Ep.73 Energy infrastructure: trends shaping a surge in investment and development

Maria Rampa: Hi, I’m Maria Rampa and welcome to this episode of Engineering Reimagined.

Did you know that Australia’s electricity market now generates over 40 per cent of its power from renewable energy each year? This has doubled in just five years, which demonstrates how much progress has been made.

One of the unique challenges of decarbonising the electricity system is the rapidly evolving landscape where various macro geopolitical and economic trends are constantly impacting the biggest capital deployment we have ever seen for energy infrastructure.

All of which makes for a fascinating conversation between three people who could talk about energy all day.

In today’s episode of Engineering Reimagined, Aurecon’s Managing Director, Energy, Paul Gleeson speaks with Ashurst Risk Advisory Partner, Elena Lambros, and Ashurst Partner and Global Co-Chair of Energy Industry, Dan Brown. This episode was a joint recording for Ashurst’s Nearing Net Zero video series and part of a longer-term partnership between Aurecon and Ashurst.

Paul, Elena and Dan discuss the current state of the energy transition, energy mix options including gas, hydrogen and nuclear and the economic choices that markets, investors and companies are making around the transition. The value of building, holding and owning long-term asset portfolios is also discussed, including the benefits of community relationships to navigate approval processes and the efficiencies achieved by having consistent teams of experts across delivery and construction.

Join us as we explore what’s coming next in this once-in-a-lifetime transition.

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Elena Lambros: For today's discussion, I was gonna focus mostly on the energy transition. There is a lot conversation around where it's going, where it has been. But fundamentally, what we're seeing is projects are still getting up, people are still investing, we're still finding that finance is flowing to the right projects. What sort of trends should we be looking out for?

Dan Brown: Let me just start by saying, we've got a really long history of working together and our businesses more recently have created this Ashurst-Aurecon Alliance.

Paul Gleeson: Thank you, Dan, and thanks, Elena. The history that we've got working together, particularly in the deal space, in the energy landscape, I think it's probably surprising to some people as to what would pull together engineers and lawyers and other advisors, and maybe we can get into that a little bit today.

Dan Brown: Paul, there is so much happening in the energy space at the moment. What's your gut feel on where we’re at from your perspective?

Paul Gleeson: I really like to remind people whenever I can that the energy transition is not a hypothetical. We're actually doing it. We are actually in it right now. For those not in the sector, particularly if you're just following mainstream media and you could be forgiven for thinking that we're still wondering, will we or won't we do this thing and is there clear pathway? And the reality is if you're in the industry, you're well aware we're doing this thing, right? There are parts of it to be figured out as we go, but there are substantial capital flows into the energy transition and have been for a number of years now. So I just think it's really important for everyone to realise that and that there are certain asset classes that are eminently bankable, investable. Our collective task is to help people, entities in that space, to deploy those projects because that's what's going to ultimately keep the lights on and then the conversations about what might the last final five or ten per cent look like, sure. We could discuss that, but right now we can't lose sight of the fact that we're in the middle of the biggest capital deployment that the sector has ever seen, and probably the country.

Elena Lambros: I like that point around bankability and projects that are really getting off the ground and forming in. Can you talk about, to the extent that you can, some of the projects you're referring to or what you see as working well?

Paul Gleeson: When I look at, having been in the sector for 27 years now, you see the different generation technologies in particular that have each reached different points of competitiveness in the wholesale market and therefore the waves of rolling out each of those. Obviously we started in Australia with a coal fired generation fleet. And then we had a period of building gas fire generators and then really since then has been the wave of wind and solar or variable renewables or VRE as we call them. And so, from an equity and debt perspective, wind and solar as a generation technology are extremely safe ground. There's obviously risks to be managed around each site, each development, costs, stakeholders, counterparties, all that stuff, but the actual technology, the asset class itself is very bankable. That's where we see a lot of the capital flowing. But probably the biggest surge of activity we've seen in the last 18 months has actually been in the battery space. So not surprisingly, as you start to build a system predominantly on wind and solar, you create an arbitrage opportunity, right, for moving all that high-volume, relatively low-cost wind and solar energy into when and where you need it. So battery projects, absolutely surging. The scale of them now is quite mind-blowing to me. Dan, I remember you and I working on one that was ground-breaking when it was five megawatts. We've now got some that are many hundreds of megawatts, maybe not too far off a gigawatt project coming. That's driven by the volume of wind and solar that we need to move around in terms of time and location. It’s also driven by the collapsing cost, the capital cost of battery modules. That's the current wave and then once that's there that will unlock another wave of VRE and then that's on the generation side. And we can have another chat about how we move it around the transmission projects.

Elena Lambros: So that kind of touches on a couple of things, so you mentioned, community, stakeholder, having all of that in place, the social licence is important, affordability of energy is also really key.

Paul Gleeson: I'm very confident to say that wind and solar are the lowest cost forms of generation we have. But that's the wholesale generation cost, right? There's a whole system cost to be figured out. But the reality is nothing is cheaper than a system that you built 50 years ago, right. If you said "if we don't care about emissions, and we’re going to build a new coal fleet", very easy to say that renewables are way cheaper than that system, right? But that is really hard, I think, to have that conversation with the electric when there's really simple things about which one's going to bring the bills down. Maybe the goal should be which one is going to try and hold it, and also give us some independence, which is the other great thing about renewables.

Dan Brown: I'd love to have a deeper understanding of the work that Aurecon's done around that gen-cost report. It's something that your business has been doing for a number of years now, but I think that work is fundamental to informing a lot of these choices that the markets are making around the transition. Do you want to just flesh out on that piece of work?

Paul Gleeson: So the GenCost report, anyone in the industry is quite familiar with what that is, but it's a report that's produced by CSIRO and then worked on and used by AEMO, the Australian Energy Market Operator. And so, I think we're in our seventh year now of Aurecon doing all of the benchmarking of the generation costs based on data from all over the world for every generation type. So it's just data, just facts.

Elena Lambros: It's just a view, right? Just a view of that, nothing else, it's not you having an opinion.

Paul Gleeson: That's what it costs to build that solar farm or that coal-fired power station or whatever it is. But it certainly gets used as a bit of a foundation for a whole lot of other modelling. But it's also not the document that people tend to use for a final investment decision, right? So you find out what the real cost is when you get out there and start developing your project, right, and start engaging with OEMs and constructors and what have you.

Dan Brown: I’d really love your insights across that 27 years of experience. What are the two or three differentiating aspects of those that are really successful in the market in delivering projects and those that perhaps are finding a little more of a challenge around getting their assets away in the market.

Paul Gleeson: There's a couple of things I've observed over that time. If I look back, probably 15 years ago, some of the early mover developers were really just trying make money as a developer, rather than build a portfolio of assets. And if I look at who's really successful now, it's those players who are trying to develop, build, hold a portfolio of assets in the long term. And one of the reasons I think that is, is one if you're into the long haul you can't burn the community or your counterparties right? But the other big one is when you're just developing something to flip it, you're obviously going to try and take as much value out of that project when you sell it down right, you de-risked it a little bit and then try to flip it to someone else, you take a whole chunk of value out of that project. Sometimes that would happen two or three times. So by the time the final party has bought it, there's almost nothing left in that project and it's going to struggle, whereas if you don't have pure play developer there but instead the person developing it is going to own it long term, they don't have to obviously take that out. And so all of that has also helped bring the total cost of the project down because you're not having people pull a few million out every time. That's one observation. I think the other one is those that really do their work with the communities because we've seen some projects really struggle to get through various approval gates, right? And if you haven't managed the community well, that can actually play out in approval decisions as well, even though it might not be, like what's that got to do with the EPBC Act? Well, the more noise there is around it, the more scrutiny there is. So I think those are real factors. And obviously, if you went into your development thinking we'll have it generating revenue in year four or five and actually it's year seven or eight because of how long your approvals took, that's blown up your model.

Dan Brown: I imagine too those that don't flip, they actually get to implement the learnings from the delivery of those assets into the next project, which ultimately can save time, cost or enhance relationships, not just with communities but with potential opt-takers to allow that pathway to revenue to be a little more clear.

Paul Gleeson: Yeah, you're right, because the other thing that those parties do is they'll often use a repeat team, and so whether that's the OEM and the constructor or the legal advisor or the technical advisor, and if you can take that across and across and across, obviously you're getting efficiencies and savings because there is a lot of work we do that, you can get efficiencies.

Elena Lambros: We're also getting to the point where we're talking some other technology that might need a bit more support, so just wondering what your thoughts are on how we're going to get to some of those tricky things, you know, hydrogen is something that people talk about, is that ever going to get going, those sorts of things. I don’t know if you've got some observations, I'm sure you do.

Paul Gleeson: Yes, you're right, I do.

Paul Gleeson: I like to talk about the different phases of the energy transition. The national electricity market is now north of 40 per cent variable renewable energy on an annualised basis.

Elena Lambros: It's huge actually.

Paul Gleeson: Most people have no idea, most people think we're still wondering about, we might have a crack and build the odd solar farm, but actually we're already at 40 per cent. And just as a side note, in less than five years you've gone from 20 per cent to 40 per cent, you start to realise what's possible. So those are the things that make economic sense which is decarbonising the national electricity market by predominantly building out renewables and storage. But then after we've decarbonised our electricity system, what else has to be decarbonised in the national economy? And you've got huge sectors like transport and a heavy industry, agriculture eventually. So that's where there's still a gap? Where there's things that we need to do that are not yet economic. When I'm talking about hydrogen these days, I like bang up a slide that has something called the hype curve on it, which you can Google but there's a bunch of these curves. I think Gartner might have done the first one and it looks at, pretty much all technologies, not just an energy-related conversation, that goes through this thing of rapidly building expectations to sort of like peak hype, peak expectations, and then as you go from this hypothetical into actually starting to deploy it, you come racing down into what's often called the valley of despair, where you find out what it really costs to build these things. And I think that hydrogen is close to the bottom of that valley at the moment, right. We've done all this work over the last, say, six or so years trying to develop projects. The numbers are still out. Other things have happened in the meantime that have also pushed those project economics out. Hydrogen is now, there's a big reality check around, okay, if that's really the economics of it, it's about accepting the reality that it's probably not going to be a globally traded seaborne commodity in its own right. Where instead, where we're still working on it, is where it's the, like the foundation green molecule for something else. And so, what we're looking at with a number of players is, where are the industries where substitution of that green molecule, for a fossil fuel one, doesn't have much impact on the final product cost? So green iron, green steel are two really, really key ones. And also other parts of that supply chain. So if you looked at replacing it as, using it in rail to move iron ore from the mine to the port. You can barely see it and that's an industry that's committed to decarbonisation, whereas, if you said I'm just going to try and compete in the market, try and sell it up against diesel or something like that, it's just not going to happen. So it's about understanding the projects we're going to do in the next few years are those ones where it really has the least impact on the final cost of production and also trying to align it with which are the industries that have made big decarb commitments, because you need those two things combined really.

Elena Lambros: So, talking about the role of gas in the national electricity market. Can you give us an overview of why gas is important and the role that you see it playing going forward?

Paul Gleeson: Look there's still some more gas turbines to be built and installed that's for sure and some of those are in development stage at the moment. The issue is not though just about the turbine itself, it's is there enough supply when and where you need it? So upstream supply of gas. Or can the gas network flow enough gas at that moment that you say all the turbines have to run at the same time? And this is a really interesting and complex part of energy transition because you're saying, a lot of the gas networks likely to see probably decreasing volumes flowing through it as a lot of load gets electrified over the next couple of decades. So how would you justify an expansion of pipeline network, et cetera, for something that you only need a few percent of the time? So it's a really tricky part of the transition.

Dan Brown: I really love the work that our peers, Paul Simshauser, the CEO of Powerlink, and Joel Gilmore from Iberdrola, have done through the Griffith University, where there's an excellent paper that they've written around solving for why and really looking at the role that gas can play in our future market. Joel and Paul took effectively eighty years of weather data to try and forecast what the role gas peakers will play in our market, particularly during the orderly retirement of coal that build out of other variable generation of pumped hydro. There's about five or ten days, particularly in New South Wales and Victoria during June and July, where gas peak is absolutely fundamental to keep the lights on based on all the sort of projections out around the load growth but also through the weather patterns and other sorts of things. So it's a really interesting piece isn't it where you know the data tends to suggest that it's really important that we don't forget about gas. There's that massive challenge and opportunity, as you say Paul, to try and justify the economics of building out those aspects of the broader upstream infrastructure to be able to deliver that gas for what might only be a small number of days each year and the capacity factor of those plants are really quite low. And I know that some of our clients, through their own modelling, are looking at developing projects where they just won't run for three or four hours. They'll actually be on for eight, ten, twelve hours because they think there's going to be a need to fill that drought when the wind isn't blowing, the sun's not shining because of that time of year, particularly during June and July.

Paul Gleeson: That reminds me, there's been some great modelling done a number of times over a number years actually by ourselves and by AEMO and by CSIRO looking at, way back, the question was, could we actually build a national electricity market that ran on 100 per cent renewable energy? And the answer to that question was yes you can. But then the next question was, would it be economic to build it on 100 percent renewable energy? And what the modelling continued to show was that 80 per cent renewables, no problem, very economic. Get to 90 per cent, very economic, between 90 and 100 per cent, the cost of that last bit, if you're not going to use any fossil fuel at all, becomes extremely expensive. And a lot of that's to do with just how much storage capacity you have to build and never use. So whether it's more and more pumped hydro or more and more and batteries that you only use maybe even not even like every couple of years, the economics of trying to spread that cost across the whole market start to bear, which is why you know we see a likelihood that gas continues to play that role in that sort of five percent-ish but also noting it's five percent of a growing market as well because of more loads electrifying data centres. So when you see like why people still building gas turbine projects that's why and I think to be able to try and talk to consumers about that people who are concerned about emissions think is this a smoke screen or proxy for going back into fossil fuel and saying you know this is going to be the best way to get the most renewables into the system that we can.

Elena Lambros: The other thing I just wanted to quickly touch on, is talking about the role of nuclear in Australia.

Paul Gleeson: I think there's a couple of challenges for nuclear in Australia. Obviously the timeline when you're starting from zero, you've got no industry, you currently got prohibition in place. So you've got to turn all of that around. There's various views around there that you're looking at seven years plus just to tackle the legislative and regulatory frameworks that need be either overturned or created. And then you've got lots of data on what the actual lead time for develop, contract, construct commission is. And in some cases that's been well north of 20 years. In some countries that maybe don't have the same working environment that we do, the people have achieved that a little bit quicker. But in real terms, I think most entities out there, have sort of shown that 20 years is probably your best case. And so for me, I just want to remind everyone that we have a task right now of building out what's right in front of us, wind, solar, storage, transmission, and some gas peakers. That's what we have to be building out right now, or we're not going to get through that 20 years. So you can talk about whether or not nuclear plays a role after that, by all means. The other big challenge is the economics, right. We've talked about how far down the cost curve wind, solar and batteries are coming and they're going to keep going down there, whereas nuclear indeed is going up with installed capacity, the unit cost is going up. So how does it play a role in Australia? How does get dispatched? It's challenging. But certainly it's going to play a role in other countries. Most countries have much more constraint on the land than Australia does. That's really the key thing. We've got great wind resource, great solar resource but the thing we don't talk about too much is it's actually the space to do it and many many countries don't have that. So that's why you'll see in some countries, that'll be the only material decarbonised energy option they've got. And one other thing too I want to talk about in Australia, just the impact of rooftop solar. Most of us spend our time dealing with utility-scale projects. Most of my career has been in that utility side of the energy landscape. And so it's easy to gloss over the fact that the largest single generator in Australia now is rooftop solar. It's actually bigger than the biggest coal units that we've ever had. And it's not visible or controllable by the market operator because it's behind the metre in our houses. And so Australia now leads the world in terms of rooftop solar deployment. It's not overstating it to call it a complete game-changer. It's changed the shape of the generation profile and the demand profile across Australia. And so when you look at it now, particularly in spring and autumn... It just dominates, it produces so much energy that it pushes everything else out of the market. And so when someone talks about, let's build some baseload generators, I always look at it and think, where's it going to fit, how's it going to work? We had a day in October last year where everything got curtailed off, even the wind got curtailed off to fit all the rooftop solar in. And it's honest to accept that energy because it's the cheapest electrons we get. So again, things that can despatch and fill the gaps, when the sun's gone down, or move the surplus from the middle of the day to the evening, that's really valuable. But it's harder and harder to see a role for things that just have to run all day, every day.

Elena Lambros: Thank you. We've really enjoyed having Paul join us.

Dan Brown: Thanks Paul.

Paul Gleeson: No, thanks so much for the invite. It's a real pleasure.

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Maria Rampa: Thanks for tuning in to this episode of Engineering Reimagined. We hope today’s conversation has shed light on the complexities and exciting developments of the energy transition.

As we continue to navigate this rapidly changing landscape, one thing is certain—we’re in the midst of an historic shift.

If you enjoyed this episode, don’t forget to subscribe and share with your colleagues or anyone interested in the future of energy. We’ll be back with more insights next time, as we continue reimagining the engineering of tomorrow.

Until next time, thanks for listening.