A net-zero emissions electricity system – how do we get there?

Navigating the challenges and opportunities of targeting net-zero

Australia's electricity system is in the process of great change, with a wide range of factors propelling the system away from coal to renewables. We spoke with Tony Wood, Energy & Climate Change Program Director at the Grattan Institute, on how energy sector participants and potential investors can best navigate the challenges and opportunities of targeting a net-zero electricity system.

Key takeaways

• Investment opportunities – A net-zero National Electricity Market (the NEM) will require significant investment from the private sector. International investors are already showing a keen interest in Australian renewables – we have assisted with a number of large portfolio sales in the sector over the past year and are seeing an active M&A market for carbon aggregators and increased interest in utility-scale battery storage.
• Three scenarios for the transition – Grattan outlined three options for our future. One, keep coal. Two, 70% renewable scenario. Three, 90% renewable scenario, All solutions have challenges, but the best option to reach our net-zero target is to use 90% renewables and with that remaining last 10%, use gas and offsets.
• Transition strategies and ESG reporting – In the absence of a national carbon price, the 'ESG megatrend' is driving net-zero ambition, with investor activism, strategic climate litigation, and international trade and investment pressures on the rise. Organisations should implement transition strategies that are evidence-driven, transparent, and embedded in everyday decision-making, and be prepared for their strategies to be scrutinised by stakeholders and regulators.
• Local impact of global trends – Approximately 70% of global GDP is housed in countries with net-zero pledges. Australia will not be immune to the effects of these pledges, which are already beginning to influence the behaviour and sustainability expectations of major investors.
• Navigating unpredictability – A renewables-based NEM can be cost-competitive with a coal-based NEM, but challenges with transmission and the 'winter problem' need to be overcome. We expect to see government policies evolve to combat these issues, and the private sector will play a role in implementing NEM reforms.

Who in your organisation needs to know about this?

This insight will assist boards, senior executives, in-house counsel, sustainability teams, and risk and compliance leaders to act as strategic partners within their organisations to capitalise on investment opportunities in the renewables sector and shape their ESG agenda.

Targeting net-zero

What will it take to get there?

Through a series of modelling, the Grattan Institute has identified that a renewables-based NEM can be cost-competitive with a coal-based NEM. However, the reliability of renewables continues to be a challenge (particularly in winter months where demand is predicted to outstrip supply), as are geographical and capacity constraints on the transmission network.

As Grattan outlined, achieving a net-zero NEM by 2050 will require state and federal governments to invest in integrated transmission system and implement a common framework for 'renewable energy zones' (REZ). While a single, economy-wide carbon price is the gold standard for driving climate goals, more realistically we expect sector-specific approaches to continue.

Voluntary shifts in corporate strategy and investment: the ESG megatrend

Even in the absence of a national carbon price or federal net-zero target, we are seeing a widespread trend toward decarbonisation in climate-related corporate strategy and investments, driven by factors such as:

• Investor and shareholder activism with custodians of vast amounts of financial capital coming together to demand that investee companies develop net-zero transition plans, and shareholders calling for stronger emissions reduction targets at company AGMs.
• Strategic climate change litigation is on the rise and is becoming increasingly sophisticated. The recent landmark Friends of the Earth v Shell decision, where Shell was ordered to reduce its carbon emissions and bring its strategy in line with the goals of the Paris Agreement, is a key example.
• International trade and investment pressures are set to ramp up, with the concept of carbon border tariffs gaining traction, particularly in the EU and US.
• Net-zero by 2050 targets are in place for all Australian state and territories, and are mainstreaming quickly among Australian organisations.
• Australian corporate regulator scrutiny of companies' transition risk disclosures and net zero plans can be expected, with ASIC turning its focus recently to greenwashing claims.¹

Against this backdrop, it is becoming increasingly risky for major energy users and producers to be out of step with the goals of the Paris Agreement. With a recent report on Australia's 20 highest emitting electricity generators and energy retailers finding that none have emissions reductions plans that are fully aligned with Paris,² there remains scope for the Australian energy sector to raise their decarbonisation ambitions to keep pace.

Increasing demand for carbon offsets and Power Purchase Agreements (PPAs)

Last year saw a record 16 million Australian Carbon Credit Units (ACCUs) issued³, there are signs that demand for ACCUs will continue to increase, along with increasing spot prices and market liquidity.

2020 was also a record year for PPAs, with corporate carbon-neutral standards recognising and rewarding investment in bulk renewables. It remains to be seen whether the ESG megatrend will compel investment in infrastructure to enhance system stability and reliability, or whether this will be left to government and energy regulators to solve.

What does this mean for gas?

Climate change litigation and government policy are proving to be disruptive forces for upstream gas. In addition to two existing judicial review proceedings concerning extraction projects in Western Australia and New South Wales, proceedings were recently brought challenging a Commonwealth decision to provide a grant for oil and gas exploration in the Northern Territory⁴. Further, in its 'Future of Gas Statement', the New South Wales Government announced that it will not release further areas for gas exploration in New South Wales. Nevertheless, the Grattan Institute sees a continuing role for gas to firm capacity in a renewables-based NEM, at least until alternatives (such as hydrogen) become cost competitive.

Actions you can take now

• Audit your transition strategy and ESG reporting – There has never been greater impetus for organisations, particularly major energy users and producers, to develop and implement transition strategies that are evidence-driven, transparent, and embedded in everyday decision-making.
• Deliver on carbon reduction targets – Corporate PPAs, structured retail products and emissions reduction investment are just some of the ways that organisations can seek to deliver on their carbon reduction targets. Energy sector participants should consider their engagement with the carbon offsets market, including opportunities for generating ACCUs.