Notes on NEM energy transition – week of 8th March 2021
Notes on NEM energy transition – week of 8th March 2021
The intention of these notes is to jot down a series of ad hoc thoughts about the energy transition – both in Australia and globally. Views are very much my own and not Aurora’s. I suspect there’ll be a lot of recommendations of podcasts, articles, etc rather than original content in these notes over time.
- Demand forecasting. Aurora ran a survey of our subscriber base in the Australian market to get a sense of where they sat on some of the key drivers of long-term energy prices. Everything from EV penetration to coal closure timelines to WACCs to technology costs. Very interesting to see where a bunch (+70) of informed market participants sat on a range of issues, and some reasonable variation – particularly on rooftop solar penetration levels, gas prices, coal closure timelines, and govt policy – all of which could swing future energy prices significantly
o The survey results on operational demand struck me as the most interesting. From what I can see most of the market forecasts + AEMO are all in a fairly narrow band – at least in our ‘central’ view of the world we see demand staying relatively flat. Demand forecasting is hard (long-term forecasting = hard is going to be a common theme in these notes), but my sense is that most forecasters are loathe to do much more than draw a straight line from the last 3-5 years and then back-solve population/ GDP growth, EVs, energy efficiency, BTM generation, etc to deliver that outcome as an input – many having been burnt overestimating future demand increases over the last 10-15 years
o These flat demand forecasts are sharply at odds with the analysis that looks at what net-zero economies mean (basically, electrify everything) which would imply at least a doubling of operational demand from today’s levels by 2050 (potentially throw in significant extra demand for hydrogen as well) – see Ross Garnaut’s work in this space, as well we ClimateWorks’ report on net-zero Aus economy. Basically, they argue we’re set for a sizeable structural shift
o Which is all a roundabout way of saying that embedded in the forecasts of much this country’s energy analysis is a deep pessimism about Aus’ ability to get to net-zero
o To the credit of various state govts we work with, they are increasingly orientating modelling (at least some scenarios) around material demand growth to hit net zero, not just in energy systems, but across the economy
o Having said that, trying to get a wholesale price forecast with 2x demand by 2050 through a (rightly) conservative project finance credit committee would be v difficult. This creates a bit of a chicken-and-egg loop – if we can’t build investment cases that are consistent w all the parameters that drive net-zero, we decrease the likelihood of reaching net-zero
o I’ll write a little about variance in survey responses on WACCs next time as I think WACCs was the other area where there was a significant diversity of opinion amongst Aurora’s subscriber group, alongside demand
- Green New Deal. Good interview w one of the lead authors of the Green New Deal – the explicit tying together of the ‘green’ and ‘jobs’ narrative is very apparent in the Biden administration approach. This was v much the approach of Minister Kean and the NSW Roadmap, too. The parallels between fixing climate and WW2 + COVID response are interesting, too:
o https://noahpinion.substack.com/p/interview-saikat-chakrabarti-creator
o Non-energy related, but the AOC recruitment story is incredible, as well
- Energy modelling. While we’re on the US, this is a great podcast with Dave Roberts (who does the excellent Volts blog) and Jesse Jenkins out of Princeton. 1.4hrs of reasonably dense energy modelling discussion. Some v smart observations about the limits of modelling, and about the comms around modelling results:
o https://www.volts.wtf/p/voltscast-jesse-jenkins-on-energy
o To the above point, Jenkins talks about adjusting modelling to produce outputs that are relevant to politically driven decision-makers (e.g., jobs in regions) rather than just somewhat arid social welfare outputs
o As an aside, I’ve gotten to know Chris Greig (also at Princeton) a little and he, along w Jenkins and a pile of others, is the author of the ‘Net Zero America’ report which really is an incredible bit of analysis – I’ve been working my way through it slowly, but v much worth a detailed review:
§ https://acee.princeton.edu/rapidswitch/projects/net-zero-america-project/
- Deep decarbonisation. This is from Guy Newey (who used to be No. 10’s energy guy). He’s excellent and this is v good on options and advice to get to deep decarbonisation in power system – noting UK has already gone from approx. 550 gCO2 per kWh to 200 gCO2 per kWh over the last 10 years, whereas Aus (I think last time I checked) is still at approx. 700 gCO2 per kWh:
o Having said it’s very good, the slight struggle I have with these types of pieces is that advice like “getting markets closer to consumers” & “you need to consider reform as part of the whole energy system” is sound, but I’m just not sure what that looks like in reality. Nor how you get from A (fairly centralised markets) to B (decentralised, consumer-led markets) without severe disruptions to the whole system (and the network of financing and contracts that surrounds it). On that note, Newey also seems to want fully nodal, real-time wholesale energy markets + decentralised reliability – some enormous switching costs given the direction of travel in the UK market over the last decade
o I also think it’s a little odd to critique the pillars of the Energy Market Reforms (particularly CFDs and Capacity Market) when they’ve been (at least in part) the engines of impressive decarbonisation in the UK market
o Finally, the UK is also a lot further ahead on demand-side response than most markets I’ve worked in, and I’m not entirely sure it’s fair to say that UK policy makers have stifled flexible demand side – of course, you can always do more, but at the same times it’s hard to do everything at once
- Market design preconceptions. One of my grand unifying theories of energy markets is that all market participants have a deep and abiding regards for the system they grew-up in as professionals. They understand it, their expertise is valued, and there are large mental-costs to thinking through the implications of switching. I think, again as a very general rule, there is not a particularly deep understanding of how other markets work in Australia. For example, I hear a lot of criticism of the UK capacity market without much accompanying insight into its operation, how its rules have evolved over time, and how its embedded in a wider set of reforms (e.g., carbon pricing, regular CFD auctions, carbon budgets, ancillary market reform, etc). One notable exception here has been the post-2025 ESB team who seem to have spent a lot of time thinking through a range of global energy market models as part of their processes. Having said all that, any structural changes need to overcome both legitimate concerns about market design switching costs, unintended consequences, which model is actually the optimal option, etc, but also just deep-seated aversion from many market participants to consequential change
- Finite and infinite games. Finally, and at the risk of getting a little expansive, I think at least part of the tensions in the NEM (and all rule-based systems that come under stress) is that there are 2 very different ways to think about the system’s evolution and outcomes: whether we are playing a finite game; or an infinite game. Parse, who’s a scholar of religions, came up w the framing in a book, that I find helpful on lots of different topics:
o The taxonomy is as follows:
§ Infinite games: players follow the rules of the game because they recognise no single outcome is as important as continuing to play the game in a consistent way
§ Finite games: the game has an end and some victories are more important that the long-term structures/ norms that allow the game to be played
o In the NEM, I think this division in how the rules of the game should be observed is fundamental split in the way different groups think about its evolution
§ Infinite gamers think ongoing govt interventions destabilise the market (particularly those that expropriate value from existing asset owners), make it much harder to plan and manage risk, and drive-up long-term costs of capital. Ultimately, electricity consumers bear additional costs of a NEM where the rules are subject to repeated and material changes
§ Finite gamers take the view that current NEM market structures (and the dominant players therein) have not moved fast enough on decarbonisation. Their view is that it’s a one-shot game to get to a net-zero power system by approx. 2040 (and decarbonise via electrification the rest of the economy by 2050), and, if we have to ‘break’ the rules of the game to get there, it’s a relatively small price to pay. Part of this narrative I think also centres on the idea that some existing players deserve to be punished for a perceived slowness to act on climate to date
o Given NSW Roadmap, VIC action on REZs, Biden’s clean stimulus spending, Boris’ 40GW of offshore by 2030, aggressive action in China, etc, etc, it v much appears the finite gamer view of the necessary evolution of energy markets is winning, and the de-regulation of energy markets will be re-wound globally for at least the next 10-20 years to try to at least get close to net-zero electricity by 2040
Real Time Information and Transaction Specialist
4yRon Ben-David I think you’ll find the thoughts on Finite and Infinite Games very interesting.
For me, your discussion on finite/infinite games seem to conflate two issues (neither of which is really related to games): (1) whether we should decarbonize quickly (eg 2040) (2) whether a deregulated market can deliver that pace of change. I would answer yes to both. But we need a carbon plan and a carbon price. Since we currently have neither, the more salient question is whether government intervention (RETs, REZs etc) can deliver. For me, this is more doubtful, particular if we also try to continue with a half-assed NEM: concerned with operation but not investment.
Executive Advisor
4yVery interesting insights. Thanks Hugo.
Managing Director at global-roam Pty Ltd
4yInteresting observation about the 'Finite and infinite games' paradigm clash