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Rik De Buyserie Australian Energy Week Speech – June 2024
13 June 2024 - “Navigating the green divide: strategies to overcome new and entrenched barriers to delivering a clean energy future”
It was just a year ago that I stood on this same stage, having recently arrived in Australia and taking over the Head of Country role for ENGIE.
And in that year, as a business, we’ve made some progress:
- we’ve retired the Simply Energy brand and started retailing under the ENGIE name, with new highly competitive offers
- we’ve continued to rehabilitate the Hazelwood site, with the mine void now 20 per cent full
- we’ve added renewable and storage projects to our development pipeline, supporting our local growth strategy; and
- we’ve commissioned the Hazelwood Battery Energy Storage System
But when I think about our operating environment and the industry overall, we still haven’t made enough progress in transitioning our energy system and moving toward net zero.
We’re continuing to have the same conversations about how we navigate the green divide, and how we find that fine balance between:
- decarbonising our energy system
- keeping household and small businesses’ power bills under control, and
- keeping the lights on as we pivot from large centralised thermal plant, to a world of renewables and storage.
Last year I spoke about four key challenges that were standing in our way and making the energy transition more difficult than it needed to be.
- The monumental task of upgrading our transmission network at the same time we navigate access for a large-scale renewables build-out
- The pace of permitting and approvals, along with the problem of community acceptance, that erodes investor confidence and eats into project value
- The wicked problem of trying to keep thermal fleet in the system, ideally by using market signals to tell us if and where these assets were needed
- And the policy settings that were attempting to solve for these problems, but in some cases doing more harm than good.
I hate to start on a pessimistic note, but I can honestly say one year later that we haven’t moved nearly fast enough on any of these fronts, and there are new emerging blockers to our progress.
I should qualify, that when I say “we” I really mean “we”.
ENGIE uses these valuable speaking opportunities to make a contribution to the public debate in the areas we operate, and to add our unique views as a company that has exited coal and pivoted to renewables.
We don’t use them to be passive aggressive, to blame governments for all our problems, or to offer impractical views of what could be, if only we had a smooth commercial pathway.
So when I say “we”, I really am using the collective …. I’m not here to single out any individual actors in our energy system.
Operators, investors, governments, regulators and policymakers all have a role to play on behalf of our customers and for the prosperity and progress of our nation.
I also don’t want to suggest that the year has been completely lost, as there have been some green shoots of progress and cause for optimism.
We’re optimistic about the work the Victorian Government is doing to deliver more certainty on biodiversity requirements for onshore wind, and on fast-tracking planning approvals.
We’re also starting to see some progress from State and Commonwealth funding on transmission - specifically with VNI West, HumeLink and Renewable Energy Zones in NSW.
This is important for our own investment plans, but will also present valuable lessons about how to best roll out REZs in other States.
And of course the Capacity Investment Scheme is an absolute game changer in terms of providing a financial footing for large scale batteries, wind and solar.
The CIS numbers are enormous, but of course, so is the task.
But financing, infrastructure, and permitting alone won’t support our ambitious renewables build-out, or help us reach net zero targets.
We also need to recognise and deal with the realities of today’s energy market and start solving for some of these problems with a measure of urgency.
And just because we focus on “the now”, that doesn’t mean we’ve got the luxury of ignoring our longer term pursuits.
We’ll need to continue making long bets on emerging technologies and keep working on flagship projects, bringing them from trial to scale.
But we do need to recognise and account for a few features of our market that exist today, and if we solve for the challenges they present, this will give us the breathing space to plan for the delivery of the next generation of clean energy projects.
If I start with the financial and physical markets where plant operates today, in simple terms, they’re not supporting existing thermal assets which are critical to our energy transition.
And specifically I’m talking about gas power plants.
I’m not saying that these assets have just become uneconomical – that would be too simple an explanation, and frankly would be an easier problem to solve for.
Generators can and should expect that market conditions are cyclical, and particularly with gas peakers there can be good and bad years, depending on a range of factors.
What I am saying is that the markets where these assets are located are not recognising the capacity value that they deliver to those very markets.
I’m happy to concede that our market structures are somewhat hybrid – that is, by necessity, they include elements of
- Rational economics, alongside
- Government interventions, and within
- A dynamic policy environment.
But if we’re picking winners after all, we should pick actual winners … by every measure that matters, gas-fired generation is a winner – particularly those assets that are already in the market.
They win simply because they’re there … no permitting, no construction delays, no supply chain problems.
They just need gas … and they run!
Unfortunately, ENGIE earlier this year took the decision to remove our 63MW Snuggery and 75MW Port Lincoln power stations from service, and brought forward the closure dates of these assets from 2030 to the end of 2027.
Without revenue streams that recognised the capacity value of this plant, Snuggery and Port Lincoln were no longer profitable, and we needed to take this decision on behalf of our shareholders.
There was no single individual action that led to this decision, but we do need to remind ourselves that each and every time we choose to support one technology or a single asset type in the market, it has a flow-on impact on existing fleet, especially larger thermal assets.
The Capacity Investment Scheme is hugely positive for underwriting renewable generation and batteries, but we need to be clear it will also add headwinds to the business case for keeping gas-fired assets in market.
This is at a time when these assets remain essential to keeping the lights on.
Not just on paper, but in the system each and every day.
This is not a criticism of the CIS policy, or a suggestion it should change, but rather a call that we need to recognise the value of today’s gas assets staying viable and available, to do some of our heavy lifting for the next few years.
This raises an important question, which has yet to be resolved, and dates back to the early days of the Renewable Energy Target - how do existing assets run alongside government subsidies in a complementary way, so that they’re available to the market for as long as they’re needed?
Both historically and in present day, we pay the most attention to how we support large coal plants (and I’ll speak to this in a moment), but I can’t overstate the importance of gas assets in the energy transition today.
I say very clearly – gas will need to be with us today, and for many years to come.
And if those assets do not stay in the market, then every gas asset which is mothballed or closed early pushes us to uncomfortable reserve margins like those signalled in the latest ESOO.
This in turn leads to us needing to rely almost solely on RERT levers and directions, which are not only expensive for consumers, but place strain on the remaining gas assets which suffer the wear and tear of being constantly directed by AEMO.
This creates a pattern which is also likely to see assets retiring sooner than we’d want them to.
Any time we pretend that an asset can perform a role which is non-economic, we need to prepare for its eventual exit from the market, because as an operator if you bleed value year after year, you’re really only left with one option: asset closure.
If we value gas, we need a framework to support it.
That framework needs to be enduring and transparent so all market participants can make sound decisions based on predictable signals that help guide their operations and investments.
And in the absence of a framework, we at very least need to recognise that our energy markets are in delicate balance, and each and every action has a flow on effect, some of which can be counter-productive and costly.
Perhaps the most important of these actions are the ones that take the form of direct intervention – more specifically government actions to keep energy bills low, to keep the lights on, or to promote the uptake of certain technology types.
I think particularly in the case of maintaining large coal capacity this is a necessary condition given where we find ourselves – I’m a market purist, but I’m also a realist.
And in today’s market you need to be a realist first and a purest second.
And while coal is not part of ENGIE’s strategy, it would be foolish to suggest coal doesn’t play an important role in today’s energy market, at least in the short term.
When referring to coal closures, some people call what we’re going through a “disorderly transition”.
And the plant that I hear referenced most often when the term “disorderly transition” is used, is Hazelwood.
I’m not interested in providing revisionist history, or by spending too much of my time looking back, but I do think Hazelwood’s closure needs a quick review through a sharp lens.
We of course accept that five months’ notice is an extremely short timeframe from announcement to closure.
We do need to remember though, some of the factors that contributed to that circumstance back in 2016.
Economically, it would have cost nearly half a billion dollars of new investment to ensure Hazelwood could operate safely, with almost no prospect of any investor return.
Strategically, we had for over a year previously announced our intention to exit coal fired generation globally.
And operationally, the plant had exceeded its design life and in many cases the physical plant could not be upgraded - it was technically just impossible.
But perhaps the most forgotten fact about Hazewlood is that it had long operated in an oversupplied wholesale market.
In fact, the market was chronically oversupplied, which is why generator returns were so low for so long.
So Hazelwood was perhaps the last coal fired power station to close with a wholesale market surplus, and thus might be the last pure market-based price signal driving a coal exit.
There were lots of signposts that closure was imminent before 2016.
And the freeze that stood in the way of new investment started well before, and lasted well after Hazelwood’s closure – that’s what prevented new capacity from coming online, and in part got us to where we are today.
Market signals did not work .. but let’s not lament the past.
If we no longer have the luxury of oversupply, and the now tighter market cannot provide the signals to spur new investment, we have to agree that some interventions are necessary to keep the lights on between now and 2030 or 2040.
But the more we know and understand about these interventions, the better prepared we’ll be to navigate them as investors and asset operators.
I’m not here to criticise arrangements between governments and operators of existing coal plant - governments play an important role in protecting the citizenry and ensuring a reliable energy supply.
And there is no shame in using bi-lateral agreements to manage the interests of both parties during these unique times.
But this is still a competitive market - even if government intervention is now an essential feature of the current transition.
We’d be well served as an industry if we knew with certainty where the starting and finish lines were set for supporting coal (and where relevant, for gas) and what hurdles or conditions would initiate this type of support.
This would help us plan, and schedule how we bring on new supply and importantly, would serve as the signals that the market used to deliver to spur new investment.
Even AEMO’s quite reasonable call for rapid investment after the release of their latest ESOO is not really a price signal in itself.
As the Grattan Institute pointed out in a recent report, each of the past five ESOOs have become more pessimistic, with forecast shortfalls creeping ever closer.
There have not been sufficient investment responses from the market, despite AEMO presenting reliability concerns since 2021. This is why we live in a world with direct intervention to keep the lights on.
But if we want investors to deploy the capital to build the portfolio of the future, only transparency and certainty will provide the confidence to make it a reality.
We no longer expect that this certainty can come from the wholesale spot price or from markets alone, but we should expect that we all know the rules of the game we’re playing.
Of course everyone in the room recognises that the best functioning markets and with the best investment signals are irrelevant without good policy and good governance.
And I think there is room for improvement here too.
This again is not a criticism of policymakers, who have an enormously challenging job to do.
I’ve heard the challenge of the Australian energy transition described as building an airplane while flying it .. which I think is apt.
I might add to that description by suggesting the plane would fly faster if the right wing and the left wing worked in tandem.
Our policy environment in my view is beset by a series of mismatches, or disconnects, which adds confusion, uncertainty and slows our progress.
For example, since the creation of the now defunct Energy Security Board, it’s less clear which bodies within government or the energy industry are responsible for which mandate and with what objectives.
Rule makers, policy advisors, regulators, market administrators and other players regularly transverse any topic they wish under the guise of “supporting the energy transition” at the ever-increasing cost of ever-increasing confusion.
Likewise, there’s a looming divergence between what some in the industry believe the transition will look like, and what policy makers and the Integrated System Plan suggests.
These differences are becoming stark, and serve only to undermine institutional credibility, which helps no one.
Co-ordination is essential not only for industry, but also for customers and communities – they look to the industry, regulators, and governments to work together in their interests, and to minimise price and reliability shocks through that partnership.
Another mismatch is evident when we look at energy prices.
The DMO and VDO were designed to ensure customers had access to reference prices and could avoid paying the “loyalty tax” of standing offers.
A very reasonable intent …
But over time, the financial models being used to set these prices no longer reflect the actual risks or costs of retailing.
That renders these price references somewhat unrealistic, and creates mismatched expectations of price movements that further confuses customers and erodes trust.
And finally, there is a mismatch we see as a large scale renewables developer, which is holding us back from a wind, solar and storage energy system in Australia.
We have a world-class program to develop 32GW of new renewable energy generation and storage in the CIS.
The policy is designed to help us reach the target of zero emission sources generating 82 per cent of the country’s electricity by 2030.
But delivery challenges for renewable projects persist
- inflationary pressures are affecting the economics of projects,
- planning decisions are still too slow and protracted,
- transmission build takes time, and
- community acceptance remains a material blocker to our putting megawatts on the ground.
ENGIE has taken steps to try and change the conversation with host communities and deliver direct benefits where they want to see them.
In May we announced that near neighbours of all of our future wind and solar projects would receive an $1000 annual rebate on their ENGIE power bills, leveraging the fact that we’re a renewables developer, but we’re also a retail business.
If we could continue to find points of alignment with communities, resolve the mismatches in how we present the energy transition, and continue to focus on what’s important to customers (like power bill relief), we might just be able to fly that airplane a bit faster and land it on schedule.
But if we can’t get these “now” challenges under control, some of our longer term opportunities are at risk.
Support for the assets we need, clearer market signals and a more aligned policy environment will allow market players and governments to discharge their responsibilities today while we give investors a stable framework to go after the longer, bigger bets that we’re making as a country.
While we appreciate that there's a post 2030 review underway for the energy market, we need to ask ourselves if we’re focusing enough attention on the period between now and then.
We have some very pressing questions, just a few of which include:
- Why would customers (especially large ones), contract in an unpredictable market?
- How do we value carbon without explicit carbon pricing, especially as we move away from LGCs to other untested mechanisms?
- How to we keep assets whole between now and 2030, and
- What about the renewable assets and gas plants that don’t have CIS support?
ENGIE’s plans for the short term in Australia are to significantly increase our renewable energy and storage footprint, while we complement our portfolio with gas, and steward the Hazelwood site through a successful rehabilitation.
Our longer term plans are to introduce technologies that don’t exist in Australia, but which ENGIE has experience in other markets, and bring them to commercial scale.
Australia is blessed with natural advantages that allow us to dream of a future of not only 100% renewables and storage, but also offshore wind and green hydrogen.
Along with our partners, ENGIE is involved in all three of these activities in Australia, and are applying lessons learned from our key projects here to other markets around the world.
Of course Australia makes sense for green hydrogen with an abundant and high quality surplus renewable energy, and for offshore wind with a near limitless coastline.
These projects are also very challenging … it does not make them impossible; it just makes them future projects. And of course we need to invest in them today.
Time is the variable that gets us to scale – technology costs need to come down, we need to build and share infrastructure, lessons and improvements with all of these projects as we consider scale, and eventual commercial returns.
This all takes time.
Yes we will build offshore wind – we will need significant port upgrades, a material injection of skilled labour and continued support from Government to manage the economic gap between onshore and offshore projects.
And we will build green hydrogen capacity – we’ll need to get better at building in difficult terrain, we’ll need to ensure offtakes remain solid and again, government support is critical.
These are worth doing – the size of the prize guarantees that they’ll happen.
But the foundation for these large scale and multi-billion dollar investments has to be laid today – we need to
- Find a way to keep gas assets available to us, to ensure reliability
- Re-establish price signals, to provide investor confidence, and
- Sort out the misalignments in our policy framework
So that customers, industry and governments can get on the same page, minimising costs and risks, and delivering the biggest economic transition of this century.
I’ll close by leaving you with a final sentiment from me – I’m actually very optimistic about where we’re headed
While I’ve raised a few concerns and things to think about, I remain buoyed by the determination of my colleagues, my industry peers, governments and regulators to persist, with resilience and innovation to advance our shared goals.
ENGIE will continue to do our part:
We’ll keep sharing our lessons from the other 30 countries around the world where we operate, and put these lessons into practical reality here on the ground in-country, and
We’ll keep engaging in good faith and being clear about what we think good looks like, not only for our portfolio and our projects, but for our 700,000 + customers and for the energy transition overall.
Thank you.