17 June 2022

A potpourri of current affairs topics from Australia, New Zealand and the South Pacific brought to you by KAS Australia and the Pacific. The weekly digital snapshot showcases selected media and think tank articles to provide a panorama view and analysis of the debate in these countries.

Disclaimer: The views expressed in these articles do not necessarily reflect KAS Australia’s position. Rather, they have been selected to present an overview of the various topics and perspectives which have been dominating the public and political debate in Australia and the Pacific region.

Australia’s energy markets have experienced significant turbulence this past week, with the Australian Energy Market Operator (AEMO) taking the unprecedented step of suspending the wholesale electricity market to prevent imminent blackouts across the Eastern states.

The cost of power had been rising so rapidly – with spot electricity prices headed towards AUD$1000 per megawatt-hour, or about 80 times the normal level – that the AEMO was prompted to place a cap on the wholesale price of electricity in Queensland, New South Wales, Victoria and South Australia. This resulted in the available supply from generators declining further, contributing to a forecast supply shortfall. Accordingly, AEMO suspended the wholesale market serving the eastern states, moving to a temporary centralised “command and control” system that will match supply and demand in a systematic way. A compensation regime applies for generators who are directed to produce power at a loss, but the regulator has now sent several stern warnings to the industry over holding back supplies to the market.

How did a nation which is an “energy superpower”, with abundant hydrocarbons as well as renewable energy sources such as sun and wind, get to the very precipice of blackouts? There is no single answer, rather a perfect storm of global circumstances and policy choices across recent decades which have combined to land squarely on the desk of the newly elected Albanese government.

Analysts have cited a range of factors which have impacted energy demand in Australia. There has been a post-COVID economic rebound, leading to higher electricity demand, coupled with a burst of cold winter weather, increasing power demands for heating.  But the supply side appears to carry the larger burden. The Russian invasion of Ukraine has roiled the international gas market into which Australia is a major supplier, exporting some three-quarters of domestic production or 4393 petajoules annually. Legal and environmental constraints on conventional gas exploration, as well as the outright bans on fracking, have also been cited. Coal-fired power generators have suffered disrupted coal supplies due to the floods in recent months, as well as unplanned maintenance issues due to the advanced average age of their infrastructure. There has been less of a contribution from renewable energy sources in recent months, with cloudy weather resulting in a 27 per cent drop in solar power generation in May compared with April, and wind-generated power falling about 1.9 per cent in the same period.

This is against the backdrop of almost two decades of “climate wars”, which have seen multiple Australian federal governments – and the careers of individual leaders – rise or fall over questions of perceived climate inaction, overpromising and underdelivering, and the controversies over carbon pricing and carbon taxes. (Nuclear power remains off the agenda, despite Australia’s abundant uranium resources and exports.) The result has been a suboptimal regime which has directly supported increased intermittent renewable energy production on one hand and created uncertainty and reduced incentives for baseload coal and gas-fired power generators which are de-facto being phased out on the other.

While many have hailed the recent election of the Albanese government (and the rise of the Teal independents) as a new dawn for Australian climate change policy, and while it has already committed to a more ambitious emissions reduction target, it appears that the old political cleavages remain with the “blame game” rapidly restarting.

Opposition leader Peter Dutton has described the crisis as a “problem of (energy minister) Chris Bowen’s making,” criticising the Labor government for negative comments around fossil fuels. In turn, Prime Minister Albanese has criticised the previous government for its “inaction” over almost a decade.  Despite this, political commentators have noted that voters will quickly come to blame the current government if their response is inadequate.

It was a top agenda item at the National Cabinet meeting of state and territory leaders held in Canberra on Friday. In other comments, Energy Minister Chris Bowen has ruled out extending the life of coal-fired power stations, saying the government believed further investment in renewable generation and storage was a better option. He was unable to say when the intervention from AEMO would end. Industry Minister Ed Husic also warned gas producers that all options were on the table, including a national gas reservation policy. “I’ve got a great deal of sympathy with the view in the broader public that these are Australian resources that should be available for use by Australian households,” he said. “If we are shipping out of some of our ports seven times the level of supply that is used by Australia in one year, this is not an issue that we don’t have the gas.”

Meanwhile, consumers are likely to face higher power prices, as has been warned for several months, coupled with warnings to conserve energy during peak use periods (typically between 6pm-10pm).

Australia’s energy crisis explained: from price caps to the suspension of electricity trading

How the Ukraine war, ageing coal, Covid restrictions and winter combined to create the ‘perfect storm’ in the power market

What’s going on with Australia’s energy supply and will there be blackouts?

Warnings of power blackouts on Australia’s east coast aren’t as ominous as they seem, an expert has said.

Where did all the power go? What caused the east coast energy crisis?

A combination of forces has sent energy prices soaring. And now there’s talk of blackouts too. How did it come to this?

Out in the cold without reliable baseload power

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Reality check for energy coal fired generators just not reliable says Kerry Schott

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Power shocks events reveal need for repairs in energy market

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We may have turned the ‘climate corner’ but there’s more to the story

The Albanese government is blaming the energy crisis engulfing eastern Australia on the Coalition’s failure to put in place policy to ensure adequate and timely investment in renewables. That’s correct, but it’s not the whole story, writes Michelle Grattan.

Unclear when electricity market suspension will end as Chris Bowen backs ‘extreme’ intervention

Energy minister says the NSW grid will again come under ‘significant pressure’ on Thursday evening, asking residents to limit power use

Albanese did not create the energy crisis, but he will have to fix it

The Labor government is electrified at the prospect of two terms in power. But if they can’t keep the lights on, an early outage could be sparked.

Health and energy to dominate Albanese’s first national cabinet

Health, the energy crisis and even the make up of the body itself will be high on the agenda as Prime Minis…

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Of the three countries discussed, Germany is the most advanced and ambitious in its approach, with both formal regulation and voluntary schemes both well progressed. In contrast, Japanese Government and industry have made clear that their priority until at least 2030 is to secure reliable supplies of low-cost hydrogen and ammonia, the emissions credentials of these fuels are of secondary importance. These contrasting approaches of two market leaders in the downstream hydrogen economy present challenges for aspiring exporters such as Australia. It is not surprising, therefore, that we are seeing a diversity of public and private approaches to both production and certification of hydrogen vectors in Australia. This conclusion will situate these approaches in light of the political, economic and environmental drivers in each country and suggest ways forward.

Challenges for Germany

German regulators face a challenge because they are trying to achieve two goals: one environmental, and one industrial. Their environmental goal is to minimise emissions leakage, that is, to ensure reductions achieved by switching to hydrogen and derivatives in Germany are not offset by increases in emissions elsewhere due to their production.¹ The motivation for this goal is understood to be a combination of enlightened self-interest – which recognises that greenhouse gases are global pollutants – and political economy concerns – whereby German hydrogen producers do not want to be disadvantaged by compet-ing with producers who face less onerous emissions constraints. Wind farms in the North of Germany – the electricity sales of which are constrained by grid bottlenecks – are a case in point.

Meanwhile, the industrial goal for Germany is to help German companies stay at the forefront of development and commercialisation of hydrogen value chains, both downstream (including green steel and fuel cells) and upstream (including electrolysers). Competitiveness of these industries relies on them being able to capture early dynamic economies of scale. For the downstream industries this relies on them having access to competitively priced hydrogen and derivatives.

German regulation and certification of hydrogen and derivatives illustrates the balancing of environmental and industrial motives. On the environment side, research from the Australian National University (ANU) has shown that hydrogen derived from fossil fuels will struggle to meet even the current voluntary CertifHy standard (Longden et al., 2022). Updated standards to meet the requirements of the Fit for 55 package are likely to be stricter still. Meanwhile, Katharina Sailer’s contribution to this Periscope explains that certified hydrogen produced from renewable energy will need to meet the strict new REDII criteria, as well as prove it has not benefited from renewable energy subsidies. On the other hand, she notes that hydrogen production is likely to be exempt from Germany’s renewable energy levy. Similarly, hydrogen has not been included in the EU proposed Carbon-Border Adjustment Mechanism (though ammonia has) (EU Commission, 2021).

In order to meet both environmental and industrial objectives, Germany needs renewable hydrogen to rapidly become cheaper than other forms of hydrogen. To do this, the country needs the green hydrogen industry to grow so it can reap economies of scale. Strict certification requirements and clear signals that fossil hydrogen will not have a market in Germany is the unilateral best approach. But the benefits would be much greater if they could convince markets such as Japan to take a similar approach.

Risks for Japan

Japanese regulators are also aiming to achieve a combination of environmental and industrial goals. As Seiichiro Kimura explains in his contribution to this Periscope, for Japan, the central environmental goal is its Net Zero by 2050 commitment. Emissions leakage does not seem to be a concern. Since the emissions produced when hydrogen and ammonia are used in Japan do not depend on how they were produced, fossil and renewable versions are equally useful for helping meet Net Zero commitments. For Japan, the emphasis is on cheap hydrogen and ammonia to lower the cost of meeting these commitments and help Japanese downstream industry and technologies gain advantage in global competition. Certification of the emissions credentials of hydrogen vectors is something to worry about in the future, after supply chains have been established.

Although understandable, the current Japanese approach presents several political and economic risks. Firstly, there is the risk that the Japanese public realises they are paying a high price for their own net zero transition, without actually doing anything to reduce global greenhouse emissions or mitigate climate change. The global emissions from co-firing hydrogen made from brown coal such as that being produced in Victoria are around 50% higher than the emissions from firing the coal it replaces (Longden et al, 2022). At the other end of the supply chains there are also political risks. Voters in producing countries – who will be paying the price for their own net zero transitions – may be frustrated that their efforts are being undermined by increased emissions from production of hydrogen for export to Japan. The social licence underpinning the supply chains that Japan seeks to establish may well be withdrawn. If that is the case, Japan may pay the price for not investing more in stable, longterm supply relationships with clean hydrogen and ammonia producers. From an economic perspective, there is the risk that the global price of credible carbon offsets will rise steeply in the coming decade, leaving Japan having established expensive supply relationships. An additional economic risk is that carbon border adjustments become more commonly applied by Japan’s export markets – and that they expand to include Scope 3 emissions. Indeed, Scope 3 emissions are already a concern for multinational companies such as Apple, Google and Microsoft that have committed to net zero supply chains. These firms have a disincentive to invest in Japan’s hydrogen economy. Japanese participation in international hydrogen certification could help send valuable signals to investors, as well as help lower costs for Japanese-based firms wishing to decarbonise their supply chains.

Horses for courses in Australia

In contrast to Japan, certification of hydro-gen and ammonia is a big topic in Australia. If anything, there is an embarrassment of riches. The Australian Government is developing its Guarantee of Origin Scheme which it seeks to make compatible for domestic and international markets, and playing a key role in the international scheme being developed by the International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE).² Meanwhile, the renewable energy industry is developing its own Zero-Carbon hydrogen certification scheme through Hydrogen Australia (a division of the Smart Energy Council). At the same time, the Australian chapter of the Ammonia Energy Association is a driving force behind its certification scheme. This apparent multiplication of effort is a reflection not only of the potential Australia sees in hydrogen and ammonia exports, but also the competing forces in domestic and international markets.

Max Hewitt’s contribution to this Periscope highlights the fact that two hydrogen industries are growing in competition in Australia. Seeking to exploit Australia’s vast renewable energy potential, dozens of “green” hydrogen and ammonia projects from small to mega scale are under development. Meanwhile, seeking to remain relevant and profitable in a decarbonising global economy, Australia’s fossil fuel industry is also looking to move into hydrogen and ammonia production.

The Australian Government’s response to the competing forms of hydrogen is to take a de jure “technology neutral” approach to hydrogen industrial policy, including certification (Aisbett et al., 2021). The focus of Government certification efforts is on certifying the embodied emissions in the product, rather than the “colour”. From the perspective of the renewable hydro-gen and ammonia industry, the Govern-ment’s approach is frustratingly slow, both because it must consult widely with do-mestic and international stakeholders, and because methods for verifying emissions embedded in fossil hydrogen are more complicated than those required for 100% renewable hydrogen.

A way forward?

Efficient international trade of hydrogen and its derivatives can lower the cost and increase the benefits of the net zero transition for all three countries. Yet, despite a common understanding of the importance of consistency and interoperability of certification to free trade, political, economic and environmental considerations are driving divergent approaches in all three countries.

Katharina Sailer’s contribution refers to the important work undertaken by the German Energy Agency (dena) to assess the potential for a uniform global hydrogen certification scheme, and notes its disappointing conclusion. None-the-less, they propose a minimalist concept that is consistent with the schemes they assessed. Establishing a global norm – even if less ambitious than some parties would like – is a common approach in international governance. Global norms can often establish a ground level on which more ambitious approaches can build.

An alternative approach could be to fa-cilitate upward and downward compatibility through a Mutual Recognition Agreement (MRA). In an MRA, the principle of mutual recognition is “strictly confined to the recognition of technical competence of designated foreign bodies, in the exporting country, in specific product markets, to perform conformity assessment for products to the rules and procedures of the importing country.” (Correia de Brito et al., 2016, p.10). In the context of hydrogen certification, it would mean that bodies such as Hydrogen Australia would be recognised as able to certify hydrogen in accordance with EU regulations, and similarly bodies like TÜV Süd could be recognised as certifiers for the Australian Government’s Guarantee of Origin Scheme. Suitable Japanese organisations could be recognised as able to certify in accordance with either government’s requirements.

References

1. See Aisbett in Mehling et al. (2021) and Stocks et al. (2020).
2. https://consult.industry.gov.au/hydrogen-guarantee-of-origin-scheme

Bibliography

Aisbett, E., Cheng, W., Beck, F., 2021. Green Industrial Policy and Technology Neutrality: Odd Couple or Unholy Marriage? Zero-Carbon Energy Asia-Pacific Work. Pap. ZCWP01-21.Correia de Brito, A., Kauffmann, C., Pelkmans, J., 2016. The contribution of mutual recognition to international regulatory co-operation. OECD Regul. Policy Work. Pap. No. 2.EU Commission., 2021. Proposal for a Regulation of the European Parliament and of the Council on the establishment of a carbon border adjustment mechanism.Longden, T., Beck, F.J., Jotzo, F., Andrews, R., Prasad, M., 2022. ‘Clean’ hydrogen? – Comparing the emissions and costs of fossil fuel versus renewable electricity based hydrogen. Appl. Energy 306, 118145. https://doi.org/10.1016/J.APENERGY.2021.118145Mehling, M., Pirlot, A., Pradhan, P., Aisbett, E., Böhringer, C., Asane-Otoo, E., Schneider, J., Guan, D., Simas, M., Wiebe, K., Ward, H., 2021. Close the carbon loophole. One Earth 4, 587–590. https://doi.org/10.1016/j.oneear.2021.05.003Stocks, M., Fazeli, R., Hughes, L., Beck, F.J., 2020. Global emissions implications from co-burning ammonia in coal fired power stations: an analysis of the Japan-Australia supply chain. Zero-Carbon Energy Asia-Pacific Work. Pap. ZCWP04-20

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He was previously the United Nations Special Representative of the Secretary General for Disaster Risk Reduction and Head of the United Nations Office of Disaster Risk Reduction (UNISDR).  UNISDR, with over 100 staff located in regional offices around the world, is the focal point in the United Nations system for efforts to reduce climate and disaster risk.  He was a member of the Secretary General’s Senior Management Group and the Deputy Secretary General’s Climate Principals Group.

Dr Glasser has over 30 years of experience as a practitioner, advocate, and policymaker in the areas of climate change, sustainable development and disaster response.  Before joining the U.N., he was the Secretary General of CARE International, one of the world’s largest non-governmental humanitarian organisations, with over 10,000 staff active in some 80 countries. From 2003-2007, Dr Glasser was the Chief Executive of CARE Australia. Prior to joining CARE, he was Assistant Director General at the Australian Government aid agency (AusAID) where his responsibilities ranged from South East Asia programs, to Corporate Policy and Infrastructure and Environment. He has also worked on energy and climate change science and policy for the US Department of Energy (Los Alamos National Laboratory) and on peace and conflict issues at a variety of institutions, including the Geneva Centre for Security Policy, Cornell University Peace Studies Program and the Centre for International and Strategic Affairs at the University of California.

Dr Glasser is on the board of WaterAid Australia, the Queensland Reconstruction Authority and the Climate Action Network Australia. He was previously a board member of the Global Call for Climate Action (GCCA), a global alliance of more than 450 national and international organisations focusing on climate change advocacy and he was the Inaugural Board Chairman of the CHS International Alliance, a new organisation resulting from the merger of People in Aid and the Humanitarian Accountability Partnership.  He was also previously the Chair of the Steering Committee for Humanitarian Response, a group comprised of the CEOs/Secretary Generals of the largest organisations engaged in disaster response, including the leading INGOs, the International Federation of the Red Cross Red Crescent Societies and the International Committee of the Red Cross.

Dr Glasser was an Advisory Panel member of the Climate Vulnerability Monitor, a member of the Principals Steering Group of the United Nations Transformative Agenda for Humanitarian Action; and a member of the Project Steering Group for the World Economic Forum project on The Future Role of Civil Society.

An Australian national, he has published on several topics, including climate change and disaster risk, peace and conflict, and humanitarian and development policy.

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The Climate and Security Policy Centre’s Strategic Insight report warns that within a decade, as the climate continues to warm, the relatively benign strategic environment in Maritime Southeast Asia – a region of crucial importance to Australia – will begin unravelling. Dr Robert Glasser, Head of ASPI’s new Climate and Security Policy Centre, documents the region’s globally unique exposure to climate hazards, and the increasingly significant cascading societal impacts they will trigger.

Dr Glasser notes that hundreds of millions of people living in low-lying coastal areas will not only experience more severe extremes, but also more frequent swings from extreme heat and drought to severe floods. The diminishing time for recovery in between these events will have major consequences for food security, population displacements and resilience.

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