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The world has entered a technology race for decarbonisation. Green hydrogen, the ‘electrification of everything’, batteries, electric vehicles (EVs), hydrogen fuel cell vehicles, international grid connectivity, and heavy industry decarbonisation are just some of the new lexicons.

There is a newfound heightened interest in decarbonisation

The extreme fossil fuel price inflation of late means there is a newfound heightened interest in decarbonisation, including energy security against volatile fossil fuel imports and securing new investments and jobs in the domestic context. The superior economics of renewable energy are also increasingly clear and stranded asset costs are being increasingly priced in by financial markets.

COP26 is about implementation and the actions of this decade. We don’t need a new Paris Agreement treaty – we need a global ratcheting up of ambition. And that is what we are seeing – there is a pull forward in ambition timetables as the race accelerates, and the costs of inaction are more evident in more frequent, more extreme weather events.

Capital flight is moving – now is the decade of accelerated action

The April 2021 announcement of the UN-led Financial Alliance for Net Zero by 2050 at the latest was a profound game-changer. And thanks to the International Energy Agency (IEA)’s May 2021 Roadmap, everyone is now clear on what net zero emissions and 1.5°C means – no new oil, gas or coal globally, with immediate effect.

This Financial Alliance has grown rapidly in global significance, with a 30% growth in assets under management (AuM) to $90 trillion in the four months to September 2021.

In October 2021 alone, AuM rose to over US$100 trillion as the Japanese insurance sector majors joined, as did JPMorgan Chase, Wells Fargo and Goldman Sachs, plus six top Canadian banks – all historically massive fossil fuel financiers. And separately, the Bank of China pledged to cease new coal finance abroad, and India’s Federal Bank committed to a coal phaseout, the first Indian bank to do so.

Global finance has radically shifted the goal posts in 2021

As BlackRock CEO and Chair Larry Fink has repeatedly said, there is a tsunami of asset reallocation underway, provoking increased excitement in the massive investment opportunity, further articulated this week with his reference to the next 1,000 unicorns to come from cleantech.

Global finance has radically shifted the goal posts in 2021. It would be silly to bet against the collective US$100 trillion pledging to 1.5°C  – five times the U.S. GDP.

With most financial institutions struggling to determine how to now implement their pledges, we can expect ongoing rapid capacity building to deliver financial risk and fair disclosures and accountability to investors to ensure commitments with substance, not hollow words. The US Treasury’s Financial Stability Oversight Council is now working closely with the Securities Exchange Commission (SEC) to ensure this.

New technology innovations provide investment opportunities

As Germany found in solar, there has been first-mover disadvantage in terms of the resulting ongoing capital cost deflation of renewables. However, only by learning by doing can you build capacity, technical knowledge and policy frameworks in the domestic context.

Massive ongoing technology improvements and deflation have surprised everyone. For instance, five years ago it was said that variable renewable energy could only be absorbed into the grid at a 10 or 20% share. Now, the Australian Energy Market Operator (AEMO) is preparing for 100% instantaneous variable renewable energy as soon as 2025, historically considered impossible, now inevitable.

We are now accustomed to ongoing technology improvements

Massive public capital support across the EU, South Korea, China and the U.S. will overcome the first mover capital disadvantage. And times have changed. We are now accustomed to ongoing technology improvements in batteries, and the ongoing scaling up in solar wafers, modules and EVs. The share market reflects this in its endorsement of world leaders, like Tesla.

Global corporate and financial leaders like India’s Reliance Industries and BlackRock are building capacity at a huge rate of knots. And there are more advances which make me very bullish. For example, global electrolyser capacity is going to expand twentyfold in the next 2-3 years, driving down the capital cost hugely, and:

  • Fortescue Metals Group (FMG) just announced plans to build a 2 gigawatt (GW) factory for Gladstone, Queensland.
  • Electrolyser producer ITM Power of the UK raised £250m two weeks ago to build 5GW by 2024.
  • Germany’s Thyssenkrupp this month also announced plans to boost its total annual electrolyser production capacity to a massive 5GW from its current 1GW.

Recent prices show fossil fuel supply chains are a global weakness

The tenfold increase in global LNG prices, and the flow-on fivefold increase in coal prices in just 12 months, shows the fossil fuel supply chains are a key global weakness.

Extreme fossil fuel price volatility is combining with capital flight to put energy security concerns front and centre in policy framing.

Although Russia is playing games with the EU by restricting gas flows, it is the massive resurgence in heavy industry and construction activity that underpins the 12% rebound in China’s economy post COVID-19 that has done the most to stretch energy supply chains.

Greater attention must be given to diversity of supply and greater domestic reliance

The current market is good for Australian fossil fuel exports, near term. However, a warning – India, Vietnam and China are likely to respond by accelerating domestic investment in zero emissions alternatives to protect their own energy security.

Going forward, greater attention must be given to the need for diversity of supply and greater domestic reliance, be that offshore wind in the UK, floating offshore wind in Japan, or a massive surge in solar deployments in India. More batteries and EVs will result, and more international grid connectivity. There will also be a premium on GH2 and ammonia.

Renewable energy investment and supply is now a financial construct with known stable costings, contrasting markedly to the extreme commodity price volatility of fossil fuels.

Australia’s net zero announcement is short on substance which will affect capital inflows

Australia needs credible national policy certainty but in the ongoing absence of that, the states are leading and as a result, have a number of the world’s largest zero emission energy investment proposals, including:

  • Yara Pilbara fertilizers, building one of the world’s first industrial-scale renewable ammonia production operations in Western Australia.
  • CWP Global’s Asian Renewable Energy Hub, proposing a clean energy hub to be built in three phases in Western Australia to produce up to 3.5 million tonnes of green hydrogen or 20 million tonnes of green ammonia annually for both domestic use and export.
  • SunCable, building the Australia-Asia Power Link to send solar energy from the Northern Territory to Singapore via a high voltage direct current (HVDC) transmission system, capable of supplying up to 15% of Singapore’s total electricity needs.
  • Fortescue Metal’s massive green hydrogen push, with hopes to produce green hydrogen at commercial scale as early as 2023, and plans to use much of that to make green steel in Australia.

A rising national price signal on carbon dioxide (CO2) is likely to unlock further investments.

The resistance and disinformation efforts of the incumbent fossil fuel firms is failing

Just this year, the voluntary carbon offsets price rose to such an extent, it has doubled the official price in Australia. Ongoing international trade tensions will likely see the Carbon Border Adjustment Mechanism and implied prices on carbon in new investments accelerate the tsunami of capital reallocation.

The resistance and disinformation efforts of the incumbent fossil fuel firms is failing. Global finance deals in facts. Lobbyists’ spin clearly works on politicians and can confuse the electorate, but finance needs the clarity of facts to manage the risk-return hurdles needed to deploy the IEA’s $4 trillion in annual new investment.

A price signal is the logical, least cost method. The U.S. suggestion of a US$1,500/t methane fee this week looks simple, and entirely logical.

Nailing climate policy certainty brings huge opportunities for Australia

The well-coordinated regulatory oversight of climate’s financial risks in Australia by the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) is excellent. These bodies recognise the need for far greater oversight of corporate and financial disclosures to protect investors from greenwash.

The RBA recently reinforced that for a liveable planet, global demand for Australia’s LNG is likely to halve by 2050, and for coal, by more than 80%.

There is a growing clamour of voices telling federal government that the investment, employment and export opportunities are huge, if it would only move.

Australia will almost inevitably become a world renewable energy superpower

Once climate risk is accepted, Australia will almost inevitably become a world renewable energy superpower.

The country has exceptionally strong wind and solar resources, massive landmass and low population densities, capital market depth, and a position as a trusted stable global supplier of key commodities. The country will likely become a world leading supplier of lithium, copper, nickel, rare earths, green iron, green ammonia, green hydrogen, and green aluminium.

Australia needs to stop being the quarry to the world and to do some resource value-adding before exporting its commodities. It needs to build key trade partnerships and assist our trading partners to deliver on their decarbonisation pledges.

A 500% renewables target is an entirely feasible outcome that will lock-in massive ongoing energy system deflation. This is clearly a more positive future position than the fossil fuel volatility of the last few years, coupled with the rising costs of massive fossil fuel subsidies and the resulting erosion of Australia’s democracy.

The technology-driven opportunities are huge, while the costs of ongoing inaction are rising.

Tim Buckley is director of energy finance studies with IEEFA Australasia.

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Tim Buckley

Tim Buckley, Director, Climate Energy Finance (CEF) has 30 years of financial market experience covering the Australian, Asian and global equity markets from both a buy and sell side perspective.

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