What would Australia's Labor win mean for the resources, energy and power sectors?
Australia's general election is around the corner and Labor looks set for victory. Labor has announced its commitment to reduce Australia’s carbon emissions by 45% between 2005 and 2030, and to reach net-zero pollution by 2050. It has also proposed changes to existing mechanisms to lower energy and gas prices.
Wood Mackenzie's Australia experts take a deeper look at the proposed climate and energy policies and the impact on the resources, power and energy industries.
Expect higher costs with imposition of emissions targets for the largest 250 carbon emitters
A number of major international and Australian coal and E&P companies feature in the top 250, outside of the power sector. This includes Chevron, Woodside, Glencore, South 32, Anglo American and BHP.
Rory Simington, principal analyst, said: "Coal miners who cannot meet their reduction targets would need to purchase carbon credits from either Australian or overseas schemes."
Wood Mackenzie estimates the cost of offsetting the carbon emissions will be up to US$10 per tonne of raw coal mined. This translates to between 3% (for thermal coal) and 12% (for metallurgical coal) of the average total cash cost of coal mine operations.
"Australia is a major coal producer globally so we expect marginal impact on exports. However, the cost of offsetting carbon emissions will have a material impact to company revenues," Simington added.
Similarly, for two of Australia's largest LNG producers, Chevron and Woodside, the cost would be material. The liquefaction of natural gas is a relatively high energy, and consequently, carbon-intensive process.
Senior Research analyst David Low said: "Using the Wheatstone project – which contains low levels of CO2 – as an example, we estimate the project would emit between 4 and 5 million tonnes of CO2 a year at full capacity. This represents an additional cost of around US$120 to US$150 million/year, or an increase in the breakeven cost of around US$0.35 per mmbtu (NPV10)."
NEG – an adequate policy to mitigate price hikes
The National Energy Guarantees (NEG) is expected to take over the Renewable Energy Target (RET). In general, the NEG supports new renewable energy generation, although the potential use of "carbon offsets" would discourage investment in renewable energy.
A 50% renewables generation mix by 2030 will accelerate Australia's Paris Agreement targets. In the short to medium term, the intermittency of renewable generation can be addressed by the NEG by securing firm capacities from dispatchable generation (which may include batteries).
In the long term as cost of renewable technology declines, power generation could potentially be supported by large-scale multi-day batteries, hydro-pumped storage and hydrogen storage. The country’s reliance on fossil fuel power generation would be reduced, as would power prices if all goes to plan.
Zi Sheng Neoh, principal consultant, commented: "The NEG is an adequate policy to dampen price spikes. A higher proportion of renewable energy generation could reduce the overall wholesale power prices in the National Electricity Market.
"Investments in renewable energy, especially hydrogen, in Australia could create a breakthrough in the power market value chain and accelerate towards realising the national energy productivity target."
Uncertainty remains on proposed changes to ADGSM and NAIF
In late 2018, the Labor party announced its intention to strengthen the existing Australian Domestic Gas Supply Mechanism (ADGSM) by introducing a permanent export control trigger.
Low added: "Introducing a permanent export control trigger is not the solution to rising east coast gas prices. Cheap supply of gas will no longer be available. By 2030, the development cost of new upstream supply to meet both the LNG and domestic gas demand will be around the LNG net back price. Fundamentally, the cost to deliver new gas to market is increasing and, therefore, wholesale gas prices are on the rise.
"Intervening in the market when prices are too high will discourage operators from bringing on new supply of gas where the development cost is above the price trigger. This will exacerbate the gas shortage crisis."
The Northern Australia Infrastructure Fund (NAIF), the A$5 billion (US$3.5 billion) financing mechanism introduced by the Liberal government, is also under scrutiny. Labor has proposed spending A$1.5 billion (US$1.1 billion) of the facility to unlock gas supply in Queensland's Galilee and Bowen basins, and the Northern Territory's Beetaloo basin. The fund's mandate stipulates that any investment must be of public benefit, but more importantly that the loan is repaid or refinanced.
However, there is major uncertainty around how much gas can be supplied from these basins. Further E&A is required in the basins to de-risk subsurface uncertainty. This could take a decade or longer. This undermines a key economic metric of a pipeline investment - its utilisation rate. New northern Australia pipeline investments are unlikely in the near future.