The Global Energy Transition - Part 2

[00:00:01] Sarah:

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Hi, I'm your host, Sarah Aubrey. Welcome back to Part Two of our discussion with Lord Adair Turner, Chair of the Energy Transitions Commission. If you missed part one, we recommend going back an episode to join the start of the conversation. And if you're all caught up, you're in the right spot. Today we turn our attention to what comes next, the steps Australia must take, the opportunities emerging and the direction the transition is heading.

Let's jump back into it.

In Australia, the cost of living is still a struggle. How can we balance the transition with affordability and is that an issue common in other places around the world?

[00:01:13] Lord Adair:

Oh, I think it's an absolutely common issue. And here's the challenge, we have to manage it and we have to be honest. We are on a journey on the power system where once we've completed that journey, it's going to be a win-win.

The cost of electricity, I can tell you for certain in 2050 is going to be lower than it is today in a renewable dominated system, because this technology is just fundamentally superior. And that is particularly going to be the place in places like Australia rather than places like Britain because it's solar plus batteries, which is collapsing in price.

But you go through a period in which you have to, you have to invest to get there. You've got to build new grids. The way that we pay for grids is the grid company is allowed to put the capital investment into what's called their rate base, and they're then allowed to charge that to consumers.

And if you end up with having to invest in a bigger grid in the anticipation of higher electricity use, but before higher electricity use occurs, you will somewhat increase the price. We also have the challenge that in the early days of a deployment of a technology, they're sometimes more expensive. So, let's take Germany. Germany did a huge gift for the world between 2000 and 2020.

It subsidised the early use of solar when it was much more expensive than than coal or gas. Far more expensive to give you an idea. I mean, they were paying people, uh, you know, 40 Euro cents, which I'm guessing must be about 80 Aussie cents to have rooftop solar. And when they exported it, they were giving them that price and that was, that was hugely expensive.

And it cost the German electricity users, because the cost was spread over all electricity users, about a hundred billion Euros between 2000 and 2020. Now they've got to the stage where the latest generation of solar PV, it costs in, it doesn't need a subsidy, but that subsidy is still there in the contracts, in the German system from, you know, because they, they made a set of commitments.

We will pay you this for 20 years or so. So there are a set of reasons to do with investment ahead of demand, or having to pay for the early stages of the technology. Before the costs come down where you can go through a period where there is some extra cost to the electricity consumers. Now those are typically net-net relatively small.

And actually, most of what has happened to electricity prices over the last five years or so, which have upset people, has much more to do with Vladimir Putin than it does with, you know, the climate transition. Putin invaded Ukraine, Europe had to switch off using Russian piped gas.

We used to get 40%, almost 30, 35 to 40% of our gas came from Russia, we stopped doing that. So, we started buying LNG on global markets. So, the price of LNG went up and all the way around the world other people were hit by higher gas prices and higher electricity prices because of higher gas prices.

A lot of them people then thought, because they were told by a lot of somewhat irresponsible politicians, oh, this is because of the climate transition.

[00:04:35] Sarah:

Because of renewables?

[00:04:35] Lord Adair:

It typically had very little to do with it. But we need to make sure that we don't promise things that are costless. We need to say, look, there is a cost. It's a manageable cost. Here's what this cost is. And be absolutely transparent. And I think if we do that, we take people with us. If we tell people there's no cost at all, I think then we open ourselves up to the danger that things which are nothing to do with the climate transition. Like, the impact of the Ukraine war on gas prices will be blamed on it, so we do have to manage this investment to get to what will be in a very, very attractive environment.

And by the way, this is particularly of course, here in Australia with your rooftop solar, I mean for lots and lots of Australians, rooftop solar is dramatically...

[00:05:23] Sarah:

Well, we had a subsidy, initially.

[00:05:24] Lord Adair:

You had a subsidy to get it going, but you, you put in, you know, rooftop solar, you put in batteries and you are enjoying much, much lower electricity prices.

And of course that means, so that if you then buy an EV you are running costs of running. Your car are going to be a small fraction of buying the petrol to put in the car tank.

[00:05:44] Sarah:

Few dollars a week versus hundreds of dollars a week.

[00:05:47] Lord Adair:

Yep, yep.

[00:05:48] Sarah:

Do you think globally or regionally that we need new targets, do you think?

[00:05:54] Lord Adair:

Well, look, there's a big debate going on at the moment and actually it's been put forward by various, climate experts and NGOs down in here in Australia about whether we should set an electrification target. And in particular, whether that should be a target which the world discusses at COP31, which is in Antalya in Turkey, but with a joint co-presidency of Australia.

[00:06:20] Sarah:

Yes.

[00:06:20] Lord Adair:

And Turkey. And let's not delve into a decision-making process at the international level that produces such a strange thing. But that's what it is. And we've got to make the best of it by Australia and Turkey working together to drive it forward. And what happened is Australia wanted to hold it, Turkey wanted to hold it.

So, the resolution was you know, they're going to jointly hold it. At COP28 in Dubai, three years ago, there was an agreement produced for everybody to commit to tripling renewables deployment by 2030 as a global target. And of course you could argue, but what is the meaning of a global target, particularly because, you know, people start with completely different, you know, starting points.And you'd probably expect that in some countries you might only have a double, and at another level, other countries which have only just started, you might want it to go up 10 times, but it actually turned out that that tripling commitment that came out of COP28 in Dubai did concentrate people's mind on saying,

Yeah, actually the future is renewables. That's the future. And how do we do that? And, and the fact that that was set there made a lot of renewables companies really confident that they could put down new factories relative to meet that demand, that companies developed to deploy it, that the thing became sort of self-fulfilling.

And we are broadly on target to achieve that tripling of global renewables. So, there is now a debate going on is we are all increasingly recognising. That alongside decarbonising our electricity primarily with renewables. I don't exclude a role for nuclear in some places, but it's going to be primarily renewables.

We need to electrify as much of the economy as possible. We need to use this clean electricity to get rid of fossil fuels in residential heating, gas boilers, moving them to heat pumps, passenger cars, and indeed trucks where the electric vehicle revolution is unstoppable. But it would be great to give it a, even a booster rocket to go faster and indeed industrial heat, where there's lots of opportunities to electrify that.

So, there's a feeling that we need to concentrate government's minds across the world that, don't just decarbonise your electricity system electrify as much as the economy as possible because there's no scenario, which gets us to anywhere close to zero carbon economies, except those which require a much bigger role for electrification.

Now, to give you an idea what the figures are right today, if you think about energy as we use it, what is called statistically final energy demand on average across the world about 22-23% of that is electricity. Right. Uh, far less than the stuff which is gas, which we use directly. Heat homes or heat industries or you know, petrol into cars.

So only 22% is electricity as we use it. At the ETC, we believe that by late 21st century, that should be 60 or 70% as we electrify almost all of the economy. There is one country which is electrifying like mad, and that's China. China, that percentage was only 10% back in 2005 and it's 30% and it's growing very fast.

So, and they are decarbonising because they're electrifying faster than anybody else, and because they're electrifying faster than anybody else, they're developing an electrical industry. Because it becomes self-reinforcing and they're achieving cost reduction because they've made this massive strategic bet that the future is electric and, and it's a winning bet.

So, we need more countries across the world to make that bet as well. And there is the hypothesis that one of the things that could come out of COP31 is a global commitment, and it might end up as a nice little catchy 35-by-35. It turns out that when you think about it, 35% of global final energy coming from electricity in 2035 is a not crazy target.

[00:10:27] Sarah:

Mm-hmm.

[00:10:27] Lord Adair:

Not crazy target. However, if we do end up without a COP31. That shouldn't be the end of the story. That's only valuable if we then create a mechanism to say, and all countries having broadly agreed with that at some grand global level should then go back and work out what is the target. For their own country, given their own specific circumstances, given their own starting point.

And what does it mean by sector by sector, broadly speaking, where do you think you're going to go faster, fastest on electrification? Where's it going to be relatively straightforward because consumers are going to immediately benefit from it.

Where's it going to be a bit more difficult, and it's going to require some subsidy, but this is what's behind this idea of an electrification target. And I think it does reflect the overall philosophy. We do need people to switch a little bit away from just decarbonising electricity and understanding electrification as well.

Now, having said that, it's different in different parts of the world. If I go to China, I don't need to persuade them that electrification is the future. They're electrifying like mad. I want them to concentrate on getting rid of that coal in the way they produce electricity. So, it's still the case in China that the highest priority is decarbonizing the electricity system.

But if you go to Europe, I would say we are at the point where we've made so much progress on decarbonising the electricity system that our priority is now to electrify as much of the economy as we can.

[00:11:57] Sarah:

Heat pumps and transport

[00:11:59] Lord Adair:

Heat pumps, transport, the EV thing is unstoppable. I mean, let me just say this electric vehicles, they're just a fundamentally, totally better technology than internal combustion engines. You have to realise when you drive an internal combustion engine, a diesel or a a petrol car you take 75% of the energy in the petrol or diesel and you turn it into heat. Right. Uh, which is giving you no value. And indeed, in dense cities in the middle of summer, it's just making a hot stick environment hotter and stickier.

When you take a battery car, 90 or 95% of the chemical energy in the battery is ending up as what you want, which is kinetic energy in the wheels. So EVs, you know, the internal combustion engine is dead we just haven't got round to burying it yet. But you know, that one's unstoppable. Some of the others will require more careful policy to drive through.

[00:12:53] Sarah:

I feel like that last mile transport and large trucks will be one of the tricky ones.

[00:12:58] Lord Adair:

Large trucks is interesting because if you'd asked me seven, eight years ago, I would've said they're really difficult.

Uh, they'll probably be hydrogen rather than battery electric truck. But in China now, 25% of trucks...

[00:13:10] Sarah:

Wasn't it just last year that 25% was...

[00:13:12] Lord Adair:

25% of new trucks are electric because the battery technology is progressing so fast that we're now being able to provide even the big batteries. That trucks need or the Chinese are developing two different technologies.

One is incredibly energy dense batteries, but also another one, which is battery swap, where your truck goes along and it goes into a battery swap station. And we'll see which of those plays out. But I would say over the last five, eight years, there's been a real switch. Almost everybody thought eight years ago that once you got to trucks above say, 20, 30 tons, they'd go hydrogen, not battery electric.

But the battery technology has developed so fast that we're now increasingly thinking that even the big 40, 50 tonners will go battery electric.

[00:14:07] Sarah:

We talk about airplanes then will we, that whole subject in itself

[00:14:10] Lord Adair:

That's really difficult. That's really difficult.

[00:14:12] Sarah:

That must be probably the most difficult thing to do

[00:14:14] Lord Adair:

Well, airplanes, you know, if I lived 50 years I'd probably fly across the Atlantic in an electric plane, but it's going to be 50 years, not 10, or 15 or 20.

[00:14:24] Sarah:

In terms of equity. I'm lucky enough that I could afford to put solar on my roof and a big battery and buy an electric car, but not everyone can afford to do that.

What happens to the people who are left, for example, still on the gas network because they can't get off gas with their homes?

[00:14:43] Lord Adair:

Well look in general, over time in most areas of the economy, people are going to gain from this transition eventually. But there is an investment cost of getting there and there are also different effects by different groups of people.

And we've got to anticipate that in advance. Let's take electric vehicles. I think people talk about the upfront cost of electric vehicles that's going to get solved because within the next three or four years, electric vehicles is going to be cheaper to buy upfront than internal combustion engines. But there's still a very major difference between different groups of people according to whether you have your own driveway.

If you have your own driveway, you will be able to charge your electric vehicle at your home electricity cost. In London, I don't have my own driveway. There's a pavement between me and the street. I have a terrace house and I charge at a lamppost charger down the street and the cost of electricity there, because it's coming from a company which has developed it and it's not the same company as my domestic supplier.

The cost of electricity is about three times as much. And what it means is that, at least in the UK, and I imagine it's here, somebody who has their own house, you know, with a driveway and they can charge on their domestic electricity, EVs are fantastic economics, but for somebody who lives in an apartment block or for whatever reasons, doesn't have off street parking and is paying more for their electricity it isn't yet economic.

So, that one, we've got to try and, you know, get round that there could be ways of doing that.

I think if we had a different way of developing our charging infrastructures, which enabled charging infrastructures to be accessed by your home electricity supplier, so that when you were charging away from your home, a bit of software, linked it through to your home electricity supplier who charged you your home electricity rate we will solve these problems, but we need to anticipate these.

Having said that, I think the EV is the least of the distributional problems, because by the way, a lot of people who, at least in London, who live in apartment blocks, choose not to have a car in any case. You know? So that comes out of the wash a bit like that.

I think the more difficult one in distributional ones in rich developed economies trying to make this transition is at least we found it in the UK, is heat pumps in homes. You know, because installing a heat pump is always going to be more expensive than a gas boiler, right? So in relation to EVs, EVs will soon be cheaper than buying a petrol car, right?

So, there isn't an upfront investment, but a heat pump is always going to be an upfront investment, which is more expensive than buying a boiler. And one of the challenges is that the cost of finance is very, very different for different people.

[00:17:39] Sarah:

Mm-hmm.

[00:17:40] Lord Adair:

I mean, if you talk about a relatively well-to-do person who has, you know, some money sitting in the bank, the marginal cost of capital to buy a heat pump for, you know, well it might be a 10,000 Aussie dollars or something like that...

[00:17:55] Sarah:

A lot less...

[00:17:57] Lord Adair:

A lot less. I'm giving up 4% interest that I'd be getting in my bank. You go to lower income people, their marginal cost of capital is borrowing on a credit card at 20%. So again, we've got to anticipate that and we've got to have targeted support for, say, low income households, either by actual grants or by government loans at low enough prices that they are looking at the same economics that higher income people look at.

So, all of these problems, I think are manageable, but they have to be managed. You have to, you have to see these, these challenges, these distributional challenges coming in advance and managed around them.

[00:18:35] Sarah:

The transition is going to require significant capital investment. How does a country like Australia make sure it's attractive to capital for investment in the transition?

[00:18:45] Lord Adair:

Well, a lot of the capital in any, any country, particularly developed country is generated domestically. And of course, Australia actually does have very large deep pools of investible capital, partly coming off the nature of its pension system and the super systems that it created there.

Australia is actually an exporter of capital of some of your infrastructure funds investing elsewhere in the world as well as here. In so far as you need to make sure that, you know, those domestic pools of finance or other pools of finance consider Australia to be a good place to invest.It's all the classic stuffs. It's certainty of contract, it's rule of law, but it's also just a clear, steady policy framework. The more that you can have a continuous policy framework, the more you can have the, you know, the federal government is committed to 82% renewables, and people believe that...

[00:19:40] Sarah:

And that has been legislated...

[00:19:42] Lord Adair:

And once that's legislated, people say, okay, now I can invest in things which will make sense if that's delivered. Sometimes developments will not occur unless there is the government playing the role of creating some sort of long-term contract, which wouldn't arise in a pure market itself. And I think this is the CIS structure, you have to support the development of capacity of various sorts.

So, it's all a set of classic things. I mean, it's, it's specifically applied to the clean technology area, but it's familiar from other areas of economy as well. It's, you know, the more that governments are predictable, the more that they're creating long-term frameworks. The more that those frameworks have been designed to give, you know, a reasonable balance between cost to consumer and return to a shareholder, you will get the, you know, the finance will flow.

[00:20:39] Sarah:

Long term certainty.

[00:20:39] Lord Adair:

I wouldn't see it, I really wouldn't see source of finance as a key problem for Australia, source of finance becomes a crucial problem for places like Africa.

[00:20:49] Sarah:

Mm.

[00:20:49] Lord Adair:

So Sub-Saharan Africa is sitting now on the most stunning technological opportunity imaginable. It has so much sunshine that it could develop entire energy systems, fundamentally 90% based on solar plus batteries, and the equipment is now so cheap that that will be far cheaper than building gas fired power stations or coal fired power.

[00:21:14] Sarah:

Skipping the fossil fuel bit.

[00:21:15] Lord Adair:

Just skip it. But the problem is the cost of capital. So, a lot of places there, people will not invest. Either they won't invest at all, or they won't invest for less than a 20% return. And it's that cost of capital because there's a particular feature of these clean technologies, these renewable technologies, which is all the cost, is upfront in the capital investment.

Think about them, you put a solar panel in place, or a whole field of solar panels or a wind turbine or a grid. Once it's up, it costs nothing to run. It has a, what economists call zero marginal cost...

[00:21:54] Sarah:

Sunshine is free.

[00:21:54] Lord Adair:

It's free to run. So all the cost is in the initial capital investment.

And that immediately tells you that the economics are driven by what is your cost of capital? What, what rate of return do you have to pay? So, the problems of where does the finance come from are pretty straightforward for rich developed countries, frankly. And they get, they become bigger for medium income and lower middle income developing countries, and they get really severe for the lowest income countries with high degrees of perceived political risk.

And that's where the cost of capital, the availability of finance, could be a significant barrier to us seizing the opportunity, which now technologically exists.

[00:22:37] Sarah:

Right. All right. I have a three-pronged final question for you. What have you seen working around the world in terms of, number one, the rollout of renewables?

[00:22:48] Lord Adair:

Yep. China is running out renewables as an extraordinary place, but India's doing quite well and India is doing quite well actually with some quite innovative contractual structures. They've created an amazing thing called The Round the Clock renewable. A contract where the electricity system says to suppliers, you enter an auction and the lease price wins in this auction.

It's a reverse auction but the auction is for a commitment to deliver electricity 85% of all hours in the year. And then the supplier, if they win the contract Has to then work out themselves What combination of say solar and wind and batteries will enable them to meet that commitment to deliver electricity 85% of hours in the year.

And a lot of countries don't do it on that way. Australia doesn't do it on that way. UK doesn't do it on that way. You say, well, how, how's the system going to buy some capacity in wind, some capacity in solar, some capacity in batteries, and the system puts it together. But this innovation in India has been a really great step forward.

And we are seeing now some stunningly low prices for round the clock renewable commitments in India at prices which make absolutely clear that this is the future of the Indian electricity system. So sometimes innovation isn't necessarily technical innovation it's ways of doing contracts which unleash, you know, new business models.

[00:24:23] Sarah:

Alright. Number two. What's working around the world in terms of driving electrification?

[00:24:28] Lord Adair:

Well, I'm afraid again, it is China. Uh, China is now over 50% you know, electric vehicles by sales. And indeed, if you go to Shanghai...

[00:24:40] Sarah:

I have it's amazing.

[00:24:40] Lord Adair:

It's 80% by stock, you know, I mean it's very, as you know, it's very easy in Shanghai to see which vehicles are electric because they have green registration plates and the blue. And, and last time I was there, I did a little count, you know, I was in a taxi had nothing else to do. And you count, and you realise the majority are now green. So, they are drawing ahead.

Uh, of course Norway is now 99%. I mean, you can't buy an internal combustion engine in Norway, they're getting on ahead with it fast. But let me give you some interesting variant ones as well, Ethiopia, has just banned the import of internal combustion engine vehicles because it basically is going, we've got lots of electricity because of the big hydro. Uh, we don't have lots of oil and gas.

[00:25:30] Sarah:

What are they saving in fuel imports?

[00:25:31] Lord Adair:

I don't know how much they, I don't know. But basically the Ethiopian economy does not want to be vulnerable to fluctuations in the global price of oil, which get in the way of good economic management. And they've said, no, we want energy security.

We want energy security. And the future of energy security is cars running in Ethiopia on Ethiopian electricity. That's another very interesting one. If I go back to renewables, actually I should have mentioned one other one, extraordinary one last year. Pakistan rooftop solar, 10 gigawatts.

Nobody planned it, a complete democratisation of rooftop solar. Um, it's just a whole load of people just began to say, I can buy a panel if I've got a friend who's, you know, a competent electrician, they can put it up on the roof for me.

In that case, I want to have electricity in an environment where the local electricity system is unpredictable and has blackouts, and it's just a, it's a bottom up unplanned. A takeoff at a extraordinary pace of growth.

[00:26:38] Sarah:

Well, that was really my part three of driving electrification in the grid. And I guess that's Pakistan then, isn't it?

[00:26:43] Lord Adair:

Well, Pakistan is doing, as I say, very, very good on that. But you know, other countries are driving it in the grid, but we've got to see it in much more places across the world as well, in particular places like Africa, where they're just not seizing the potential, which is available.

Sarah:

And the US.

Lord Adair:

Well, the US sadly has gone into reverse. What's interesting that is not stopping solar. The solar is still expanding rapidly in the US because solar plus batteries are so economic. What has received a huge setback from the policies of the Trump administration is wind.

[00:27:22] Sarah:

Well, thank you Adair. I am blown away and I've again learned so much.

So, I really appreciate you sharing your time with us.

[00:27:29] Lord Adair:

Well, thank you very much, much enjoyed it. Thank you.

[00:27:33] Sarah:

We hope you enjoyed our special two-part series with Lord Adair Turner on the global energy transition and Australia's role in it.

Join us for our next episode where we explore the complex job of electrifying Australia's businesses. Every industry has a role to play and every operation will need to change. We'll also unpack how network businesses can drive the transition, both by enabling others and by transforming from within.

For more info on today's episode, visit wiredforgood.com au, and don't forget to follow us on YouTube, Spotify, or Apple Podcasts, so you never miss an episode.