar capacity forecast to be installed over the next 20 years.

It's easy to see why there would be such a growth in the use of solar. Energy Action has been in the commercial and industrial solar market for the past decade,  and we have seen the market mature considerably. Incremental advances in equipment performance, coupled with the emergence of a highly experienced body of installers with a legacy of high-quality projects, means that procurement can now match the right kind of installer and installation for the right type of situation.

 The Quickest way to get From your Desktop to Solar Power

With current COVID-19 restrictions adding extra complexity to the task of scheduling a solar install, the reality is that a solar install before the end of January is a tough ask. In addition to the challenge to sort through the myriad of offers you are probably receiving from installers, technical and quality issues need to be addressed. 

One of the easiest ways on the market to make the transition to solar power is via Energy Action's Solar Auction Platform.

Our online reverse auction process for solar is currently achieving reductions of 16% from the first bid to the last bid. From the highest initial offer to the final accepted offer, the whole process has led to an overall reduction of 42% in cost for the participant.

All we need to get started is a copy of a recent bill, your meter information and available rooftop configuration to determine your requirements. We can provide initial offers for your acceptance within a week from Qualified suppliers and then help you drive the margin down through our Solar Auction process.

Click here to learn more about Energy Action's reverse auctions for solar.

It's crucial to note solar installation projects take up to four months to build, so now is the time to assess the savings solar will deliver for your site and then procure with our Solar Auction process.

And for your grid-supplied energy, Energy Action's Green Auctions provide businesses with a means to enjoy the benefits of a firm price renewable energy supply to meet net zero obligations, where multiple renewable energy retailers competitively bid for a business' contract.

To find out more about these options, contact Energy Action today on 1300 964 589, or get in touch with your account manager.