2020 Global Energy Outlook: Australian Bushfires & Energy Impacts

February 3, 2020

In Energy Economics & Politics, our first release from our 2020 Global Energy Outlook, we promised a deeper dive into the effects of the Australian bushfires on energy markets. We reached out to Lisa Zembrodt, our colleague in Melbourne for her expert opinion. Lisa is the Director, Operations – Energy Markets (AUS) within Schneider Electric’s Energy & Sustainability Services division. Her insights cover the bushfires’ short-term impacts on Australia’s electricity grid, medium-term impacts on consumers and long-term planning and risk management recommendations.

Q. How have the bushfires affected electricity and gas markets in Australia in the short-term? Will Australian markets see increased volatility in the medium-term?

Zembrodt:
Other than a few isolated price spikes due to bushfire activity around key infrastructure, the impact on the price of electricity has actually been quite minimal. Owners of these assets take care to reduce the risk of impact by the bushfires, and while there’s always a risk that long-term damage may occur, it’s not as likely as it seems.

But, end-users are being impacted by the costs for the activation of emergency reserves. Without getting too deep into the weeds, suffice it to say end-users in New South Wales and Victoria thus far should expect to see RERT (Reliability and Emergency Reserve Trader) costs creep into their bills in coming months. Last year, in fact, more than $35 million in RERT was passed along to end-users.

Q. Have the fires done any lasting damage to grid infrastructure? If so, any projection on the time to make repairs?

Zembrodt:

Not really. As I mentioned, the impact on infrastructure has been limited. A few bits were impacted, but just as quickly repaired. There is a bit of damage to Snowy 2.0, which is a 2000MW pumped hydro project set to begin operating in 2026 or 2028. But that timeline is so far out, it’s unlikely to be materially impacted by the damage.

Q. Australia is set to expand both its natural gas and coal-fired electric power capabilities. Will the reality of these fires reverse those efforts to more sustainable forms of energy?

Zembrodt:

Yes, Australia is set to continue to be a key global exporter of gas. In fact, it was the largest exporter of LNG last year, overtaking Qatar to claim the top spot.

There hasn’t been much appetite to increase fossil fuel-fired generation capacity in Australia, not just because of political uncertainty, but also due to cost. The cost to build and operate renewable capacity is competitive, and when you take into account the externalities of dirtier types of generation, it just doesn’t make sense. Yes, we need baseload capacity while we transition, but the reality is (or should be) that in a couple decades or less, we’ll be operating on renewable sources and storage primarily.

A key part of the equation is the demand side, of course. Consumers need to set themselves up to participate more actively. I’m referencing load curtailing, load shifting, making use of battery storage, creating microgrids as a few examples. All these can have positive financial value if organizations integrate them correctly.

Q. The consensus is that these fires are the result of – or at very least aggravated by – climate change. Will Australia ramp up its efforts/goals to reduce its impact on the environment (even if other nations don’t)? 

Zembrodt:

I do think there’s stronger public appetite given that the bushfires are a visible symptom of climate change, but it also depends on the government. Australia has been plagued with political uncertainty, with swings and roundabouts in policy. Companies can and should take control of their own destiny and go down their own path toward a sustainable future, just as we’ve seen companies in the U.S. do despite the current government’s stance on the issue. We know that companies that have implemented sustainability strategies tend to outperform their peers that don’t.

Q. Let’s assume bushfires of this severity become the rule vs. the exceptionAre there risk management recommendations you’d recommend going forward?

More than a decade ago, the 2008 Garnaut Climate Change Review clearly stated bushfires would be more intense and the season would start earlier and end later with more days of high or extreme fire weather. The latest data on climate change certainly has not reversed or given cause to reverse this expectation, so companies should consider this in their list of risks they’re managing.

From an energy and sustainability perspective, two questions should be under consideration in every organizations’ boardroom:

  1. What are we doing to reduce our impact on the environment for the long-term?
  2. How will we manage the potential physical and price or cost impacts of climate change? 

Companies should be building holistic sustainability strategies and simultaneously working to implement them.

 

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