Corporates bring energy procurement and climate risk strategies together

Author Dr Peter Holt

Date January 2018

For years Australia’s largest businesses have called for policy certainty and bipartisan political support of a national climate change response. Yet the 2017 Climate Policy Review simply states that Australia is on track to reach our 2030 national target without presenting firm details on a pathway.  The Review also provides no guidance on how deeper emissions reductions will be achieved as required under the Paris Agreement. In the past, the political turmoil around climate change policy has resulted in large energy users scaling back or even abandoning a dedicated climate response. However a significant shift is underway in businesses’ strategic priorities. Climate and energy strategies increasingly reflect the changes in Australia’s energy mix resulting from the penetration of renewable energy sources. Energetics argues that businesses are turning their attention away from local climate politics and instead looking to the many commercial drivers and innovative risk management strategies through which large energy users can take control of both their energy supply and spend through renewable energy supply agreements, and at the same time drive down greenhouse gas emissions.

In this article we share our insights gained from advising some of Australia’s largest companies over the course of 2017 on their energy and climate strategies.

Energy cost increases and market volatility have become risks to manage 

Over the last decade, the Australian energy market has been undergoing fundamental changes and this confluence of factors has led to record increases in the cost of energy. Over 2017 Energetics commented extensively on these drivers. In summary they are:

  • The east coast gas shortage and lack of competition has driven up gas prices at a time when demand for synchronised and dispatchable gas-fired power generation is needed to support the growth in renewable energy generation. This has had significant flow on effects to electricity prices in the National Electricity Market (NEM).
  • We are exposed to higher and more volatile power generation prices due to the disruption caused by the integration of renewable energy supplies, the increasing reliance on gas-fired power generators as marginal dispatching units and the lack of capital investment to replace ageing coal energy generation assets.
  • Network charges currently account for about 40-45% of electricity prices. Over $46b was invested between 2007 and 2012 to replace and augment existing electrical network infrastructure. Passing through these costs arguably led to the first energy price shock for consumers. Although over the past few years these charges have been stabilising.
  • Environmental charges include all compliance obligations from the Renewable Energy Target (RET) and State-based schemes. The RET was reviewed and re-set to 33,000 GWh in 23 June 2015. During the review, investment into the renewable energy sector paused but is now rapidly catching up. This ‘pause’ drove up renewable energy certificates prices, particularly those related to commercial grade renewable generation, resulting in higher environmental pass-through charges in the short term.

Energy supply security dominated policy developments over 2017

Wholesale electricity prices are influenced by a range of factors including weather, local economic activity, global financial outlook, international energy commodity prices, resource availability, investment in future resources, government policies and market sentiments. This complicated mix can result in significant price volatility in the electricity futures markets of 5% or more over a few days, and moves of ± 20% in a single month are possible.

The extreme example of this was the State-wide blackout of South Australia in 2016 where many influences combined to cause the blackout. The political storm that followed ensured that energy supply security would be a paramount consideration for governments. However, investment in Australian energy generation renewal has been fragmented over the last decade as potential investors in generation capacity sought clarity and certainty in Australian policy frameworks. In 2018 we will see a significant number of utility scale renewable energy projects developed and constructed easing the pressure on our energy supplies.

As discussed in the preceding paragraph, the Government and Regulators will be challenged to ensure security of supply and lower the cost of electricity, unless more gas is made available, and cheaply, as gas-fired electricity supports intermittent renewable energy supply. 

Clear long term market signals – a clean energy future and a market in transition

The world is transitioning to a low carbon energy supply. The clear market signal was the Paris Climate Agreement where global leaders agreed to limit temperature rise to "well below 2 degrees". Globally, Australia is one of 147 parties (out of 192 UN listed countries) which are signatories to the Agreement. The pace of ratification made the Paris Climate Agreement the fastest global agreement in the history of the United Nations. Australia has committed to a 26-28% emissions reduction target from 2005 levels. For Australia this requires a significant transition of our energy generation mix given our heavy dependence on coal fired power.

Even with President Trump’s announced withdrawal from the Paris Agreement, the market signal for a clean energy supply is clear. BlackRock, responsible for over US$5 trillion of investment funds, is listening as they seek to understand how Boards’ manage climate change risk[1] - declaring that "coal is dead"[2] as they look to invest in renewable energy projects here in Australia.

Australian businesses have also read the market signals. Pragmatically we are seeing businesses re-evaluating their risk profiles using science based targets, reassessing their markets, investing in low and zero carbon technologies, electrifying and optimising operations and examining offsite renewable energy supply opportunities. Most attractive currently are corporate Power Purchase Agreements for low cost renewable energy purchasing. The prime drivers here are commercial considerations and the desire to take control of their energy supply and spend.

What are the business levers? Managing the risks and investigating renewable energy supply options

More and more we see strategies with common themes. These are:

  • Intelligently sourcing energy supply to control cost and reduce budget volatility by employing progressive purchasing and renewable power purchasing contract instruments.
  • Optimising energy productivity by investing additional capital in process improvements and new technologies that are not only highly efficient, but deliver a range of productivity improvements. These new technologies encompass core operations, air conditioning, lighting and integrated behind-the-meter solar PV and battery storage technologies.
  • Innovating through design to future proof business operations by creating resilient, efficient and intelligent infrastructure.
  • Capturing growth opportunities through the development of new products and services of value in a low carbon economy.

The long term global market signals for business are clear. The energy markets are transitioning to a low carbon energy generation mix. However, with no consensus on national energy policy, the outlook for large energy users is continued medium term high energy costs and market volatility.  The other consequence is business taking steps to proactively manage energy, taking more control, both ‘behind the meter’ and in the marketplace to not only manage volatility and risk but also capture and enhance competitive advantage.

 

References

[1] Reuters: "BlackRock vows new pressure on climate, board diversity", 2017

[2] Wiggins, J:  "BlackRock says coal is dead as it eyes renewable power splurge", Australian Financial Review, May 2017