Energy Transition and the Role of the Infrastructure Sector in Australia

Meeting the challenges of transitioning Australia’s energy systems to lower carbon emissions will be an enormous task requiring coordination across governments, industry, banks, and investors. So, what role can the infrastructure sector play?

There are many answers to this question and the infrastructure sector has already played a significant role in the development and funding of many of Australia’s renewable energy projects. In our view, the areas where the infrastructure sector can have the most impact align with the traditional strengths of the sector:

1. Funding, financing and delivering the necessary transmission infrastructure to support the efficient rollout of renewable energy projects.
2. Delivering more renewable energy projects.
3. Partnering with industry to develop solutions to difficult issues that need to be solved to ensure supply of energy is low-cost and available when required.
    

Transmission infrastructure

A critical component of Australia’s energy transition is the development of new transmission infrastructure to facilitate additional renewable energy projects. Without it, we will see a continuation of the issues that have impaired the development of renewable energy projects, such as unpredictable marginal loss factors and curtailments.

The New South Wales and Victorian Government’s Renewable Energy Zone (REZ) policies are designed to encourage infrastructure operators and investors by providing opportunities to bid for assets with a tried-and-true appeal to infrastructure investors.

Less obvious is the role of behind-the-meter connection infrastructure. Australia’s large industrial consumers, including miners and smelters, are embarking on their own decarbonisation initiatives and are increasingly active through their demand response capabilities. There is a role for the infrastructure sector to play in helping to accelerate those projects and assist industrial consumers to manage their energy costs.

Delivering renewable energy projects

There are over 200 wind and solar generation assets currently operating in the National Electricity Market (NEM). Given capacity factors, these projects deliver less than a quarter of Australia’s electricity.

What is staggering is the number of additional projects required to meet emissions reduction targets. The infrastructure sector doesn’t need to be convinced to invest in conventional renewable energy projects like wind and solar, however, the most successful will:

1. Organise capital to deliver multiple projects. Over the past few years, we have seen a consistent trend of capital aligning with project pipelines. Given the significant shift in Federal Government policy on climate change and state-based policies, the question is no longer ‘if’ it is ‘when’ and ‘how fast’ renewable energy projects will become Australia’s main electricity source.
2. Develop innovative and bankable offtake structures and manage commodity risk on a portfolio basis. Once the domain of pure energy companies, we are seeing more and more infrastructure investors develop sophisticated offtake and trading strategies.
3. Manage construction risk and adapt to different contractual models. For a long time, fully wrapped Engineering, Procurement and Construction contracts dominated Australian renewable developments. While highly desirable, these contractual models are changing and split procurement is becoming more common.
    

Partnering with industry to develop solutions to difficult issues

While the steps taken to develop REZs and further roll out of wind and solar projects are all positive and necessary steps, the most difficult challenges centre on reliability and working out ways to replace high emission generation assets in a cost-efficient way. In our view, the infrastructure sector can play the following roles:

1. Having a voice on market design. We know many of you already do this. The recent response from government to the Energy Security Board’s recommendations for 2025 continue to demonstrate political interest in an issue which, at its core, is a technical and engineering one.  We encourage the infrastructure sector to continue to bring its perspectives.
2. Finding opportunities to support new technology. In the short term, we see this as supporting the development and roll out of battery and pumped hydro. Following that, offshore wind and hydrogen present new opportunities. The infrastructure sector has a long track record of identifying and developing assets which have infrastructure features, such as digital infrastructure and registries.
3. Working with industry to accelerate decarbonisation strategies. We are already seeing this in lower carbon mid-stream Liquified Natural Gas. The benefits we see the infrastructure sector bringing to industry are two-fold. First, it allows capital to be unlocked to further develop assets. Second, the investment rigour and ESG mandate requirements of infrastructure investors assist in the validation of those projects.
4. Providing infrastructure solutions to decommissioning issues. One issue that stands out is water supply for coal mine decommissioning. This has been a critical issue in the Latrobe Valley and there is a potential role for the infrastructure sector to play in delivering alternative  water supply options for a number of projects in the area.

The infrastructure sector has, and will continue to have, a critical role in meeting the challenges of Australia’s energy transition. The challenges and opportunities are vast and while some are familiar, such as onshore wind and solar, the most difficult issues require more than capital. They require alignment between a range of stakeholders, engineering and technology led solutions and creativity and coordination.

This article was originally published on 9 September in Infrastructure Partnerships Australia 2022 Partnerships handbook.