The Global Opportunity For Renewable Energy

On Thursday 13th September 2022 I had the opportunity to sit down and talk with Tim Buckley from Climate Energy Finance (CEF), a public interest think tank analysing the financial impacts from the global transition to renewable energy. Tim spent more than 10 years as Managing Director at Citigroup heading the equity research practice in addition to stints at Macquarie and co-founding the ArkX global cleantech fund.

Our discussion covered some of the key opportunities and challenges that lie ahead in the renewable energy sector, particularly for Australia, China and India. I thoroughly enjoyed our conversation and hope you enjoy reading the 5 key insights from our discussion below:

1. Australia will be the lucky country once more

Tim notes that there is a multi-hundred-billion-dollar opportunity for Australia over the coming decades to play a leading role in the global transition towards renewables and a zero carbon world economy. Global investment in renewables is expected to reach a cumulative $100T by 2050, and powerhouse nations like the U.S and European economies want energy independence and reduced reliance on major energy exporters like Russia.

Australia finds itself in pole position as a resource rich, democratic ally to the West. Australia's land mass is ~7.7 million km2, and with a population of ~26m our population density is around 3 people per square kilometer. For comparison, the U.S has a population density of 36, China 150 and Japan 346 [1].  Australia’s low population density, our natural advantages in renewables generation, including solar and wind, and our abundance of critical minerals such as vanadium, lithium, nickel and cobalt and other rare earths, mean there are few nations that can compete with our capacity to produce both clean energy on a mass scale, and the resources that will power the energy transformation.

For example, as a continent, we have among the best solar resources in the world, we have 100% coastline for generation of offshore wind and strong hydroelectricity capacities, and we are the world’s largest producer of lithium. Tim notes that despite ourselves and our politicians, Australia is the lucky country, endowed with an unparalleled opportunity to help forge the global pathway to net-zero.

2. Opportunity exists down the supply chain for 'dirty' high value-add activities

Despite being the world’s largest exporter of iron ore, coal, liquified natural gas (LNG) and lithium, Australia has to date undertaken limited value-add activities like refining. [2] Most refining of Australian lithium hydroxide monohydrate (LHM) takes place in China, where it processes about 60% of global supply.

Tim notes that this trend is beginning to change, with significant developments including the recent opening of Australia’s first lithium hydroxide refinery in WA with an export capacity of 24,000 tonnes p.a., slated to double over the coming years, and be replicated with 2 more lithium refineries of the same 48,000tpa capacity, and capital flows into value-added onshore refining accelerating across a broad range of projects. Opportunities are also building to onshore other stages of the supply chain, including manufacturing of batteries and electrolsyers. Tim and Matthew Pollard (a CEF analyst working with Tim) have recently published the first four in a series of papers on Australia’s value-adding critical minerals opportunities, with two further papers to come. They can be read here.

3. Barriers to change /challenges

There are enumerable challenges on the road to net-zero, but Tim and I discussed a couple of the major ones below:

1) The energy transition means large quantities of resources need to be mined and refined. Vast tracts of generation and transmission infrastructure need to be built across regional Australia. Tim points out that expanded mining and refining will need to be underpinned by rigorous assessment of environmental impacts for the life of mine, and take into account post-mining rehabilitation. It’s critical that there are proper land and environment management and protection plans in place, to protect natural environments, habitats and livelihoods. Just as important is robust community engagement, including with First Nations communities, to achieve social license both on mining projects and on renewables and transmission infrastructure in the regions. Fair benefit sharing agreements and compensation for impacted communities and landholders need to be central. In other words, Tim says, it’s critical that energy transition is rolled out responsibly and sustainably.

2) Lack of funding: Significant underfunding exists for relatively new renewable energy producers across Australia where they are unable to access the magnitude of capital required to implement operations, often seen as high-risk prior to commercialisation by pension capital that is keen to invest, but only after approval and construction risks are resolved. There may be an opportunity in the private debt market which reached a record A$133B in 2021 [3] and is witnessing strong growth counter to current macroeconomic conditions. Tim notes that syndicates and private debt brokers are well positioned to attract deal flow from this underserved market as major banks are unable to offer senior credit and affordable rates for smaller scale and potentially higher-risk enterprises.

4. China is leading the world in renewables

Despite being the largest total emitter of CO2, on a per capita basis China emits far less than Australia, (7.4 tonnes vs. 17.1 tonnes per person per anum). [4] Tim notes that we should make no mistake, China is leading global production of renewable energy, with more than a third of all global hydropower, wind and solar power production globally. Combined with its GDP growth slowdown and Xi Jinping’s pledge to reach net zero by 2060, China could have seen emissions peak already, with a plateau over the coming decade, ahead of the ‘peak by 2030’ target.

The Chinese consumer market is also demonstrating strong uptake of electric vehicles (EVs), with 2022 sales forecast to hit 6 million, almost double the 3.3 million in 2021. As Tim wrote in a recent op ed on China’s energy transition leadership, “This is double the expected 2022 EV sales in Europe and four times that of the U.S. Having overtaken Tesla in terms of volumes earlier this year, Chinese EV manufacturer BYD has reinforced its now leading global position with year-to-August 2022 EV sales of 974,000 units, a staggering 274% year-on-year growth rate.” [5]

Perhaps more telling of China’s strategic energy awareness are its deepening partnerships with Australian refineries and battery cell producers. A recent joint venture between China’s Tianqi Lithium and Australia’s IGO in Western Australia may be the first of similar deals to come for onshore value-adding pre-export. The key takeaway is that China is surging ahead when it comes to the energy transition, and they understand the long-term strategic imperative of becoming clean energy abundant and independent, and their need to diversify away from purely their own China manufacturing base (CATL has proposed the world’s largest new battery factory in Hungary, closer to EV manufacturers). As we’re now witnessing in Europe, scarcity of energy and fossil fuel price hyperinflation places enormous strains on economies and acts as a bottleneck to productivity. Countries that embrace renewables and invest now will reap the benefits long-term.

5. India is the world’s leading emerging market in renewables

Tim points out that India has been a frontrunner amongst developing countries in the adoption of renewable energy, including hydro. Production has increased from a few megawatts (MW) in 2010 to 165 gigawatts (GW) as of September 2022. Incredibly, 100% of new capacity created for the first half of FY2022/23 has been entirely renewable. [6]. Tim notes that unlike other countries, India’s government has demonstrated incredible support for companies investing in the renewable energy generation sector, with generous incentives which include a 25-year, government-backed power purchase agreement (PPA). This effectively guarantees revenue for renewable energy producers and de-risks capital expenditure as future revenue is guaranteed.

Furthermore, India is on track to dramatically upscale installed variable renewable energy capacity to over 400GW by 2030, as it slashes thermal power generation market share from ~72% to ~53% in the same period. India could well beat its target of 50% of electricity capacity from non-fossil fuel sources, despite recent global headwinds that have prompted policymakers to expand the use of domestic thermal power in the short-term. In short, India’s long-term trajectory for its transformative journey to a renewable energy future is intact, propelled by ambitious government targets and commitments by both state-owned and private players, such as Reliance Industries Ltd, Adani Green Energy Ltd., TATA Power, ReNew Power and ACME Group. [7]. As Tim says, “money talks, and billionaire money talks loudly”.

*A special thanks to Nishtha Aggarwal a CEF finance analyst focusing on India’s transition to renewables for introducing me to Tim and helping to shape the content of this article.

** If you’d like to learn more about the work being undertaken by Tim, Nishtha and Matthew please visit their research site at: https://climateenergyfinance.org/.