The experience of large-scale renewables so far
The Australian energy sector has experienced a huge increase in wind and solar generation projects being built and connected to the National Electricity Market (NEM) over the past 10 years. These projects have been undertaken by a wide variety of developers with project sites being chosen, not always in a co-ordinated way (although there is increasing emphasis on the establishment of renewable energy hubs in some States), but rather primarily because of their natural wind and sun resources and proximity to the grid.
Initially both developers and investors alike were attracted to high development fees, long-term offtake contracts offered by creditworthy retailers and governments, and generous spot and forecast electricity and LGC prices.
From an equity perspective, some of these projects have been a great success, as equity investors have often reaped the rewards of long-term, above market Power Purchase Agreements (PPAs). However, on the other side of the PPAs, utility providers and governments have experienced (and are still experiencing) significant losses in light of the current low electricity spot prices.
More recently, equity investors have faced many challenges, not only in relation to electricity prices, but also due to grid congestion and a very tight construction market. They have realised their generation projects are only one part of the electricity value chain in the NEM that goes from generation all the way through to the household or end user. Additionally, in the current output only market, where you are only paid for the electricity you despatch, it is very difficult to structure a bankable intermittent asset such as a large scale renewable generator.
While the NEM is unique to Australia, many of the challenges outlined above are not, and are similarly faced by developers of renewable energy projects globally.
In response to these challenges, global developers are considering a new technology: Power to X. Power to X focuses not only on generation (the P) but also on the storage and use of that generation (the X).
"P2X" is the process by which P (ie. power surpluses from renewable energy sources such as wind, solar, biomass and geothermal) are converted to X (ie chemical energies, products and other uses such as hydrogen, ammonia, methane, syngas and other gases).
As part of the P2X process, “excess” and underutilized solar and wind resources are used to power technologies that are capable of converting available abundant molecules such as water into hydrogen; CO2 and water to methane, syngas, and oxyhydrocarbons; and air and water into hydrogen peroxide (H2O2) and ammonia.
These energy carriers and chemical products provide significant versatility in renewable energy storage (to solve its intermittency), transport, and subsequent conversion to decarbonize the energy infrastructure.
This allows developers not only to capture more of the value chain but also, through energy capture and storage, offers them a solution to the main issue with renewable energy - its intermittency. One of the concerns expressed about reliance on renewable energy is that, because of its dependence on inconstant natural resources (ie. wind, sunshine), the generated electricity is not always available when required (eg. mornings and early evenings in Australia) and also not needed when available (eg during the middle of a day in Australia).
At the core of renewable P2X technologies is electrolysis. Electrolysis utilises renewable electricity to convert an abundant molecule into the relevant X. Eg. Splitting water into hydrogen and oxygen/chlorine; splitting nitrogen into ammonia; and splitting CO2 into CO, syngas and formic acid.
The International Renewable Energy Agency (IRENA), the International Energy Agency (IEA) and Renewable Energy Policy Network for the 21st Century (REN21) have previously published a key report titled "Renewable Energy Policies in a Time of Transition", in which they recommend that global policies focus on ammonia as the best option for decarbonising shipping and long-haul road transport industries. The report also lists liquid biofuels, biomethane, renewable electricity, hydrogen, ammonia and synthetic fuels as alternative fuels key to decarbonising the transport sector.
In Australia, at a federal level the Commonwealth Government, in its "Technology Investment Roadmap", has proposed streamlining regulation to encourage private sector investment in low emissions technologies. The first "Low Emissions Technology Statement" (LETS) was issued last year.
This month, the second LETS was released. This LETS identifies six priority technologies, including "clean" hydrogen, energy storage, low-carbon materials (steel and aluminium), carbon capture and storage (CCS), and soil carbon, as well as adding "ultra low-cost solar" for the first time. These technologies span three categories, including priority technologies, emerging technologies, and enabling infrastructure.
Amongst the priority technologies, clean hydrogen and energy storage were have been identified as key areas for investment by the Commonwealth Government in each LETS.
The Government has since released its "Activating a Regional Hydrogen Industry – Clean Hydrogen Industrial Hubs Program", offering grants of up to $70 million to approved clean hydrogen hub projects.
As expected, the Government has identified the Australian Renewable Energy Agency (ARENA), Clean Energy Finance Corporation and the Clean Energy Regulator as the key federal government agencies that will help drive and implement the Commonwealth's Government policy and investment into priority low emissions technologies. Further to announcement of new policies, Australia is seeing a major increase in government and private equity funding and announcements of new project.
Australian State and Territory Governments are competing for emerging energy technology projects, with each releasing or working on a plan to attract the hydrogen industry. The most recent, and most extensive, policy was released in New South Wales in late October.
The NSW Government's Hydrogen Strategy called for Expressions of Interest for the development of commercial-scale green hydrogen projects, and committed $70 million to establishing ‘hydrogen hubs’. The Government aims to increase electrolyser capacity in the state to 700 megawatts by 2030.
Currently, there is no comprehensive legal framework in Australia targeted specifically at P and X. Different stages of P and X projects are subject to different regulatory requirements including for construction, production, transportation, storage and use. Not all of these are well adapted to development and use of new technology.
Most of the legislation which regulates P2X projects is at the State and Territory level, and varies from one jurisdiction to another. We have not yet seen much significant change to legislative requirements to facilitate P2X projects, but we anticipate regulatory adjustments in the near future. For example, the NSW Parliament last week passed amendments to its electricity and gas legislation to simplify the regulatory regime for blending hydrogen or biomethane into conventional gas pipelines, provide exemptions from some system and network charges for hydrogen production, and provide consumer incentives to switch from conventional gas to biogas or green hydrogen.
Issues such as the social licence to operate will remain as significant factors in securing project approvals even if legislative requirements do change.
However, we anticipate that, as is the case with the development of renewable energy hubs at State / Territory level, P2X project hubs may develop around key transmission and transport infrastructure (including ports to facilitate export).
In our view, while there are many announcements currently in the market surrounding hydrogen, P2X is a broader way of considering the various solutions available to decarbonise, not only generate, many sectors of our economy.
There is a broad spectrum of opportunities arising for P2X, and the current policy settings and activities of all Australian Governments are encouraging for investors.
Now is a good time to investigate project opportunities across the P2X value chain. We would welcome discussing both the projects and the market more broadly with you.