Key outtakes from the Climate Change & Business Conference 2024
Discussions at CCBC 2024 traversed a wide range of topics but there were consistent themes around energy and capital that stayed with me, some of which are consolidated below. Input and views from others is very welcome via comments.??
NZ Energy & Decarbonisation Context
NZ has a fleet of large hydro generation assets mostly built between 30-70 years ago, supported by relatively consistent rainfall, as well as abundant wind, solar and geothermal energy resources. We should have cheap energy, but we don't. Instead, we have relatively high average prices and quite a lot of volatility in the wholesale market.
Despite having a highly renewable electricity grid, roughly 70%[1] of our energy needs come from fossil fuels due to their usage in residential, industrial and transport sectors. For New Zealand to meet the decarbonisation goals set out in the Zero Carbon Act, the use of these fossil fuels needs to be substantially replaced, in a large part by electrification of the machines (including vehicles) used by households and businesses, and the supply of renewable electricity needs to grow to support that. Where over recent years we’ve seen industrial decarbonisation investments driven in part by the GIDI fund and availability of keenly priced electricity supply agreements, Ben Thomson observed that industrial electrification decisions are becoming more complex, requiring a longer-term perspective on energy availability and prices.
Electrification, Supply & Demand, Chickens & Eggs
As Mike Casey highlighted, households can access cheap energy through electrification and installing solar and batteries, thereby avoiding transmission and distribution costs. Households can also provide valuable flexibility services to the grid operator through the use of batteries, so we need a market that recognises and rewards that value, which currently it doesn’t. Getting households to electrify involves swapping fuel for finance, meaning upfront costs are swapped for lower ongoing costs as energy savings can outstrip the cost of the additional finance[2]. One of the challenges to resolve is how to ensure that lower energy costs are adequately and clearly reflected in property valuations, so property owners are more inclined to invest?
For large scale generation, the wholesale electricity market we have is designed to provide a price signal to encourage investment in new electricity generation capacity when its needed, meaning supply follows demand. However, as Carlos Martin Rivals observed, the market design came from a context where there were existing fleets of centralised generators with meaningful short run marginal costs (i.e. fuel and operating costs), which was considered reliable in providing a signal for investment in incremental new generation investments over time as electricity demand rose, roughly in line with growth in GDP.
The world we're in now is very different, with two key factors driving the need for a step change in (rather than incremental) investment in new generation capacity: 1) the imperative to decarbonise existing electricity generation; and 2) swapping fossil fuel usage for electricity in industry and transport, which is the driver of the need to grow electricity supply by an estimated 71% by 2050[3].
So, the existing electricity market design triggers investment in supply following a demand signal - this may work well in a situation where only incremental growth in electricity supply is required, however in this energy transition a step change is required. Flipping the equation, where investment in new supply anticipates demand, may require a different approach.
Attracting Investment in NZ Renewable Energy Infrastructure
Will Thomson talked about infrastructure investment requiring visibility of strong stable cashflows to enable investment in capital intensive assets (high upfront costs) where the return on investment comes over a long asset life (25-30 years+). Pension funds like infrastructure investment for this reason but need to have a high degree of confidence that they'll receive consistent cash returns over that long horizon to match their liabilities.
On NZ as an investment destination, Kate Binns noted BloombergNEF's ClimateScope report [4] that ranked NZ 66th in terms of attractiveness for renewable energy investment (27th out of 30 developed countries). Given NZ is an otherwise attractive investment destination with relatively stable political, legal and economic environment, perhaps that’s a signal there’s some work to do on our energy policy settings.
Carlos Martin Rivals talked about Contracts for Difference that had been widely used in the UK and Europe over the last decade to drive investment in new renewable energy generation. These are long term price stabilisation contracts that are awarded through a reverse auction process, meaning they are market mechanisms that drive competitive pricing outcomes.
Kate Binns touched on the importance of offtake arrangements for independent generators and highlighted alternative price stabilisation mechanisms such as LTESA in NSW, which provides an element of long term price stability, enabling financing and investment.
Malcolm Johns challenged NZ to be more ambitious in its vision for energy transition - to start thinking about going well beyond net zero and plan to drive future export opportunities i.e. attract energy intensive industry that relies on clean power. To do this New Zealand needs affordable power.
领英推荐
James Shaw and Jason Patrick shared some related insights - New Zealand needs to think bigger and deliver opportunities at scale to attract large international investors who have such significant pools of capital that they can't afford to consider sub-scale opportunities. This can be done through aggregation of projects and having a bolder vision.
A long-term National Energy Strategy
If we swap fossil fuels for electricity, we increase energy independence, enhance energy security, create more energy related jobs onshore rather than offshore, and vastly improve our balance of payments - all of this could result in a stronger and more stable economy.
As a few of the speakers observed, now is the right time to complete the work on the National Energy Strategy, including the review of electricity market design to identify opportunities to complement the existing market with market-based mechanisms that will encourage investment and secure abundant cheap, domestically produced energy for New Zealand. There’s a great opportunity to position New Zealand as a producer fueled by abundant, affordable renewable energy – let’s make sure we take it.
-------------------------------------------------------------------------------------------------------
This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser.
No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article. Any opinions in this article are not necessarily shared by BNZ or anyone else
?
[3] BCG Report “The Future is Electric” estimates that supply needs to grow by 34TWh between 2020-2050, which compares to 40TWh of supply in 2021.
Assurance Partner | Sustainability Reporting & Assurance Leader, PwC
1 个月Thanks Adam for the excellent synopsis of two days at CCBC 2024.
Company Director and Partner
2 个月The ability for residential houses to be relatively self sufficient with solar/batteries but more importantly the ability to sell unused power back into the national grid might be a good start. Whose blocking this practical step ? And is it feasible or does it require major infrastructure upgrades ?
Founder at EVA | Energy consultant
2 个月Thanks for your summary Adam. Mike Casey, Carlos Martin Rivals and Kate Binns are right, our policy settings and market design are not fit for delivering the energy transition. It's time for industry to earnestly engage with politicians (across the spectrum) and regulators in an unbiased way so we can realise a more ambitious vision for NZ. The opportunity's there. For our part, EVA has been pushing the government to enter into PPAs with them as an offtaker (it's a win for everyone). We're also developing tools to make PPAs more accessible for corporates of all shapes and sizes.
Corporate Sustainability | Communications Specialist
2 个月My favourite comments from the panelists - "electrification is a slamdunk", "we need it all!!!", "we need to give the customer agency over electrification" ????