Australia’s energy transition: investing in an uncertain regulatory environment

Australian Energy Market

Australia’s energy system is undergoing its greatest transformation since the 1950s. These changes are driven predominantly by environmental factors, but also by economic conditions and engineering developments.

Most of Australia’s energy currently still relies on traditional sources: non-renewable fossil fuels (coal and gas). Coal-fired generation still accounts for the majority of electricity generated. However, coal-fired generation will inevitably have less of a future in Australia in the resource mix as industry heads towards net zero in 2050 and global sentiment for oil and gas is following that of coal.

Net-Zero Target

The Australian Government has now made the commitment to “net zero” emissions by 2050, and Australia’s Renewable Energy Target mandates that 33,000 GWh of Australia's annual electricity output must be sourced from renewable sources, until 2030. The growth of Australia's renewable energy sector shows no signs of slowing, and State and Territory Governments are supporting (financially and through policy) record numbers of new projects. Wind, solar and other renewable and so-called “clean” options will undoubtedly play a very significant role in Australia's energy future.

In addition, industry is charging full steam into other new clean energy technologies, including hydrogen (green, blue and others), nitrogen and biomass.

Regulatory risks in the current market

Adapting to the “net zero” target

As both the public and private sectors of Australia push to achieve the “net zero” target, there is even greater pressure for Australia’s regulatory landscape to simultaneously evolve and adapt. Progress has been hindered by national and international issues, which continue to have unprecedented impacts on Australia’s energy market.

The "East Coast Energy Crisis"

An example of this is the ongoing so-called "energy crisis" in the East Coast Energy industry. Through 2022 the entire Australian East Coast energy industry has come under strain with fuel supply shortages, generation outages and unusually high spot prices. There are a number of contributing factors, including heavy rains and geological issues which have slowed coal production, cyclically low wind and solar production, higher demand due to colder-than-usual temperatures, geopolitical issues (such as the war in Ukraine and sanctions against Russia), unusually high prices for coal and gas and untimely generator outages.

In June, the Australian Energy Market Operator (AEMO) took the unprecedented step of temporarily closing down the spot electricity market in New South Wales, Queensland, South Australia, Victoria and Tasmania. This was reported to be caused by generators ceasing production when the wholesale electricity prices hit the price cap of $300/MWh. While this suspension has since been lifted, it indicates the difficulty that AEMO faces to regulate the electricity market, amid high electricity demand and lower generation. All participants in the market acknowledge the challenges of enduring stability of the East Coast energy sector and continue to work toward this despite the turbulent conditions.

Current regulatory landscape

The uncertainty within the current regulatory landscape has seen regulators, such as AEMO, take significant steps to regulate the market – both in respect of the electricity and gas sectors. This uncertainty also creates a risk of deterring investors from investing in “green” and renewables projects, amid the “unknown” of how such projects will be regulated into the future. Further inconsistency is found in respect of the unsettled policy surrounding carbon credits and offsets (on both a national and international level), which is to be addressed by the Australian Government’s anticipated emissions reduction legislation. Until this legislation is enacted, we expect this uncertainty to continue for both private and public sector players with a view to reduce their emissions.

While decarbonisation remains at the forefront of the agenda, the current volatility of the global economy has created other challenges for Australian regulators to address, which has inevitably impacted investor confidence in the stability of Australia’s energy market. This uncertainty threatens the net zero target, as the investment of private capital is an integral part of Australia’s energy transition, alongside the reduction of emissions. Despite this, there continues to be significant momentum towards, and investment in the Australian energy transition, with a number of large companies committing to net zero through internal policies and by diversifying their traditional business models to transition towards “clean” energy projects.

In particular, the renewables sector is very active, with the growth of wind and solar generation along with pump hydro and battery storage and a large appetite for green funds and sustainable investment funds to find a home for their investment dollar.

We anticipate this trend to continue throughout FY23 and we will continue to monitor the regulation of Australia’s energy market.