How Australian energy companies can chart their own future

It’s been a turbulent few weeks for Australia’s energy industry.

The 2020-21 Federal budget delivered around $2.5b to the sector, but its areas of focus, including gas and hydrogen, have driven mixed reactions from within the industry and beyond. The government’s technology roadmap extended funding of the Australian Renewable Energy Agency (ARENA), but with an expanded mandate change to consider technologies beyond wind and solar, including gas and carbon capture.  

Meanwhile, AEMO has released its Integrated System Plan (ISP), a 20-year blueprint which gives us a glimpse of what Australia’s energy future may look like under five different energy scenarios. The ISP flags the investment required to enable what it describes as “the biggest and fastest transformational change in the world”, including in building and upgrading transmission lines across the National Electricity Market (NEM).

But despite these announcements and support for multiple technologies, clarity about the way forward is still missing from our energy market.  This lack of clear policy direction and no commitment to achieving net zero carbon emissions are undermining investor confidence and depriving Australia of least  $60b in new investment opportunities, according to economic modelling.

At the same time, our major trading partners are ramping up decarbonization ambitions, with China pledging to achieve carbon neutrality by 2060. The global move to cleaner energy has multiple implications for Australia’s energy sector, beyond the more obvious drop in demand for coal from China. Will foreign owners of Australian energy assets redirect their investment if we don’t step up efforts to accelerate the energy transition? What we do know is that while policy action can drive an ‘orderly transition’, government intervention in the energy mix may derail it. The energy sector is wary of government plans to build a new gas-fired power station – a new plant that injects more electricity than needed into the NEM will distort the market and slow down the energy transition

Finding a path Define your own future

Amid uncertainty, utilities have had no choice but to take control of their own future. This is not easy and means having both the courage to forge a new path and the flexibility to course correct as policies evolve. It wasn’t long ago that the energy sector was considered as slow to change. Now, agility is a prerequisite to operating in an industry and a market where disruption is a given.

What is also clear is that it is the energy sector itself which must take responsibility to lead the energy transition. Of course, the government will continue to have a leadership role, hopefully by adding climate commitments, but companies cannot wait for its cues. Instead, we’re working with energy companies across the country to determine their direction and set a long-term plan that outlines their transition to a net zero emission economy.

For generators this means becoming fundamentally different businesses as the generation mix moves away from coal and towards a mix of renewables, with some natural gas. Companies will need to consider how to best restructure the business to make the most of new revenue streams while planning for asset retirements. Opportunities are plentiful – including exploring hydrogen and investing in grid-based storage – but the challenge will be determining and committing to a new strategic direction.

For retailers, the challenge is serving both corporate and household customers whose needs and behaviours are changing almost beyond recognition. More and more customers are becoming prosumers - generating electricity on rooftops, storing it in batteries and selling power back to the grid. How will retailers offer value-added products and services to consumers – while keeping prices down? We see an urgent need to build new business models, optimize processes, capabilities and technology if retailers are to be ready to engage in this market, and adapt to new technologies.

The role of the distribution network is morphing from interconnector to integrator, as the exponential rise in distributed energy penetration creates a new bidirectional electricity model. Bringing stability to this more complex system requires networks to deploy the technologies that deliver visibility across the low voltage network, keep voltage within safe thresholds and ensure consistent, reliable service. 

The success of Australia’s energy transition depends on the ability to bring renewable energy into the grid quickly and efficiently.  Investment in transmission operators has been acknowledged as critical by both sides of government and, as highlighted in the ISP, ongoing upgrades to infrastructure will optimize the NEM for the future energy market. 

 And all utilities must accelerate the digitisation that will deliver the insights into customer behaviour, asset performance and network activity that will enable faster, better decision making and deliver better commercial outcomes. At EY, we say it’s about “being digital”, not “doing digital”. This means making intelligent investments in the right technologies, including the Internet of Things, artificial intelligence and machine learning, and the capabilities and skills to support them.  

Utilities must also strengthen their social licence to operate in a world where the environmental, social and governance (ESG) agenda is more prominent than ever. We’re helping energy companies set bolder ESG goals to create long-term value for the organisation, their stakeholders and society.

These changes are all part of utilities’ shift from passive to proactive – to moving through uncertainty to design their own future. And ultimately to build a better working world. 

At EY, we’re proud of our long-term partnerships with the Australian energy industry. Our team work passionately alongside clients to co-design their own transitions and navigate uncertainty.