Interview with Dr Mary Stewart

21 Jun 2010Archived News Climate Change Matters

With the recent demise of the CPRS and while we wait for the expected report from Prime Minister’s Task Group on Energy Efficiency, we speak to Dr Mary Stewart, Group General Manager, Resources and Heavy Industry, Energetics, to consider the issues for companies within these sectors. These challenges include the implications of the current 2020 national emissions reduction target; the ongoing importance of a strategic business response to climate change; the role of energy efficiency, and the complexity facing decision makers as they consider how best to “future proof” their businesses in the face of uncertainty.

Meeting 2020 emissions targets without CPRS

1. In your opinion, how can Australia most effectively work towards meeting our 2020 emissions targets in the absence of a CPRS?

The Federal Government has stated that Australia will work towards an emissions reduction target of 5% below 2000 levels by 2020 (or up to 25% if an international agreement is achieved). With nations such as China, India, Japan and the European Union setting and working towards targets for 2020, we can expect that Australia will hold to a 2020 emissions reduction target. Despite the deferral of the Carbon Pollution Reduction Scheme, there is no indication that our current 2020 target will be changing.

The most recent national figures for Australian emissions indicate that mining and manufacturing contribute approximately a third of Australia’s greenhouse gas emissions (direct and indirect). The challenge to achieve the national emissions target is not insignificant, and the resources and heavy industry sectors obviously have a role to play here.

It will not be sufficient for the resources and heavy industry sectors to only implement incremental improvements for example through energy efficiency or process efficiency measures. These incremental changes will not go far enough towards achieving the emissions reductions required. It will require a step change in the way the mining and heavy industrials do business.

While the obvious approach here is to rethink the way that mines are designed, or to focus on making significant investment in major alternative energy projects, these are not the only options available. Companies that take this approach will review the emissions intensity of the energy they use and work out how to reduce this, either through producing their own power, or through influencing power providers.

Another approach is to understand that, as a general rule, a dollar of added value per GJ in mining is extremely high: focusing on increasing the return from investing in a dollar of energy is a better approach than focusing on reducing the amount of energy used. This means a shift to optimizing the core process and improving control.

The challenge, as I see it, is the extent to which industry understands future risk: the degree to which investments made today will be a hedge against costs arising either from possible future government policy decisions such as the introduction of a price on carbon, a resources super profit tax or increases in energy prices.

Adopting a climate change strategy

2. What progress has been made in the resources and heavy industry sectors towards developing a climate change strategy?

Over the past 5 years the greatest change I have observed has been a shift in people's attitudes to climate change. A good example can be seen in the Hunter Valley coal mines in NSW. During this time, I have seen people's attitudes change from "climate change is not real" and "why should we do something about this?" to an understanding that addressing climate change and all its complexities is a licence to operate issue.

I no longer have the half hour argument about the reality of climate change: everyone knows that this is a challenge that needs to be addressed. Even more, people are excited about addressing climate change. They understand they can make a difference, and they can explain to their children that taking action is the right thing to do. This change in attitude has resulted from two main influences:
a) local communities and their concerns about climate change, and
b) companies emphasising climate change as a real issue which needs to be addressed throughout the industry.

We have seen that there is a new breed of operator and we are meeting them throughout the industry, from the boardroom to the site. The same can be said of the minerals processing, metals production and oil and gas industries where commitment to sustainability and reducing climate change impacts are readily visible.

The business case for energy efficiency

3. Energy efficiency has been described by the Federal Government as the 'fourth major element' in the government's strategy to address the challenges of climate change. What are the benefits to businesses within the resources and heavy industry sectors of pursuing energy efficiency?

At between 10 to 25% of operating costs, energy costs are one of the industries’ most manageable costs. Already we have seen cost savings driving investment decisions. The reality of greater volatility in energy prices across all Australian states means that now, and into the future, there will be a focus on realizing energy cost reductions.

Particularly over the next 3 to 5 years, businesses will need to think differently and take a long term view on forecasting future energy prices and develop hedging strategies to protect against cost increases that at times may be unforeseen. To do this they need to understand the issues and uncertainty around the increasing cost of energy, the impact of a price on carbon and concerns around security of energy supply. With this insight, an investment in energy efficiency measures becomes a justifiable response.

Mitigating climate change risk

4. What do you see as the major risks to resources and heavy industry of not pursuing a strategic and comprehensive approach to climate change mitigation?

The major risks for the resources and heavy industry sectors are financial: the direct and the indirect costs of not developing a climate change strategy. Direct costs are related to exposure to unbudgeted increases in energy prices as well as potential carbon costs. The potential does exist for these price increases to be significant and sudden as we have already seen with recent increases in the prices of diesel and electricity. Companies need to be prepared to proactively manage these increases.

Indirect costs are associated with the effects of a rapidly changing climate. For these industries the affects are typically related to water – either there is too much water, or there is not enough water. Managing the implications of both of these scenarios is not trivial and requires foresight and planning.

Skills required to meet the challenges

5. What are the skills that would be needed to create leaner and more agile industries to meet emerging energy, carbon and water management challenges?

Above all else we need people who are able to make decisions under uncertainty: "the variance tolerant engineer". While the magnitude of uncertainty may not change, the source of this uncertainty is likely to shift. Decisions will become increasingly complex as different drivers start to play a role. These drivers may not be readily quantifiable, however the need to include them in the decision process will become undeniable.

Our mining and heavy industrial clients are well placed to manage parametric uncertainty or uncertainty in information, typically this is interpreted as a risk and factored into decision processes. A more complex source of uncertainty is stochastic uncertainty, or uncertainty which arises as a result of how we frame a problem: the choices we make when we define the decision we are trying to take. This uncertainty is extremely complex to quantify.

The skills which are required are those which allow us to acknowledge that this uncertainty exists, and then to take decisions in spite of the uncertainty not being quantified. For example, including the effect of uncertainty around policy directions is not trivial, however it is necessary if the industry is to continue to grow and deliver sustainable outcomes for Australia.

Energetics is working on a real options evaluation view of energy prices for the mining, minerals processing and heavy industry sectors. This study is highlighting the need for companies to act now to hedge against future price volatility, not only through forward contracts, but also through reducing their dependence on energy.

We welcome the opportunity to discuss this with you further, please contact Mary Stewart on 02 9929 3911. 

 

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