Three steps to net zero, each with its own challenges

One could be forgiven for concluding that the great energy transition is roaring ahead. The truth is that the transition is doable, but a careful assessment suggests reasons for caution if not concern.

The energy transition requires the transformation of a system that is more than 100 years old in electricity and twice that in gas. Driven by the fundamental need to address climate change, the objective of the transformation is a net-zero energy system in less than 30 years. The answer is obvious and sounds simple: replace coal and gas generation with renewables, and electrify most of our road transport and gas sectors.

If the technologies to deliver this transformation had characteristics like those underpinning the current system, life might have been simpler. The fact is the dominant low-emission technologies are distributed rather than centralised, intermittent rather than available on demand, and zero marginal cost. Herein lies the rub.

There are three phases to a successful transition, each with its own challenges. The first was to build a credible platform of low-emission technologies that can produce affordable low-emissions electricity at scale. This problem has been solved. The answer is solar PV and wind power in a country that has lots of both. Government policies and technology development have achieved a position where about a quarter of our power comes from them. So far, so good.

We are now into the second phase. We need to scale up and connect the solar and wind power nationally, and close most of the supply powered by coal and gas while maintaining reliable and affordable supply.

A reliable system with at least 80 per cent to 90 per cent solar and wind, no coal, and a modest amount of gas can be achieved at modest cost. But to do so, we must break the back of three tough immediate problems.

A reliable system supplied by solar and wind power requires a combination of energy storage and fast-start (“dispatchable”) capacity that is available on demand. The Turnbull government developed its National Energy Guarantee policy in 2017 to deliver both low emissions and reliability at low cost. It had broad support from suppliers and consumers but was abandoned in 2018 due to the internal politics of the Coalition.

Since then, state governments have continued to drive growth in renewable supply, prices have generally trended down, and coal-plant closures have been brought forward. However, governments and the industry have failed to agree on market reforms to deliver and pay for dispatchable capacity. In the meantime, partly in frustration, some governments have decided to intervene unilaterally. If that continues, the result will be greater uncertainty and higher cost.

The second problem is to build the transmission grid that can connect widely distributed solar and wind power and storage, and move electricity as needed to manage weather-driven variability. Some progress has been made at a state level towards the creation and connection of renewable energy zones, and interconnections are being built, such as EnergyConnect between NSW and South Australia. But it’s not been a smooth journey.

One barrier is reforming the market to enable generators to build and connect to the grid with the confidence that they can achieve an acceptable financial return. In addition, there is no agreement on how major interstate connections, essential in a high-renewables grid, will be paid for.

The third immediate problem has arisen from the extraordinary rate of adoption of rooftop solar by Australian households, such that more than a quarter of homes have solar on their roofs, a world-leading position. As with large-scale wind and solar power, our regulations and system management capabilities have not kept pace with this growth.

Output from rooftop solar on some days is leading to record low or even negative demand from the grid. Not only does this require new management practices, but we also need tariff structures that encourage this electricity to be stored when it is in excess supply, so it can be used at other times. Plugging in thousands of electric vehicles and electrifying the gas network will add to this problem, so we need to get moving.

These three critical issues have been on the agenda of the Energy Security Board for several years, and the Energy National Cabinet Reform Committee (the national council of energy ministers) is expecting final recommendations this year. Industry consultation has been extensive, and options have been identified, but none has yet been endorsed. Time is not our friend.

The third phase of Australia’s energy transition is the end game – a net-zero electricity system. The best information today indicates that achieving net-zero emissions in the NEM will be most efficient if a small and declining quantity of emissions are offset.

The alternative – achieving absolute-zero emissions – looks more costly. If the proportion of renewables were to grow from 90 per cent to 100 per cent, the physical and economic challenge of balancing the system during rare, sustained periods of high demand, low wind and cloudy skies would become too big.

Gas generation with offsets looks to be the lowest-cost “backstop” solution, playing a critical, but not expanded, role: the NEM faces a gas-supported transition, not a gas-led recovery. Yet this role has its own challenges: complex logistics and economics to supply a network of lowly utilised gas power stations, possible high future prices of offsets, and high costs of carbon capture and storage unless the storage is close to the gas generators.

Alternative zero-emissions technologies, such as hydrogen-fired generation, coupling a renewable-electricity grid with a renewable-hydrogen grid, or one of the emerging nuclear technologies such as small modular reactors, have daunting technical, economic, and/or political challenges.

Some combination of such technologies will also be needed to replace gas as a chemical feedstock and a source of high-temperature heat.

The third and final phase may be 20 years away, or the climate change imperative may dictate a much faster transition. Either way, the best solution will not emerge miraculously, even with the federal government pledging $18 billion towards low-emission technologies over the next decade.

The task to solve this problem and advise on deploying investment should be given to the Energy Security Board, working closely with the Low Emissions Technology Advisory Council. Emissions-reduction policy and the electricity market framework will still be needed to accommodate the technology developments that will best close the final gap to a real zero-emissions future for the NEM.

In summary, a successful energy transition urgently needs the federal energy minister, working collaboratively with their state and territory colleagues, to drive short-term market reforms and longer-term technology development.

Failure will mean slower, uncoordinated policies and investments, higher cost, and the risk of shortages. Success will position Australia as a global leader in the energy transition. It is a prize worth fighting for.