Achieving net zero requires a new industrial revolution

Not only is Australia looking at a new industrial revolution with the commitment to net zero, but the government has now imposed a firm emissions target and carbon budget on this revolution.

Few people yet appreciate the magnitude of what’s ahead. If we err on the side of unrealistic gloom or naïve optimism, we will fail. Success will come only from hard-headed analysis, clear planning, and relentless execution.

Every sector of the economy will be affected. Inside the next 30 years, we must: reinvent and dramatically expand a century-old electricity system; abandon a gas system that is close to 200 years old; adopt new technologies across all modes of transport; transform the way we make iron and steel, cement and concrete, alumina and aluminium, fertilisers, and explosives; and make big decisions on the food we eat and how it is produced.

Every one of these changes would be significant. Together, they justify the label of a revolution.

An effective and affordable transition to zero-emissions energy is central to a successful revolution. Australia’s distances and current dependence on fossil fuels for our domestic economy and exports mean we have bigger challenges than many other countries. Yet our comparative advantages in renewable energy and mineral resources give us a globally significant opportunity.

The 2022 energy crisis provides a glimpse of the challenges involved for the Labor government that has made these big policy commitments and must deal with the challenges and opportunities. A toxic mix of weather patterns, supply chain disruptions, and geopolitics led to alarmingly high electricity prices and disruption that triggered suspension of the market. There was little the government could do to prevent the problems, and the worst impacts on consumer prices are yet to be seen.

Concurrent with this crisis, it became clear that little progress has been made on energy market reforms initiated more than five years ago and critical to a successful transition.

The window of opportunity for the Labor government is open. As the Prime Minister has publicly recognised, the opportunity must be seized before that window closes, as it will.

There are five areas where the challenges are clear and where actions by governments will determine how well Australia meets and benefits from this industrial revolution:

• Transmission and storage infrastructure must be rapidly built to support a system increasingly dominated by solar and wind generation – as much as 82 per cent by 2030. The easiest part of this challenge has been met, largely because the existing grid could support more renewables than many anticipated a few years ago. That capacity has been largely exhausted. This is not a financing problem. Governments and regulatory bodies must lower the planning and regulatory barriers.
• Since the 2017 Finkel Review into the security of the electricity grid, there have been concerns that the existing electricity market does not provide clear incentives for investment in capacity to ensure power is always available. Energy ministers recently removed the development of a solution from the responsibilities of Energy Security Board. They must now develop a solution: either a full-blown market for capacity alongside the wholesale electricity spot market; or one of several alternatives such as some form of capacity reserve.

Alongside that, the federal and state energy ministers must decide whether a formailised mechanism is required to drive the exit of coal generators in a way that avoids disruption to supply and/or nasty price spikes.

Gas with carbon capture and storage (CCS) or offsets currently looks to be the only viable solution to ensure supply reliability in a grid with 90 per cent or more renewables.

This is because storage will be required for extended periods of low solar and wind supply. This problem may be more than a decade away. Technology development and analytical work is needed now to identify and plan for the best solution.

• Gas has played a valuable role in Australia’s energy system for about 200 years, in the form of natural gas for the past 50 years. But low-cost domestic gas supply has been diminishing, and gas contributes an unsustainable 20 per cent of Australia’s carbon emissions. Electrification of gas networks seems a clear answer for households and small businesses, but governments are struggling to manage such a transition.

Replacing gas where it is valued for high-temperature industrial activities or as a feedstock requires rapid development of replacement technologies, including hydrogen.

• Over the past decade, governments and industry have been excited by the potential of hydrogen to solve some of the energy challenges. There has been little progress in identifying the best uses of this potential, or in discarding the least likely. While much of the task can be left to the private sector to reap the benefits from commercialisation, the scale of the potential applications and the pace at which the potential needs to be resolved suggest the need for greater government/industry co-operation and industry policy.
• Legislative responsibility for Australia’s energy system is spread across federal, state, and territory governments. The value of an integrated system increases significantly with increases in supply that is intermittent and widely distributed. In recent years, co-ordination and co-operation of policy across jurisdictions has been patchy or non-existent.

The recent agreement by energy ministers to establish a National Energy Transformation Partnership is a welcome move. Making this partnership a reality that deals with multiple policies and programs will be a major challenge. It’s a challenge that must be met.

This policy agenda will not be delivered the way we are going. It can be delivered if there is clear focus on these relatively small, but mostly very tough, actions. Leadership from the federal government, partnership with the states and territories, and co-operation with industry will be necessary elements of success.

The Albanese government has begun well. It has legislated the climate-change target and budget, and avoided knee-jerk responses to immediate problems. But the opportunity window will remain open only until the next crisis – and that crisis will be sheeted home to this Prime Minister and his ministers. They need to be very focused.