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The ESG Brief - How the net zero transition might transform Australia
37 Plays2 years ago
In this edition, Paul Bloxham, Chief Economist for Australia and New Zealand and Global Commodities, reflects on Australia's efforts to kick-start its energy transition. Disclaimer: https://www.research.hsbc.com/R/51/vVSBVPt Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Introduction to HSBC Global Viewpoint Podcast
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
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The following podcast was recorded for publication on Monday, the 7th of August, 2023 by HSBC Global Research.
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All the associated disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Australia's Challenges and Opportunities in Energy Transition
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Hello and welcome everybody to the ESG Brief by HSBC Global Research, focusing on environmental, social and governance issues and the latest views from our team of economists, analysts and strategists.
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I'm Jack Reed.
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In this edition, we're going to explore two challenges faced by one country in the transition to a net zero world, Australia.
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First, can Australia meet its own carbon cutting commitments?
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And second, can it one day play the role of a superpower in the global energy transition?
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On the face of it, neither seems an easy win for Australia, which is of course the world's second largest exporter of liquefied natural gas and one of the world's biggest producers of coal.
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To explore these questions and look at some of the research we've done on these subjects, I'm joined by Paul Bloxham, our Chief Economist for Australia and New Zealand and Global Commodities.
Australia's Role as a Major Commodity Exporter
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Paul, welcome to the ESG Brief.
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Where does Australia fit into the energy equation of the world today?
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Well, Australia is a very large exporter of commodities into the global system.
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We are the single largest exporter of iron ore in the world.
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The same with coking coal.
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We're the second largest exporter of thermal coal and one of the largest exporters of liquefied natural gas.
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And those are the main exports that Australia puts into the global system.
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A lot of them we sell into Asia.
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And so at the moment, we're a very large producer and exporter of fossil fuel products to the rest of the world.
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And
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I guess the most interesting things are going to be around how we are going to then transition from that to selling the other products that we can produce, which are both renewables energy itself, because we've got a geography that's very supportive of that story.
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And also, of course, Australia has got a lot of the sort of critical mineral resources that are part of the energy transition.
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So we are a big part of both that fossil fuel story, big energy producer, but also an increasingly important part of the energy transition story as well.
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From Australia's perspective, which of these minerals are key in the transition away from fossil fuels?
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Well, so we've got big reserves of the sorts of things that are in demand as we make the energy transition globally.
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One of the ones where we've seen a lot of investment recently has been lithium, obviously, which goes into the production of batteries.
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Australia is the largest exporter of lithium at the moment.
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It produces 53% of the world's production.
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We have the second largest reserves, resources available.
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And lithium's had a lot of investment going on recently.
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It's gone from an industry which
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exported about a billion dollars worth of lithium in 2020 to estimated about 20 billion dollars this financial year.
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So that's quite a step up, but it's not the only one.
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We've also got the rare earths.
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We've got the largest reserves of nickel, the world's second largest reserves of copper.
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We have reserves of cobalt.
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So there's a large collection of the critical minerals that are part of the energy transition story.
Shifting to Renewable Energy and Critical Minerals
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that Australia has in reserve and there is investment going on in that space already.
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So fortunate to have big reserves of those minerals, plus there's great sunshine.
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Yeah, so I think this is a really critical story for Australia.
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We're a very large country, obviously a continent, but very sparsely populated.
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So there's a lot of space for putting solar panels and wind farms in place.
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It turns out we've also got very high quality solar.
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So not many people, lots of space and high quality solar...
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It's a sort of strong set of ingredients for being a large producer of renewable energy using solar.
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And then, you know, we've got a lot of wind, particularly on the south of Australia.
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You know, we're in the roaring 40s at that point.
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And so there's a lot of opportunity for potentially producing electricity using wind power as well.
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So if you look across the world, what you're looking for is countries that can produce solar and wind, but also have low population density.
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So it's actually feasible to build that sort of capacity in the locations that's required.
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So here you have a country packed with key resources, lots of sunshine, all valuable in the energy transition.
Policy History and Renewable Energy Adoption
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And yet, as you noted in your most recent research poll, Australia is a bit far back from the front line of net zero policy.
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How do you explain this?
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Well, a lot of this has to do with the fact that we are a large exporter of coal and gas, and there's a lot of vested interests in those industries.
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We've had a very checkered period of policy changes in terms of managing the energy transition.
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Back in 2012, they introduced legislation that put in place a carbon tax.
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But then we got a change of government two years later in 2014 and actually repealed the carbon tax.
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So the whole of the policy that was moving in the direction of making the energy transition then got unwound for a period of time.
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And it's not been until last year, 2022, when we got another change of government that we actually saw Australia as a nation commit to net zero for 2050 and start to put in place more policies to try to achieve that.
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And that's really good news that that's what we're doing.
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I mean, I guess I look at it in two ways.
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One, yes, we are behind in terms of making that the energy transition ourselves.
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But that also means that there's massive opportunity for investment as we do seek to do that.
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Part of the challenge though is that even with the policy changes we've seen, the current set of policy arrangements is not sufficient yet to even meet the goals that they have set for getting carbon emissions down by 2030 or the net zero goal by 2050.
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So there's more work to be done.
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Let's look at Australia in terms of the rollout of solar power and electric vehicles.
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How does it stack up against other nations in the OECD?
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Yes.
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So if you look at Australia's own progress in terms of decarbonisation, it's the case that only 32% of Australia's electricity at the moment is produced using renewables.
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And it's still the case that 47% comes from coal.
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And then if you rank Australia relative to other OECD economies, that makes us 26th out of 38 OECD economies.
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And likewise, with electric vehicle adoption, it's been very slow as well.
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It only accounts for
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4% of motor vehicles on the road in Australia.
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And if you compare those numbers, I think in Europe, it's more like 21%.
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And in the UK, it's 15%.
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So we are still behind.
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We're moving in the right direction.
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But there's a lot more that's yet to be done.
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big distances in Australia.
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What's the charging infrastructure like?
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Is EV travel actually practical yet?
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Yeah, so that's exactly right.
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The problem at the moment, at least in terms of electric vehicle penetration, is that the networks are still quite limited.
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It isn't standard practice, and that needs to be expanded almost ahead of encouraging a widespread use of electric vehicles.
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I think
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The other challenge is that Australia is a very big country, of course, and people travel larger distances often.
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So that also at the moment makes electric vehicles a little bit less likely to have as much as rapid a penetration as perhaps more sort of other countries that are potentially a bit smaller.
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There is active moves to try to
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increased subsidies on electric vehicles.
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But it's, as I say, the progress is in the right direction, but it's not, we haven't gotten very far as yet relative to other countries.
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There's still a lot more to do.
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So you say, but what policy successes can you point to in the past year or so to give us some hope?
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So moving even in the right direction has been something that I think I would flag as positive.
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And so setting targets to try to achieve carbon decarbonisation.
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The other one I think that is a bit unique for Australia is...
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while the proportion of energy, electricity, energy generation using renewables is still only rising and it's still only 32%, as we said earlier.
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It's coming about in a little bit of a unique way, and that is we have a lot of rooftop solar.
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And so, in fact, we're the world's leader in terms of the proportion of households that have got their own rooftop solar panels.
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And again, it's sort of partly because that's something that's feasible in the country.
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There's a lot of solar.
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And so it's been a bit of a different pathway.
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That's actually been one of the ways in which Australia is moving faster towards using renewables is having individual rooftop solar that is then...
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sold back into the network if you use excess electricity, if your solar panels produce excess electricity through the day, it can sell it back into the system.
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And then likewise, you buy out of the system if you haven't produced enough at the peak periods.
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But it is a little bit of a different model in the way it's working.
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And what that also means is less need for large transmission and so, you know, less large capacity to transmit long distances because you're actually the source of the electricity is exactly where it's being used in a lot of cases.
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So that's one of the more unique features of Australia.
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And that is being assisted by state and federal subsidies to support that program as well.
Australia's Future in Global Energy Markets
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Okay.
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Now, in your role as HSBC's chief economist in Australia and New Zealand, you are talking this story to the international investment community.
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What are the questions coming back to you?
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So global investors ask about what is going to happen to Australia when the world is no longer using as much coal or gas.
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And given that we are a very large exporter of coal and gas, it seems like an obvious question that there's a concern.
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What's the growth story going to be for Australia once the energy transition occurs globally?
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And I guess my first answer is, well, the energy transition is going to take multiple years.
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It's a long term horizon story.
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And at least in the short run, the demand for gas and coal is actually quite high because we need to continue to use it to produce energy globally, particularly in the emerging economies and China in particular.
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And so and we're not investing in much new large scale capacity to produce these products.
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And so
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the price of these products is actually going to remain more elevated.
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We think that that's likely.
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And of course, the demand is going to be there.
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So at least in the short run, that's not such a negative story.
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But it certainly is the case.
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Eventually, there'll be a transition away from using these products to using other products, renewables.
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And I guess then I get to say, well, Australia's also got huge capacity to produce renewable energy using solar, using wind, and then we can use it to make our own energy transition.
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But also there are other ways we can use it too.
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One way of that happening is by using that green energy to produce so-called green hydrogen.
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That is one of the keys that you've raised in terms of Australia's energy transition.
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Well, Australia's already...
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The first country to basically to have exported hydrogen to Japan.
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There's investment going on in that space.
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And if you look at the estimates from the International Energy Agency, Australia is forecast to be, by them at least, the largest exporter of hydrogen in the world by 2050.
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So there's quite a lot going on in that space already.
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There's obviously a lot of scope for investing in that space and that will help us to transition.
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That's not the only area though.
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We've got to think also about, we've talked about this a bit already, the critical minerals, which there's more investment going on in capacity to export those products and they'll be in demand.
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And then there's another element of this, not just exporting the renewable energy in the form of hydrogen, but
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But Australia is both a large producer of iron ore and I might add bauxite, which produces alumina and then aluminium.
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A large input into the production of turning these things into steel and into aluminium is electricity, is energy.
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And Australia could potentially be a large exporter of these these processed minerals using using renewables.
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And there are experts here in Australia who write about this, and I think this seems about right, that the comparative advantage Australia has right now in selling fossil fuels to the rest of the world will be outweighed by our comparative advantage in being able to sell.
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produce renewables that we can combine with the metals we have and then potentially sell processed minerals into the global system that are produced using renewables.
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Now this is a much longer term story and there isn't much evidence of it happening quite yet but you can certainly see the ingredients in place and the structures in place and we have the geography to support that story.
Australia's Potential as a Renewable Energy Superpower
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Okay, so this is the superpower opportunity that some observers in Australia are describing.
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Yes, so that goes beyond, I guess, the question of whether Australia itself makes the energy transition and is able to do that for our local use.
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It heads much, much more into that direction of Australia could be a large exporter of renewables energy through processed hydrogen,
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Potentially also through direct cables that could be laid between our Northern Territory and Asia.
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There's discussion and a potential project out there at the moment in that regard that could sell electricity directly into Indonesia or into Singapore.
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and then processing of minerals using renewables and then selling those into the global system and therefore making us into an energy superpower as it were or a renewables energy superpower.
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We already are a large exporter of energy products in the form of coal and gas.
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So there's certainly ambition there and there's certainly scope and what is needed obviously is the investment to make that happen.
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So there are, as I said, when I get these questions from the global investors, the answer is Australia is indeed a lucky country because we don't just have the fossil fuel resources.
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We also have both a geography and the resources associated with the renewable story as well.
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Paul, super interesting insight into a path away from fossil fuels for Australia and a possible path toward becoming an energy transition superpower.
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Thank you very much.
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Thanks, Jack.
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Enjoy the chat.
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That is the ESG Brief.
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The ESG Brief is one of three podcasts produced here.
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We showcase some of the research that is coming from our global team of analysts, strategists, and economists.
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There's the Macro Brief, which is available every Friday with only a few exceptions, wherever you listen to your podcasts, including Apple and Spotify.
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And under the Banyan Tree, our weekly focus out of Asia that's hosted by Fred Newman and head of Asian equity strategy, Harold Van Der Lindeck.
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Thank you very much for listening.
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We'll be back soon.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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