Would giving energy away for free create the sustainable and economic change we need?

Anthony Richardson Anthony Richardson
Managing Director, Resources – Australia
18 August 2020
7 min read

The coffers of Hollywood have been lined billions of times over from blockbusters featuring dystopian futures where the world runs out of energy. From the classic Mad Max 2 to the more recent NBC Revolution series, what happens when the lights or fuel run out creating enough drama and intrigue to even warrant a dedicated energy crisis film category on IMDb.

While worst case scenarios make for good entertainment, what if a radically unconventional view was taken for real life: what if energy was free? Imagine if it was so abundant it could be made free or a nation decided that free energy was to be its competitive advantage? Although it might not help James Cameron with his next blockbuster: what sort of future would that stimulate?

Professor Tim Flannery's 2005 book The Weather Makers painted the scenario of a new Australian inland city called Geothermia. This city isn't created for access to agricultural areas or waterways, rather because energy derived from the sun and hot rocks is free. Rather than driving economic activity from lower taxes or lower labour-cost, Geothermia draws business investment by offering zero-cost energy.

Let's take Flannery's idea to a global scale for hot-weather countries. Nations with an abundance of arid land and high insolation rates become free-energy zones where the costs of renewable power are so low that domestic energy is given away. Exporters pay an export duty to sell products, and the export duty is reinvested in the energy system.

The benefit? It attracts investment, especially in manufacturing; it cleans up the environment; creates a 'zero-emissions' export brand, and lowers the cost of living for local communities.

To get there we need a major rethink

For decades, countries have attracted investment and industry to their nations with the goal of generating jobs and economic progress. Much of the development of South East Asia and Latin America has resulted from developed nations shifting manufacturing plants to locations where labour costs are lower, making production cheaper. Lower cost products increase the manufacturers’ markets and drive jobs for the host country.

Other countries have advantages other than labour cost, including access to abundant natural resources or access to large markets. Governments also offer investment incentives and low tax regimes. However, using energy as a differentiator has been low on the priority list. The Middle East's low oil costs have not resulted in it becoming a renowned manufacturing centre because other factors have outweighed the low energy-cost benefit.

Enter Australia. We have copious fossil fuel resources, most of which we export. We also have raw materials and an educated and high-skill workforce, even if our access to large markets is not great. However: We also have relatively high energy prices, particularly for a country that produces so much gas, coal, sunlight and wind.

Our energy system is complex and while we have around 23 per cent of renewables in our electricity grids already, the grids were built for coal-fired baseload generation, with some hydro and gas for peak demand periods. Even with a growing renewables share of our grids, we are bogged down with connection and transmission challenges.

The COVID-19 pandemic has exposed weak points in the global supply chains that have basically shifted manufacturing to where the wages are low, and sold the subsequent products where incomes are high. These supply chains now prove troublesome during COVID-19, as basics and essentials – such as medical supplies, pharmaceuticals and precursor chemicals – are delayed or restricted in their country of origin.

For countries such as Australia, the question becomes if the global supply system has been changed by COVID, what levers can we pull to build our manufacturing base? If we accept that access to raw materials, access to market and the cost of labour remain the same, post-COVID, what lever could we pull other than a blatant bidding war on tax incentives?

There's a left-field, revolutionary option: free energy

Here's how it could work in Australia. The entire economy wouldn't start on 'free energy' since we don't have a large enough renewables sector to be able to give away the energy. But we could begin with a zero-emissions loop where manufacturers' products with zero-emissions energy inputs, get their energy 'free'. They take electricity from hydrogen or renewables – for no cost – and pay 20 per cent tax on their exports.

Specific industries could be kick-started on the royalty system in a number of ways. For example, instead of billing the energy user, imagine if you set the royalty at the price of energy consumed via that product today, and it was attached to the cost of the export. Alternatively, you could start by taking the price of energy today and the export would pay no more than that.

As this system develops – with increasing renewables and hydrogen generation becoming more efficient with scale and technology – the marginal cost of producing the energy approaches zero. With sufficient renewables and hydrogen in the grid, which forces out gas and coal on a cost basis, the entire economy can eventually transfer to free energy.

The Australian domestic energy system would be maintained by a 20 per cent duty on energy exports, including hydrogen, ammonia, undersea cable electricity, LNG and coal. In this scenario, if you're an Australian household or a business, you don't pay for energy – energy exports pay for the domestic energy system. And just about everything manufactured in Australia is zero-emissions.

The most obvious advantage of the free-energy nation is that companies with significant manufacturing interests could choose to make things in Australia, especially those with an energy cost greater than the 20 per cent export duty they'd be charged. This would include just about anything metal or chemical-based, and create an incentive for companies to manufacture in Australia rather than shipping raw materials to Japan, China and Korea.

Australia performs poorly in terms of the value that manufacturing adds, as a percentage of GDP, according to the World Bank. Australian manufacturing adds 6 per cent, the same level as Panama and Belize, well short of China (27%), Germany (19%), the United States (11%) and the world average of 17 per cent.

Another advantage is the capacity for products manufactured in Australia to be labelled 'zero emissions' or 'carbon-free', whatever the agreed branding. Carbon inputs and embedded emissions in goods will at some point be penalised as they cross national boundaries, under Scope 3 rules.

Also, 'Article 6' of the Paris Agreement on emissions gives scope for one country to invest in emissions-reduction projects in another, and claim the carbon credits. Given the right carbon credit regime, Japan could offset its domestic emissions and pursue its Paris targets, through investing in either 'green' hydrogen (using renewable electricity to crack water) or 'blue' hydrogen (from the offtake of a Carbon Capture and Storage plant attached to coal or gas facilities). The hydrogen is then used to generate zero-emissions power.

Early commitment is vital

The 'free-energy' idea depends on a first-mover advantage, especially as it pertains to global commodity prices for energy. We don't want a repeat of the gas situation where it's now cheaper to import LNG from Singapore than to buy it from Australia's domestic gas system. In order to avoid the same global blowback on Australia's next big energy export – hydrogen – we need early government commitment.

And how would this be negotiated? It would require governments to step back into a planning and coordination role in energy systems, and an acceptance that energy is a strategic element of the national and global economy, not just a short-term revenue earner.

Just as governments give away billions in tax revenue to build industries, would Australian governments give away energy to lead a new green economy that cleans up the environment, brings manufacturing back, and creates a 'zero-emissions' export brand?

While this scenario might seem as extraordinary as the futures we're used to seeing on screen. Economies fuelled on low carbon-free and abundant energy is unorthodox thinking that could set one economy zigging when everybody else is zagging.

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Anthony Richardson
Written by
Anthony Richardson

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