13 September 2022

Australia’s renewable energy ‘superpower’ opportunities

Superman had many powers but none worked in the presence of ‘kryptonite’. Australia, an energy superpower, is experiencing its own kryptonite moment – one of the world’s largest exporters of coal and liquefied natural gas is facing an energy squeeze.

The metaphorical ‘kryptonite’ has come in an unusual form – domestic and international policy failures and the high level of politicization of climate and energy issues over the past 15 years.

Despite an abundance of energy resources, local prices have spiked sharply higher, with wholesale electricity prices in Australia more than trebling in the year to the second quarter. This is set to push consumer price inflation higher for households and constrain the profitability of businesses.

While this problem creates short-term challenges to the government, it also points to a broader issue – the structure of Australia’s energy market needs to be improved. The infrastructure is aging and mostly relies on coal. The global energy crunch has forced up coal and gas prices sharply, and Australia’s exports of these products has forced the global price shock into the local system.

While global resource producers operating in Australia are great beneficiaries of the sharply higher coal and gas prices, the rest of the economy is being squeezed. Underinvestment in capacity, including renewables, has exacerbated the supply challenges, as Australia’s energy transition has lagged behind other countries.
The good news is that there is plenty of room for improvement. As the world transitions from fossil fuels towards renewable energy, this presents the country with a huge long-term opportunity.

A large land mass, plenty of empty space, lots of sun and wind, particularly in the coastal regions, mean that Australia is well placed to harness renewable energy. Hydro energy has already been well-utilised, but the other energy sources remain largely underdeveloped. In particular, policymakers ought to focus on solar and wind to ensure the country’s future energy supply.

There has already been some success, with the government offering support for rooftop solar power installations. In Australia, unlike other countries, most solar generation comes from small-scale panels. A notable absence of large-scale solar is a clear opportunity for policymakers.

Clearly, the federal government’s Climate Change Bill 2022 is a step in the right direction. This bill sets out Australia’s emissions reductions targets and sends a strong signal to businesses and other policymakers about the direction of travel.

Achieving these goals will require significant investment and further policy changes. In particular, the more Australia can move towards a well-structured carbon-price guided system, the sharper the incentives are likely to be to encourage the energy transition.

There is an opportunity here for further collaboration between government and businesses, particularly in terms of addressing hurdles that companies cannot overcome alone, such as redesigning the energy grid and other parts of the energy system.

Another opportunity for policymakers is to help accelerate the export of renewable energy to meet rising global demand. This is an emerging industry and it has the potential to generate both income and jobs. Policymakers can help to overcome technical challenges and also underpin the longer-term investment horizon.

For example, the Australia-ASEAN Power Link undersea cable which will provide high-volume renewable energy sourced in the Northern Territory to Singapore will be a world first when it is completed (the target is 2027). Likewise, the Asian Renewable Energy Hub in Western Australia is set to export renewables in the form of hydrogen ammonia.

Finally, Australia could use low-carbon energy to process minerals such as steel and aluminium. These products are sizeable contributors to global emissions, with steel production alone creating 7-9% of the world’s carbon emissions. The economic viability of these processing opportunities may be strengthened by shifts towards imposing global tariffs on the carbon intensity of products, which are being implemented in the EU and have been proposed in the UK, Canada and the US.

As global policymakers move towards imposing higher taxes on products made using fossil fuels, those made using renewables would be more price competitive. In turn, this provides policymakers with an opportunity – the faster the onshore energy transition, the more competitive Australia’s exports will be in this changing global environment.

Australia is well placed to become a renewable energy superpower – it’s time to take away the kryptonite.

Paul Bloxham is HSBC’s Chief Economist for Australia, New Zealand and Global Commodities. Jamie Culling is HSBC Economist for Australia, New Zealand and Global Commodities.

This article first appeared in The Australian on 12 September 2022.