Saturday, November 25, 2023

Is the ‘dumbest country in the world’ finally seeing the light?

Is the ‘dumbest country in the world’ finally seeing the light? Peter Hartcher Political and international editor

What’s the defining difference between poor countries and rich? In a word, investment. Poor countries don’t have much. Rich countries have lots.

To illustrate the difference between a country that enjoys lots of investment and a neighbour that doesn’t, look no further than starving North Korea and flourishing South Korea.

Illustration: John Shakespeare 

The world is in the midst of one of the greatest investment booms in history. It’s a “once-in-a-lifetime” wave of capital spending estimated to total about $US130 trillion ($198 trillion) over the five years to 2027, according to McKinsey & Co management consultants.

That’s about one-quarter greater than the value of the entire world’s economic output this year. Or 76 times the value of Australia’s. The money “will flood into projects to decarbonise and renew critical infrastructure”, says McKinsey. The question is whether Australia gets its share. Or more. Or less.

“The policy chaos we have had in the electricity sector for more than a decade has meant that big institutional investors have found it very difficult to invest in Australia,” says the managing director for policy at the Investor Group on Climate Change, Erwin Jackson.

He knows. His group represents big institutional investors with a collective A$30 trillion under management, including global majors such as Blackrock and the biggest Australian superannuation and infrastructure funds.

One consequence: “For every dollar they’ve invested in Australia, they’ve put $3 into other jurisdictions,” says Jackson. “Principally because of that policy chaos, they’ve been going to the US, Asia, Europe.”

Australia started well by inventing the photovoltaic solar panel in the labs of the University of NSW. Then botched it. “In Australia we invented the technology and basically gave it away for free,” says the chief executive of the Smart Energy Council, John Grimes. “We are the dumbest country in the world.”

Australia had a second crack at it, leading the world with rooftop solar systems. This made Australia a leader overall in solar deployment: “Ten years ago Australia was No. 1 or No. 2 in the world,” relates Grimes, “but the rest of the world is catching up and we’re now No. 8 in solar.”

Australia used to lead the world in rooftop solar systems. Not any more. Australia used to lead the world in rooftop solar systems. Not any more. CREDIT: BRENDON THORNE/BLOOMBERG The policy chaos, as Jackson describes it, has been working against the systemic transformation Australia needs. The Albanese government made a major change by imposing a more ambitious emissions target. To hit it, Australia has to lift the renewables share in its electricity supply dramatically – from today’s 34 per cent to 82 per cent by 2030.

But it’s failing. Big, new solar and wind projects have started up, but they increasingly have encountered a problem. “The biggest structural barrier to building a massed renewable engine to power our economy is the growing fleet of renewables already installed,” energy expert Matthew Warren wrote recently in The Australian Financial Review. And rooftops in particular.

“Almost every day 3.4 million rooftops generate more than 10,000 megawatts at their midday peak. This creates chronic oversupply, sending wholesale electricity prices negative.” Negative prices? That means power companies have to pay to feed electricity into the grid. So the rooftop power providers are crowding the large-scale projects out of the market. “This means the value of any additional electricity from solar panels or other sources is beyond worthless to the grid,” Warren says.

This is a flashing red light to investors, of course. So new investment commitments for large-scale projects have slowed dramatically in recent months. To hit the national target, every year Australia needs investors to commit to installing renewables in the order of seven gigawatts (a gigawatt is a billion watts, roughly the energy need of a city of one million people). But so far this calendar year, they’ve signed up to build just 0.6 gigawatts. That’s a tremendous shortfall of over 90 per cent.

So not only is Australia failing to attract new investment, it’s falling far behind in meeting its emissions pledges. With the next big UN climate conference next week, Climate Change and Energy Minister Chris Bowen would have had to walk naked into the COP28 conference hall in Dubai.

But at least we have enough electricity to keep the lights on, right? Wrong. “Most of our coal-fired power plants are rust buckets right now that will either break down or blow up,” explains Jackson. A policy and political disaster of major proportions has been shaping up, along these lines: as the ageing fleet of coal-fired turbines spin their last in the next few years, with insufficient renewables ready to take up the load, the lights start to go out and Australia fails to meet its emissions targets. The planet won’t be the only thing overheating as an outraged electorate turns the government of the day to toast. Chris Bowen has launched a major green energy rescue mission.

Chris Bowen has launched a major green energy rescue mission. CREDIT: SMH So Bowen launched a major rescue mission this week. Energy experts are calling it the biggest policy change in at least a decade. The federal government announced it will underwrite revenue for companies that build new renewables projects. And on a huge scale.

Australia’s overall national electricity capacity is about 65 gigawatts. Bowen’s new scheme will guarantee minimum revenue for 32 gigawatts of new renewables, or about half as much as the existing national system.

Of this new capacity, 23 gigawatts is to be “variable” power, meaning solar and wind, and nine megawatts “dispatchable”, meaning battery or other storage. Together, this qualifies the new capacity as “firmed” energy supply. “This is the largest renewables scheme in Australia’s history by a big margin,” says Grimes. “It’s actually really smart because it sets out a co-ordinated investment framework.”

But you’d expect him to say that. His Smart Energy Council, the lobby group for the renewables industry, was urging the government to implement just such a plan, called a capacity investment scheme. The opposition has slammed it as a “blank cheque” to finance Labor’s “obsession” with renewables. And it’s true that the government says it won’t announce the price it pays to underwrite the electricity flowing from these future projects. Bowen’s stated reason is “to ensure that reverse auctions achieve the best bang for buck for taxpayers”. The scheme will cost the Treasury, but it will also pay the Treasury. It works by putting both a floor and a ceiling on the revenue flow from a renewables project. If the market price of electricity falls below the floor price that the project has agreed with the federal government, the taxpayer tops it up to the agreed sum. Obversely, if the market price of power rises above the agreed ceiling, the project pays any excess revenue above the ceiling to the government.

Will it work? It’s modelled on existing schemes in Victoria, NSW and the ACT, and abroad. The ACT scheme has been using the reverse-auction system for years. Grimes says the territory enjoys the lowest power prices in the country. Where the national average retail price rose by 21 per cent last year, prices rose by just 5 per cent in the ACT.

But what do the big investors think of Bowen’s capacity investment scheme? After all, they’re the policy’s target group. The reaction from the Investors Group on Climate Change “has been very positive”, says Erwin Jackson. “They like this because the government has taken responsibility for this mess and they’re taking action to address the problem. It helps a lot that you will get a guaranteed level of revenue. There will be a lot of appetite for investment to come back to Australia on the basis of this announcement.”

And the alternative? The Coalition is the anti-investment party in this sector. It is sceptical of renewables, fond of carbon fuel and fantasises about small modular nuclear reactors.

“The fundamental issue if you want nuclear in Australia is how will you attract the capital to build it?” says Jackson. “You’d need a capacity investment scheme on steroids. The government would have to take the burden (sic in original buden as at 10:05 am) of subsidies. It’s a new and risky technology in Australia.”

And so long as one of the two parties of government – Labor – remained opposed to nuclear, investors would be reluctant to commit. “It’s not an ideological position – my members invest in nuclear internationally – it’s just a financial reality.”

The government’s policy, using federal money to attract private capital to build the projects needed, is the sort of pro-investment industrial policy that made South Korea wealthy.

The Coalition’s policy, like the Kim family’s communist dynasty, deters private capital and spruiks a fake alternative like Pyongyang’s apartment blocks that are all facade and no apartments. And we’ve all seen the satellite photos of the Korean peninsula at night. The southern half is aglow. In the north, all is darkness.

Peter Hartcher is political editor.