Rooftop Solar Boom Turns Australian Power Prices Red

the transition now. It can be hard sometimes given that there's so much going on within different sectors and different parts of the world. And today we're going to dig a little bit deeper on a specific country. We're going to talk about Australia. The reason I'm really excited to talk about Australia is because oftentimes people think about it as a sandbox due to the size of the country and the nimbleness of the government. When they do something, they can move a little bit faster and the rest

of the world can really learn from it. We also go to think about Australia and the role that they have historically played as a hydrocarbon exporting nation for things like coal, and increasingly now natural gas. But let's really think about the role that Australia can play as that sandbox,

and let's think about the energy transition. They've announced that they intend to double renewable energy capacity by twenty thirty and the federal government has really underlined this aim by handing the clean energy sector the equivalent of one point two billion US dollars as a part of their federal budget.

One of the things we're going to drill into in more detail will be solar because Australia's really been an adopter of this, both at the utility and residential level, and that has actually led to some negative power prices. So what does that do to the economics? Now. To tell us more about Australia and what's happening there is Bonif's head of Australia Research, Leonard Kwang. He's based out of our Sydney office and certainly knows a thing or

two as he lives and breathes this. He's going to use a recent report that he wrote, which is about the first half of twenty twenty four and what is called our Australia Market Outlook. If you want to take a closer look at that market outlook and read the report. BNEF subscribers are going to be able to find it at bu go on the Bloomberg terminal or at BNF dot com. Make sure to subscribe to switched on wherever you get your podcasts, and give us a review to

help other people discover the show. But right now, let's talk to Lenny about our outlook for Australia. Lenny, great to have you here today and thanks for joining the show.

about what that transition looks like in Australia. But can you set the baseline how should the world be thinking about Australia and well, essentially in their place where they're at in this transition.

only about forty percent of its population. For our US listeners, Australia is about eighty percent of the land masks of the US, but only the population of Texas. So it has a lot of land that's sparsely populated, but it does have a lot of stuff in it. It has a lot of animals that can kill you, which I think a lot of people think about when they think of Australia, unless like the late Great Stevia, when there's not much you can do with dead animals to drive economic growth in a country.

has somewhere in its borders. It has precious and rare earth metals, has a large amount of industrial metals exports copper and bulk side. It's the world's largest exporter of iron or It also has an enormous amount of battery and transition metals, an enormous amount of hydrocarbons like gas where it's vye with the US and guitar to be the world's largest exporter of LNG, and an enormous amount of coal.

To give you a particularly shining example of this, former Prime Minister Scott Morrison once got up in Federal Parliament holding a lump of coal in an attempt to scare the opposition. Now this sounds like it might be an anecdote for many decades ago, but this happened just back in twenty and seventeen, and this is a real example of the dynamics, the complicated politics and the relationships with

coal and extraction industries that Australia has faced. Because of these challenges, for much of the past twenty years, Australia has struggled with its decarbonization trajectory, often flip flopping on policies, ambitions, and targets. Being famously the first country in the world to both introduce and remove a price on carbon, it has increased and decreased and removed and increased again renewable

energy targets and aspirations. And while over recent years it feels like Australia is turning a corner on its decarbonization plans and becoming more paras aligned to the years ahead, it's expected that extraction industries and things like coal and gas will continue to play an important role in the economy of Australia for the foreseeable future.

that discussion about what is changing. And one of the things that Australia has actually had is headline in the news more recently has been around really a commitment to natural gas in saying that they intend to continue with natural gas through twenty fifty and I'd really like to better understand from your perspective where you think that really

originates from, given that the transition is certainly happening. Is it more around the export revenues or the role that natural gas can play is an important source of flexible capacity for knowables or is there something else that maybe I'm not understanding regarding the commitment to natural gas in the long term.

it in some context. Now, amongst this stable of export commodities that Australia has through mining an extraction, natural gas is one of the most recent additions that has really just scaled up over the past decade really from about twenty and sixteen, so really quickly, Australia went from a very closed off self supplying market for all its gas demand, began to rapidly scale up its extraction, particularly of coal seam gas throughout many different states Queensland, Western Australia and

now the Northern Territory as well, to become a global

player in this export commodity. And due to that rapid change of pace, Australia has struggled to keep up with its longer term vision around what natural gas and other hydrocarbons might mean for its economic story, either domestically or from an export's perspective, and this becomes increasingly important when we've established valuable trading relationships with other nations both around the Asia Pacific region from China, Japan, South Korea, Taiwan

and many others, as well as our visions of what Australia might transition to over the longer term in terms of exports as the world transitions to.

status quo. There is some hope that we might find other economies to export these hydrocarbons to, particularly emerging economies. They're rapidly growing appetite for energy, although that comes hard up against the need for the world to decrease its carbon emissions in line with the net zero future, to

stay in a well below two degrees scenario. And so the government, who is in charge of directing policy, signaling to investors, signaling to industry what the future might hold is as of yet really welcoming all comers, and so we might hold views that the future role of gas isn't quite as rosy as the Australian government is currently suggesting, and some of the newer industries it's looking at, like transition metals, potentially hydrogen and hydrogen drived clean products play

a more important role, although this transition from traditional to new has to be managed and might not be as smooth as the government is hoping.

are known for being the largest exporter of coal. Now that is actually huge because you see coal retirements happening in developed countries all over the world, saying that we are committed to bringing these down as a really kind of quick way to reduce emissions from the power sector. When it comes to coal, what is the state of play for Australia. Are they seeing fewer exports? Is that declining?

Have we reached peak demand? And then after we talk about the exporting element, I then want to come to domestically are they using it? Is it largely exported but internally being used only sparingly in that transition to renewables is happening. Can you talk a little bit about the role of coal both out of the country and in the country.

dynamics across the region. Now, if we look into the future, what we see in our longer term analysis here at BNF is that the world is going to have to dramatically reduce its reliance on thermal coal, in particular in order to stay on a low carbon trajectory to stay within the Paris targets. If we look within the Australian market,

the story is similar, if slightly more advanced. Now, given what I've said and what we've talked about the role of coal being a superpower of economic force in Australia in years gone by, it probably wouldn't surprise you to hear that coal generation made up the backbone of power supply in the country's electricity system. But now Australia's once mighty coal fleet is facing structural decline, and the question

is increasingly when, not if it will exit the market completely. Now, to put some numbers to that, about fifteen years ago coal accounted for about seventy five percent of Australia's electricity generation, and today it accounts for roughly forty seven percent. Now, coal generators are a bit like old car. As they get older, it can get a little bit less efficient.

It might have a harder time speeding up and slowing down, and they might start to break down more often, becoming less reliable and more costly to repair, maintain, and retrofit

to keep them running efficiently. And when you take into account that many of Australia's coal assets were never built to be particularly flexible or efficient to begin with, you can begin to see some of the challenges that Australia might face when you realize that Australia hasn't built a new coal generator in its domestic market for over ten years now, but we continue to send coal offshore to

supply others who are building you coal generation. But the domestic fleet is of now about thirty one years old on average, and most coal plants around the world are built with an expected operational life of between forty to fifty years, and so if you run the numbers on the age of these assets, by twenty thirty, you would expect about twenty three percent of the fleet twiggs of the market just due to aging out, and by twenty forty this would be about fifty two percent of the remaining assets.

utilization of about seventy three percent. Today, coal capacities down to about twenty three gigawatts and it's operating with the utilization rate closer to sixty percent, and it is really not ideal for capacity designed to operate as a base load where you want higher utilization to disperse your returns.

the next six years. Some other commitments like reaching eighty nine percent of all new light duty vehicles being electrified by the year twenty thirty as well. And overall you can see that these policy ambitions and increasingly the policy mechanisms that support them, are likely to have a dramatic impact on the remaining.

There are a series of smaller grids throughout the rest of the countries and are being for the larger towns and are being for mining sides, but really a lot of the action in the country does happen within the national electricity market. But if you zoom out and look at what role of what impact renewables are having across the country, it can be useful to put some numbers to that as well. Back in two thousand and nine, renewable energy accounted for about eight percent of total electricity

generation in Australia. Today this is closer to thirty four percent of the market. Now, this is a pretty significant amount of growth, even if it's over quite an extended period of time. But this is an annual figure and if we drill into it, we can see some pretty extraordinary incidences within the market being caused by renewable energy.

And again if we drill and even further, there were particular days in certain hours where wind and solar accounted for over one hundred percent of electricity demand in certain regions of the grid, in this case in South Australia, and there were even still hours of the day when behind the meter solar capacity alone was supplying more demand than the state had at that point in time. So to spell that out, consumers in South Australia have been producing more power at certain hours of the year than

the whole state is consuming in terms of electricity. It's pretty remarkable. Now, other firms of generation were operating at that same time, the interconnectors to other states were able to move that excess supply into other regions. But just from those figures alone, you can see that the impact that wind and particularly solar is having on the market.

get older. They don't or can't ramp down when renewable energy generation are ramping up, and so they might be tempted to bid into the market negative pricing, that is, paying to stay online in order to not further damage their assets or to be available when prices might increase later on.

from the year prior. In the fourth court of last year, in South Australia, spot price and electricity market were below zero thirty two percent of the time. And this is of course having a massive impact on the value of the rest of the generation fleet, in particular self cannibalizing effect on other forms of renewable energy generation there have been multiple months now across the country where the value

of large scale solar generation is below zero. To give you a more clear example, in December of twenty twenty two, in South Australia, utility solar generators paid an average of twelve Australian dollars per mega what hour for the privilege of generating. That's how low and how frequently below zero

wholesale prices were. And if we look to the future as the government races towards its ambitious renewable energy targets in years twenty three, if we can't see this bulk of coal capacity getting out of the way fast enough, and if we can't manage to shift demand either through flexible price signals or through energy storage, we would expect this trend of negative prices to only get worse.

liberal is urcut in Texas. That's the Texas grid. So I want to know how similar is the national electricity market, given that this is eighty percent of the country's demand, How similar is that to air cut and is installing this capacity really just down to whether or not companies want to do it, And they're building this network of the future, and we're hoping that demand will actually end up kind of evening out in the prices, will level out with natural market forces, or is it more regulated

and is this very intentional and intentional push to actually get more renewables online.

These are largely natural monopolies and they're held by separate entities, so distribution companies or transmission companies who build, maintain and operate the polls and wires that move those electrons around. Now, what's been driving this renewable energy capacity in the years gone by has.

This has been done at the federal level, but also state and territory governments playing a very important role in driving up renewable energy generation in their home grids, and corporates too have a role to play. We've seen quite a rise of demand from corporate entities and utilities looking to on sell clean power to their own consumers, who are all contributing to this rise in recent years of renewable energy supply.

solar capacity. And with these negative pricings that we have seen throughout the wholesale market, the value of electricity generated from these systems has fallen both in terms of the electricity fed into the grid through feed in tariffs, which Australia doesn't really have outside of a few regions of the country any mandatory feed in tariffs. Most of this is up to the discretion of the local utility to decide and value and potentially attract additional consumers through higher

solar feed and tariffs under certain rate designs. But this erosion of midday prices has also caused an introduction of new tariff design models for consumers, incentivizing shifting demand towards the middle of the day when electricity prices are at their lowest, and to reduce consumption in those afternoon periods when solar ramps down and more expensive forms of generation have to come online to keep the system in balance. Now, there have been some teething problems with deploying these cost

deflective tariffs across the country. They're much more complicated than the traditional flat tariff design and in some cases can decentivize some of the cleaner technologies like rooftop solar that customers across the country really like to see both to manage electricity bills but also feel like they're having a positive impact on their own carbon footprint, and even though across the world we have seen falling solar module prices,

we haven't necessarily seen that trickle through into the residential or small scale market In Australia. A lot of that has to do with managing the inventory of price fluctuation of the recent years. It has to do with rolling off of upfront subsidy schemes and also a softening in the Australian dollar. But that doesn't mean Australia is installing less behind the meter solar generation. Last year was a near record year for new installations in capacity terms, with

an estimated three point two gigawa's constructed. Now a lot of that had to do with the energy crisis across the world and here in Australia in twenty twenty two. A direct consequence of that was rising retail tariffs, which went up by about forty percent by July of twenty twenty three, and as customers rolled on too larger bills, they turned to solar in larger numbers in order to reduce their consumption from the grid while retail electricity prices

were high. And the other factor is that Australians have a love of these rooftop solar systems and they have a comfort of playing manywhere between five to seven thousand Australian dollars to install one, and as a consequence, any cost reductions from modules or through subsidies results in larger and larger systems being built, and by our numbers, towards the end of last year, these were inching up closer to nine kilowatts of solar per system in stall, which

compared to most of the rest of the world is incredibly large.

in commercial and industrial systems. But the cumulative impact of this area of technology in the market could represent about forty five gigawatts of behind the meita capacity that responds to very different price signals than generation assets connected to the wholesale market. Which these other forms of either balancing technologies or supportive infrastructure are going to have to work around.

way to tackle this is actually through storage. So I want to better understand how Australia is approaching the concept of storage, whether at the residential level, which pairs very nicely with residential solar, or at the utility level when we're thinking about battery infrastructure being used to really bring down those peaks and to spread that, you know, solar energy throughout the times when the sun isn't shining.

a reasonably positive result. I mean that was the construction of the one hundred and fifty megawatt Hornsdale Power Reserve, which at that time was by far the biggest litimon battery operating anywhere in the world, and in the years that follows, batteries were continued to be built, pushed on by governments, pushed on by independent power producers, pushed on

by network companies and utilities as well. Today Australia has about one point for gigawatts of utility scale storage operating across the country and this is particularly heavily weighted towards li imaan batteries. State governments have continued to try to outdo each other, building bigger and bigger systems and this has peaked right now with the Acacia Energy Warata super battery, which is eight hundred and fifty megawatts and is currently

under construction. Across the rest of the fleet under construction, we have about four point four gigawatts of battery capacity and this is expected to come online in the months to years ahead. But the rapid increase in battery capacity has had a really interesting result on the dynamics of the power system and the rolls of these storage projects. Years ago, frequency control and auxiliary services, which are the

services required to stabilize the power group. This is offering energy over one second or four seconds, sixty seconds or even five minutes and not participating directly in the wholesale market, but these frequency control and auxiliary services represented the vast

majority of market revenues for batteries. Es are quite shallow and it doesn't quite take a lot of capacity to begin to flood these markets, and by twenty twenty three, on the back of the energy crisis, arbitrage that is, buying when prices are low and selling electricity when prices are high became the majority form of market revenues for

most batteries operating around the country. And if we expect that negative pricing events are likely to become more common as Australia races to meet its renewable energy targets, batteries are going to increasingly play an important role in moderating these fluctuations in wholesale power prices. If we look to the future, we continue to see batteries playing a bigger

and bigger role in the energy system. By our forecast by twenty thirty in additional seven point four gigawats of batteries could be constructed up to fifteen point three gigawats by twenty thirty five, resulting in a total of about twenty one point three gigawatts. Now increasingly these batteries aren't just getting bigger in terms of megawatts of capacity, diggining bigger in duration of storage as well. When we look

at the operations of these we can see shorter durations. Batteries, whether it's five minutes fifteen minutes, can play a very important role in these smaller balancing services, particularly managing frequency in these power systems. But when you begin to shift larger amounts of energy in response to fluctuating prices, whether they're negative or near zero or incredibly high, you need longer and longer durations as well. And across the country

governments have seen this and are responding in kind. Many of the new policies coming forward to support storage across Australia and now focusing.

to have a more efficient energy system. Australia has a relatively small residential battery and this is really a artifact

of its policy dynamics. Australia has had some small local schemes to support the uptake of battery storage technologies on behind the meta level that we've never really had a robust national policy, certainly none that would reduce the upfront cost of these batteries like we've seen in the Australian rooftop solar market, and as a consequence, we do see continued growth, but it is significantly further behind compared to

rooftop solar adoption. Now, some of this also has to do with the increased complications of installing and selling solar systems to consumers. Australia has a hyper competitive residential solar market, with many installers often operating within fairly small business operations, and understanding how to economically model pitch to install a

solar system can be more challenging. But if you look in the years ahead, by twenty thirty we expect residential installations to reach about two point one gig what hours per annum, increasing to about two point nine by the year twenty thirty five. Which will mean humulatively, it will play a greater and greater role in beginning to shift some of this excess supply of electricity from the middle of the day to other periods where it's more valuable.

electric vehicles. So it's a stability to not only be your own energy generator, but also to be your own generator for the fuel that goes into your car. And what I want to know is have electric vehicles really had a positive uptake in Australia as well, and is that kind of come along with the residential solar boom or has it been separate.

Its last car manufacturing plant closed sometime in twenty seventeen, and for years many areas of politics and policy have seen any move to support the increase or adoption of electric vehicles simply being as a cost on the Australian consumer without a broader economic benefit to a manufacturing base.

That's the consequence of a lack of policy. Has meant that global automotive manufacturers, with a limitive number of evs and their portfolios have simply chosen to prioritize sending those lower missions vehicles to other markets that have more onerous or looming decarbonization targets on their transport fleets.

this has been a problem for adoption as well. While we are increasingly seeing electrified SUVs and some limited range of pickup trucks that come with a battery and a plug, there have been limited models available historically and very limited supply available to Australian consumers.

pretty dramatic uptake from where the market is today. And while we might see growth in the policy environment which could be introduced in a few months time, it doesn't mean the transition will be easy.

hard debate sectors. Is hydrogen Australia has really, you know, over the past few years, has been positioned as a potential exporter of hydrogen and thinking of this idea of generating it in Australia and potentially shipping it around the world. Is that still actively being discussed, especially now that the US has taken such an interest in hydrogen production through the Inflation Reduction Act.

the years ahead. It has additional advantages in its position in the Asia Pacific region, with many of its existing trading relationships being with countries who might have energy security concerns of their own, particularly as they look to their decarbonization targets by twenty thirty or even by twenty fifty, and many companies are beginning to capitalize on this opportunity or their perception of it, particular example being Forteskew Future

Industries and the Fortskew Metals Group, who have high pline of proposed projects about twenty gigwats of electoralizer capacity and have recently opened a two gigawatt proton exchange membrane electoralizer

manufacturing facility in Queensland in Australia. Now, on aggregate, if we look across the country, Australia has about one hundred and twenty six gigawatts of proposed electoralizer opacity to produce green hydrogen, which is an enormous amount and it would produce somewhere in the ballpark of about thirteen million tons of green hydrogen per year, far more than the Australian economy domestically could ever hope to can and this is really because of this export opportunity. Now, how that will

manifest is where the problems really begin. The challenges, the costs, the infrastructure required to send liquid hydrogen or hydrogen derivatives offshore could be a challenge, and the economics of their use case in these markets is still being examined. We've seen a lot of interest from markets like Japan, South Korea and even increasingly Taiwan of the role of Australian produced green ammonia to be co fired in their existing

coal assets to reduce their carbon emissions. But increasingly Australia is looking at greener commodities that could be produced with a hydrogen it makes locally with an abundance of iron or in the local market. We're beginning to investigate whether green iron or green steel production could play an important role as an export industry within our existing trading relationships more broadly across the Asia Pacific region, and the government

is really aware of this still. When we run the numbers on promised support, we can account for about forty three billion Australian dollars of earmarked funding a hydrogen or hydrogen related industries or infrastructure, and a flagship program within that is the two billion Australian dollar Hydrogen Headstart program, and this looks to bridge the gap between the cost of supply and the willingness to buy hydrogen from an

export perspective, to support over one gigawatt of electorallyzer capacity by the year twenty thirty. So there still is a lot of conversation. Some of the hype may have dried out over recent years, but the conversation on exactly what the opportunities are I think is getting more sensible and in some cases more serious.

to their core. Whether that's around the deployment of physical infrastructure, such as grids, poles, and wires to move electrons around, whether that's the regulatory environment that creates price formations in a wholesale power system, whether that's the way we view

flexible balancing services and technologies as well. The need to accelerate decarbonization efforts brings the need to accelerate change in the systems that support power markets, and those that are too slow to transition, whether it's infrastructure, regulation or policy, can come hard up against disruptive forces as a result, whether that delays in network congestion, whether that's negative pricing, or with that's new forms of volatility and disruptions in

wholesale market price design. It shows that the transition to a low carbon future is a disruptive one, but an incredibly important one for global markets.

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