Sustainable and efficient supply chains are the backbone of the energy and resources market. Key exporters, such as Australia, must grapple with the challenges associated with rapidly scaling up supply chains if they wish to capture market share in an increasingly decarbonised world. In this article we explore:
- Australia’s previous success as a global producer and exporter of energy and resources; and
- various challenges Australia will face in replicating its success during the clean energy transition.
Australia’s rise as a global producer and exporter
Australia is globally renowned as a major producer of energy and resources, and the growth of its exports is undeniable. According to the Australian Department of Foreign Affairs and Trade (DFAT), Australia’s top three exports for the past three years were iron ore, coal and natural gas. However, this has not always been the case. The immense growth of Australian exports, particularly from the resources sector, can be seen in that:
- Australian exports of goods and services grew from $3.2 billion to $382 billion from 1963-64 to 2020-21; and
- minerals and fuels (excluding gold) grew from approximately 16.9% to 52% of Australian exports from 1969-70 to 2019-20.
Trade relationships have also changed dramatically over this period. Australia’s top three export markets in 1963-64 and 2020-21 were as follows:
- 1963-64: United Kingdom (23.5%), Japan (22.4%) and the United States of America (12.9%); and
- 2021-21: China (38.8%), Japan (10.0%) and the Republic of Korea (6.2%)
Australian industry’s ability to establish and perfect supply chains involving substantial volumes has been a key component of its export success. The growth of Australia’s iron ore and LNG industries are key examples of the rapid development of supply chains to globally significant scale.
The value of Australia’s iron ore exports has increased dramatically since the start of the century. In 2000-01, Australia exported approximately $5.2 billion of iron ore and concentrates. This grew to $64.1 billion in 2010-11, and $153.0 billion in 2020-21. Throughout this period Australia comfortably solidified its position as the largest exporter of iron ore in the world and became an exporter of choice for key international partners including China, Japan, the Republic of Korea and Taiwan.
Australia has also grown to become a significant exporter of natural gas. The value of Australia’s LNG exports in 2003-04 was $2.4 billion. This rose to $16.3 billion in 2013-14, and natural gas exports peaked at $49.7 billion in 2018-19. Australia became a top three global exporter of LNG during this period, and LNG was its third-largest commodity export by value in 2020-21. Similarly to iron ore exports, key export markets for Australian natural gas include China, Japan and the Republic of South Korea.
International demand leading into the clean energy transition
The global energy market is entering a new era. Resources used in emissions-intensive traditional energy generation processes, such as coal and LNG, must decline to reach global net zero targets. However, under-investment in these commodities may prove dangerous as the market struggles to scale up clean energy production. Further, unprecedented demand for key commodities and clean energy will require a significant scaling-up of existing supply chains.
LNG, critical minerals and green hydrogen each have an important role in achieving global decarbonisation. International demand during the clean energy transition is examined in more detail below.
LNG – a short term substitute?
The International Energy Agency considers that exports of natural gas will increase in the next five years. However, it also notes that demand projections vary greatly in the long-term. A key determinant of demand will be the extent to which countries substitute natural gas for existing coal-based electricity generation. The Grattan Institute also notes that Australia’s share of global LNG exports is expected to decline between 2030 and 2050 as existing supplies diminish and the upfront costs of further expansion become prohibitive.
Critical minerals – urgent attention required
While different clean energy technologies utilise different critical minerals, an enormous increase in current production rates is required across the board. The International Energy Agency stated in its May 2021 report “The Role of Critical Minerals in Clean Energy Transitions” that global demand for critical minerals is expected to grow dramatically by 2040, and that “clean energy technologies are becoming the fastest-growing segment of demand” for critical minerals.
Green hydrogen – the key to a cleaner future?
Demand projections for green hydrogen vary dramatically. For example, Deloitte estimated in 2019 that the amount of green hydrogen generated globally by 2050 could range anywhere from 90 to 304 Mtpa. The International Renewable Energy Agency stated in 2022 that up to one third of green hydrogen production in 2050 would be traded across borders, which is a slight increase from the amount of natural gas traded globally in 2020 (approximately 24%). Overseas production will play a significant role in the green hydrogen market, and Australia has a clear opportunity to capture a position as a key exporter.
A new focus
Australia is respected by international trading partners for its well-established and stable regulatory processes, environmental standards and taxation policies. Maintaining and enhancing Australia’s regulatory and risk regimes and leveraging relationships with key trading partners will be essential to preserving its status as an attractive jurisdiction for energy and resource development during the clean energy transition.
The market is at a tipping point, and the composition of the global energy and resources trade is expected to rapidly change in the near future. Resources used in emissions-intensive traditional energy generation processes, such as LNG and coal, presently make up a significant portion of Australia’s exports. However, Australia is able to leverage its rich mineral resources and its history and reputation as a global leader in the energy and resources market to transition towards clean energy exports more easily than other countries. As noted in Australia’s National Hydrogen Strategy, this is a significant competitive advantage and will allow for a more measured approach to the scaling of clean energy supply chains.
The scale of investment required to facilitate the transition to net zero is immense. Commonwealth Bank of Australia chief executive Matt Comyn recently stated that Australia’s transition to a net zero emissions economy will require $2.5 to $3 trillion in further investment, which is similar in scale to the investment in Australia’s mining boom from 2005 to 2015. The good news is that it’s been done before, and it can be done again. The present scale of this challenge should not be a deterrent.
Replicating Australia’s success as a globally respected energy and resources exporter during the clean energy transition will not be straightforward. Various key challenges are discussed in more detail below.
Key challenges in developing clean energy supply chains
Scaling up Australia’s existing supply chains
The clean energy transition does not require the creation of entirely new supply chains – supply chains that are able to be utilised for clean energy already exist. For example, Yara already exports ammonia from its facilities on the Burrup Peninsula in the Pilbara region of Western Australia. In addition, there is an existing international market for zinc, lithium and other critical metals that are essential to clean energy technologies such as wind turbines and batteries. The major challenge will be to scale up these supply chains in the timeframe required for clean energy initiatives to meet global demand and to make a meaningful impact on the environment.
Legislative regimes and certification schemes will play a significant role in guiding the upstream production of clean energy, particularly in relation to green hydrogen. Certification schemes will define what is considered to be a “green” product and, importantly, they will determine how much of the supply chain is assessed when reporting on total greenhouse gas emissions. For example, the Green Hydrogen Organisation’s Green Hydrogen Standard (Standard) mandates that upstream emissions will count towards its 1kg CO2e/kg H2 threshold, but only expects downstream emissions to be “measured”. Projects seeking to become certified under the Standard will therefore need to minimise the emissions associated with processes such as construction, water production, and transporting components. On 16 September 2022 the Smart Energy Council announced that it provided pre-certification for Yara’s ammonia plant in the Pilbara region of Western Australia, recognising that the Yuri project will provide it with green hydrogen. Dr Andrew Mortimore, Vice President – Pacific Region at Bureau Veritas, stated that independent certification is “a critical element for enabling offtake and provides assurance to stakeholders around the commitment organisations are making towards net zero targets”.
The Australian regulatory environment in which the clean energy projects of the future will operate is currently being crafted. The precise impact that regulatory reforms will have on clean energy supply chains remains to be seen. Australia’s National Hydrogen Strategy notes that a preliminary review identified approximately 730 pieces of legislation and 199 standards that are potentially relevant to the hydrogen industry and supply chain development. It is expected that key legislation such as the Environment Protection and Biodiversity Conservation Act 1999 (Cth) and the various state-level Environmental Protection Acts will play an important role in developing clean energy projects of significant scale. Demand clearly exists for clean energy. The key question is how quickly the regulatory environment can facilitate necessary development.
Managing environmental considerations
Environmental considerations will have a major impact on the development of clean energy projects. It is well understood that the value and credibility of clean energy will be inherently tied to the “green” credentials of the projects that produce it. However, environmental considerations will also make a notable impact further along the supply chain. In recent years Boards have increasingly begun to treat environmental impacts and climate risk considerations as a critical part of their mandate, rather than as a “nice to have”, and we expect this trend to only grow with time. Justin Mannolini, Corporate Advisory Partner at Gilbert + Tobin, noted at the recent Masterclass session on “Balancing decarbonisation opportunities and risks in the boardroom” hosted by Gilbert + Tobin, that environmental considerations and climate risk will begin to meaningfully affect the cost of capital in the near future.
Clean energy projects are broadly considered to be the pathway to a greener future. However, the development of these projects will be accompanied by an associated environmental cost. The Australian Industry Energy Transitions Initiative noted in its June 2022 report “Setting up industrial regions for net zero” that the decarbonisation of Australia’s five most emissions intensive industrial regions will require an additional 68-126 TWh of electricity, which is equivalent to 26-47% of Australia’s current electricity generation and 107-197% of its current electricity generation from renewable sources. Vast areas of land will be required for renewable energy generation on such an immense scale, especially where utilising land intensive technologies such as solar. As a result, project proponents must balance environmental risks such as biodiversity loss and interruptions to ecosystem balance against their project’s potential future environmental benefit.
Unprecedented generation capacity from renewable sources is required to meet global decarbonisation targets, and the development and optimisation of new technologies at scale will be critical. However, industry must also grapple with the challenges of establishing circular economies in the clean energy space. For example, solar generation is often criticised for utilising components with relatively short lifespans, and because a significant proportion of solar panel waste currently ends up in landfills. The Clean Energy Council estimates that retired solar panels will generate over 1,500 kilo-tonnes of waste in Australia by 2050, and this wastage is even more concerning when factoring in the increasing difficulty in mining critical minerals. While it is not clear whether reforms will be led by industry or regulators, a uniform approach to wastage created by renewable energy generation technologies (such as a solar panels) will likely develop in time. Reforms such as this will play a key role in ensuring future sustainability and efficiency.
Engaging with communities and capitalising on co-development opportunities
The concept of a “social licence to operate” has become increasingly important in recent years, especially for industrial companies that are critical to the clean energy transition. There is a growing expectation that proponents must engage with the communities in which they operate and seek to deliver transformational outcomes that produce lasting positive change. Companies must assess their impact across the entire supply chain in order to create enduring and self-sustaining benefits for all stakeholders.
Traditional Owners are key stakeholders who are rightfully recognised for their significant role in the future of clean energy. However, attitudes towards consultation and collaboration with Traditional Owners have fluctuated significantly in the past. The various Federal, State and Territory Energy Ministers recently stated that they will commence development of a co-designed First Nations Clean Energy Strategy, and we are hopeful this Strategy will stimulate positive engagement. As reflected in the July 2021 Final Report to the Australian Government on the Indigenous Voice Co-design Process, consultation with Traditional Owners will not impede industry’s progression, but will serve to facilitate and accelerate development in a respectful and ethical manner.
Co-development with Traditional Owners also presents a unique opportunity for project proponents and the Australian clean energy industry. As discussed above, the certification and value of clean energy will be inherently tied to the ethical qualities of the supply chains involved in its production. Industry-wide collaboration with Traditional Owners would allow Australia to position itself as the exporter of the most ethical clean energy and would stimulate significant global demand.
The ongoing global energy crisis highlights that energy security is more important than ever. Australia has a significant advantage because of its stable geopolitical landscape and its strong ties with key trading partners. However, the opportunities presented by the clean energy transition are not unique to Australia, and there is clear evidence that other global players are attempting to craft attractive jurisdictions for capital investment. For example:
- the Inflation Reduction Act, enacted in the United States of America in August this year, introduces tax credits that will reduce production costs for green hydrogen and stimulate local capital investment; and
- the European Parliament’s adopted position on revised amendments to the Renewable Energy Directive (Recast) 2018 (RED II) will reduce regulatory red tape in the hope of creating a more investment-friendly environment.
The clean energy landscape is shifting rapidly, and Australia’s supply chains must develop quickly if it wishes to compete for global capital and maintain its position as a key exporter of energy and resources.
Gilbert + Tobin operates at the forefront of the energy and resources sector and interacts extensively with industry experts, Government, regulators and key industry stakeholders to provide a meaningful contribution to the clean energy and decarbonisation transition. For advice on how the transition may affect your firm or its existing or proposed projects, please contact our team of Clean Energy + Decarbonisation lawyers.
Author: Adam Sibum