Historic AUS-US energy compact to supercharge Australian cleantech & renewables

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Photo credit: Pilbara Minerals. Lithium mine

26 MAY 2023 Climate Energy Finance and Renew Economy

Nishtha Aggarwal, Tim Buckley

Australia’s renewable superpower ambitions could be turbo-charged by Biden compact

 

The new US-Australia Climate, Critical Minerals and Clean Energy Transformation Compact agreed by US President Biden and Australian Prime Minister Albanese provides a landmark policy statement of strategic intent.

Effectively tackling climate change is a key joint priority. This declaration formalises collaboration and coordination of policies and investments to expand and diversify the clean energy and critical minerals supply chains that underpin global decarbonisation.

The Compact, which will go before Congress for approval, is a critically-important development in the context of the Inflation Reduction Act (IRA), which is turbocharging the energy transformation in the US with upwards of $800bn of federal investment in clean energy initiatives and attracting a massive influx of global capital to the US. Short of a meaningful policy and investment response by Australia, the IRA had the potential to pull capital away from Australia at a critical inflection point in the global energy transformation.

The commitment to release a new action plan by end 2023 provides the impetus and the speed of response warranted, and, importantly, embodies the Compact in a concrete form for implementation.

The Compact proposes that Australia be treated as a domestic US supplier under the IRA, opening up new investment and export possibilities for Australian critical minerals, clean tech, energy transition materials and renewables supply chain. This massively boosts our reindustrialisation potential as a global renewable energy superpower and zero-emissions trade and investment leader as the world rapidly decarbonises.

The emphasis on building the workforce and skill base required is a clear prerequisite to delivering on these policy and investment objectives.

We are in a unique position to leverage our world-scale, low-cost renewable energy potential to process, refine and manufacture critical minerals and energy transition materials onshore, thereby ’embodying decarbonisation’ in our exports. This will assist the Asia-Pacific and the world more broadly to transition to net zero at a pace dictated by the climate science.

Climate Energy Finance has strongly advocated for a strategic prioritisation of expanding and value-adding our world leading critical minerals resources to position Australia as a key beneficiary of the pivotal global shift to zero-emissions industries of the future, and leverage our world leading renewable energy resources to power refining and new industry.

The emphasis on critical mineral, battery and hydrogen derivative technologies in the Compact plays to Australia’s unique opportunity as the nation holding some of the world’s largest reserves of these materials.

And it will unlock our global competitive advantage – near unlimited renewable energy capacity at low cost, driving our economy away from its dependence on hyperinflated fossil fuel energy supply to zero emissions, deflationary renewable energy.

We are in a unique position to leverage our world-scale, low-cost renewable energy potential to process, refine and manufacture critical minerals and energy transition materials onshore, thereby ’embodying decarbonisation’ in our exports. This will assist the Asia-Pacific and the world more broadly to transition to net zero at a pace dictated by the climate science.

The recent commitment by US chemicals giant Albemarle to double its Kemerton WA lithium hydroxide refinery to a world-leading 100,000tpa capacity perfectly illustrates the strategic opportunity for value-adding Australian resources pre-export, working in partnership with US and foreign investors.

WA Energy Minister Bill Johnson’s brilliant WA Government Demand Assessment plans a tenfold expansion of electricity capacity via the construction of 50GW of wind, solar and batteries, meaning this refinery will soon be zero emissions energy-powered. A strategic win-win!

Climate Energy Finance (CEF) entirely agrees with the emphasis in the Compact on the roles of export credit agencies (ECAs) and our joint stakes in key multinational development banks (MDB), newly leveraging the financial power of the U.S. Export-Import Bank and Export Finance Australia (EFA) as well as the Asian Development Bank and World Bank to de-risk and scale-up new zero-emissions investments.

This will accelerate clean technology deployments, enhancing the financial capacities of our Pacific and ASEAN neighbours to reduce their crippling dependence on expensive, inflationary, high-emissions imported diesel fuels.

The joint US-Australia release also announces the formation of the Quad Investors Network, to be made up of public and private stakeholders from the group’s four nations of India, the United States, Japan and Australia.

This should enhance other cross-border investments, technology and domestic supply chain developments, particularly Australia’s bilateral strategic focus on building financial and political bridges with India that go beyond the export of yet more fossil fuels.

As one of the largest EV markets in the world, the opportunities for Australian critical mineral alliances with Indian corporate decarbonisation leaders like Mukesh Ambani’s Reliance Industries, Gurdeep Singh’s NTPC and Dr. Praveer Sinha’s Tata Power are enormous with the right political support.

Critically, the new US-Australia Compact will help ‘crowd-in’ an influx of private capital, potentially leveraging and mobilising Australia’s massive A$3.4 trillion of superannuation assets to accelerate investment into cleantech and renewables here.

This will complement the new emphasis in Australia on credible green financing frameworks (such as that being developed now by the Australian Sustainable Finance Institute (ASFI) and the Smart Energy Council’s (SEC) Zero Carbon Certification).

The federal government has a key role to play to maximise the impetus of the Compact. It should deploy patient, national strategic-interest public capital at scale, and de-risk projects to crowd-in private capital.

Together with the Climate Capital Forum, we advocate the government invest A$100bn of public national interest capital – via EFA, the Australian Renewable Energy Agency (ARENA), Clean Energy Finance Corporation (CEFC), and Northern Australia Infrastructure Facility (NAIF), complemented by a new national interest mandate for the Future Fund – to crowd >$200-300bn of private superannuation capital into energy transition opportunities.

We also advocate that the ARENA, CEFC and the Department of Foreign Affairs and Trade’s (DFAT) roles to be expanded – both in terms of geographic and technological remits – to realise much broader decarbonisation objectives and opportunities.

The establishment of a ministerial-level Australia-United States Taskforce on Critical Minerals will accelerate investment, employment and exports in the world’s needs of the future, providing the key cushion for Australia’s economy as the inevitable pivot away from its history as  the world’s third largest petrostate exporter takes shape at unprecedented speed.

This Taskforce will provide greater strategic clarity on the benefits of establishing new domestic supply chains, driving and enabling investments and reducing political and regulatory risks even as it creates the demand pull investors need.

It is clear that we are in a global technology and investment race. China is a decade ahead of the West in its investment, manufacturing supply chains and technology deployment, with its electric vehicle deployments up another 117% year-on-year to 609,000 EVs in the month of April 2023 alone, a record 34% market share.

And South Korea is moving super-fast in response to the US IRA, announcing multiple new billion dollar battery factory investments both in its domestic market and the US. This also raises a huge opportunity for a second bilateral agreement for Australia with South Korea, to accelerate joint developments and strategic co-operation, particularly in the critical minerals sector.

On the climate front, the new US-Australia Compact also acknowledges that the implications of climate change warrant preparation and investment in resilience and adaptation via the new National Emergency Management Agency, working in collaboration with the U.S. Federal Emergency Management Agency.

Further, the Compact endorses Australia’s bid to host the United Nations Climate Change Conference of the Parties in 2026 (COP31) in Partnership with the Pacific islands, but acknowledges global leadership is a pre-requisite to Australia’s COP31 success.

Australia’s lost decade under the previous government, which was working in lock-step with the fossil fuel industry, effectively delayed climate action.

Major progress has been made since the change of government. Now, finally, Australia is rapidly moving away from its dubious status as one of the world’s leading climate science denying luddite nations and petrostates, but we have some way to go.

Fossil fuel multinationals operating here are still banking their tax and royalty-free war profits offshore. Australians bear the energy poverty and environmental costs.

CEF reinterates it is overdue that Treasurer Jim Chalmers ensure these multinationals pay some corporate tax in Australia, lift the PRRT to ensure a fair share of the royalties are able to be reinvested in our nation – including in clean energy and industry initiatives that complement the Compact – and cap the diesel fuel rebate to $50m p.a. per corporation.

This would reduce the disincentive to electrify heavy vehicle fleets in industry and while also reducing rebate beneficiaries’ dependence on high emissions and inflationary imported diesel fuel.

In terms of our climate targets, there is considerable room for greater ambition. CEF endorses Zali Steggall’s 75 by 35 campaign.

This policy clarity of the landmark new Compact will accelerate capital flows and position Australia to seize its once in a century decarbonisation opportunity, deliver its climate targets, and elevate our status as a constructive global citizen in the most important transformation since the industrial revolution.

Tim Buckley is director of Climate Energy Finance

 

Australia to be treated as a domestic supplier under the US ~$800bn Inflation Reduction Act (IRA)

Last weekend at QUAD, US President Biden and Australian PM Albanese announced an historic and potentially groundbreaking bilateral agreement – the Australia-US Climate, Clean Energy and Critical Minerals Transformation Compact. 

Subject to passing Congress, as the name suggests the Compact is a landmark statement of strategic policy intent that will increase cooperation between the two countries on climate and clean energy with a focus on critical minerals and cleantech supply chain. 

A key takeout, as described by PM Albanese, is that Australia will be treated as a domestic supplier under the US ~$800bn Inflation Reduction Act (IRA), suggesting the opening up of access for Australian companies and projects to huge investment opportunities (we’d suggest this will only be for Australian projects supplying into the US).

In the absence of an agreement of this nature, the overwhelming critical mass of the IRA’s funding program – an unprecedented stimulus that is massively crowding-in private capital to the US – has been pulling investment away from Australia at a definitive inflection point in the accelerating global energy transformation.

Critically, the Compact is framed as a strategic defence- and security-related initiative, geared to securing critical energy supply chain diversity in a period of increased volatility in the US-China relationship, and with China leading the world on decarbonisation by a significant margin. This imperative should boost the likelihood of Congress approval.

CEF was first with analysis of what this game-changing Compact means for Australia in the context of the IRA, and for our potential as a zero-emissions trade and investment superpower.

>>>See our media commentary on the Compact: Tim breaking down the topline implications in a concise 3 minute explainer on ABC TV News Breakfast

CEF hopes this quantum will grow many fold. We estimate a national interest-oriented public financing commitment of ~$100bn is needed to de-risk and crowd in the $200-$300bn in private capital required to position Australia in the global energy transition race  – a significant advance on the $40bn committed so far through various programs including the NRF, Rewiring Australia and Hydrogen Headstart.

With appropriate government investment commitment and de-risking, there is a golden opportunity here to leverage Australia’s world-leading $3.4tn superannuation pool, the fourth largest such pool globally, to supercharge our transition, a key call in the Climate Capital Forum’s roadmap to decarbonisation.

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ONE YEAR OF FEDERAL GOVERNMENT’S ‘PRAGMATIC GRADUALISM’: LEAVES LNP LUDDITES FOR DEAD, BUT MUST GO HARDER 

In a feature for the AFR reviewing the achievements of the Albanese government, published ahead of the announcement of the new Australia-US Compact, CEF director Tim Buckley said he was frustrated by the government’s “pragmatic gradualism” a year into its term: ‘“It lacks the ambition the climate science dictates, and has meant an insufficient policy and fiscal response to the US IRA.” If Australia fails to use its status as one of America’s free trade partners, others like South Korea “will, with both hands, and we will remain the dig-and-ship nation of old.“’

While there is still much greater room for climate ambition – CEF endorses MP Zali Steggall’s call for 75% by 2035 – the newly announced Australia-US Compact negotiated by the government has potentially changed the global geopolitical and investment dynamic around energy transition in Australia’s favour. This is a key strategic development and an achievement of the Albanese government that CEF applauds.

We will be reviewing the Compact’s passage through Congress with interest, and working with partners domestically to advocate Australia act now to seize its once in a century opportunity to lead the world in value-added critical minerals, energy transition materials and clean tech, embodying decarbonisation in our exports by processing and manufacturing onshore using our abundant renewables. And to stop wasting capital, time and energy approving yet more planet destroying fossil fuel projects.

As for the government’s other achievements in its first year, Tim notes that the Safeguard Mechanism’s “credible, rising price on carbon emissions is exactly the right policy signal finance and corporates need to have the clarity to plan and invest” in decarbonisation.

>>>Read the full AFR story with Tim’s commentary on the first year of the Albanese government here. 

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__ENERGY REGULATOR FLAGS PRICE HIKE HALF WHAT IT WOULD HAVE BEEN WITHOUT FEDERAL INTERVENTION |

The Australian Energy Regulator (AER) has put forward default market offers (DMO) for retail electricity price rises from 1 July of 20-25% for NSW, Queensland and SA and 25% in Victoria, foreshadowed in the draft proposals in March.

While this is terrible news for Australians already smashed by fossil fuel energy price hyperinflation and rising interest rates, these increases are about half the projected hike absent the Albanese federal government’s interventions to cap wholesale fossil fuel prices in December 2022 and provide cost-of-living support in the May 2023 budget.

We expect that this could well be the peak in absolute electricity and gas prices at the retail level. There is a massive lag in the system in passing through the hyperinflation of fossil fuel commodity prices that occurred in 2022, which has squeezed up electricity prices to record highs. Since the start of 2023, LNG and coal prices have come down significantly, with thermal and coking coal down another 10-20% in recent weeks.

Unlike inflationary fossil fuels, firmed renewables are progressively deflationary – and that’s good news for energy bills in our zero-emissions future. We expect solar module prices to decline by 10% per year over the rest of this decade. A halving of installed solar costs by 2030 will accelerate the energy transition and progressively unwind the fossil fuel cost of living crisis.

The only solution to permanently lower power prices is to decouple our economy from polluting, inflationary fossil fuels and accelerate the transition to cheap, clean firmed renewable energy. In the meantime, the federal government has stepped in with energy bill rebates, and a budget package to improve domestic and business energy efficiency and speed electrification. All of this is taking place in the context of a rapid global shift to decarbonisation – a race in which Australia must engage emphatically with bold policy and significant capital investment to reap the benefits for reduced energy prices, investment, trade, exports and jobs.

We explore energy market dynamics and this context in detail in our op ed responding to the AER DMO.

>>>Read our op ed on the energy price hikes; Tim’s interviews on ABC Newsradio and ABC Melbourne will be posted on our website.

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__APPEA GAS SHILLS TALKFEST: MORE HOT AIR ON “NEW GAS” FURPHY & CCS |

As climate science denying APPEA members and foreign tax haven-based lobbyists gathered last week for the annual gas shills’ jamboree and talkfest, we took a look at Resources Minister Madeleine King’s keynote address.

We deconstruct the baseless claim that we need more gas. This perspective only holds if the Minister lets the foreign multinational gas cartel continue to starve domestic gas supply by prioritising their LNG exports and gouging Australian consumers on price. Most nations require their energy producers to clearly serve domestic needs as the top priority, and export the residual. Not so when the Multinational Gas Cartel sets the rules here!

Further, there would be a surplus of domestic gas supply if only the gas industry electrified their Australian operations, recouping the 8.4% of  Australia’s world leading gas production burnt by the gas industry itself. Redirecting all of this to domestic customers would increase domestic supply by 40% relatively quickly with zero sovereign risk or contractual change to exports.

>>>Read our op ed on the gas supply myth in Renew Economy – Developing new gas projects is 100% the wrong answer – and see the AAP story headlined by CEF and syndicated across 100+ mastheads, Gas claims ludicrous as energy transition fires up.

The APPEA gabfest also produced the unsurprising revelation that Chevron’s much-vaunted giant Gorgon CCS plant, the biggest in Australia, is upholding its unblemished record of spectacular underperformance, operating at 30% of target rates.

Despite the assiduous defence put forward by industry and some parts of government, this is yet more evidence that the industry needs to put up, and show evidence of this tech “solution” working consistently and commercially at scale, or shut up, and pivot investment and strategic focus to actual decarbonisation. Amongst other things, this may take the form of investing some of its war superprofits in powering its operations using renewables, and reevaluating the investment case for gas expansions in the light of growing SGM tax liabilities.

>>>See our commentary on CCS on ABC Online and via AAP in Canberra Times and other mastheads.

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_BNP PARIBAS EXCLUDES FINANCING NEW COAL AND GAS |

Last week, BNP Paribas (BNPP) released its oil and gas financing policy committing the bank to excluding the financing of new oil and gas fields, and making it the second largest bank in the world, after HSBC, to make such a commitment. The move places the bank within European best practice on oil and gas climate commitments.

While there is plenty of room to remain skeptical – please see the detail in our op ed linked below for further nuance – the recently strengthened oil and gas exclusion policies by major financiers could herald a new source of momentum for the decarbonisation transition. And as capital momentum away from financing these historically important fossil fuel sectors continues to build, that should assist in building the financing capacity into zero emissions solutions.

>>>Read our analysis of BNP Paribas’ move by CEF’s Nishtha Aggarwal.

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__CEF TRACKS CHINA RENEWABLES SURGE |

As we reported in our last newsletter, during the first quarter of 2023, China’s decarbonisation trajectory saw a record 50 GW of renewables capacity added, 84% of total newly installed. Coal power was 8.1 GW, just a 14% share. Simultaneously, China accelerated its push into EVs with its new record high 29% EV share of passenger vehicle sales.

>>>The analysis by CEF’s China energy policy analyst, Xuyang Dong, has now been published in US-based Climate and Capital Media.

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