Australia is on its way to a clean energy transition. But like any generational shift, investors will need to accept the complexities involved as commercial models are adapted over a 10-20 year time horizon.
Stockhead recently spoke to four experts in the space to get an update on developments from professionals involved on the ground.
The catalyst was a recent documentary, Planet of the Humans, produced by film-maker Michael Moore which questioned whether clean energy creates more pollution that it saves.
But the experts we spoke to disputed some of the broader claims, and advocated for a patient approach.
However, that doesn’t mean viable commercial models can’t be built in the meantime using technologies that can at least reduce the overall carbon footprint.
One executive involved in the space is Stephen Gauld, managing director of WA-based company Infinite Blue Energy (IBE). Gauld pivoted from a 20-year career in oil & gas to found IBEE in 2017, and work on solutions that generate hydrogen power through sources such as solar and wind, rather than gas.
The company is working on projects with a multi-year timeframe, and Gauld said the shift to clean technology on the input side would be a “complex transition”.
“In five or 10 years time the technology may have advanced so heat-generating processes are using a hydrogen fuel, rather than coal or gas,” he said.
“Our plant is completely green in the output of energy, however there are components that use fossil fuels and we have to accept that transition period.”
Another expert we spoke to who’s directly involved in that transition is Brett Parkinson, a recipient of the John Monash Foundation scholarship and who completed his PhD in chemical engineering at Imperial College in London.
Adjacent to IBE’s field, Parkinson now works in developing technologies that convert natural gas to hydrogen with lower CO2 emissions. And he says focusing only on the CO2 emitted in the production of cleaner technologies is “kind of misleading”.
“Nothing’s a perfect tech; all of these things have a footprint. Even if you remove fossil fuels from the supply chain on renewables, at some point you’re still going to have to refine metals and pull these metals out of the ground,” he said.
“What you should compare is the environmental impact across the whole lifecycle, from pulling it out of the ground to point of use per killowatt hour. In that context, these technologies still have a lower footprint than fossil fuels. They’re just not zero, which is often how it’s reported in the media.”
Parkinson’s current specialty is in the field of pyrolysis — a process of heating natural gas to release hydrogen where the residue is stored as solid carbon, rather than CO2.
“It’s a transitional technology,” he said. “We need to move to a sustainable future, but we have to recognise these fuels are cheap and widely available. So we need ways for people to continue using them in a more sustainable way.”
Another component in the green energy mix is biomass, which is the focus for Hunter Energy CEO Richard Poole.
Having acquired the now-defunct Redbank power station in NSW, the Hunter team wants to generate energy using biomass sources such as discarded wood waste.
Poole says Australia has abundant biomass resources, and cited data from the International Energy Agency which suggests it can make a material long-term contribution to the base-load power mix.
“I think biomass energy is one of the best alternatives to transition away from coal-fired generators. It may not be the be-all and end-all, but as a step away from increasing carbon in the system, it’s there for now and the next 10-20 years while we develop other systems to address the problem,” he said.
Green exposure for investors
To get the investor view, Stockhead also spoke with ASX-listed investment group Australian Ethical Investment (ASX:AEF), which holds a portfolio of equity investments that meet the criteria outlined in its Ethical Charter.
The company’s head of ethics research, Stuart Palmer, explained that along with oil and coal (which AEF has never invested in), the fund no longer holds positions in gas companies either.
But in terms of the energy transition, he agreed that some of the arguments put forth in Planet of the Humans were somewhat misleading.
“The documentary seemed to suggest we all thought there were no emissions associated with (clean energy) production, or the energy grid those technologies feed into didn’t include any fossil fuel production. But I think anyone who’s thought about it and looked at the sector closely is pretty aware of that,” Palmer said.
In that context, he highlighted AEF’s investments in two companies that use natural gas in a strategic way to accelerate their exisiting operations in renewables.
One is New Zealand-based Contact Energy (ASX:CEN), which generates about 80 per cent of its energy from hydro and geothermal sources.
“Hydro is better than solar or wind in terms of being able to store electricity because you can keep it in the dam. But the amount you generate in a given year will vary depending on the rainfall and water falling in the catchment,” Palmer explained.
“So they maintain natural gas as a backup to pick up the slack when it’s needed. But we view them as a renewable energy company.”
The other example is wind farm operator Infigen (ASX:IFN), which is investing in building out its wind fleet but deploys natural gas as a way to build some security into its client offering.
“The company’s primary focus is on building out its wind fleet, but to do that they incorporate some existing gas generation capacity,” Palmer said.
“At a portfolio level, that allows them to do more wind expansion than they would have without the gas. So what they’re doing is a sensible measure that’s going to achieve the transition quicker than if they just said ‘we’re not going to attach anything other than our wind power’.”
Parkinson also highlighted the efforts of WA-based small cap Hazer Group (ASX:HZR), which has secured research grants and is working towards commercialising its Hazer Process for the low-emission extraction of hydrogen and graphite.
Aside from the technological complexities, anyone who’s followed the energy debate in Australia’s federal parliament would know there’s been some wildly divergent views about what role government should play in the clean energy transition.
But almost unanimously, the experts we spoke to said the local sector would benefit from a more coherent policy framework.
On a high level, IBE’s Gauld pointed to the annual rankings on the Global Innovation Index, where Australia has dropped out of the top-20 after peaking at number 17 in 2015.
Switzerland consistently ranks number one, while China has moved from outside the top-30 to number 14 as of 2019. Gauld also cited a list of 23 cities, including London, Paris and Rome, that had signed declarations to ban fossil fuel vehicles by 2030.
“Australia’s not on that list yet, but we should be,” he said, adding that he was encouraged by a recent increase in government engagement with large renewable energy projects.
“There’s more to come, from both the government and large energy companies. So I have seen a notable change in the government as part of the move to cleaner fuel.”
Parkinson contrasted Australia’s policy frameworks to initiatives deployed by authorities in the US state of California, who have taken a more “technology agnostic” approach.
“They’ve started with the end-goal, which is to reduce the carbon intensity of fuels, then asked ‘how best do we do that’?”, he said.
The policy is based on a system of credits, which are awarded to companies that can prove (to an independent expert panel) their technology results in a lower carbon footprint than existing processes.
“It’s an interesting framework because it’s saying ‘we don’t care how you do it, if your end goal is to reduce emissions and you achieve that, we’ll give you credits’,” Parkinson said.
“Essentially we just don’t have a comparative framework in Australia. We’ve got a renewable energy target, but we don’t give much thought to the second layer of the problem. So it can become a bit of a ‘kicking the can down the road’ exercise.”
For Hunter Energy’s Poole, who is currently in negotiations with the government over a loan facility to fund the transition to biomass at Redbank, the decision making processes can sometimes do more harm than good.
“I think the government wants to help, but they can sometimes be so worried about making a mistake the apparatus of the funding process drags out,” Poole said.
“So I think sometimes the government gets stuck, and the biggest risk for a lot of projects is the red tape and the time taken to consider the approval processes can make a project uneconomic to maintain.”
And from an investment standpoint, AEF’s Palmer said the fund had a sense of “frustration” with the current policy tools in place.
“I think Australia would benefit from a broad-based carbon price, whether you’re an economist or you’re an investor,” he said.
“That’s one of the challenges of investing in this area, is we often don’t have that clear market signal which allows people to make sound investment decisions.
“If you look at some of the stocks in our portfolio, they’re not always an easy ride. Over a longer time frame they’ve done well, but say a stock has made a 3x return over a five or 10-year timeframe, it may have returned 5x or 10x with the right policy tailwinds in place.”
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