Energy – the new renewable energy future

Despite coal’s dominance as Australia’s primary energy source, there has also been a steady uptake in renewable sources of energy, primarily in wind and solar. With increasing momentum to meet Australia’s renewable energy target by 2020 and technological improvements, there are growing opportunities for investment in Australia’s renewables sector, particularly for investors willing to take greater price risks. In 2016 alone, 17.3% of Australia’s electricity was generated from renewable energy sources and large-scale renewable investment was five times greater than 2015, representing an investment of over A$4 billion.

Renewable Energy Target

The Australian Government’s policy to encourage investment in renewable energy for electricity generation is known as the renewable energy target (RET). The RET requires that at least 23.5% (or 33,000 GWh) of Australia’s electricity generation be provided by renewable sources by 2020. Under the RET, wholesale purchasers of electricity have an obligation to purchase and surrender an annually increasing number of renewable energy certificates which are created by or in respect of certain renewable energy generators or other sources. This means that liable entities (particularly retailers) under the RET will need to continue to invest in renewable energy in Australia to meet their obligations.

At the State and Territory levels, there is also considerable support for large-scale renewable energy projects. For example, South Australia has announced a target of 50% renewables by 2025, and the ACT Government has introduced a target of 100% renewables by 2020, relying primarily on large-scale feed in tariffs and reverse auctions. As at May 2017, there were 5.6 GW of new wind and solar under construction across Australia, and there will continue to be opportunities to invest in new large-scale renewables projects in the future to help meet Australia’s various renewable energy targets. Despite the strong pipeline of renewable energy projects with development approval, 6000 MW of financed new-built capacity is still required by 2020 to meet the RET and avoid a shortfall in large-scale generation certificates markets.

New baseload energy sources

As Australia gradually shifts away from reliance on traditional baseload power supplied by coal-fired power stations, there are new opportunities for investment in alternate forms of baseload power, such as gas and pumped hydroelectric technology. For example, with the announcement of new state-owned gas power plants in South Australia and greater incentives for Australian sourced gas, there will be increased opportunities to assist and develop additional gas resources to serve Australia’s domestic market. Similarly, with the planned A$2 billion expansion of the Snowy Mountains hydro scheme, there will be further opportunities for large-scale pumped hydroelectric energy storage to play an important role in replacing Australia’s traditional baseload power.

Distributed energy and battery storage

Technological innovation, particularly in the form of distributed energy and battery storage, also presents new opportunities for investment in Australia’s sustainable energy future. In particular, there has been a steady uptake in the penetration of ‘behind-the meter’ generation through new smart rooftop solar photovoltaic systems, which is set to continue as the technology becomes more cost-competitive and installed capacity increases. Similarly, there have been continuing advances in the roll-out battery storage technology to store surplus energy from decentralised on-site generation, including on a large-scale basis. As Australia’s energy market transitions to one that requires less capital-intensive infrastructure and is focused on the wider integration and deployment of distributed energy resources, there will be new innovative markets for investment.

The ‘new energy future’ in Australia

In June 2017, the Finkel Review into the Future Security of the National Electricity Market was released with some 50 policy recommendations to address the so-called “energy trilemma” – providing affordable, reliable and low emission electricity for Australia.

KWM’s publication, The New Energy Future: A Guide to the Australian Energy Market Transition: www.kwm.com/en/au

Resources – resurgence of market confidence and investor activity

Given Australia’s resources are found across the States and Territories, there will continue to be opportunities to invest in under-explored and untapped resources throughout the country. As the mining sector recovers from uncertainty in both Australian and global markets, it is expected that confidence in Australia’s resources sector will return. It is further expected that market players will seek to take advantage of share price weakness and submit opportunistically timed offers and resources will continue to be extremely profitable in Australia.

Companies in the gold sector are likely to lead M&A activity in the resources sector with gold prices expected to continue climbing. There are also opportunities for companies to capitalise on increased interest and demand for lithium and graphite given that demand is currently outstripping production. While the uranium spot price has declined due to excess supply and market uncertainties, conditions will also likely improve in uranium markets and consumption is predicted to increase in the future. Major iron ore producers have also taken steps to improve competitiveness, particularly through cuts to production costs to correct oversupply issues. China is expected to remain the most important market for base metals, including zinc, copper nickel and lead.

Fossil fuels also continue to dominate Australia’s energy mix, particularly coal. While coal contract prices for coking and metallurgical coal have surged to their highest levels since 2011 due to higher than expected demand from steelmakers, the coal industry is undergoing significant structural changes as traditional players such as Peabody Energy, Rio Tinto and Anglo American begin to exit some coal markets. This means that there will be increasing opportunities for non-traditional participants (such as private equity players) to acquire coal assets.