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Aussie energy crisis & Net Zero transition w/ Josh Stabler, Energy Edge – EP170

Energy market expert Joshua Stabler shares his views on the current Aussie energy crisis and how well placed Australia and other countries are to transition to net zero greenhouse gas emissions. Learn why Joshua thinks that transition could be disorderly, and learn about the role self-driving EVs could play and whether Josh thinks nuclear energy and hydrogen are realistic options for Australia. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

About this episode’s guest: Joshua Stabler

Joshua Stabler is Managing Director of Energy Edge. He has extensive experience in supply-side market operations for the electricity and gas sectors, and as an advisor and system developer in the Australian energy industry.

Joshua is the architect of the Gas Market Analysis Tool (GMAT), which is utilised by gas producers, LNG participants, gas generators, end users, financial intermediaries and banks. Joshua is also the author of The Edge – Gas Market Update report.

Joshua has a BE (Computer Systems).

You can follow Josh on LinkedIn:

https://au.linkedin.com/in/josh-stabler-6683895b

Links relevant to the conversation

Energy Edge, the advisory business Josh is Managing Director of:

https://www.energyedge.com.au/

What are Renewable Energy Zones? 

https://www.climatecouncil.org.au/resources/what-is-renewable-energy-zone/

Abbreviations

EV Electric vehicle

NEM National Electricity Market

REZ Renewable Energy Zone 

Transcript: Aussie energy crisis & Net Zero transition w/ Josh Stabler, Energy Edge – EP170

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:00

Coming up on Economics Explored.

Josh Stabler  00:03

So we have a known urgency that we need to get rid of carbon out of the atmosphere because it is causing issues with regards to climate change, our ability to shift that rapidly, may be outside of our economic grasp. That’s the danger.

Gene Tunny  00:19

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane Australia. This is episode 170 on the Aussie energy crisis and the transition to net-zero, not just in Australia but around the world. I’m joined by Josh Stabler Managing Director of Energy edge. Energy Edge is a Brisbane based advisory firm specialising in energy markets. Also joining the conversation is Tim Hughes, who helps me out of my business adapt economics from time to time. It’s great to have Josh on the show because energy has been very topical lately. High coal and gas prices, largely as a result of the war in Ukraine that pushed up the costs of power generation worldwide. Also, a cutback in maintenance during the pandemic has compromised generation capacity. Also increasing prices as Josh explains in this episode, just how bad are things energy markets, Josh helps us understand what’s been happening and what’s to come. Please check out the shownotes relevant links and information and for details where you can get in touch with any questions or comments. Let me know what you think about this episode. I’d love to hear from you. In the show notes, you’ll also find a list of abbreviations. There’s a lot of them when it comes to Australia’s energy sector, including any M for national electricity market and our Zed for renewable energy zone. Righto. Now for our conversation with Josh Stabler on energy markets. Stick around for the end of the conversation for what I think are the big takeaways. Thanks to my audio engineer Josh Crotts is the assistance in producing this episode. I hope you enjoy it. Josh Stabler Managing Director of Energy Edge welcome to the programme. Thank you for having me. Oh, it’s great. Josh. Tim, who’s joining me as well. Tim, my occasional co host, recommended you as an expert on the gas market and energy in general. So I thought it’d be good to have you on the show. So Tim, thanks for that. And good to have you on the programme again.

Tim Hughes  02:18

You’re welcome, Gene. Good to be here. Hi, Josh.

Gene Tunny  02:20

Excellent. Okay, Josh would be keen to know about your role at Energy Edge. What is Energy Edge? What, what do you do at Energy Edge, please?

Josh Stabler  02:30

Sure, so we’re a small boutique advisory firm in the energy market, we have sort of two different arms of our business, one sides, our advisory sites. So that’s helping businesses in the wholesale energy market, understand their exposures, that’s with both traditional assets and renewable assets. And on the second side, we have our software arm of our business. So we have our own deal capture system, we have our own risk and analytical system. We have a gas market analysis tool, and we have our own edge report, which we talk about things that are going on in the industry.

Gene Tunny  03:02

What do you mean by exposures? What are they exposures toward?

Josh Stabler  03:05

Oh, yes, so the commodity exposure. So we we we delve deeply into understanding what the business are, how it makes money, how it pays for its energy, and then using that commodity exposure, where then we’ll say simulate out the exposures that they have on making a sort of at risk assessments of the money that they could make. And then from that you can go into deep sort of risk metrics. So you can work out a business’s probability of exceeding certain levels, and that’s known as at risk modelling.

Gene Tunny  03:39

This is Monte Carlo, Monte Carlo simulation modelling. Yeah, good one, using At risk. That’s one of the tools you can use. Right. And what sort of clients

Josh Stabler  03:50

Ahh yes, we’ve we’ve actually supported about 80 to 100 energy businesses on the East Coast, which surprised me sometimes I never wouldn’t think there’d be that many. But, you know, we help all sorts we help, you know, most of the Queensland Gox, we’ve really supported. So we’re actually heavily involved with the setup of Cliniko, which is the latest Queensland Government generator that took over all the renewable projects in 2019. So we came in, help them set up their risk systems and help them get started ready for day one, and then they flip went on and did their own things themselves.

Gene Tunny  04:25

Right. So this is one of the Gox the government owned corporations here in Queensland, that’s looking at renewable energy options for the Queensland Government. Okay. Right. That’s great. Sounds like quite a nice portfolio of clients. And that’s great. Yeah. Okay. Yeah. Tim, did you want to kick off with the first policy or economics question?

Tim Hughes  04:54

Yeah, absolutely. So it’s funny we’ve we’ve all talked about this at different times. So cobbling it together. We’re gonna start with Josh, a summary of how we got here, because I know you’ve talked about this before. And I think getting an understanding of this then helps with the conversation we will have about where we go from here.

Josh Stabler  05:14

Yeah, definitely. So how do we get here is such a, you know, an open-ended question, but in terms of, what are we looking at there. So during winter 2022, in Australia, we saw unprecedented levels of pricing. So the electricity prices settled at $300 a megawatt hour for the quarter, the highest ever previously was about 170. And this was across all the regions. So Queensland, New South Wales, South Australia, and Victoria, were all at record high levels. And this was an accumulation of so many different things that have happened over the last few years. And if we go back two years ago, we have to go through the traumatic experience, again, with going through COVID was that during COVID, we had travel restrictions and congregation restrictions, which means that you couldn’t bring expertise from international space, and put them together to do preventative maintenance. And because we didn’t do the preventative maintenance on coal generators on gas generators that lowered their reliability of those assets. Now, the exact causality of each of those is not perfectly known. But what we started seeing was a rising of unavailability of the coal generators. Now, as we move forward through time, we started seeing other international things starting to change. The, the war of Russia and Ukraine was in March this year, but they actually started reducing their supplies into Europe at the end of 2020. So by the time that they’d reached the point of the Nord Stream failure in July this year, they had actually stopped delivering mushroom to Northern Europe, had lowered their deliveries from 17 petajoules, a day to 1.6. Now, that’s 16 petajoules less now that seems like a big number. And it is a big number, it’s actually the equivalent of 95 million tonnes of LNG, which is 25% of the world’s LNG cargoes. So the extraction of one country’s deliveries to Europe was the equivalent of 25% of the world’s LNG. So it’s a it’s a big, big variation in terms of this is probably the largest shock in terms of supply shock, ever, like I know what the equivalent would probably be the 70s sort of oil shock conditions. So it’s an amazing sort of outcome. But it started happening well, before we actually got to the point of war, which meant that we actually started seeing gas prices in the international space rising from September 2021, six months before we actually had the the actual war. And that led to a scarcity of that of energy starting to appear across the planet. And by the time we got to April, in Australia, we’d actually been buffeted away from this, we weren’t seeing any of the higher prices until we started in April. And that’s when it’s first started seeing a rising of the of the energy prices. This is on two fronts, one was on the coal international coal prices which reached $450 a tonne, which is the equivalent of around about $25 a giga Joule in the in the coal pricing. So that means that coal was not cheap. Coal was very expensive.

Tim Hughes  08:24

What was the regular price?

Josh Stabler  08:27

 Yes, for the first decade of the market, it was $1 a giga Joule for coal and $3 or Giga Joule for gas. So that’s in the early 2000s. And progressively gas prices have risen and fallen. But the coal prices have stayed in that sort of $1 to $3 range. So to see it go 10 times the level is really just driving up an underlying input cost. And then by the time we got to May, we had our first event, the event of the roundabout, the 28th of April through to the sixth of May, was when we first saw a sharp increase in the electricity prices. And that was primarily driven by a large reduction in availability of coal generators. And so we saw a spiking of sort of 30% of the fleet was completely offline during May. In New South Wales, we’re talking 40-45% of the fleet was offline. So this is an unprecedented level, like a AMO forecast 12%. So we are three, four times the height in terms of unavailability of the coal generators during that period that caused electricity prices to spike. Two days later, gas prices spiked. So it wasn’t a gas rose and caused electricity to price up. Its electricity went higher and that caused the input costs to follow it up. So we had and once that once the dam had broken once we had the gas prices jumped up to around about $30-40 it connected to the international price which coincidentally was around about $40 a giga Joule, but just pure coincidence. And when once it reached that point, we started having the prices remain in that area. Now, the coincidence wasn’t that the price joined up the coincidence is that in the late 90s, we decided that the market should have a cap, the market cap should be $40. Nobody thought about that $40 cap when thinking about the Ukraine war in 2022, she just happened to be in a note number that worked out very nicely. And once it came that $40, we’ve just had it stay that level. And we’ve had the market go into a price administered state. And then during that, that level, there we had very high electricity prices. But we didn’t have shortfalls, they weren’t customers that were losing the ability to consume. They were just paying a lot in the spot market for those for that generation, that consumption.

Gene Tunny  10:52

Right. So look, there are a couple of things I’d like to follow up on there. Josh, you mentioned that COVID meant that we couldn’t get people over to do maintenance on coal-fired power stations and gas-fired power stations too. Yeah, right.

Josh Stabler  11:10

An outage is literally bringing expertise and putting them really close to each other in a kind of confined space. So we couldn’t get them in because they couldn’t fly from overseas. And when they were here, they also couldn’t do the work. So what we did was a lot of the generators moved their outages just to the next slot. And the slots are normally the April, May or March, April, May. So the shoulder seasons in terms of weather. And the second slot is in the September, October, November period, where you also have a lowering of demand. So you’d normally fit the outages in there, and they didn’t. So they moved them into the next area. And eventually we just squeezed them all together, and then assets just started to fail.

Gene Tunny  11:50

Yeah, that’s interesting. Something that Tim and I are interested in for in terms of, it’s another one of these potential world costs of lockdown or costs of COVID policies that are on the year, the negative side of, of COVID, or the cost side in a cost benefit analysis. So I have to check with Judy Foster’s included this in, in her analysis because we went to an event a couple of weeks ago in Brisbane here on pandemic and managing the pandemic. And there’s a lot of discussion about the costs and benefits of lockdowns. I mean, that’s, that’s not for this conversation. But I just thought that’s interesting as another cost of those policies during COVID.

Josh Stabler  12:42

And it’s not just Australia, the French nuclear facilities are all having an unheard of levels of maintenance right now. Because again, they also had to delay their work. So there was just that there was just a period of and so that that created some of the false security because in 2020, nobody had outages. So everybody had extra supply to the market, which caused prices to fall. So it wasn’t just that we had a lot lower demand, we had a slightly lower demand because of COVID. But we had an incredibly high level of availability of assets. Because no one did any work. No one was doing any work. But the repercussions of that are that there’s an increased unreliability, but be they’ve got it then do that work. You can’t avoid it. There are statutory obligations, you have to actually do it within a certain time period. Otherwise, you’re breaking the law.

Gene Tunny  13:32

Josh, can I ask you what’s the connection between the domestic price paid for gas in Australia and the international price they’re linked?

Josh Stabler  13:41

They are at time. So we’ve we had a very, very strong relationship during 2019, 2020 and early parts of 2021. And then in mid 2021, electric the gas prices domestically jumped up very rapidly, primarily due to domestic issues, domestic supply concerns, and then the gas prices internationally started to rise and they rose steadily from 10-15, 20-25, 30, $40 a Giga Joule, but the Australian Government gas market after about October or September 2001, all the way through to April was only about $10 a giga joule. So we had this rising International and a very low flatlined was still higher than historical numbers, but it was very low in relative terms. And the relativity really matters for a lot of businesses. If you are a fertiliser business and you sell fertiliser, you are a price taker, you take what the international price of fertilisers are worth, and that is priced on international price of gas. So if you have a relatively low price that absolutely high, you are still in a strong position. Whereas if you are a domestic customer who sells domestically then the absolute price is a problem for you because you’re passing that on to a domestic an audience who have to take the higher price. And that will directly increase their, their outcomes, because there they are a price setter themselves. So that, that differential there matters, especially over the medium term in terms of what that does for certain businesses. Now, once we got to make we, that’s when it joined up, and we had lots of periods where the domestic and international were about the same. There are periods where it looks like the domestic is cheaper than the is more expensive than the international but the international price was jumping $10 a giga Joule, every couple of days. So the volatility was more to do with the when you sample the data more than it was to do with the market price it was moving between 40 and $60, depending on the international experience at the time. You know, when Russia first did that change in their availability, the market moved to $20 in a day. So it gets a bit hard when you’re trying to say, well, what is the exact outcome, in general for the year substantially cheaper than almost any other country other than, say, the US and Canada, Australia in terms of gas pricing. Because most other countries are highly linked, you have a Japanese Korea market, okay, yeah. And you have the TTF, which is the Dutch price for gas, both of those have been elevated in the 60s $70 for Giga Joule equivalents for the entire year. And Australia had 40 for about two to three months, and has had 15-10, 15 for the rest of the period. And long term contracts have been in and around about $12.38, I think was the number that the ACCC reported on so substantially below where the international prices are. Now there are some people who have offered very high prices. But that doesn’t mean that anybody traded there. It’s like going and saying, I asked a hotel. Well, I thought price for a night was and I asked a guy on the street, if I could buy his house, they came in at different prices. You’ve got somebody who doesn’t have any guests available to sell, and you ask them to sell you gas, and they’re going to obviously offer a very high price.

Gene Tunny  17:03

Okay, so I just want to make sure I understand what’s going on. So is it the case that the gas suppliers or the big gas companies, they’re they’re entering into these longer term contracts with their customers, and they’re doing that at a rate that’s much lower than the spot price, because they know that will that spot price is just temporary. That’s what’s going on.

Josh Stabler  17:27

And it’s just for short periods of time that those prices are at that very high levels. So you’re not seeing that pass through that long term contracts unnecessarily getting done at $4. There are, if you go to businesses that do not have any gas, yeah, it’s already in you ask them to give you a price, it’s going to be high. But that, but that post, that business doesn’t end up doing the deal. And that’s what we’re seeing. And when you look at the ACCC report they’ve got the price range was between 10 and 60. But the price ended up being 12. So it’s yes, there are some numbers that look, and they are frightening if you are a customer, looking at the deal like that, and trying to make it work. But most of the ones that were especially the ones that made the media were related to the accident of western energy, which went broke in late May. And the basically, businesses were then going out to so that that retailer had to give their contracts back to the retailers last resort. And that didn’t that those prices were back at the tariff rate. And they were very, very high. So there was some bad media around that. But in general, most customers who have gone to long term, producers have had prices in the order of 10 to $14 a giga Joule right, not on a weighted level. Is it anywhere in the 30s or 40s?

Gene Tunny  18:54

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  19:00

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Gene Tunny  19:29

Now back to the show. I’ve got some more questions. But Tim, I should ask if you’ve got any questions for josh.

Tim Hughes  19:36

I know between the three of us we could talk for days. For us and for everyone else who might be listening, we should not. However, so if you did have any more questions with that Gene, what I was going to come to and we might want to move on to this after if you have any questions to finish, but basically, because we’re in this fascinating point in our history of our time with emerging energy markets to clean and green options that are coming, the opportunity or the challenge to get to net-zero. So that’s what I’d like to put forward for the next part of it. So if you’ve got anything to add from what we will do that first.

Gene Tunny  20:18

I might just ask you about the risk of what happened earlier this year, happening again, it sounded like that there were some specific circumstances the fact that there wasn’t this maintenance going on, in their catching up with maintenance, does that mean, we won’t see another repeat of what happened earlier this year?

Josh Stabler  20:42

Okay, so, I guess, there’s two parts to that we have the problems that we know that are deterministically at fault. Yeah, which is that we know that there is some coal supplies that are low, some of the local mines at say Mt piper, in near Newcastle, have reaching end of life, and they will need to get coal from train links. And the train links have a limitation in terms of the delivery. So we know there are some facilities that will be energy limited by the fact that their suppliers are constrained. That’s the deterministic issue. On the probabilistic issue, we had outage rates of three times what we anticipated during May and June periods. That of those were random events. So they weren’t failure, reliability failure, they are a probabilistic event, they there is a chance that those numbers could come back, there’s chance those those things, as we are getting closer and closer to the end of life are these assets that are less likely to spend the money to go and fix the power station to be ready. Because they don’t, they won’t recover the profitability. And that’s that there is so if you’re only going to survive five years, and you want to spend $100 million, you need to make an extra $20 million out of that asset every year in order for that to even makes sense. And if your input costs are high, then you won’t go and do that. So that’s why we’re seeing a whole lot of power stations, even in a very high price environment. But it’s also a high cost environment, are worried about what that means for them as they get closer to their end of life. And that leads us to that, I guess, if we can carry on to the next question is what happens in terms of as we get closer to transition. And the complication of transition is that it is by default, disorderly.

Tim Hughes  22:38

So this is transition to new energy sources.

Josh Stabler  22:40

As you transition anything from any old, anything old into anything new, you are going to hit this issue in regard to how you get somebody to give up their space for the next person. Now, if a power station has no goal, no plan for profitability over the next three years, then you would be better off to turn off rather than lose money three years in a row. So that means that you’ve got this, you don’t get an overlap in a transition. Normally, you get old assets who are there will want to exit because they see no path to profitability. But we don’t have a solution yet, because that hasn’t come on yet. So we have a renewable wave and a battery wave, and we have a decline of the coal. And if you don’t act to try and keep them so that they overlap, then there will just be a gap. And if you have a gap, then you’ve got an issue because then the power stations as they become less reliable, will fail. And in fact, when they fail, they will withdraw their capacity from the market, which will cause prices to rise. Making them the reason why the prices are high is because of their failure caused the event. So you actually have to that, and that leads you to part of the policy plan, which is how do you keep something online that doesn’t make money. And that’s where you had starting to talk about capacity markets or anything else to try and social licence. This is why a most said that you’ve got to give three now three and a half years notice before you can exit is because you need to tell them in advance that you’re going to leave. Now the obvious response was origins, which was if I had to tell you three and a half years, I’m just gonna tell you three and a half years and I’m just gonna make a different decision at a later date if I need to. If I get close, and I want to keep it online, well, you didn’t tell me I have to shut and three and a half years. I can just keep it on for another two years with a year’s notice. And I’ll just keep it going. But if I’m forced to make a notice then I’m gonna give it early. And then I’ll update it if I need to.

Gene Tunny  24:48

Yeah, good point. Good point. So amo was the Australian energy market operator. And yeah, it’s interesting. This I mean, I’m, as an economist, I’m rather laissez-faire. I’d prefer to just to rely on market hours, the market as much as possible. But yeah, with energy, you’ve got to take into account the fact that you need to keep the power on you need reliability. So we need, we can’t just rely entirely on the market. And that’s why we’ve got this Australian energy market operator that’s overseeing things and trying to get the right policy setting. So we do have, we don’t end up with unreliable power. And we don’t have to have blackouts in that horror show scenario.

Tim Hughes  25:32

I see. Am I right in? I think it might have been one of your podcasts Josh, or something I read recently, and it was a rant. There, there is gas that is used as a backup currently, for that kind of situation where it is expensive, but it kicks in and that can sort of cover any shortfall. Is that right?

Josh Stabler  25:52

Yeah. And it’s, it’s important to like, when sometimes when you think about what is the what is the idea, you can think globally, you’re like, Okay, well, nuclear is going to work for the world in terms of meaning things because of the problems that some countries have. But Australia has the situation we have, we have a lot of sun, we have a lot of wind, we have a LNG export capability that is delivering gas offshore, all the time. So if we get ourselves into a situation where we are short of wind and short of, of sun, we actually have this enormous amount of gas being delivered, that can be interrupted for a short period of time to deliver that energy back into the grid. And the amount that has been delivered is the equivalent of the entire electricity market. So the four petajoules, that goes off is approximately 100% of the net. So if you actually brought it all down, you could power the whole network if you had enough power stations. But what it does is it provides resilience. Now, not every country has an LNG export option. And it’s not saying that we need to use the gas all the time. In fact, we only want to use it when it’s required, because it’ll probably cost us more to interrupt them. So if we had a commercial arrangement where we could say, give me your gas when we need it, and we’ll pay you some money for it, well, then we almost never have a reliability issue. So long as we can get that gas where it needs to go.

Tim Hughes  27:21

I mean, that would obviously cause some problems with markets. So you’ve got to keep a consistent supply to the current customers overseas, etc. So that might be in a sort of like a short emergency sort of situation.

Josh Stabler  27:33

Yeah, a percent of theirs is a huge amount of gas for the domestic market. So a percent of a day is still 40. It’s like 150 megawatts, 24 hours a day. So it’s 1000 megawatts for six hours, it’s a huge amount of gas that can be moved through into power stations to meet the short term problem.

Tim Hughes  27:55

So with the broader view of where are we going, you know, what’s, what are the options open to us? What are the opportunities for Queensland and Australia in particular, but there was clearly a lot of choices about, you know, renewable energy is obviously growing very quickly. It appears to be green and clean, which I know is a little bit of a side conversation as well. You know, everything has some impact of some sort. But that’s the direction we’re heading. Net-zero is the term that we are all familiar with, that covers it all as in like, whatever we’re going to be doing, it’s not going to be harming the planet. That’s pretty much what the goal is. And so we’re in this transitional period that we’re entering now. So from gas and coal in towards these different areas, and like you say, gas may form a part of the contingency or the emergency supply. So we’ve got renewables, we’ve got wind, we’ve got solar, waves, hydro, all these different things, in your opinion, and your experience. What are your views on these new available sources of energy?

Josh Stabler  29:04

So if we separate it into two parts, one is can we get the electricity grid towards a greener environment? Yeah, we have moved a lot further than most people think. So when we signed the Paris accord in April 2016, so six years ago, six and a half years ago, we had an a carbon emissions for the electricity grid of 171 million tonnes per annum, 171. And this year to a couple of days ago, we were just below 120 million tonnes. So we have reduced our carbon emissions and our electricity grid by 40%. In six years.

Gene Tunny  29:41

Are we talking about Australia or Queensland? Australia?

Josh Stabler  29:45

Australia wide and so in the last couple of days, this is the gold period of the year is the golden period for renewables. It has great sun, no much demand, fair bit of wind. We are sitting in Most days at about 65% renewables during the day, and about 25 to 30% renewables every night.

Tim Hughes  30:06

So that 40%, so 40% reduction in six years. Yep. And that’s purely attributable to these renewable energy sources.

Josh Stabler  30:16

Yeah, it’s basically a one for one reduction increase in renewables, one for one reduction in brown coal fired power stations. So that was it, certainly for the first like four years, and then it’s progressively eaten out some of the black coal, that appears to be really first it’s very, very fast, quite a lot. We’re moving 10 million tonnes per annum reduction. That’s on the electricity side. And we are now we’ve now you know, we’ve got days when we’re more than 50% reduction in terms of our carbon emissions, which is, which is great. That’s really, really wonderful. The problem is, is that it’s not the only thing that our requirements our Paris Accord is not electricity market requirements, it is an economy wide, starts getting a little bit confusing, which is that you cannot use renewable solar panels to meet our agricultural emissions requirements or our industrial requirements. But there are still good news stories in it. As we bring in electric vehicles, we move away from inefficient oil to efficient electricity. And as our carbon emission of our electricity grid becomes cleaner and cleaner, it has a multiplicative effect. Now, five years ago, because the ratios change every year, five years ago, the ratio was 36% was our electricity, and 18% was out was transportation. Now, this is where I’ll jump into some of the numbers for this so EVs, we have 15 million cars on the road. Each EV is at two kilowatt hours, if you had them as a Tesla mum, Tesla Model three, just as far as an example, which makes it 1200 gigawatt hours worth of storage, which is about the equivalent of 250 Wivenhoe, and why Wivenhoe is able to support about 1000 megawatts worth of renewables.

Gene Tunny  32:03

So that’s if everyone in Australia had an EV. If we replaced all the cars, on the road with EVs, we would have how many Wivenhoe dams?

Josh Stabler  32:12

250 Wivenhoe’s in storages which can do 1000 megawatts, which makes it 250,000 megawatts worth of hydro of renewables, which is more than we use switches will far more than we use. So we actually only need about 15% of the equivalent of cars moving down in order for us to have a situation where we have enough storage from cars. But cars don’t plug into the grid every night, we need to have them absorb them the right time, there’s a whole lot of, you know, complications that come around that plan. But it’s just a point of what is an opportunity available to us, we have so much storage there that would need to be replaced. Because at the moment, we have all these cars with their engines, and all they do is drive people. Whereas if we had them being engines that were able to be electricity driven as well, they would have a they would have a role in this market. Now, that is a wonderful vision for 2040. Okay, but as a idea of the same problem they have with any bridge, if you start a bridge at one side and start on this side, you’ve got to make sure they meet in the middle, you can’t just have a dream of where you want to be in 2040 and go off and just hope it’s gonna work out. You have to aim the bridges at each other. And that’s where it gets complicated, is how do you transition across. And right now our danger, is it we’ve seen what happens when things don’t go right, and it’s unpalatable. It is politically unpalatable. Electricity is not run by the governments anymore. But it’s politically considered to be run by the governments. So having it move fast is something that people can not accept, that it’s not politically acceptable. So therefore, if you have these another event like this, then people will start giving up on wanting to transition because I think that that is the reason why it’s happening now. Is that the reason? Well, there’s it’s far too it’s not you can’t point to one thing and say there’s definitely been fault on multiple sides of the fence here because renewables have made coal, not make money which has made them unreliable and made them unreliable before they have to exit and renewables are not ready to take over the role yet because they haven’t got the cost structures in order to do it. So we’ve we’ve got one abdicating the role and the other one, a child who can’t take over it.

Tim Hughes  34:34

So what’s your feeling on that? Josh? Like? Because I mean, is it just the transition is happening too fast? Or is it? Are there other things that we need to consider?

Josh Stabler  34:42

We’ve we’ve, we have a known urgency. So we have a known urgency that we need to get rid of carbon out of the atmosphere because it is causing. It is causing issues in regard to climate change, our ability to shift that rapidly, may be outside of our Economic grasp. That’s the danger.

Gene Tunny  35:02

Okay, that’s a good point. I think I know what you mean. But what do you mean by economic grasp?

Josh Stabler  35:08

Exactly. So it’s the cost of solar falls 36% for the doubling of capacity. So if you wait until you’ve doubled the amount of capacity in the world, you get at 36%, cheaper, wait for your next installation. So that part of the deflationary learning curve that we have, right, so you are highly motivated not to invest now, right and wait for it to be cheaper, and then be beat everybody on the lower cost structure. All other things being equal, not all other things are equal, because initially, you have high income for being in a scarce market. So the initial investments of PV got paid 42 cents a kilowatt. And there was a really good incentive for those first people to invest in solar while it was expensive. Yeah, but eventually, you’ve got to compete in is this worthwhile in the long term. And that same applies to batteries, batteries are falling very rapidly. And if you invest, now, your income stream is high, but your costs are high. And eventually, if you don’t get the right deal in place now, then eventually, someone’s going to come along and eat your lunch. And that gets harder, because you’ve and that’s what does that lead to? It leads to, if you accelerate the process, it will cost money. Is that an unpalatable level of money? I don’t, I haven’t clearly worked out, it’s got better, if we had accelerated faster, five years ago, we would be a very expensive system. But we are accelerating now and batteries are coming on. And they are likely to have a heavy impact because we are having a under normal circumstances a very negative during the day price and a high evening peak, which gives a very large arbitrage, temporal arbitrage, buy low sell high. And therefore people are incentivized to put in batteries to meet that obligation. But as you bring on more batteries, that arbitrage shrinks, lowering your income. So therefore, you need to win on costs at that point, because the revenue numbers will start to decline. So it’s just a it’s a there are you know, there are assets that are getting built now that will make money. But if we built all the assets now at this cost, we will just have a high-cost system,

Gene Tunny  37:18

Right. Okay, yeah, good point.

Josh Stabler  37:21

And eventually that comes back because the customer the godly truths of our market is as the customer pays for everything. Yeah, everything has to be extracted from the end user.

Gene Tunny  37:31

Right. Okay. And what do you think about what the state governments here is proposing with? They’re looking at pumped hydro, aren’t they?

Josh Stabler  37:40

They are. So there’s some very, very large pumped storage hydro that they’re talking about. It’s gonna take a long time to get into the market. Yeah. pumped hydro is so when we’re talking about how solar drops in price, as we instal more pumped storage hydro increases every year, because it’s the civil project. It’s not getting smarter technology, its its its potential energy, gravity and height. That’s that maths still the same from 1950s, as it is, now it’s, we probably gained a couple of percents in efficiency. So we are we are getting more expensive, which is a problem, which is why the state’s doing it. Because the state can afford to do something like that, that has an 80 year life and take on that level of risk. Because the of the there are two outcomes, either it was not needed, and everything’s fine. And they’re happy with that, or it was needed, and they helped make it better. And they’re happy with that, as opposed to a private company, which would be unhappy with a scenario where they were unneeded. So iIt’s not that it’s warped. It’s just that they have greater vision in terms of what what is important to them compared to a private in private industry.

Gene Tunny  38:55

I liked the point you made about EVs and in just how many Wivenhoe dams the EVS could represent if Wivenhoe, Wivenhoe is not Hydro Electric is it?

Josh Stabler  39:06

It’s a pump storage. So it is a small drive to a big lake, okay, and it’s called split Creek. So it has the ability to move water up and down from the so an actual slide on the dam is not good for the power station, unfortunately. But it has about 20,000 mega litres of water. So it’s got a large area that it can fill. Yeah, this gives a you know, having all of those batteries gives a incredible capability to meet the rearrangement of data nine, right, we probably have too much, which means that we will, we’ll probably get to a situation where not everybody has to do it. Because we’ve got we’re going to have all these batteries and all these cars and we’re not expecting everybody to be doing this every night. We don’t expect you to get because the other problem is is that you have to fill during the day and then empty when you get home and your rooftop PV is on your roof and you’re not at home because you drove your car away. So if we’re imagining in 2040, we have an answer to that, which is when the car drops you off, it goes home again, because there’s an automated car, and it returns to the base and fills up. And then it comes and picks you up in the afternoon in the process, it’s filled. And when it arrives, it pumps power into the grid, and keeps everything’s sorted. Because it’s moving energy around, not just passengers.

Tim Hughes  40:24

I see this feeds into an area, which I think is really interesting, because the technology is moving so quickly. Yeah. Is that then a hindrance to adopting new technology because you know, you’re investing in infrastructure that all of a sudden becomes, you know, it gets superseded by the next shiny thing.

Josh Stabler  40:40

Oh yeah, especially big costs, like a great example is distribution networks, you’ve got these power grids, or these power lines, they are long, long, long life assets. But if you’ve got power that’s moving by car, you don’t need the distribution network anymore. You got this. So which leads you to the threat, which is known as a death spiral, which is that you have a large cost, but by structure, and you’re smearing it over customers that are getting smaller, which means that you need to charge them more. So eventually, we’re in a position where my, my mom needs to pay $250 million a year in order to keep everything on track. So because you know, it’s the last people obviously, regressive, the people with the most money exit first, and the people the least money exit last. And that means that you’re smearing more and more customers, people who can’t afford it. But that just leads you and that could be where we’re at, we could have some of these assets that are built that are a little bit stranded. But again, you know, some of these things need to get done. In order for us to get there,

Tim Hughes  41:41

You end up with a drawer full of Betamax videos and CDs.

Gene Tunny  41:46

This is fascinating. I’ve never, I hadn’t thought of that before. But if I’m interpreting what you’re saying correctly, we’ve got a car that drives us to work, it’s all automatic. And then it drops us off, and it goes home. So we have all these empty cars travelling on the roads to go home, so that they home when the solar PV is collecting the energy, and they’re storing it.

Josh Stabler  42:12

Yeah. Do you want to make it’s really crazy? They may not go back to your house.

Tim Hughes  42:15

I was gonna, I was going to say they go to the closest available home. Yes, you know, but the thing is also like so this, I mean, we’re getting into the speculative nature of this.

Gene Tunny  42:27

Imagine the IT or the AI  that you need to organise all of it.

Tim Hughes  42:31

That is an exercise in efficiency. Yeah,

Josh Stabler  42:34

well, that’s, that’s the classic, I’m travelling salesman issue. So you got to got all these ones that you need to move on. Because once they select does, it does the first person who gets to choose it, because I’ll just choose the one next door for the next 17 years right now. So that it doesn’t every time. But you need to make sure that that is an equitable sort of delivery of energy. And when we get to that state, then, you know, if you’ve got this demand that can be moved, and can be selected as selective and discretionary in its consumption, then we can just keep on installing more solar, because it will find a find somebody who wants to buy because the power all the cars will come and fill it up. Which leads us then to a problem, which is what have we just built the world’s most expensive way of doing that. Because most of our energy that we need to have, we need to move from the middle of the day to the evening. If I put power into a car, I can come back 100 days later, and it’s still at 99%. So long as you don’t put on a sentry mode, then it will consume it all. But you got to you’ve got to technology, a wonderful technology that is able to keep this energy for long periods of time. But in fact, we don’t need wonderful technology, we need terrible technology that is highly inefficient. That just does it for nothing between the middle of the day and evening peak. And then we can just keep on plunking down more and more solar, because it’s going to solve the more and more expensive evening peak with gas issues or any other thing else or its competition is expensive other vehicles or other batteries. And you’re just trying to undercut them by buying for nothing and selling for anything.

Tim Hughes  44:11

So becomes a market sort of battleground if you like,

Josh Stabler  44:15

Well, I think we’ve over engineered the solution. We’ve there’s probably a much cheaper, easier, stupid engineering solution.

Gene Tunny  44:22

So what and what is that job?

Josh Stabler  44:23

One example would be let’s freeze ice and your roof and make your house cooled down when it does that. Now that one’s I’ve already been asked somebody I think it’s been debunked, but there are answers, which are to do with most of our most complicated times like today. We’re 37 degrees too hot and what we need to do is just move these copious amounts of sun because it’s hot, and it’s bright into the evening and just make cold and if we make it cold if you make the house cold, like in Germany, you have pipes throughout the house and you just heat up that and that hits that water heating keeps the house warm. Same thing We just need to know, is that economically viable? Do you need to go to every single house and water? You know, there are, these things start getting highly complicated when you start thinking about all the engineering and and there’s just a point of, we kind of don’t know what we are going to have. I can think of 25 ideas today on what could possibly happen. And none of them will be right in comparison to what we’re going to do. 20 years time is a long, long time, in a world where people are incentivized to reduce their costs, where something starts causing, you know, the old adage, high prices as a cure for high prices. Because when it starts getting up, people start finding different answers, they find, oh, I don’t need to use that much electricity, I can lower my consumption, I can make these changes. And once you start having those drives, correct drivers people follow, follow the economic behaviour, we, we underestimate our citizens. And that’s why we make our electricity tariffs so simple, in terms of the way that they’re done, the billings insane. But the actual methodology is very, is too simple. It’s, you have a flat price from 7am till 10pm at night, even though that you don’t consume that way anymore, because most people have solar, which means you don’t consume during the day, and then you consume a lot during evening. So we actually need more definition that will drive behaviour, if you were aware that these things were driving you and changing your behaviour, then you would do things slightly different. Anyway, that was it’s a nice little.

Tim Hughes  46:29

It is interesting, because, again, it’s an it’s a question of efficiency. Yeah. And yeah, and householders are interested in efficiency, especially when it’s gonna save them money, especially when it’s gonna save them money. I did have another thing I wanted to pop in there, because I don’t want to make it too speculative. Because I mean, it is fascinating. But solid state battery technology has been mentioned by a mutual friend of ours who John Atkins, who was on a previous show, previous episode. And he had come across this technology, I think Toyota are one of the leaders with this new battery technology, which ultimately could have the potential to charge your house. So it’s not just running the car, you can then plug it back into your house, and it can run the house in the evening. So one of the main areas of concern if you like, at the moment, obviously, it’s you can’t take a punt on future technology that’s not here, we have to go with what’s here. But this must be also a concern for not a concern. But like, governments aren’t always going to be the first to adopt this new technology. But it must make it harder for them to commit to putting infrastructure in for a technology that they think could be redundant fairly soon.

Josh Stabler  47:42

Yeah, and that’s where, you know, a lot of the res idea is that we’ve we have this expectation that we’re going to need large scale wind and solar, out in the out in the regions, that’s going to bring all the power in and that and therefore that’s where the energy is going to come from. And the biggest error in any of the forecasting for the last 20 years of electricity has been the forecast of rooftop solar, every one of them is like this year, it’s gonna be the same as next year quadruples. This year, it’s gonna be the same instead of quadruples, there’s just been this constant misunderstanding of how quickly people were going to invest in it. And they’ve and the and the forecasts have been just horrendously wrong. And now, rooftop solar as a market share is one of the biggest in the net, it is got a now a major part of the electricity grid is what happens from rooftops. And that is driven by mums and dads.

Tim Hughes  48:40

The market is driving this as we’ve had conversations with quite a few different people. And the common thread is that the market is driving these changes.

Josh Stabler  48:48

It is but do you get to talk? Do you get to go into the room and tell people that you’re going to go and do this? Are you going to tell people that you’re putting batteries in, or the big guys can? It’s easy. There’s only like 100 of them, we just go and ask them are you going to go and install batteries and they say sure, I’ve got this big plan to build this big battery out there. And I’m gonna build this wind fine over there. And this is where my solar farm is going to go. And they can tell the people who are going to make those plans. What it is, they didn’t go and interview 15 million households to find out who’s going to invest in batteries. So there’s a level of a lack of advocation on behalf of those customers on behalf of mums and dads in terms of what they’re going to do. They also don’t really get paid for it. Because when they installed batteries, they lowered the consumption during the middle of the day. For the first 10-15 years of this market. The middle of the day was the most dangerous part. It was the most worrying section was what’s going to happen at the hottest point of the day, two o’clock in the day. It’s the highest demand we have the hottest weather and the electricity grid starts failing power lines can’t move anything. And then we don’t have that problem. Because rooftop solar has completely carved out the amount of demand we have at what used to be the most threatening. Now we’ve built, the whole market has built all sorts of power lines, and extra things that need to handle hot weather to move really long, lots of power at certain points in time, that are completely unused now, because that requirement doesn’t exist. And then when we start thinking about what’s going to happen with people, when they put vehicle to grid, and they can move their own power between themselves, Well, no one’s getting asked. So we don’t know what they’re going to do. So there’s like a just an unknown when that starts happening. And what I suspect is going to happen is that eventually, a, someone like probably Macquarie Bank, because they’re the kind of people who would do it, which is they’ll work out that if they install a battery on your home loan, you are now better, you are now a better creditworthy person, because your costs have just gone down, so they can offer you a better deal. And at that point, it all starts changing when you can just put on your home loan.

Gene Tunny  50:49

Right? So you can buy a Tesla Powerwall.

Josh Stabler  50:52

Put it on your home, you are now you are now considered a bit less of a threat, because you don’t have an electricity bill anymore. So at that point, they’re like, oh, okay, well, yeah, you deserve to be I can, I loan you money if you know, whatever percentage lowest because I think that you’re in a better, better position. And you can put that money on to your on your home loan, and we’re going to accept that. And that’s all fine, because we consider this an investment, not a bad, not a negative decision. Once that starts happening, things start moving quickly. Once debt gets involved, the world moves changes very fast.

Tim Hughes  51:24

Yeah. And that technology is obviously good for a considerable time to come. Solar seems to be working really well, that 40% drop in six years that you mentioned down to renewables. Great news. Yep.

Gene Tunny  51:39

Yeah. Okay, so, Tim, I think we suspected we, we might be picking Josh’s brain a lot, we’d go on quite a while. So we’re at 50 minutes, I’ve got a few questions I want to make sure we get answered before we wrap up. So if I try and wrap up for the next 10 minutes or so. Okay, so first, what about nuclear or hydrogen? How much potential do they have in the future electricity grid?

Josh Stabler  52:07

In the world nukes have a very big role, in Australia. I think that that the moment, most of the discussion that is around nukes is probably not in good faith. It’s more in a let’s stop doing things and wait for this new technology. And then our didn’t work out? Well, you might as well stay with coal. I don’t feel like the discussion is necessarily in a in a with completely good faith. Your issue with nukes, which is the same ones that you have with coal is that you can’t get cheaper than solar in the middle of the day, when it’s delivered to your house on your roof. It is cutting through transmission distribution directly into the source of where the demand is, which means that is impossible to get cheaper. So that means that nukes will never be able to run 100% capacity factor, because they will be carved out by the six hours of sun every day, which means that their capacity factors will be lower, which means that their very, very high capital costs will have to be smeared over a smaller volume making their costs, every estimate of costs will be based on 100% capacity factor. That’s all impossible, which means that everything’s going to be more expensive than you anticipated, unless they plan on turning off solar. So they need to get rid of a better solution to make this other one work. So I just don’t see it really working on hydrogen. I am the biggest issue with hydrogen is economics. And it is an inefficient process to produce energy that can be moved. Now, if we have infinite free energy in the middle of the day, because we have so much solar, then having something that costs nothing to put into this energy. So if it’s inefficient, inefficiency doesn’t matter when it doesn’t cost you anything. Zero times by an efficiency of 30% is still $0. So so long as you can get to a point where there’s basic never ending spilling of the load of the solar that it would do nothing, it would literally be turned down and dig and shorted, then you’ve got something that can make sense there. Because then you can just the inefficiency doesn’t matter. So that’s what I was talking about before we you know, we have what is our engineering solution? I mean, that one there is a horrendously inefficient way of getting energy. I don’t know you might fit the bill. I it just doesn’t fit the bill now. Yeah, because the cost structures are $2 or $2 a kilo. That’s $15. If you could do, we’re not doing anything at $2 a kilogramme. Right now we’re doing things at six and sevens. We’re talking 80s and $90. A Giga Joule, you know, we’re having conniptions right now, because the gas prices are above $12. We, we can’t expect to move from something where the world goes in goes into crisis mode at the best possible price point of the future. Like that’s there’s there’s a there’s an issue there. So we’ve got to work out how we’re going to bring the capital cost down and then the marginal cost down so that the the dollars per kilogramme that was a giga Joule for hydrogen falls. But even with all of that, I don’t see how it beats EVs, like, how does it be just putting the power directly from the roof into your car? Like why introduced another thing between an inefficient thing in between there. So if you lose that market, you don’t have EVs are okay, maybe you’re going to get car trucks, because they might need the energy, well, there’s probably better answers to that one as well, why not just have replaceable batteries in your truck, because then you can just take it out, and then you don’t have the energy problem, you can just put a new one in moving energy to other countries so that they can use it that very much relies on the demand, wanting to pay more for it. We’re not, we’re not in charge of that. Japan’s in charge of that. And Toyota most recently, sort of can’t there or not can but they’ve di D prioritise their hydrogen cars, which is not necessarily a great sign for where that’s going. But there are other things green, green steel, you know, there’s always other things, there’s always other things that use hydrogen and making that green. Sure, that doesn’t seem to that seems like a great direction, because you need to build it anyway. Need to get the hydrogen somehow anyway. And your choices are using natural gas or using clean options. If your carbon has got a price on it, then you will end up with a clean one. Without a price. You need regulation to say you can’t do it that way in order for it to hurt. So that’s, that’s my concern is just it’s just economics. That’s that that’s worries me there. I just needs to get the economics. You know, the numbers are so big that it needs to be like have like, eight times. And things can get hacked. It’s easy, you do a lot of economies of scale, and suddenly you find something that’s half the price. But doing it eight times feels like a lot of steps that you need to make better.

Gene Tunny  56:54

Yeah, here there,

Josh Stabler  56:55

you know, yes, you can get a couple if anything’s out by four to one. And its initial stages. Yeah, that’s, that won’t take any time to fix. But, you know, 100, to one that starts getting to a point where you’d like we, there’s a lot of things that need to go right together.

Gene Tunny  57:10

Okay, so now some policy questions and probably haven’t left enough time to go through these complex issues. I’d be interested in your thoughts on the you mentioned capacity, capacity markets before paying for capacity. So you talked about the problems that nuclear and coal, they can’t compete with solar during the middle of the day? Should we be paying to the generators, the fossil fuel generators, or if it’s nuclear, paying them to make sure that they’re online, that they stay in the market, that they’re available? If we need them? Is there a need for some payment like that? So that’s one policy question. The other big policy question at the moment is regarding the and the one of the challenges we’ve got, as this episode will be released after the national Cabinet meeting that we’re having this week to decide on whether we have a cap on coal prices, whether we have a cat isn’t it is proposing a cap on gas prices and also a domestic domestic gas reservation policy. What are your thoughts on all of those,

Josh Stabler  58:10

please start on the gas cap one and then go back to the GST. So the gas coal caps, your biggest issue with any type of so let me start with gas gas one because and they’re all good, we got analogue across to call it the gas, the problem with the gas market cap is that you need to you are having a broad based market response to try and solve what is not a broad based problem. So your businesses a an example a coal mine does not need cheap electricity, because it is making more money than it knows what to do with. So charging it more for charging it an appropriate price for electricity, based on its cost structures end up its revenue stream is part of the reason why cost structures are so high, which is why electricity is high. So if you give them a discount on their electricity, then they’re just making more money. If you are a services business, I’m sure electricity doesn’t even make it or a percentage number in terms of a normal business or normal professional services business. So increasing the cost of electricity doesn’t make a difference. It doesn’t materially change your market, your value of your business. It doesn’t materially change whether or not you’re viable. However, there are businesses that where there is a clear difference, which is if you are a domestically focused manufacturer, and you have a implication of high absolute prices will cause you to pass on high absolute prices to the domestic market that has an inflationary impact, and therefore it needs to that has a legitimate claim to being fixed and to being resolved. Your other group is that mums and dads have paid two points to Extra 2.9% of the total costs for the last 40 years on electricity might be slightly higher right now, but the number is about the same all the time. It’s also not a lot with it, our cost of living has increased remarkably much this year, because of interest rates, not because of electricity. So we’ve had a massive increase in terms of people’s livelihood costs, because of because of the interest rates. And electricity is like a thing that is annoying because it’s on top of so. So for depending on which sector of the market, if you are a low income earner, then that 2.6 is not 2.6 is probably four or five, because your consumption doesn’t really change that much based on your, you know, your your money, you still have to do all these things to keep the lights on and to consume. And therefore that becomes a regret your recess, regressive sort of threats. So you need to manage low income, and you need to manage domestically focused manufacturers or consumers, energy intensive consumers, if you are the rest, which is a lot of the energy consumption, aluminium spouses, you know, your fertilised and everybody else, they are competing internationally, and they are competing in a high market international price. And therefore, their prices they’re passing on, I’m not even going to Australians, they’re going out into the world. And the most of us not even coming back to Australia anyway. So what that doesn’t, so doing a broad based outcome for that kind of doesn’t really fit the bill. So I think that’s where the problem is. Now when you take a look at coal, coal really only has one market in in Australia, which is thermal electricity, our, our meteorological metrological cold, there was stuff that’s used for coking coal, we don’t, we don’t make steel in Australia anyway. So all that stuff is going off to China where the iron ore, it’s getting turned into steel. So there is the implications on the coal market are purely on the electricity space, so long as you can still get the energy. Our problem in winter was not because coal prices were high is because the coal generators were offline. And the ones that were online had limited coal supplies, and you couldn’t give them more coal, because they’re not next to the coal mine. The ones in New South Wales are off the spur of Newcastle and you need to drive the train through a major city to get it to a power station. And you can’t deliver any more to that power station. So you get physical limitations. And just simply saying, your price of your coal is cheaper, doesn’t make them have better power stations, or find more coal, they are just limited by their energy. And that makes it a that that’s an that could return next year, we could have kept on the market, low coal prices, and no energy. And therefore prices are high, because we’re not actually keeping anything that fundamentally keeps the market under control. So our threats right now are not only input, the problem that I find is that everybody said the market is going up because of Ukraine, which makes it feel like it’s an external thing. And all we have to do is disconnect ourselves from there, and it’s all fine. But we aren’t we aren’t actually we’re not we’re in we’re in our own scarcity issue domestically, at the same time as the scarcity issue internationally. And when it goes bad, it joins the international market, which makes it feel like it’s all related. But it’s actually just joining whether they’re in a bad place, and we’re in a bad place. And unless we see some sharp increase in availability, then we don’t, we may just have the same problems again. So that’s, and that leads us to our other question, which is what do you do about capacity markets? How do you make a power station that is unreliable, more reliable? One way, definitely making sure it goes to be less reliable, is to not spend any money on maintenance, so that it will turn off. So if you are thinking that your power station has two years left to live, you’re not going to spend any money on your maintenance, just like you don’t spend money on that car, a clunker that’s about to break down, you don’t go and send it in for a service. When it breaks down, you leave on the side of the road and get someone to deliver it to their records. That’s the problem we’ve got with the power stations as we’re getting to the record stage. When they break, like realistically This is at the point in their life where they might have four units, one breaks, it becomes parts, it doesn’t get turned back into service, it just left to make sure the other ones survived through to the end. Right. So that’s where your capacity might do is it might give you an incentive to stay around for a longer period. Yeah. Which gives you the money to be able to do that to spend on the maintenance so that you can have an asset that will be able to survive until you’re no longer required.

Gene Tunny  1:04:50

Yeah, so we’ve been talking about this for for years now. Do we know if we’re gonna get one capacity? Okay.

Josh Stabler  1:04:57

I think now that we’ve got So many power stations planning on exiting over the next X number of years. It’s also about with we’ve rapidly changed our expectations. Yeah, even just two years ago, we were in a position where coals wood, coal was cheap. There was coal mines were losing money on what they were delivering in. So they stopped slowly stopped there, the supply, you had power stations that weren’t making money, because they were they weren’t, the electricity prices were so low, you know, we’ve, we have gone from $30 a megawatt hour to $300 a megawatt hour in two years. Like it’s such a variation in terms of the outcomes, it’s so quick that nobody has in a market that that builds its world over 10 years, you can’t respond in two. And, and that’s just where we’re, you know, when we’re, you know, we go into a price cap on gas on coal, it doesn’t fundamentally make doesn’t change the engineering just changes the economics. And then the hope is that the economics works. Because if, if you’re saying that’s the next year, anybody who sells coal only gets a lower price, then you just hold and you own it, and you have a stockpile of coal, well, then you just wait to the year after and some of the higher price economic theory is you just waiting there. Or if you can deliver to a boat and sell into $500 a time overseas, then you definitely do that. So you’re definitely getting this position where if you deflate the domestic one, you also need to motivate them to continue to supply because otherwise, you’ve just given them the exact opposite, which they don’t supply, because no one’s going to pay you anything that’s worth anything.

Gene Tunny  1:06:35

Yeah, well, I mean, is that what we’re going to end up with? If there’s a domestic gas reservation policy, where we say that you’ve got to supply this amount of gas to the domestic market at this price, I mean, is that where we’re heading,

Josh Stabler  1:06:49

it does appear that that’s where the direction they’re going. It it. The problem also applies to where that supply is coming from Australia is a lot the tyranny of distance. We with this usually said in the fact that it takes a long way to deliver things from Australia to other countries. But the tyranny of distance also works for our large country to deliver gas from Dolby to Moomba, to young to Melbourne is 2800 kilometres, yeah, which is the same distance as Edinburgh to Turkey. Yeah. So it’s very long distance in terms of of how far you have to deliver, which means that we don’t necessarily have the infrastructure to be able to deliver all the guests that’s required in the south via the infrastructure that we have we we have limitations on that, which means that we need to build up our, our storage in the south ahead of winter so that we can actually deliver it. Now if there’s a cap on the market. And it costs you $12 To buy gas, and it cost you money to put into storage so that you can take it out and get paid $12 What was the financial incentive there? So your cost $12? And then you get paid 12? So what are the $2? Or you just lost that? Okay, well, once if I deliver it from Queensland, where you buy it at two or $5, you’d paid $3 to deliver it down, and then you can sell it for $12. So you’re taking a financial hit there as well. So you, it’s not just so simple as to say that everything’s the same, because then you’ve got no incentive to do anything. If you’ve got gas in Queensland, and you’ve got no reason to move it to another region, other than regulation, that you must deliver excess capacity. It’s just this is when you start delving into how you want things to work. It’s the the problem with putting a cap in is you lose merit, or you lose who deserves to get the gas, who’s willing to pay more who’s willing, or has a higher need for that. So they can actually meet that meet their requirements. Because you don’t have the merit order, you then don’t have the volumetric assessment. So if I was somebody there, I’m just going to say, Can I have a billion petajoules of gas. And if we prorate or down, I’ll have 99.9% of it all, because I asked for the most amount, because there’s no difference between my $12 and your $12. Let’s just split it, split it down the middle of who bet in a billion versus one. I’ll have my billion and you can have your lunch. So it’s it just your problem. You’ve it’s there’s a lot of unintended consequences that need to be managed there. And it’s it’s difficult. It seems simple, but it’s difficult.

Tim Hughes  1:09:33

Yeah. Does that fall into the category of the infrastructure needed for that particular energy source? So for instance, you know, it’s obviously going to be expensive to deliver that, that amount of gas. One of the things I was going to say it was like clearly, not clearly, but it would appear that a diverse array of energy sources would be a wise thing to do. So we now have all of our eggs in one basket Solar has its limitations. Wind has its limitations, etc. Coal has its limitation has its limitations and gas has its limitations as you were saying there’s so like, a sort of array of all of these solutions that would get us towards Net Zero. Yep. would seem like a good idea. So hydro might be a good part of that.

Josh Stabler  1:10:21

Or we should definitely have every single piece of the puzzle that we can get, then the question I think has been slipping in regarding the Niccolo answer. The problem with the nuclear answer is there’s no way we’re getting a nuclear facility in, in Australia. 15 years. Yeah. So even even, you know, we can even have the conversation just so long as the conversation isn’t, we should spend more time talking about Nikola the, the the reality is, if somebody wants to go and do that, yeah, change the law, and then have somebody go and pay the money and spend the 15 years getting it organised. Talking about it now, and with it never been within, you know, not five election cycles away. That’s, that’s, that’s a long, long time. Now, and I guess that also leads to how quickly things have changed away from what we expected, our expectation of gas was that it was going to do nothing anymore, we were just going to have a little bit in Victoria, it’s expected to continue to decline every year, the gas storage two years ago, almost did nothing. The amount of gas that we should be expecting, you know, we, we ran near record levels during winter, but we ran an absolute record lows during spring. So that’s, you know, that’s like a 10 to one variation in terms of daily consumption between spring and winter. We’ve got this, it’s, it’s not just that we have a, an, a constant need is this we have this massive variations and our experts, the forecasts, then beforehand, were like, we’ll use 22 petajoules. And we ended up using 100. Like, we’re completely, we’re completely misreading how it’s going to occur, because things happen that we didn’t expect. And those unexpected things relied on certain technologies to solve it. Because you can’t ask solar to be brighter. You can’t ask wind to get more wind it, it can do everything it does, which it what it does, it does, it runs as hard as it possibly can. The problem with that part as possibly can is, is you can’t go more and go less solar conquer more can only carry less. Gas is already less, and it can do more. But our complication of that is that ends up costing money. Now that might be the cheapest money we could spent. Like that might have cost us a lot of money. And we managed to have no shortfalls. And we managed to keep society going on. And we had no other issues other than a whole lot of political noise around the outside of it. But in reality, we only had a small, very small marginal change in terms of people’s bills. And everything’s, you know, some people are bad, but you know, in general, we have worked our way through it. That cost us money. Yeah, could have been the cheapest option we had available, probably was the cheapest option we had available.

Gene Tunny  1:12:56

Right? I think we might have to.

Tim Hughes  1:12:59

It’s quite an it’s so good hearing your insights and your your from your experience, Josh. And, you know, we could go on and on.

Gene Tunny  1:13:11

I think we’ll have to have you back on again, Josh, because I need to digest. Yeah, this episode. And what’s what’s been said here, because there’s a lot of, there are many things to think about. And I mean, I’m starting to think oh, yeah, I mean, there could be some things that are really positive and make it easy. But then there are other things that are big challenges. And, and you mentioned how this is all uncoordinated. And yeah, I mean, it sounds to me like there’s a risk of some bad outcomes in the next decade or so potentially the non trivial probabilities of, of blackouts. And it just, I mean, I guess we will muddle through somehow. But could could be messy.

Tim Hughes  1:13:54

We seem to be doing remarkably well, like that. The figures you mentioned about reducing 40% In six years is is fantastic. Yep. And I was going to mention, of course, like, there’s a geographical advantage that we have in Australia, for instance, like with solar, like the other parts of the world. Yeah, they would love it doesn’t have, you know, I said so they might have different nuclear might be more viable for certain places, with all its, you know, issues that come with that too. But certainly as technology and this emerging technology, which is coming through very fast, you know, if they can get solar through to be doubly triply 10 times more effective, then it can make it more viable for different parts of the world. So it’s, it’s fascinating, where we’re going and it’s it’s amazing to move so fast. And I guess this transitional period that we’re in is really important that we not trip ourselves up. Yeah, on the way to net zero like, which, of course, you know, who wouldn’t want to be there? I certainly wanted to be there. But we want to get there with the lights on.

Josh Stabler  1:14:59

Yeah, we need to do it. with the least amount of, you know, this is an essential service. Yeah. And it, you know, society doesn’t function if this if this breaks and and transition will lose its lose its losers backing if it can’t keep the lights on. So it’s these are these are important parts. But it’s also I have one last point which is always very difficult to imagine the world different to the one you’re in. So right now we’re in a high market pricing, we’ve got all these danger, we’ve got all these conditions that are that are creating uncertainty where we are, but we have so much, you know, it can change so quickly in this space, we’ll just two years ago, we’re in 1/10 of the price. Yeah. And it can move very quickly against you in or not against you, but in very quickly into a different environment. And it you know, leaps of faith could leaps of technology change, or, you know, we could have, like, everything that’s basically happened in the last couple of years has been supply side failure, it’s just been everything that happened just happened to be on the supply side, we didn’t have a smelter go down. We didn’t have customers do large scale production, because they got their meeting, you know it the spot price was high. But domestically, they’re probably making pretty good positions that are able to pass on these costs. That’s why we’ve got such high inflation, these things are happening, which is allowing people to survive. But if these if we suddenly got lucky on the supply side, and things started getting better, and some things just started getting lucky, you know, we could really move that back away, and then we could leave the international space where it is solve our domestic scarcity issue. And then it won’t be Ukraine that’s holding us up, we were in, we’re in a we can return back to a a more settled environment, which is a little bit like the US us as far as you could your gas, because they are separated for physically separated and the ability to export more is not there. If we suddenly solve some of these problems, we can really pull back, we don’t use other gas for electricity, and that won’t set the price. And therefore we can see it dropping back down if we see some of these problems get resolved. So it’s just a, you know, it’s easy to be stuck in it and to feel the you know, the shadows, the darkness of the shadows in the times when they’re in there. But it’s also you can move past that and you know, we’re definitely at 40% down in emissions, we are on the right path and once we start bringing EVs that’s 54% of the emissions in two sectors, and if we can bring them down to full 4% That’s a long way in terms of where we want to go.

Tim Hughes  1:17:31

Well, I was gonna say I mean, because the way this is driven by the market is, is giving it is decentralising in its effective, like, yeah, if you’ve got rooftop solar, and ultimately you can be self sufficient. The consumers have more autonomy and, and that collectively around the world will make a massive difference. And so it’s, it’s a good direction, it appears, you know, like, I mean, who wouldn’t be happy with that, because you’re not going to have the bigger issues with those outages, you know, it’s going to be more of a localised

Josh Stabler  1:18:04

issue, and a 5% fault is 5% of a million, which makes it 50,000. It’s, it’s not 5% of 20. When you start becoming actually 5% means it’s probably those two, all which is probably the 1% of the time is four off, it’s like when it’s a million, it’s always the same, it’s you know, it’s distributed, the the law of large numbers kicks in, and it’s just 5% Haircut across all the time, on everything, as opposed to occasionally being a very large number, which is what we’ve had very large numbers of times where we’ve had coal fail at the same time as coal fail, same time with gas fail and the, in the in the misalignment of a couple of bad things at the same time, because they’re large, ends up creating large impacts. Lots of little ones and it all disappears.

Gene Tunny  1:18:54

Okay, Josh table, it’s been fascinating. Thanks so much for your time and for your insights have really appreciated that. And once we digest this and think about some more, I’m gonna have to chat with you again, since it’s been terrific. Thank you. Thanks, Josh. Thank you. Okay, so what are the big takeaways from our conversation with Josh? My first takeaway is that the transition to net zero will probably be a bumpy ride. I love the way that Josh described it. To quote Josh, the complication of transition is that it is by default, disorderly. my conversation with Josh confirmed my fear that we could end up with unreliable electricity in coming years. I’m still very concerned, we will have to start expecting the occasional blackout as we bring more renewable energy into the system. My second takeaway from the conversation is that the energy solutions of the future may not be obvious to us at the moment. We need to allow innovation and we need the right incentives in place. EVS could be a big part of the transition path in the conversation with jasha was blown away by the idea of self driving EVs returning home or going to other people’s homes to fill their batteries during the day after they drop us off at work. That’s just incredible. Okay, before I leave, I should note that the Australian Government legislated a highly interventionist energy market package earlier this week, I recorded this conversation with Josh last week when we only had an outline of what could be included in that package. I’ll aim to have a closer look at the specifics of the package in a future episode. Thanks for listening. Okay, that’s the end of this episode of economics explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact at economics explore.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

Please consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

The Aussie electricity market malfunction of June 2022 – EP156

Australia’s National Electricity Market was suspended by the market operator for nine days in June 2022. For a brief period, authorities were worried there would have to be widespread blackouts to balance supply and demand. In this episode, Andrew Murdoch, Managing Director of Arche Energy, explains what went wrong in June, and he talks to show host Gene Tunny about whether it could happen again. Are renewables coming into the system too quickly? What’s happening with batteries? Will Australia be able to cope with the retirement of coal-fired power stations? And what about all the EVs that will need charging? These and other questions are tackled in a frank and fearless conversation.  

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

About this episode’s guest: Andrew Murdoch

Andrew Murdoch is Managing Director of Arche Energy, a Brisbane-based consulting firm specialising in energy projects.. He is an experienced general manager, project director and engineer operating in renewable power, power generation, energy, ports and heavy infrastructure. For more on Andrew’s experience, check out the Arche Energy website.

Links relevant to the conversation

Australian Energy Market Operator (AEMO) report into market suspension in June 2022

AEMO’s Integrated System Plan

NEM suspensions costs lower than expected – NB when they were directed to supply gas to the market at an uneconomic price for them at the market price cap of $300/MWh, the generators became eligible for compensation

AEMO’s Electrical Statement of Opportunity

Some large-scale Australian renewable and battery projects: 

Lockyer Energy, Supernode

Global coal demand as high as it has ever been (IEA report)

Transcript: The Aussie electricity market malfunction of June 2022 – EP156

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny

Coming up on economics explored…

Andrew Murdoch  00:01

Reflecting on the events of June, more energy would have been handy. So it was the cost of energy issue that created these extreme prices. So whether that energy came from renewables or from gas or from coal, any additional gigajoules or megawatt hours generated onto the system would have had downward pressure on prices and certainly would have helped.

Gene Tunny  00:26

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 156 on Australia’s national electricity market, the NEM. In June 2022, the NEM was suspended by the market operator for nine days. For a brief period, authorities were worried there would have to be widespread blackouts to balance supply and demand. My guest this episode explains what went wrong in June, and we talk about whether it could happen again. My guest is Andrew Murdock, Managing Director of RK energy, a Brisbane based consulting firm specialising in energy projects. Andrew has a background in engineering, and he really knows what he’s talking about when it comes to electricity. So standby for a deep dive into Australia’s NEM. Please check out the show notes relevant links Information and for details of how you can get in touch. Please let me know what you think about what either Andrew or I have to say. I’d love to hear from you right now for my conversation with Andrew Murdock on the NEM. And we also chat briefly about electric vehicles toward the end of the conversation. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Andrew Murdoch for a market energy. Thanks for coming on to the programme. Thanks, Jane.

Andrew Murdoch  01:55

Good to be here.

Gene Tunny  01:56

Yes. Great to have you on. So you got in touch after a recent episode where I was talking about EVs and I mentioned that you really love to talk to someone who’s familiar with energy with electricity. And you got in touch and yeah, it seems like you’ve got a great track record. Great experience. Could you tell us about what Arche Energy does and your experience, please?

Andrew Murdoch  02:22

Yeah, sure. So Arche Energy is an energy advisory firm. We’re a small firm based here in Brisbane, Australia. We help people develop energy projects, we help people solve strategic energy related problems. We help people with decarbonisation and developing strategies to meet their netzero goals or other other related goals. We do project management, project development, strategic engineering, owners engineering, etc, in the energy and infrastructure industry.

Gene Tunny  02:54

Right. So in terms of meeting their decarbonisation goals, are you advising them about what renewable energy options they’ve got? I mean, what sort of things would you be advising them?

Andrew Murdoch  03:06

Yeah, absolutely. So I guess a typical decarbonisation job will be a for us will be an industrial mining facility with a significant energy consumption need. And we will look at what what their energy consumptions is, what their, what their physical processes are, and look for opportunities to either make better use of the resources that they’re using, whether that’s gas, coal, heat, power, etc. And then also look at opportunities for integrating renewables and other low carbon sources of energy into their into their processes.

Gene Tunny  03:45

Right. Okay. Are there any examples of clients you can talk about or jobs you’ve done?

Andrew Murdoch  03:51

Yeah, so one particular job was a mining clients, they they developing a greenfield mine, lithium mine over in Western Australia, they guessed the way that you would power a mine 20 years ago was when you would just get a half a dozen big diesel generators, truck diesel, the site and the way you go. These days, you look at some more complicated, complicated processes. So you might integrate some solar into the into the system, you might, you might also integrate some wind into the system and certainly batteries are very valuable for mine supplies. Mine power supply systems now because it allows you to if it allows you to run your engines more efficiently, allows you to have less engines and allows you to deal with shocks to the energy system when a cloud goes over your solar farm or the wind stops blowing etc. So those technologies that are available now are we’re seeing those in most mine supply power jobs that we’re doing these days, right

Gene Tunny  04:56

but would you typically have some diesel generators, they’re just in case.

Andrew Murdoch  05:02

Yes. So system has to be robust enough to deal with a wet week or a week without rain, when the batteries can’t recharge, nighttime evening peaks, etc. So, but we’re seeing, you know, we’re seeing in the studies we’re doing these days, we’re seeing renewable energy fractions going up to sort of the 60s and 70 percents, which is, which is fantastic and wouldn’t have been achievable 20 years ago on mine sites.

Gene Tunny  05:27

Wow, that’s incredible. Okay, that’s, that’s good to know. We want to want to chat about as this whole issue of integrating renewables into the system. And, look, there’s a lot of debate about this. And there are people who are very pro renewable. And I mean, I understand that we have to get there eventually we need to decarbonize. I mean, I’m not arguing against that. But one thing I’ve been concerned about is just just how not, are we doing it too quickly? I think that’s still that’s a legitimate question. What are the risks to the system? We had this situation earlier this year, when the Australian energy market operator had to intervene in the national electricity market? It because it looked like there were concerns about the reliability of supply. Could you tell us about that? What’s your take on what happened there, Andrew?

Andrew Murdoch  06:19

Sure, we might just rewind a little bit and start with a little bit about how the market works. And the physics involved. It’s an incredibly complex system, both physically and commercially. So what we have essentially is a market that needs to match supply and demand almost instantaneously. We have very, ah, it’s not possible to store electricity as electricity. So even batteries are chemical storage, not not, not electrical storage. And so there’s a constant need to match supply and demand as accurately as we can. When demand exceeds supply frequency goes down, everything starts spinning a little bit slower. And when supply exceeds demand, the opposite happens. Everything speeds up a little bit. So there’s a constant need to match supply and demand.

Gene Tunny  07:09

Right? So I mean, what does this mean? Could this mean that it could damage some of our equipment, our appliances connected to the grid,

Andrew Murdoch  07:17

The system in Australia is very, it’s very geographically dispersed. We have power stations that are in the regions. And we have centralised demand in the major cities, capital cities, and also industrial cities like Gladstone, Newcastle, Illawarra, for example. And we need to manage the flows between the generation sources and the loads without overloading a particular network elements. So if we get too much power trying to flow through a particular part of the network, then we start to melt things. And so the market has to manage that. The national electricity market, the NEM, was established just over 20 years ago. And so, it, it has the objective of supplying power in the most economically efficient way to the consumer. Yeah, without breaching any of the technical constraints that it has to work with. So NEMO, the Australian electricity market operator operates a dispatch engine and the name dispatch engine. And that dispatch engine takes bids from each of the generators, builds a bid stack for each of them, and each of the each of the NEM zones, and the NEM zones roughly correlate to each of the states. And then that dispatching engine matches supply and demand and sets a marginal price based upon where the supply demand curve crosses,

Gene Tunny  08:45

Right. So this bid stack, your ranking the bids that come in, so see us energy or whatever, or the other generators say we will supply, what is the bid in terms of is it megawatts? Yeah, megawatts over whatever, particular period?

Andrew Murdoch  09:01

Yeah. So the unit of sale is megawatt hour, so that megawatt hour, one megawatt for an hour. But the bids are done on the bids are done every five minutes on a megawatt basis.

Gene Tunny  09:13

We will supply this much electricity at this price, correct? Gotcha.

Andrew Murdoch  09:19

And then the price is then set at the marginal, the marginal, the marginal bidders price, and everyone, everyone who gets everyone who bids below the marginal bidders price gets dispatched, and they and they they receive that price modified by their loss factor. And then anyone who bids over that price, then doesn’t get dispatched.

Gene Tunny  09:37

Okay, so it’s the marginal bidders price. So that’s the price that was offered by the bidder that they need the last bidder, the marginal bidder, to make sure that the supply of energy matches the demand. Correct? Yeah. Okay. Gotcha. And so everyone, all of the energy supplied, up to there that all gets the market price.

Andrew Murdoch  10:06

Correct. Now the bidders can bid anywhere between negative $1,000 and $15,100 per megawatt hour. So there’s quite a large range of permissible bids. Yeah, the reason for the negative bids is so that if you’re a thermal unit, a coal plant, you have a large cost associated with coming offline. And coming back online, so you will accept for short periods, you’ll accept the cost of having to stay on and receive negative prices for your power. The purpose for the extremely high prices are there to provide an economic incentive to construct peaking plants. So, peaking plant might be something like a gas turbine that only runs maybe 2% of the Year, 3% of the year. So it needs those extreme prices to be able to cover its costs for the rest of the year when it’s simply on standby. In parallel with the physical market, there’s also a contracting market, which is essentially an over the counter market where a generator and a retailer will enter into an agreement to swap exposure to the pool price. So essentially, they that’s what agreements that synthetically generates a fixed price netting out the generators exposure with the with the buyers, the buyers exposure. The larger gen-tailers also tend to vertically integrate as well to manage their risk.

Gene Tunny  11:28

So gen-tailers their generators and their retailers as well, because we’ve got this. Yeah, we’ve broken up the market in Australia, haven’t we? We’ve got we’ve split generators from distribution and from retailers. And once upon a time they were all integrated, weren’t they? We had these electricity boards. We had southeast Queensland electricity board, and yeah,

Andrew Murdoch  11:52

Yeah. So back in the 90s. Yeah, the, the industry deregulated and competition was introduced at a wholesale level. And now we have retailers competing for our, our, our, our retail contracts. And then we have the wholesalers competing to supply to the, to the retailers.

Gene Tunny  12:12

So Andrew, this is fascinating. We’ve got this complicated market, where there’s generators bidding into supply electricity at particular prices, and we’ve got these, this wide band over which they can bid and there’s a negative. There’s a possibility of negative bids. So that’s something we’re seeing more of lately, we’re seeing these negative prices. And that might strike people as very strange, why we see negative prices. So we’re going to just sort of chat about that in a minute. But also, you mentioned that it could go up to what was it $15,000 a megawatt hour. But what happened recently was that they said no bids over what was it? $300 a megawatt hour?

Andrew Murdoch  12:52

Yeah, that’s That’s correct. That’s correct. So I might I might go through what happened in early June. Yeah, fascinating. It’s a fascinating story. So so it all, it all began when Russia was demanding payment for their gas in rubles, and that shell and Orsted and others refused to comply and Russia then made significant cuts to gas supply into Europe, which then obviously had an impact on the the global LNG prices. And because most of these cases of this gas is is connected to the LNG market through the the LNG plants in Gladstone. And we’ve seen netback prices on the East Coast go up as well. So if I reflect back to sort of 2011 2012, we had a spot price of gas that was largely following the cost of supply around $5, $6, $7 dollars a gigajoule. In in March, sorry, in June, we saw prices ranging from between $15 and $43. A Giga Joule for gas, so quite a significant increase over the over the cost of supply for for gas on the East Coast. Right. So

Gene Tunny  13:59

we’re talking many multiples of cost of supply and multiples of many multiples of what it was trading at previously.

Andrew Murdoch  14:06

Correct. Yeah, right. Meanwhile, we had a very wet summer, and that wet summer had the impact of restricting coal supply. So for example, Millmerran wasn’t able to mined coal for a significant period, period of time. And global coal prices also followed energy prices upwards which coal difficult to get and expensive. So last time I checked, thermal coal was trading at around $400 a tonne, which is which is incredible. Now concurrent with that, we had a third factor which was that a large number of plant was out of service throughout, throughout the country. So we had outages that are raring Bayswater, Loyang Liddell and keloid Sea. See, I believe there’s also an outage, just one vacay at the same time as well. So that was about 30% of the call fleet was out of service in in in June. So we do have significant capacity be taken out of the market.

Gene Tunny  15:01

So one thing that’s brought up and I don’t know, I should be careful not to necessarily attribute this to Matt Canavan because I’ve had Matt on the show before Matt, someone I chat with from time to time about these issues. And I’m hoping to get him on the programme again. But it may have been Matt that said that, look, they’re just not investing in this old coal fired power generation, because there’s a push to decarbonize. There’s all of this excitement about renewables, and they’re not doing the maintenance, so they’re not refurbishing the old coal fired power generation capacity. Is that do you know if that’s true, or do you have any views on that?

Andrew Murdoch  15:39

I do have a view. And I guess I take the view that we’re currently using a lot of coal in the country. And it’s great to decarbonize, and it’s great to reduce our reliance on coal, but it’s not going to happen immediately. Yeah. And my personal view is that there was a lot of decarbonisation to be gained simply by making coal plant more efficient, and more reliable. So I’m talking about things like, for example, reducing our reliance on Victorian lignite and transforming it that to higher quality Queensland black coal will have a significant impact on carbon emissions, just by the higher quality of the fuel being burned. The other thing we can do that is, in my view, an easy win is to transfer from 1960s 1970s subcritical technology to 2020 Ultra supercritical technology, or even better integrated combined cycle gas turbine technology.

Gene Tunny  16:38

What’s the difference? Is there an easy way to explain what the difference between those two different types of the whatever it is, it depends on its level of criticality or something

Andrew Murdoch  16:49

Subcritical versus super critical. So, So essentially, if you imagine a little paper wind turbine that you’ve made that in primary school, for example, and you blow on it, and it spins, now the harder you blow on it, the faster it will spin and the more energy that it takes. Yes. So essentially, what we’re trying to do in terms of making a steam turbine more efficient is to increase the pressure at the, at the steam turbine inlet. So essentially, the more energy we can put into the steam before it gets into the turbine, the more efficient the turbine will be. Now, the difference between subcritical and supercritical, interesting little point of physics is that subcritical boilers, the pressure is relatively low, and we we heat up and boil water, similar, similar to the way that the kettle works at home. We bought boiled water to make steam, a supercritical plant. So supercritical plants, there’s not a distinct boiling phase, we simply just heat it up, and it gets thinner and thinner. And that steam because it’s such high pressure has the properties of both a gas and a liquid at the same time. So okay, that’s so much. It’s not so much irrelevant to the physics of efficiency. It just has to do with how we designed the boiler and the steam processes.

Gene Tunny  18:09

Okay. So it’s good to know that, that this technology that came out of the 19th century or possibly even before it can be improved and yeah, okay. That’s good.

Andrew Murdoch  18:21

And then the other dimension to, to decarbonisation of coal generation is, is is carbon capture utilisation and, and storage. And my personal view, and I know, people have some very strong views on this, but my personal view is that there’s more to be gained in carbon capture and storage. Okay. Okay, good. Good. Yeah. So back to June. And I guess the next factor that we have to consider was that June was unusually cold. So we had the ninth of June, the low at Archerfield, was 7.9 degrees against the June mean of 11.8 degrees. So it’s not super cold, but just a little bit colder than usual. And that what that led for us all to do was at home turn on your air conditioners. And in Queensland, on the ninth of June, we reached a new record maximum demand for Q2, for quarter two of just over 8000 megawatts, which is 8.2%, higher than the ninth of June of 2021.

Gene Tunny  19:18

And was this the day that they were warning that they might have to restrict supply? They might have to be blackouts in some areas,

Andrew Murdoch  19:26

correct? Yeah. So that was when we got the loss of reserve notices from right. So and So. Yeah. So I guess moving to that. Obviously, as that demand supply balance started to started to move into, the into the zone of scarcity. The prices went up and hit the market cap of $15,100 per megawatt hour on a number of occasions. As I said, you know that that very high market cap isn’t for our current market design and necessary factor to encourage investment in peaking Last. However, there’s a, there’s a safeguard, there’s a bit of a safety valve on the on the on the system so that we’re not exposed to $15,000 a megawatt hour for too long. And that’s the cumulative price cap. So the cumulative price cap is just under $1.4 million. And that’s taken as the sum of the price in each of the five minute periods over the seven days preceding. So essentially what that does is it gives you a maximum exposure that, that, that that for, for energy buyers, and on the rationale that okay, you’ve had $15,000 for a little while, you’ve paid your operating costs for many years to come. That’s enough.

Gene Tunny  20:41

Yeah. So do we know? I mean, I don’t expect you to denote that I’ll be here. But do we know which was the plan? Or the bidder the marginal bidder? Do we know who was the marginal bidder and what they were bidding into? To meet the supply? Yeah, well, that showed to meet the demand to provide the supply.

Andrew Murdoch  20:59

So yeah, that’s publicly available information and can be achieved, can be obtained through an email. Now it changes for every five minute period. Yeah. Maybe a different person to tomorrow. So there is a lot of data to get through to to identify that. And yeah.

Gene Tunny  21:17

So sometimes, so sometimes it’ll be renewables will let in the during the day, and sometimes it’s coal, and sometimes it’s gas. Do we know?

Andrew Murdoch  21:23

Yeah, so typical, a typical day. So back when when energy prices were normal. Yeah, the marginal the marginal operator during the middle of the day would be either coal or renewables, depending upon depending upon how sunny it is or how windy it is. So on a, on a sunny, moderate day, in April or September, you might find that that solar is is is the marginal bidder, and they may be solar has a negative short run marginal cost, because every month for every megawatt hour of renewable energy that you produce, you also produce a large scale renewable energy generation certificate, which you can then sell for $30, $40, $50 a megawatt hour to to your retailer so that your retailer can meet their renewable energy target obligations. Or you might sell it to a customer who would like 100% Green Power, okay, so so they have a negative a negative short run marginal costs and can afford to operate with a negative spot price.

Gene Tunny  22:28

So they can bid into the NEM at a negative price so that they can sell that power, and then they get this certificate, which meant, so this is a subsidy from the government. Is this right?

Andrew Murdoch  22:41

It’s a subsidy from the energy consumer. So yeah, okay. So so our retailers are obligated to, to surrender a certain number of renewable energy certificates based upon our consumption. Yeah. And we obviously pay for that through, our through our electricity bills.

Gene Tunny  22:56

Gotcha. Yeah. Okay, that makes sense. Okay. Yep. Yep.

Andrew Murdoch  23:00

Then on a more moderate day, the coal plant will be the marginal, the marginal, bidder. Yeah. And they typically have a short run marginal cost in the order of anywhere between $15 and $30 per megawatt hour when the price is normal. Yeah, maybe not today. So then in the evening, you might see some of the gas plant come on. And again, sort of back to normal energy prices, they might have a short run marginal cost somewhere in the order of 80 to $100 a megawatt hour.

Gene Tunny  23:28

So we’ve got, we’ve got solar potentially bidding in negative, you’ve got coal coming in sort of at a you’re at a positive level, and then gas at a higher rate they’d be bidding in during the evening. Yep?

Andrew Murdoch  23:43

Correct. Yeah. So you’ve sort of got those natural price bands that fit around short run marginal costs. Now, then you can sort of add to that and elements of profit maximisation. So. So to actually obtain those high prices, you might not be all of your volume at your short run marginal cost, you might reserve some of that to try and encourage the price up a little bit higher. So yeah, so, essentially, yeah, your goal is profit maximisation. And if you’re, if you’re a gas plant, and you’ve got so many territories of gas to burn every evening, you’re going to try and bid them into the network at at at a at a price where essentially you, you’re going to use up all your gas for the maximum amount of revenue that you can possibly obtain in that evening.

Gene Tunny  24:33

Yeah, yeah. Okay. So they’re being strategic about when they bid into the market to maximise their profits and Okay, so if we go back to June so there was you talked about this cumulative price cap and did that kick in in June did it Yeah, correct.

Andrew Murdoch  24:49

So, yeah the cumulative price cap kicked in. And, and what what that did was forced amo to, to cap the spot price to $300 a megawatt hour. So, so we ended up going from a market operating as it normally would to a strict $300 cap. So which which sounds okay, however, the price of gas was $40 a megawatt hour, I beg your pardon, the price of gas was $40 a giga joule. Yeah, now, the short run marginal cost of a gas turbine is approximately 10 times its gas price. Okay, so, so essentially a megawatt hour of for gas turbine to produce a megawatt hour of electricity, it will it will consume, it will consume 10 Giga joules of gas. So, so 40 times 10 is obviously $400. So, if you’re a rational operator of gas turbines, you’re not going to be dispatching at a cost of $400 to to only receive $300 in revenue. So, so the gas turbine operators, rationally withdrew capacity, which was, which was not in itself sounds like a selfish thing to do, they needed to do that to allow a new AEMO to issue a lack of reserve notice, which then allowed AEMO to force the gas turbines back online. So, without that lack of reserve notice, they wouldn’t have been able to, to order the gas turbines back online, which is, which is what they do.

Gene Tunny  26:18

So they essentially they intervened in the market, they said you, you’ve got to supply this, we will direct you to supply this into the market. Correct. So the market and this is why people at the time were saying the market is essentially failed. And I mean, is that a fair thing to say that, look, the national electricity market, as it was originally designed, is no longer fit for purpose. I mean, if if you’ve got a situation where the the operator has to intervene and essentially take over and go into command and control, central planning style, is that, does that mean that whole system has failed? And we need to start it again?

Andrew Murdoch  26:55

Look I think I think, I think it’s a bit harsh to say that the market has failed, the market has operated extremely well for for over 20 years. And, and has has done an excellent job of balancing supply demand and, and facilitating private investment into the, into the market. And, and I guess modernising beyond state controlled power systems. It’s not perfect, though. And we have this situation, this extreme situation of four unusual events that happened that that was not foreseen. What was the scene was that these types of events will happen. And therefore we give, we have the cumulative price cap to act there is a safety valve to to allow a AEMO to intervene and suspend the market when when it’s appropriate. So yeah, so after a week, of, of regulated $300 A megawatt hour cap, then at most suspended the market and then set the price based upon previous bidding behaviour. But yeah, and that was essentially, essentially just to give time for people to go and have a few deep breaths and, and, and Reset, reset themselves and reset, how they were going to bid. In same way that, you know, in the share market, for example, a company might say, Okay, we need to have a market, we need to suspend trading of our shares, because we’re dealing with this issue, or we’re dealing with that issue. And every system has crisises, from time to time, and it is appropriate to suspend markets from time to time.

Gene Tunny  28:36

Yeah, I think that’s a that’s a fair point. Now, it looks like there was a close run thing, we didn’t end up having blackouts, which was good. I think they had some big industrial users reduce their demand quite substantially, didn’t they? But yeah, we did avoid blackouts of residential areas. I mean, I was concerned and I thought, what a terrible night because it was very cold at the time. Like, what if you couldn’t run your heater? That would be awful. So do you think could this happen again? I mean, how concerned should we be about this? Or do you think that the people running in the people in AEMO the people in the other agencies are overseen energy policy? Do they have this under control? How concerned should we be Andrew?

Andrew Murdoch  29:23

Well, I think look, I think it’s important to note that we didn’t have load shedding Yeah, and and you know, aside from some, some negotiated reduction of industrial load, AEMO were able to keep the lights on and the market participants were able to keep the lights on so. So that in itself is is a tribute to the to the people involved that hey, we we can as a as an industry collaboratively, do our job during, during these extreme extreme periods. Now, I guess, could the factors happen again, could the, could we find ourselves into in a situation where AEMO has to has to suspend them again? Well, the answer is yes. Because if you look at the four, the four factors, could we have very high gas prices? Again? Well, well, yes, they haven’t gone down, prices are still still expensive and Nord streams would drop to drop two to two, no deliveries into Europe. And the headlines coming out of Europe are more and more exciting. From day to day, and particularly as we move into the European into the European winter and into our, our summer, which is our our peak peak demand, very concerning. I feel that we’re globally under invested in gas exploration. We have very long lead times for project development from exploration all the way through to production is many, many years. There’s a reluctance by governments, policymakers, insurances, insurers and banks to support hydrocarbon projects. And so yes, I think gas, high gas prices will happen again.

Gene Tunny  30:55

Where would that be that exploration? Is Australia, one of the prime places you’d be exploring for for gas?

Andrew Murdoch  31:02

Oh, absolutely. Yeah. So so as I think, you know, we’ve seen We’ve seen Moratorium on on gas exploration in Victoria and New South Wales, which is reduced supply into, into into the Australian East Coast grid. There’s certainly a lot more gas in Queensland that that can be developed over, over time. So, so yeah, there’s there’s there’s, there’s a lot there that we have, we can we can contribute there. Yeah. Likewise, with coal. I don’t see. I don’t see global coal prices restoring to levels that we’ve seen in the past. I don’t think they’re going to take $400 a tonne forever. But like gas, you know, there’s reluctance in an even greater reluctance to develop and approve coal projects. Notwithstanding that, globally, we’ve consumed as much coal in the last 12 months as we’ve ever consumed. And that’s a reflection of increasing energy demand from developing economies, who are building coal fired power stations.

Gene Tunny  32:09

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  32:43

Now back to the show. Right, so what about this concern about renewables? Is there a big challenge integrating them into the grid? Does that make the grid more unreliable? If we don’t have the backup the storage capacity, and it looks like we don’t at the moment, we’ve got coal fired power stations, they’re going to be progressively shutting down over the next couple of decades? How confident are you arecan manage that transition? And if you know, what are the what are the things we need to do to make sure it goes well, and we don’t end up with with loadshedding with blackouts from time to time.

Andrew Murdoch  33:32

Yeah, so renewables are complex. And the obvious thing to say on renewables is that, you know, solar doesn’t work when the sun’s not shining, and wind doesn’t work when the winds not blowing the challenge for us. I guess the the key challenges is number one, accessing the resource number two, matching supply and demand, making sure that we’ve got the transmission infrastructure in place to connect the generation to the to the to the load centre, noting that the generation is going to come from your is coming from different places to where it has come from in the past. And then, you know, dealing with storage, so I guess, to, to develop a system where we have the equivalent of baseload power from renewables, you first got to generate the power. Yeah, then you’ve got to store it, then you’ve got to dispatch it. So you’ve got three elements, where we where we would once have had one so so it is it is quite, quite complex. I guess in terms of accessing the resource and there’s a there’s a lot of really good work being done. If you look at the the growth statistics in solar and wind over the last five years has been fantastic. In terms of the, the the number of megawatts that has been added to the grid. It’s still it’s still not easy to develop these projects. You’ve got landholder interest to deal with. You’ve got the interests of traditional owners, you’ve got community interests and expectations. Some people love wind farms, some people don’t. And we each have a different, different view on that. And competing, competing land use is is another another issue. So moving moving through that, I guess, you know, land land acquisition and development approval environmental approvals is complicated for, for renewables projects are land intensive projects. And so and so therefore, therefore complicated from a renewals perspective in matching supply and demand. We have very limited opportunities for baseload renewable says obviously, hydro, but between snowy and Tassie hydro, pretty much tapped all of the hydro resources that we have in the country, there’s a little bit of biomass, particularly integrated with sugar mills, I think we can make better value out of waste to energy projects. So that is using the energy in waste to generate, to generate power. And we’re going to need to to develop massive, massive amounts of storage to cover an average 24 hour load cycle. So yeah, so pumped hydro, large battery projects, and we’re working on on on a very large pumped hydro project, and two very large battery projects that will contribute to, to contribute to solving some of these problems. Yeah.

Gene Tunny  36:18

Do you have any thoughts on what this bet the future with batteries will look like? Well, well, we all have to have something like the Tesla Powerwall. At home, will there be larger batteries? on street corners? I mean, houses going to? How’s it going to play out? What are your thoughts on where the technology is out at the moment? where it’s going? Yeah, are we actually going to have the, the the improvements, the technological improvements that we need? I mean, I remember reading might have been in Bill Gates his book on on the climate change challenge. And I think you were saying we need some, you know, multiple improvement in the efficiency of batteries. I don’t know if it was 20x was some big number in that we need to improve batteries by

Andrew Murdoch  37:03

Yes, I think I think we’re going to see a mix of projects. And we’re working on some very large projects, gigawatt scale battery projects. And, and these batteries are a two hour duration. So they’ll they’re really they’re these projects are really designed to harvest solar energy generated during the middle of the day, store it and then put it back onto the grid in the evening. And essentially dealing with that dealing with that peak load, I think you’ll see, you’ll see a lot of batteries at at a at an industry level as well, we’ll see projects on the fringe of grid utilise batteries a little bit more. So for example, a mine that is in an Outback community that might be supplied by a long skinny transmission line that doesn’t quite have the capacity to serve the mind. So the mind will put a battery in trickle charge the battery during the day and then use that battery to use that battery to cover the peak demands that the mine might have, they might also integrate their own solar in there as well to to self generate a little bit so so so we are seeing a lot of batteries within industry there for for energy management also helps with things like peak demand tariffs and other related energy costs. We’ll also see batteries at a household level participators as virtual power plants, so essentially what happens there is that you’ll you’ll go and have a battery that that you’ll instal in your house and your retail supply agreement will allow your retailer to control your battery and that will allow your retailer to use your battery capacity to trade a little bit of energy. They’ll they’ll harvest the harvest the solar from your roof and then dispatch, dispatch it to your house and then whatever’s whatever the Enders and overs are they can then trade onto the grid. So I think I think we’ll see them at all all levels are at wholesale level that at large industrial level and also at at the household level.

Gene Tunny  38:59

Right. Can we talk about that gigawatt battery? That sounds fascinating. And it gigawatts obviously, a huge amount of energy. So what would that actually power? Do you know? I mean, that I mean, I guess you you could estimate it based on household electricity use, but are we took like what sort of sized town are we talking about?

Andrew Murdoch  39:22

So to put it into context, the the Peak Peak Demand in in Queensland is somewhere between eight and 10,000 gigawatt hours. So let me start that again. So to put it into context, the peak demand in Queensland is somewhere between eight and 10 gigawatts during during high high demand. So essentially, it could contribute roughly 10% of the peak demand to the state.

Gene Tunny  39:51

Right. So that’s now this is going to be in precise because industrial use is a big part of demand but 10% of Queensland. So we’ve got about 5 million people. So that’s about that’s 500,000. People. So we’re talking. Yeah, I mean, that’s a that’s a city. Right. That’s a reasonable sized city. I mean, yeah. I mean, we don’t have any main gold coasts, for example. 500,000 people. Right. So that’s a big battery, then. That’s impressive. Yeah, it is a big battery. Yes. Okay. And so that’s the sort of thing we’d be, we’d be looking at, we’re looking at large batteries to back up the grid. And so without naming names, it looks like the people who are sort of involved in this, the the companies involved in this are looking at options like this.

Andrew Murdoch  40:43

Yeah, absolutely. Yeah. I mean, investors look for opportunities to solve a problem. And yeah, that’s, that’s, that’s how capitalism works, of course, is that you, you know, you add value to the community, by by solving a problem, and then you get paid for it. So yeah, we have some some very smart clients who, who, who can identify these types of opportunities, and then deploy their capital to solve

Gene Tunny  41:06

them. Okay, because they know they can store the energy in the battery and then sell it into the grid when it’s needed. Correct. Okay. Uh, one thing I forgot to ask was about, if you’ve still got time, I know a token. Yeah, that’s right. Do we need something like a capacity mechanism in the national electricity market to to keep this coal fired power and gas fired power online? Because one of the complaints I hear is that with the way the markets been set up, and these, these certificates that mean that renewables can get beat in at negative prices, This undermines the viability of the coal fired and the gas fired generation, but we actually need them from time to time to be able to provide that was it peaking to do the peaking to provide that, that that energy when we really need it?

Andrew Murdoch  42:02

Yeah, well, I guess, yeah, we don’t specifically need coal or specifically need gas. To provide that firming capacity. We need dispatchable power. And traditionally, we’ve gotten that from from coal sources, and yeah, from gas sources. So so it’s not so much that we we need, we need coal, or we need batteries, are we need gas, or we need pumped hydro, we need something. Yeah, that will provide that, that, that, that peaking capacity, then if you overlay a climate change lens on it progressively over time, we need the carbon intensity of that capacity to reduce. Yeah. So back to your question about, do we need a capacity mechanism? It’s hard to see a market restructure being able to address the combination of geopolitical meteorological and physical issues that were were present in early, early June, those four factors still would have been the irrespective of what the what the the, the, the, what the market structure was, I think there are some tweaks we can make to the, to the system, for example, that market cap of $15,000 a megawatt hour, perhaps that should integrate down once it’s hit the cap a few times as you integrated down over time. So the cumulative price cap is not, is never, is never is never exceeded. And I think if you took a control systems engineering view to to how that price cap operates, you could put a feedback system in there that has integrated control down to a to an equivalent of that, of that price cap, which is averages out at about $800 a megawatt hour. So which is good money, if you’re if you’re

Gene Tunny  43:49

I think I understand what you’re saying. So you’re, you’re saying that maybe don’t let it get up as far as 15,000 or maybe once but then start scaling that, like just start reducing that so that they’re still getting the high prices when the market really needs energy, but they don’t get such high enough prices, that it ends up exceeding their cumulative cap, which means that I am asked to intervene and yeah, okay, great. Yeah. Okay.

Andrew Murdoch  44:18

Now, we also have another, a few other, let’s call them quasi capacity mechanisms that are in the system already. And that, as I said that that $1,500.15 $1,000 A megawatt hour is a significant incentive to make sure that you’re well invested in in pacity. And those that weren’t lost a lot of money. So the the other the other thing we have is we do have the contract market on the side. So if you’re an energy retailer, you can go and contract with with the power station to to provide you to provide you with with coverage and essentially they’re providing a physical slot. So every time that the pool price goes up, they will generate on your behalf and you’ll swap that exposure. So so that’s, you know, that’s a A non let’s call it a voluntary capacity market that already exists. And email also has the reliability and emergency reserve trader. And that’s a short term mechanism that whenever a emo feels that the based upon it’s more than just feeling it’s based on some some very sophisticated modelling that the the probability of unserved power exceeds point oh 2%, then they’re able to go and contract with generators to, to provide emergency power during a particular period. And that led to some some temporary generators being being installed in various different locations around the country over the over the past few years.

Gene Tunny  45:42

Temporary generators are they diesel generators? Oh, they

Andrew Murdoch  45:46

could be diesel could be gas. So yeah, so you can you can go to GE and order some trailer mounted 30 megawatt trailer mounted gas turbines. And there’s there’s fleets of these owned by hire companies that that go around the world? And, and, and plug holes in power systems here and there. So

Gene Tunny  46:05

very good. Okay. Yeah. So we were chatting about the capacity mechanism. And I think you’re saying that it’s not going to solve all the problems that that could that could arise, which would, which would cause which would cause issues? So I mean, what, what do we need to do? Do you have any thoughts on what needs to happen with the NEM.

Andrew Murdoch  46:28

So I guess, reflecting on the events of June, more energy would have been handy. So it was a cost of energy issue that that created these extreme prices. So whether that energy came from renewables or from gas or from coal, any additional gigajoules or megawatt hours generated onto the system would have had downward pressure on prices, and certainly would have helped. So there’s a couple of tweaks you can do to the you can do to the to the to the rules to perhaps prevent the accumulated price stress on ever been ever been breached? And that’s just, that’s just a function of mathematics.

Gene Tunny  47:07

That was what we were talking about before. Yeah, yeah, yeah,

Andrew Murdoch  47:10

looking forwards. We’ve got 8.3 gigawatts of coal plant sheduled to be taken out of the market between now and 2029. It’s like 2022. Now. So that’s a lot of a lot of firming capacity needs to be developed in that timeframe. If I look at the various different committed projects that are that are in the system, at present, I only get that only adds to 1.32 gigawatts of dispatchable generation required to cover that 8.3 gigawatts of retiring capacity. So so there is a bit of a deficit there in terms of project firming projects that are available. Now more projects will be be committed between now and then. And those projects I mentioned before, aren’t included in that 1.3 gigawatts. But yeah, these these projects we’re working on are in the development phase development phase for projects is, is very long takes many years. There’s a there’s a lot of hoops to jump through. Some of them necessary, some of them not so necessary. So it’s a bit like the argument in house prices and housing demand is, you know, is extreme high house pricing being caused by the the complexity and speed of approvals, or are there other factors that played personally my my view in power is that we could, we could certainly work a lot faster in terms of bringing these projects onto the onto the grid. If the approvals process wasn’t so bureaucratic and slow. Now, I think it should still be thorough. We certainly, we certainly want to have a thorough EIS process and a thorough technical review of of the contribution that these plants have on the grid. But I think there’s a lot we can do to make it a lot more efficient and perhaps remove duplication. And yeah, and and yeah, I guess add a little bit of I want to say common sense, but that’s not quite the right word for it, but

Gene Tunny  49:23

we do maybe a sense of urgency among some of these regulatory agencies. So you mentioned the EIS environmental impact statement. And I guess, yeah, trying to respond to the environmental issues that that’s obviously a major part of the whole process. Trying to satisfy the environmental regulator that you’re not going to damage the environment. You’ve got a plan, like if there’s a particular there’s foreigner that’s threatened, you’ve got a plan to manage that. So yeah, yes,

Andrew Murdoch  49:53

essentially. Yeah. And I guess, you know, to be fair to this is not just one one agency that the could improve. We see it across all all, all agencies. The the, I guess is there’s a desire for perfection, that that whether whether it’s whether it’s a technical approval or or a planning approval or a or traffic or whatnot, every, each of the departments come wanting to see a level of perfection in every every area, and sometimes it’s just not practical.

Gene Tunny  50:29

Yeah. Okay, I’ll, I’ll put something to you. And I’d be interested in your reaction. I’m looking at what’s happening with energy in Australia at the moment. And I see, we need all of this firming capacity, or we need to be able to back up the grid because we’re bringing in all these renewables. We’re coal fired power, leaving the system. And I mean, I look at this, and I’m very worried about whether we’re actually going to have sufficient power in five or 10 years time, I’m really worried about the reliability of the system. And partly, that’s because I’m concerned that we’ve promoted renewables into the system at a very high rate, but faster than the system can can handle it and not in conjunction with the storage. And we’ve done that for Well, we, I mean, I think, you know, the people are doing it for reasons that, you know, I think they, they think they’re doing the right thing, because it’s for the environment, it’s to tackle climate change. But I’m worried about what that means reliability of power in five or 10 years. And what that will mean for prices, How worried should I be? Am I just am I overly concerned? Am I too concerned? Or is that there might be an irrational, am I being biassed myself in analysing this issue? yet? So

Andrew Murdoch  51:51

I think we can’t oversimplify, or we shouldn’t be oversimplifying the debate. We are talking about complex physics and complex economics. And whether it’s in the media or in politics, there’s these oversimplifications of the answer is x. And depending upon what your political view or your commercial view is your put whatever noun you’re after the answer is to to suit your needs. I try and take a balanced view. Now, in terms of, Should we be worried at a technical level? So I’ll get back to those numbers. Again, there’s 8.3 gigawatts being retired from the fleet between now and 2029. So we’ve been through an incident where, essentially, yeah, it was more of an energy related issue than a capacity related issue, but capacity wasn’t far behind. So we, we have kind of almost just enough right now. Okay. So when we retire 8.3 gigawatts, and we increase peak demand, because peak demand continues to grow, you’re on. And we want to we want to continue to to industrialise and we want to continue to grow the population and grow the economy. And there’s a strong correlation between energy consumption and GDP. So that, you know that that margin is probably going to go negative. And so we should, yeah, we should certainly be prioritising firming capacity. And as I said, previously, whether that firming capacity comes from batteries from gas turbines, from pumped hydro is somewhat somewhat irrelevant. There’s probably still a role for coal to play, but it gets a little bit harder for for, for coal plant to, to provide, provide firming, in terms of, you know, should we be worried about capacity in the future? That’s, the answer is yes. And or just scroll down here to have a look, I was reading over the weekend, the HMOs. Electrical statement of opportunities, which essentially is a forecast of off demand that they use to inform the market. So they’re forecasting that the reliability standard will be breached. If there’s no further investment, that the reliability standards will be breached in New South Wales in 2025, and then Victoria in 2027, and Queensland and South Australia shortly thereafter. How web are if the FA Mo’s recommendations in the integrated system plan, which is a Mo’s map of the projects that they feel should be progressed, then that situation improves a little bit we don’t see the reliability standard being breached in in Victoria until 2027 28. And then, New South wails 2029 2030 But again linked to coal plant retirements,

Gene Tunny  55:05

I have to look at this integrated system plan, what are they? What are they saying in that are they saying, you know, these are these are the investments that are needed in what capacity and in storage and distribution. So,

Andrew Murdoch  55:17

so it deals, the integrated system plan deals with the transmission network more so, than the generation network, they do look at where they believe the, the more, the better renewable energy zones are on the grid and, and that informs a lot of the infrastructure. So that allows them to forecast where the energy is going to be coming from in future years. So it’s essentially feed into the regulated process. So once I emo identify a project that then allows the network service providers, so the power links the trans grids, to start the regulatory investment process, which then allows them to invest in these in these upgrades. But yeah, the timeframe between amo raising a project in the in the ISP and then a network service provider to actually construct and commission a plant is many 510 years in the making. So So these these are big infrastructure projects that take a long time to develop and construct

Gene Tunny  56:21

good one, I’ll check that out. I’ll check out this ISP and put a link in the show notes. One thing that one thing that’s occurred to me is that I mean, one, one possible way to avoid this, this deficit that you’ve you’ve described is, well, we just don’t retire these coal fired power stations, we keep some of them open or longer than is intended or was initial longer than amo thinks that other companies themselves think they will be currently be kept open for. But what that might mean is that’s where that capacity mechanism could could be useful, possibly, but then that means that we’d be paying then just to have the generation available if it’s needed. And that’s why there are accusations that our capacity mechanism would be coal keeper. Have you heard that? Yeah. So

Andrew Murdoch  57:06

I’ve certainly heard the call keeper fever slogan. Yeah, look, it’s it’s interesting. I’d have to think about that a little bit more as to what would a capacity credit encourage a coal plant to stay open more so than the current market structure? I guess the economics of ongoing operation of coal plants on one hand, you’ve got back to a world where energy prices are, quote, unquote, normal. On one hand, you’ve got a very low cost of operation, then you’ve got four, seven production. So you’re you’re it’s true baseload and the volumes are higher. On the other hand, you’ve got ongoing refurbishment costs. So I think callide spent $130 million or so on the refurbishment of one of the B units recently. Yeah, that’s a lot of money. And so you know that that’s an that will keep that that plant operating for another five years for argument’s sake. So it’s always it’s always that economics of, you know, when you’re between major overhaul cycles, and you keep going until the until you hit the next major maintenance. And then and then you make a decision. Do I spend $100 million? Upgrading? Yeah. refurbishing, economy or economy economizer tubes or whatnot? Or do you or do you at that stage retire the plant?

Gene Tunny  58:29

Okay. Okay. Look, I better I only ask one more question, because I’m so long, because this is fascinating. And I really liked the point you made about how, look, let’s not look at this, simplistically, it’s too easy just to come up with some simple diagnosis of what’s going on. And as economists we like to do that, because we like to cut through the complexity. We like to have a simple, elegant model of what’s going on. But I understand Yep, you’ve got to think about the physics and all of this as well as the economics that makes perfect sense. My final question is about EVs. Are we ready for EVs in the network? Will we be able to provide the power? Will we be able to provide the necessary charging infrastructure? And one thing I should I’m interested if you’ve got any thoughts on it is how can EVs help us have a smarter grid? Because I’ve seen that in I think it’s in California? Is there a company that lets people who have EVs they can have that use them as a bit of a mini as battery? And then they can they can even start selling power to other people? I don’t know if you’ve seen that sort of thing. So if you could just talk about EVs?

Andrew Murdoch  59:38

Sure, certainly certainly. Great. I just want to go back to the Nikah the the complex physics and complex economics. I just want to make one other point. There’s also an ecological impact as well as your Yeah, is it every choice we make, it has an impact on cost. It has an impact on reliability, but it also has an impact on carbon emissions. So truth is balancing the three and three issues are all common. looks. So back to EVs. Yeah. So, so So yeah, fascinating stuff. And, and obviously, you’ve had a couple of guests over the last couple of weeks who have had some some interesting things to say on EVs. But yes, so there are there are companies who are planning on using the battery capacity in your Eevee, as part of that virtual power plant mechanism that I was talking about, yeah, with a battery on the wall, that you can also extend that by plugging in your Eevee and allowing them to use that charge. So maybe you’ll come home from from from work, you’ll drive into your garage and about this time of evening, that’s, it’s 6pm, here and in. So you might come home and plug in in the evening, and you might still have 80% of your battery charges there. So the the your retailer might use that to cover peak demand during the evening, rather than drawing from the grid. And then later in the night, when peak demand goes off, and power prices get a little bit cheaper, maybe the wind starts blowing a little bit, then your your retailer will then fully charge your car. So the next morning, you get up and unplug and away you go to work, and you don’t even know that it’s happened. So So yeah, so these kinds of things can be can be done, I noticed, I was reading on LinkedIn, I think this morning, the the Tesla’s in in California, over the last couple of days have been setting you people will go home and the Tesla comes up on the on the Tesla display. You know, the California grid is about to experience peak demand, you might like to charge your car later in the later in the evening. And the Tesla system has an ability for you to time to essentially tell it when you want to leave and it will optimise the charging process a to maximise battery life and also to minimise power costs and impact on the grid. But I guess in terms of physical impacts, look, if we all go home in the evening and plug in our EVs in the evening, then that’s going to contribute to peak demand. And that’s not going to be particularly helpful when it comes to reliability of supply. Yeah. But if we time the charging of the car to be a little bit later in the evening to in the morning, three in the morning, and as I say the Tesla’s can do it. And I’m sure the other EVs can do it as well, with smart charging, then, then the impact on the grid will be will be minimal, because we’re making better use of matching, we’re using the cars to to maximise supply and demand.

Gene Tunny  1:02:31

Right, based on so how does it work? So the you mentioned Tesla, so they’re looking at what the the power prices are, they’re getting a signal from the market. And they’re saying, Oh, look, you might you might want to charge later. Because there’s a lot of demand for power at the moment. And prices are high.

Andrew Murdoch  1:02:53

Yeah, so in the case of the California one it was it was more around reliability. So okay, as I understand it, California is going through a situation that was similar to what we went through June, where they’re, they’re issuing lack of reserve notices, or whatever the California for the lack of reserve notices. And so it’s more so more related around around system system reliability, rather than rather than price. Okay, but there’s no reason why it couldn’t also respond to price if it’s integrated with the with your retailers.

Gene Tunny  1:03:23

Okay. That’s, that’s cool. And just finally, so yeah, so I guess you answered the question. You’re saying that, if we do it intelligently, if there’s some if there’s some way with a possibly buy it, that, I guess it would be via it that these things are charging at the right time? During the night? They’re not all charging when we get home? That they’re delayed, then yeah, it’s possible we we should be able to handle it in your view.

Andrew Murdoch  1:03:54

Yeah, yeah. Yeah. So that’s not to say that won’t have any impact that will have an impact, because there’s more energy that the power grid needs to provide. So if it is all coming from from renewables, and that’s more solar farms and more wind farms, because we still have to produce more megawatt hours of energy and transmit them. Yeah, so it all contributes to load growth. And there will be there will be EVs that do have to be charged during the peak because I’ve just come home or maybe I’ve driven home from a couple 100 kilometres away. Yeah, 2% left in my battery. And in an hour’s time, I’ve got to pick the kids up from school. So I’ve got a charge now. So there will be a contribute contribution, but it won’t be won’t be everyone most of the time for most of your daily cycling will be able to charge during during periods. When when it’s not peak demand. And do

Gene Tunny  1:04:39

You think this will be done automatically? Will there be the computer the in on the in the car or and it connects to the grid and then this will all be managed and coordinated across all of the EVS out there and yeah,

Andrew Murdoch  1:04:51

Yeah, so So Rena did a study. And they found that when people were just left to their own devices, people would come home and plug in Yeah, 30% of all charging happens during peak periods. Yes. Because that’s when you come home. If they, if they then get gave a 10 cent per kilowatt hour incentive, this dropped 10%. So people started thinking about it, I want to save some money or save some money on my power bill. So I’m not going to I’m going to programme car did not start charging into after peak period. And then if they handed over control of the charging to the retailer, then that peak demand use dropped to 6%. Yeah, so Gotcha. So automation is definitely the way and who wants to come home and think about oh, what time should I charge the car? Yeah, I can just plug it in and have have the AI work it out for me. And as long as I don’t know, if I don’t have to think about it, it’s easy.

Gene Tunny  1:05:44

Yeah. Extraordinary. Okay. We’ve, I think we’ve probably come to time because yeah, we’ve had a great chat, Andrew. And, yeah, I’ve really enjoyed this conversation and learned an incredible amount. So it’s been incredibly valuable for me. Any final words before we wrap up? Oh, no. Look,

Andrew Murdoch  1:06:04

thank you for the opportunity to talk. As I say it’s a complex system. We’re balanced. We’re balancing our contribution to climate change. We’re balancing economic development. We’re balancing physics, we’re balancing reliability, and we’re balancing affordability. So it is it is, it can’t be over simplified.

Gene Tunny  1:06:20

So I think that’s a really good way to to put it. Andrew Murdock, Managing Director of RK energy. Thanks so much for your time. I really enjoyed that conversation. Thanks,

Andrew Murdoch  1:06:29

Joan. I appreciate the opportunity.

Gene Tunny  1:06:31

Okay, that’s the end of this episode of economics explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact at economics explored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye

Credits

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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Podcast episode

Fuel prices & electric vehicles (EVs) – EP154

A wide-ranging conversation on petrol/gasoline prices and electric vehicles (EVs). The conversation explores the peculiar economic phenomenon that is Australia’s petrol price cycle. What drives it and how can consumers make it work for them? Show host Gene Tunny and his guest Tim Hughes then discuss the big issues around replacing petrol-powered vehicles with EVs. What does it mean for total electricity demand and what challenges do we face in adopting EVs?

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

Links relevant to the conversation

Australian Financial Review article (paywalled) quoting Ampol CEO saying EVs have to be 50% cheaper before widespread take up

Recent oil price news

Brent crude oil price (ABC news)

Australian Competition and Consumer Commissions (ACCC) monitoring of Australia’s petrol price cycle

Information on Queensland’s electric superhighway

Queensland Government website on environmental benefits of EVs

The Grattan Car Plan which includes lots of useful data on EVs

John Freebairn on fuel excise in Australia

Drive magazine article on impact of EVs on electricity use

Australian Energy Market Commission (AEMC) paper on integrating EVs in the power grid

Economics Explored EP113 – Lithium and the new energy revolution with Lukasz Bednarski

ABC News report As EVs drive a mining revolution, will Australia become a battery minerals superpower?

Transcript: Fuel prices & electric vehicles (EVs) – EP154

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored,

Tim Hughes  00:04

But you can maximize your chances. And you can sort of, play the game over that four-week cycle to keep your fuel costs down.

Gene Tunny  00:13

Welcome to the Economics Explored podcast. A frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. 

This is episode 154, on fuel prices and electric vehicles. I’m joined this episode by Tim Hughes. Tim has been doing some business development work in my business, Adept Economics. Tim’s not an economist, but he’s very interested in economic issues. And in my opinion, he asked very good questions, so I thought it’d be good to have him on the show again to chat about some big issues regarding fuel prices and electric vehicles.

On fuel prices, Tim and I have a close look at a regular cycle and fuel prices that we see in Australia. On EVs, one of the important takeaways from the discussion, is the big challenge we face in replacing petrol powered vehicles with EVs. It’s not impossible, but we’ll need to generate much more electricity and spend a lot of money getting the necessary infrastructure for EV charging in place. 

Please, check out the show notes for relevant links and clarifications and for details of how you can get in touch. If you’re outside Australia, please let me know if there are any patterns and how fuel prices behave where you live. Also, please let me know your views on EVs and any useful info you may have. I’d love to hear from you. 

l’ll come back to EVs in a future episode for sure. I know that I need to look more closely at all the resources needed to build EVs such as lithium, nickel, cobalt, and copper. Australia looks well positioned to supply many of these minerals. But will there be sufficient supplies worldwide to meet the growing EV demand? We’ll aim to cover that issue in a future episode. 

Right oh, now for my conversation with my colleague, Tim Hughes on fuel prices and EVs. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode, I hope you enjoy it. 

Tim Hughes, welcome back onto the show. 

Tim Hughes  02:16

Gene Tunny, good to be back.

Gene Tunny  02:17

Excellent, Tim. Now, Tim, you actually suggested the topic of today’s conversation. So, could you just tell us please, what are these issues that are turning over in your mind at the moment? What are you interested in speaking about today?

Tim Hughes  02:33

So many things Gene, but we’ll settle with; for today, we’ll talk briefly about the price cycle. We’re in Brisbane, in Australia, we have this price cycle of roughly month fuel prices, yes. So, it was in relation to that when we got chatting. There’s a lot around this that we did discuss that we won’t go into today around, you know, the future with electric vehicles and that kind of thing. I don’t know if we’re going to talk about that too much. 

Gene Tunny  03:05

I’d like to chat about that, because I’ve done some research on that.

Tim Hughes  03:09

So, it did set us off around fuel prices. And then, we did talk in broader sort of, ways about the future of what that fuel cycle might look like with the rise of electric vehicles, and then how they’re going to be paired. So, we’ll talk about that in a bit shortly, I guess. But fuel prices otherwise, yeah.

Gene Tunny  03:31

Exactly. I mean, there is a logical connection there isn’t there. Because with the higher fuel prices that’s making more people think about electric vehicles. The problem is electric vehicles are still so expensive. And the Chief Executive, I think, was Ampol. The other day, I saw it in the financial review, I’ll put a link in the show notes. He came out and said, look, basically they have to half in price, you need to get those EVs prices, which I think start in the 40,000s and if you want a Tesla, it’s above 50,000. You need to get them into the 200 to 300 range for there to be widespread take up of EVs in Australia. And I suspect I mean, there’s going to be a similar issue in the States as well and in other countries. 

Although Scandinavian countries, they seem to have higher rates of take up and yeah, but here, I think the price is a barrier and also the so-called range anxiety. We can talk about that a bit later.

Tim Hughes  04:28

There are so many things that would be interesting to talk about with that. And of course, there’s a cost, an ongoing cost to me, the amount that for instance, you might pay, on petrol or diesel now, over a year compared to what your costs might be to charge an electric vehicle and the running costs of any vehicle, which seems to be at the moment far less if you have an EV.

Gene Tunny  04:56

Exactly. Well, you’re not paying for the petrol.

Tim Hughes  05:00

You’re paying for the power, I mean, at the moment, you charge these not from home, it like, there are certain stations that you charge the EVs at. Is there a cost to those? I haven’t actually checked that. I understood that Tesla didn’t charge for recharging the car. I don’t know if that’s correct or not.

Gene Tunny  05:18

That’s a good question. I’m not sure if it’s made it or not. I’ll have to look into that. I know that the Queensland Government has; it’s built this EVs super-highway across Queensland. So, it’s set up charging stations in different cities, I think there must be over 20 of them. I’ve got a link somewhere I can put it in the show notes. They’ve got them in places like Port Douglas and there’d be some places in Brisbane and Cairns Townsville.

Tim Hughes  05:45

I mean, this is an area, because I know that we were speaking broadly today. So, we’ll go into a deeper dive into that part of the infrastructure and the costs. Because I can only imagine that if it’s free at the moment, that it won’t stay that way. I mean, it doesn’t seem to be tenable to not charge people. And also, it’s not the way that it normally works. Obviously, if there’s energy being used, somebody’s got to pay for it somewhere. 

Gene Tunny  06:11

Well, I think there’s a big issue with apartment blocks. So, if you, if you’re doing it at home, then you’re paying for it. The question is, what happens with apartment blocks and some of the evidence I’ve seen, and I’ve got, when I was doing the research, I found these experts talking about the challenges in some apartment blocks of getting the right infrastructure in there, and making sure that the apartment block can support the EVs that are drawing all that power, given they’ve already got lifts and things that are also drawing on power. So, that’s a big issue there. So, there’ll be cost associated with that that’ll have to be met by the body corporate.

Tim Hughes  06:50

Well, we might as well dive as deep as we can on this now, because that is such a big part of what that future of EVs will look like, I mean, obvious time for people to charge their vehicles is overnight, most people, you know, working sort of, during the day. So, to charge overnight, you’d want to be able to charge from home, if you’ve got a house, that’s going to be more likely. Clearly, you’re going to be using power. If you’re in an apartment, like you’re saying there’s going to be an infrastructure challenge there to make that available to the cost basis. And if you’ve got street parking, you know that’s going to give you another challenge, as well. But all of that energy as well, it’s got to come from somewhere. So, we’re going to have to produce more energy than we currently do for electricity to basically replace what we use fuel for, petrol and diesel to have electricity. And then the conversation around the likelihood of where that energy is going to come from, again, infrastructure would be something to consider. But clearly, at the moment, we can’t do that through clean energy. So, the drive towards clean energy is also then part of that question. I don’t know, we’ve talked about the importance of coal, in a transition phase from current coal supply or coal supply power to clean energy.

Gene Tunny  08:20

Well, at the moment, we really don’t have much of an alternative, because we’re still generating the bulk of our electricity from fossil fuels, than coal and gas. Now, the idea was that gas would be the transitional fuel that we would move out away from coal fired power much quicker than we have. But I think we’re discovering now just how hard that is and what that means for the reliability of the network. A lot of the problems we’ve had in the electricity market here in Australia this year, have been because we’ve had some coal fired generators offline, the Callide generator up in Queensland, part of that which was shut down for they had some incident there last year, if I remember correctly, and there are other coal fired power stations that have; there was a big one that closed down in Victoria. And that means that there’s not as much capacity as there once was. So, that’s a big issue. 

And when you have a winter, that was unexpectedly cold, there’s a big demand. There’s not enough supply, the renewables are intermittent. We don’t have enough battery technology to store the power. We don’t have enough pumped hydro. Yeah, this is it’s a big problem.

Tim Hughes  09:35

Well, I mean, the thing is, like, it clearly seems to be moving that way. Personally I’m fully supportive of. I think the drive for clean energy, and electric vehicles is good. One of the things I wanted to talk about was, from your perspective as an economist, you know, to look at just how clean the making and running of electric vehicle is because obviously, there’s an environmental cost to anything that gets produced, and then whatever waste products come from that. But the move towards that seems to be, it’s quick. And so, in some ways, I guess it’s not a problem unless we’re just trying to move too fast. You know, like, clearly there’s a transition period that’s needed with the available infrastructure and fuel supply that we have currently. But that’s going to change significantly over the next 5-10 years. 

So, as that move towards electric vehicles, as the infrastructure does catch up, and as the cost of the vehicles comes down becomes more attractive. I can only imagine then that, we can only move as fast as we can move. So, if there’s a holdup with the infrastructure, or the power supply of electricity for EVs, that’s going to just slow down the rollout of EVs and lengthen the period of time that we might have fuel powered cars. 

Gene Tunny  11:03

Yeah, I think maybe we’ll save this discussion for later on in the program, because you’ll get on to the fuel prices. I think that’s a very good introduction. I agree with you regarding those challenges that we face, I think you’ve actually captured that or presented that quite well. That’s good. Very good, Tim. 

So, you got me thinking about these issues myself. 

Tim Hughes  11:31

Yeah. And there are big areas as well. And we will have like, a lot of this, obviously, like I said, we can dive as deep as we can. We have got some guests and friends and colleagues that we’ve been talking to about coming on here who can dive far deeper than us on these individual issues. But this is more of an overview. I guess, at the moment. 

Gene Tunny  11:53

I had Lukas Bednarski from, well, he’s over in London, he’s wrote a book on lithium. He came on the show last year, and just talking about all the opportunities with electrification and making use of, of lithium batteries. So, we had that conversation. So, I’ll put a link in the show notes. So, that was good. 

So, there’s a lot of potential there. It’s just a matter of, you know, how’s all this going to come together and play out? And if you’re an optimist, you think, oh, yeah, we’ll solve it all with technology. And we’ll, get the policy settings right. But then if you’re an economist who has been around a while, you might be thinking, no, it looks pretty risky. And, I’m not sure we will get those policy settings right. We will eventually, but there’ll be a lot of messiness in the meantime. And that could last decades. 

Tim Hughes  12:49

It’s really interesting, because we’ve obviously headed in this direction of electric vehicles, because hydrogen powered vehicles are still in the conversation and all sorts of other options, I guess. And it’s going relatively fast in the EV direction, and where it had been talked about for decades prior to it really happening. So, this is really quite fast. And I guess technology is just driving that little bit further ahead, of course. And so, we’re just following the available technology. And as they get better, the rollout of EVs is getting quicker. So, it’s that, I guess, we have all of these industries, working like crazy to get ahead of the demand to try and make it possible. So, it’s an interesting time. It’s a fascinating time to see all of this change happening globally, extremely fast. It’s very quick.

Gene Tunny  13:45

Talk about how fast it’s going. It’s going faster in other parts of the world than it is in Australia.

Tim Hughes  13:53

Always fastest in Scandinavia. They always seem to be ahead of the curve over there.

Gene Tunny  13:58

Yes, yes. Yeah. That’s a whole different; that’s another podcast episode, possibly. What is it about Scandinavia? What is it about Sweden? I mean, from the outside, it looks like they’ve got a lot of things right. And we look at it from our Anglo-Saxon perspective and we think oh, well, we really wouldn’t do things like that but it seems to work for them and they seem to be very happy.

Tim Hughes  14:27

The Viking mentality tribes.

Gene Tunny  14:33

We’re gonna chat about that in another episode. Let’s begin with fuel prices. So, everyone’s noticed petrol prices are so high. I mean, what are we paying? Is it nearly $2 a liter or something? 

Tim Hughes  14:47

Well, so we’re in August 2022 in Australia, so this is going to be not an evergreen episode for this part of it. Currently, the cycles just finished in the last week or so. So, it went up to $1.95. So, I’m going to come clean here, I’m a complete fuel nerd. Like when it comes to prices, I’ve sort of, tried to maximize everything, which is I think, where this conversation started with us. The previous peak of the cycle went to around $2.25. So, which is about as expensive as it has ever been? I think it was hitting new heights that was just a couple of months ago.

Gene Tunny  15:23

Was that before they cut the fuel excise?

Tim Hughes  15:27

That was after. So, we were still with the fuel excise in place, which I think is 22 cents a liter. Is that right?

Gene Tunny  15:33

Yeah, it’s normally 44 cents a liter. And they halved it temporarily and

Tim Hughes  15:37

So, the Morison government put that in place. We had an election over here, of course, and new government, but that is still in place, and has been extended until the end of September, I believe.

Gene Tunny  15:49

Yes. So, finishes in late September, September 29, or something like that, and it’s going to be a big deal when the cut is unwound, and there’s another 22 cents a liter added to your fuel bill.

Tim Hughes  16:04

From the consumer’s perspective, we can only imagine that when we were paying $2.25, we should have been at the top of the, you know, the most expensive part of the cycle, effectively, we would have been paying $2.47. Without that fuel excise cut, you know, an extra 22 cents. So, in the cycle, it’s just been, we’ve dropped down to as far as a dollar 53 was about as low as it went. Which was great, you know, so for the consumer, it’s really good. It’s just going up to $1.95. So, it’s about a 40-cent jump whenever it seems to jump. The cycle seems to be around a 40-cent cycle. So, we’ve gone a lot deeper than before, without any real understanding of why there’s still a war in Ukraine, which apparently has an influence on fuel prices here.

Gene Tunny  16:55

Yeah, because Russia was producing oil and also, the gas supplies have been compromised. And so, there’s some substitution between gas and oil in our generation. And so like, everything’s connected, and so when Russia gets taken out of the market, and there’s still the demand for it, because the global economy has been recovering from the COVID recession, prices really,

Tim Hughes  17:24

Which made sense. I’m saying, like, it supposedly affects us over here, because it doesn’t explain why we got so low at the bottom of our last cycle, which was down to like $1.53.

Gene Tunny  17:38

Okay, so the global oil price was coming down, it’s going back up now. So, if you look at the Brent crude oil spot price, and I’ll put a chart in the show notes, it got up to about $125 a barrel earlier in the year, it fell back down to maybe about 95, or something it’s been at, and it’s going back up now. 

So, there’s a report from Reuters. So, this is a 23rd of August report, 2022. Oil prices surged by nearly 4% on Tuesday, after Saudi Arabia floated the idea of OPEC plus output cuts to support prices in the case of returning Iranian crude and with the prospect of a drop in US inventories. Okay, so prices are starting to go back up. Yeah, they reached almost $130 A barrel in the US earlier in the year. So, they’ve been down a bit since then. But they’re much higher than they were a few years ago. 

Tim Hughes  18:45

Yeah. So, the thing being is like, I find it really interesting as to why there’s such volatility in these little four-to-five-week cycles that we have here. So, for instance, we’re up at 2.25 just a few weeks ago, with the 22 cents cut. So, that’s dropped 30 cents, if we’re talking the peak of the cycle. So, we’ve just gone back to the start a new cycle, and it went up to $1.95. So, that’s still 30 cents less than what it was. As a consumer, it’s great, you know, like, obviously, we love the low prices, but that volatility in the local cycle doesn’t seem to match other cycles. That’s not linked, that kind of volatility that doesn’t seem to be linked to the price of crude oil.

Gene Tunny  19:33

Okay, so what’s interesting I think about the Australian market and we’ve studied this extensively in Australia, the ACCC, the Australian Competition and Consumer Commission keeps an eye on it. I think I’ll have to look more closely at other markets but I think this really isn’t Australia phenomenon that we’ve got this price cycle. I don’t know if you noticed it when you’re in England.

Tim Hughes  19:54

They’re pretty stable over there. Like it doesn’t seem to move around very much. I mean, I have to say it’s actually a bit of a game. It is a game over here, which kind of you know, like putting fuel in the car is pretty dull. So, it’s a little bit more spice to doing that, because you can, which we’ll talk about at some point. I know, this is one of the things we talked about, which got us on to this conversation, but you can maximize your chances. And you can sort of, play the game over that four-week cycle to keep your fuel costs down.

Gene Tunny  20:24

So, we can talk about how it is a game and one way that economists have analyzed fuel prices is as a game. So, there’s a field of study called game theory. So, you’ve seen A Beautiful Mind, haven’t you, John Nash, the great mathematician who, you know, had a few issues, but was, obviously a genius. He made major contributions to game theory. So, game theory is a theory of how do people interact? What’s their best strategy, and you can apply that to businesses. And you can apply that to say, fuel retailers, I mean, what’s turned out to be the optimal strategy that they’ve all figured out works for them, and no one really deviates from it. Because it’s just going to make life worse for everyone. If they get into some fuel price war, that is figure out, let’s not do that, let’s not rock the boat, let’s just go along, and we’ll will benefit from this cycle. And they’re making this cycle work for them. So, there’s no real collusion, they’re not ringing up each other. They just sort of, all know how the games play; this has developed over the years. 

Tim Hughes  21:30

They’ve got a mode of behavior that they all follow. They just have to do the same thing at the same time.

Gene Tunny  21:40

Yeah, it’s, it’s funny, isn’t it? You can explain that with Game Theory. So, there have been various different models of this proposed over the years with fuel prices. I’ll have to revisit it, I remember learning about it in the 90s. This was a topic of conversation in one of our micro economics lectures, I remember Harry Campbell is a professor at UQ. He would often talk about fuel prices. 

Now, the way I think about it is how this benefits the petrol retailers is that they’re able to segment the market, they’re able to divide the market into different segments and charge different prices to both segments, and this is going to maximize their profit. Now, one of the challenges that firms have when they’re selling to the public is that they can’t distinguish between different customers in terms of their willingness to pay, how much were they actually willing to pay for this their product. And so, what they end up doing is, well, if you can’t really discriminate, every customer has to pay the same amount, then the price you charge is just enough to cover the costs of production of the last unit, the last sale that you’ll make to the last consumer that is profitable to sell to. But what that means is that you’re missing out on a lot of the upside from customers who would have paid more. And, well, what you can do is have a strategy of price discrimination, if you can separately identify different groups of customers, you can discriminate amongst them charged at different prices, depending on their willingness to pay. So, that’s why for years I mean, well, look, that could be another explanation. But one explanation for why nightclubs used to charge lower cover charges for females, relative to males is that males typically had more money, they made more money on average, higher income, higher willingness to pay to get into the nightclub. 

Tim Hughes  23:41

I thought that was to encourage, because it was better to have women in the nightclub.

Gene Tunny  23:46

I think so, that’s part of it. But it could also be because men have a higher willingness to pay to get into the nightclub than women. So, yeah, it’s in the interests of the nightclub to attract the women in;

Tim Hughes  23:59

And to get the men in who want to pay more to get in.

Gene Tunny  24:03

Yes. To the attract the right ratio, or the right numbers of women, and they have to lower the price for females. And then they charge the males more. Males have a higher willingness to pay to get into the nightclub.

Tim Hughes  24:17

And then we’re known as meat markets, which sort of, explains that approach, I guess, because that was part of that scene, I guess.

Gene Tunny  24:29

Yeah. Don’t think as many places have covered charges now.

Tim Hughes  24:35

They do apparently, someone also tells me

Gene Tunny  24:38

I guess I’m not going to;

Tim Hughes  24:41

You can get in free before 10 o’clock at certain clubs. But back in the day.

Gene Tunny  24:48

I’ve just noticed that there seem to be fewer places with cover charges. I think maybe it’s more competitive now, who knows. Anyway.

Tim Hughes  24:54

We should do some research on that.

Gene Tunny  24:59

So, how I think this plays out in the fuel market with the fuel cycle that goes over several weeks is that they figure out there’s a group of customers who are really price conscious, they’ll buy when the fuel price is cheap, we’ll get them in. So, they’re a group that we can’t really get out. Or we can’t charge the high price to. They are the savvy consumers, they’re like you, Tim. They’re monitoring the, what are you doing? Are you monitoring or not?

Tim Hughes  25:45

Yeah, we’ll go into that in a bit. I’ll let you finish what you were saying. I’ll go into that.

Gene Tunny  25:49

Okay, you’re the savvy consumer. They know that there are some consumers they have to charge this lower price, too. But then there are the less savvy consumers or the consumers with deep pockets who don’t really watch the fuel tank, who aren’t thinking about when should I fill up what’s the optimal time, they just don’t care, there’s a high opportunity cost of their time. And the fuel retailers know that it’s sometimes, we can really charge them the maximum that we can get away with.

Tim Hughes  26:18

So, they are the only ones who are going to be filling up.

Gene Tunny  26:21

So, what they’ve done with this fuel price cycle, it allows them to segment the market into the high opportunity cost people who don’t care, people with deep pockets, let’s charge them as much as we can get away with. And then another market segment; that’s the savvy consumer, the cost-conscious consumer, the consumers who are paying attention to this price cycle, the fuel nerds, they might be monitoring the ACCC website, and the ACCC website is amazing. It has buying tips. I’m going to have to follow this now. Buying Tips, prices are decreasing, but they are likely to decrease further. So, this is what you were saying before, we were at the peak of the most recent cycle, is that right? And so they’re coming down now.

Tim Hughes  27:08

So, it went up to $1.95, which is a peak, is lower than it has been. It was going up to 2.25. That was the peak just a few weeks ago, maybe, one or two cycles ago; the top of it was 2.25. And that’s with the 22 cents cut in in the excise.

Gene Tunny  27:26

Yeah. Okay. And they recommend, if possible, motorists should delay by and petrol until later. I wonder if anyone’s ever complained to the ACCC about their advice. But I guess their advice is based on the cycle, and the cycle is just built in now. Because everyone’s playing the game; all the fuel retailers know that this is in their best interest, all the customers come to expect it.

Tim Hughes  27:48

There’s very little said about it, because it’s just accepted. That’s just how it is, but you can see, when the when the cycle does change. Because it happens gradually, it’ll happen over a seven to 10 day period from the first one you see, changing all of a sudden, that’s 40 cents difference, no one’s going there, it’s empty. So, very few people are going to be at that first one. And then it trickles down over the next seven to 10 days, until the last ones there. And when you get to that pointy end, those last ones normally have quite a few cars in there filling up. So, you can maximize your chances obviously, by keeping topping up or go through.

Gene Tunny  28:29

Yeah, you know, you go through it, but just tell me, did my explanation makes sense?

Tim Hughes  28:37

It did, because it was one of the questions why did they do that? But that made sense as to why they do it because they’re looking to charge as much as they can for those who don’t care as much.

Gene Tunny  28:50

That’s my as to why they’re doing it. It makes sense in terms of price discrimination, which is something you learn about in first year economics or micro economics. It’s a strategy that a firm will employ if it can distinguish different market segments and charge different prices to different market segments.

Tim Hughes  29:12

I guess it’s interesting. I’d like to say I don’t mind it, it’s a bit of a game and you play the game, or you don’t care. And it’s it doesn’t really matter. But I wouldn’t be interested; like my other experience really is in the UK, where I’ve been for longer periods and not noticed the cycles. And I would imagine with anything like this, if there’s a benefit that that will catch on and get done around the world. So, it’s kind of like side thought, but it’s it would be interesting to see if it’s unique to Australia to have this kind of volatility in a four-week cycle, or if that’s common in other parts of the world.

Gene Tunny  29:47

Yeah, I’ll have to look more into it. But it’s my understanding that it is. This is an Australian phenomenon. We’re examining that there might be elements of it in different countries, but for some reason it is baked in here. Our retailers have figured out, this is in our best interests.

Tim Hughes  30:04

Because it’s a big step, I mean, 40 cents out of it. Like, even if we average $2 at the top of the range at the moment, you know, that’s a 20% difference, which is big.

Gene Tunny  30:19

Anyway, okay. I want to hear about how you’re playing the game, Tim. Could you tell us how you’re playing the fuel price game?

Tim Hughes  30:26

It’s great, because technology really helps with this. There are several apps out there, for instance, again, this is Australia. So, for other countries, it’s going to be different. But there are; RACQ have one, there’s another one called fuel track, I think it is. And if you just look up fuel app, you’ll come up with all these different ones. And they will tell you, or you can search your local area to find out what’s the cheapest and you get a good idea as to, once you hook into the cycle, you can start to see when they’re starting to go up. There’s normally a couple of, for instance, here in Brisbane, around Kenmore, there’s a couple of servos there that are like the first to adopt; but that changes around too, you know. So, you can find that where it used to be the first place to go up isn’t always the case, I don’t know how that works. And again, that’s going to be stuff that we may never know about. But it doesn’t seem to be absolutely predictable. 

But what is predictable is once you see one go up. And so, if you can search an area around you and you see the first one go up, then you know you’ve got maybe a week before that disappears out of the realms of being able to get that lowest price. And so, when you know you’re at the bottom of the cycle will you fill up, you know, you fill your car up, and you keep topping it up until the cycle is completely gone. There’s a further thing you can do, which I’ve got, which is from the 7-11 app, it’s called My 7-11. And so, 7-11 and Mobil have joined forces. So, it’s basically a Mobil servo with the 7-11 shop attached to it. And the My 7-11 app allows you to do a fuel lock, which is fantastic. So  So, when you when you know you the end of that, and again, this is a real game, because when you do your fuel lock, it’s locked in for seven days. So, you can do it, but effectively, you’ve got seven days before you can then put another fuel lock in. I did a fuel lock, and it was a long time before it all disappeared. So, I filled up on my sixth day, and it reset. So, it looks like if you do your fuel lock, I might be hard to follow with this. I’ve realized but, if you do a fuel lock and then you buy some petrol. What happens is you show your app and the little barcode of when you did the fuel lock and it’ll lock in the price that you locked in. Then it starts again. So, that seven-day cycle does actually start again. So, you don’t have to wait seven days until you can do your fuel lock again.

Gene Tunny  33:05

Is there a transaction fee if you’re locked? Do you have to pay for fuel lock?

Tim Hughes  33:09

No, nothing. So, it’s really good. So, obviously, if you don’t use a full tank in those seven days, you stretch out until the seventh day, you’ve got a time on your fuel lock, which says it’s only up until this point. And then you can go to a 7-11 or Mobil station, fill it up and show them that fuel lock barcode on your app, and it’ll charge you, so for instance, instead of paying $1.95, I paid $1.55 for the tank full I got yesterday. There’s one little tip there, which I got wrong. The first time I used it is you have to specify what kind of fuel you’re going to use. So, I just had unleaded and I filled up with the 10 and they wouldn’t honor it because you can only do it for the fuel lock of the fuel that you’ve locked in anyway. Nerdy stuff but you can get you can get another week’s worth or another full tank of discount fuel once everyone else is paying top dollar.

Gene Tunny  34:12

Yeah, so tell me about that. I mean, you’re not going to get from trough to trough of the cycle with one tank of fuel, are you?

Tim Hughes  34:21

It depends what you do, what car you’ve got. And for me, I use about a tank full of fuel every week. I do a lot of running around. Like for you, you’d be okay.

Gene Tunny  34:32

I Hardly use any;

Tim Hughes  34:36

But you don’t do a lot of driving with it. So, you probably fall in the category where you don’t really care because you don’t use much anyways. You just get fuel when you need it. Yeah, but using a tank a week with a lot of running around, it makes a big difference. So, I never pay top price. And so, the rest of my strategy, I’ll just finish my thing there. So, I’ll do that, I’ve filled up at the cheapest, I’ve put my fuel lock on, or go for another week, and then fill up again at the last opportunity, either the weeks running out, or I’m running out of fuel, fill up again. And then you run that all the way down. So, you basically run that extra tank out, by which time, more than halfway through the next cycle. So, you should be heading towards a reasonable price anyway. And at that point, you just put in 20 bucks, $30 at the most to top up until it gets to the bottom of the cycle, then you fill up and go through it all again.

Gene Tunny  35:30

Yeah, I find it interesting that they don’t charge you for that privilege of having fewer lock, because if you think about it, there’s a correspondence to something in financial markets called a call option. Okay, so this is the Investopedia definition, a call option is a contract that gives the option buyer the right to buy an underlying asset at a specified price within a specific time period. So, you might have a call option on a share. Now they’re giving you something of value and you’re not paying for it because you got the right to buy that; maybe they figure out some people are going to make the wrong call. Or it’s a way of them segmenting the market even further, because they realize it’s the real savvy, the super savvy customers who are going to fuel lock, that will do enough research to figure this out. And yet we know we can’t rip these guys off.

Tim Hughes  36:35

Well, it’s an interesting point and they’ve obviously got reasons for that one of it. One of the reasons with 7-11 is that you have to go in their store, which is effectively a 7-11 shop, to pay for your fuel, and they have all these other rewards and incentives for you to buy stuff in there. So, the more often they can get you into that shop, the more often they can get you to buy things from them.

Gene Tunny  37:00

So, they’re hoping you get the connoisseur cookies and cream ice cream?

Tim Hughes  37:04

That’s just a rumor, Gene. That wasn’t real.

Gene Tunny  37:06

that was stuck. At 7-11.

Tim Hughes  37:12

They had this brilliant thing with a $2 Pies sometimes ago, which were okay. But yes, so there’s other incentives and other marketing schemes for doing that. And I think 7-11 is one of those that doesn’t take part; my understanding is they don’t take part in an ongoing rewards offering. So, for instance, part of my strategy is using Puma for that interim time. So, once I’ve used my fuel lock, when I get my fuel from that point onwards, I go to Puma, because I can use my RACQ card and I get four cents off a liter, so that drops it down again. This is another retailer, so, my understanding is I don’t think there’s one out there for Mobil. And so maybe they just sort of, like balance that out with being able to offer fuel lock, but they don’t do the four cents off. Because that’s another point worth making in my world of fuel nerdery that there are certain ones; the Woolworths one I think is one, I haven’t checked that, but you get four cents off for having rewards card. I think it’s Caltex that are linked with Woolworths, and you get a further four cents off if you spend $5 or more in store. But normally, that sort of, doesn’t pay out whenever you have to buy something in store, the elevated prices of whatever you’re getting in store normally, cancel out any kind of financial advantage of having that four cents off a liter. So, the little things like that play into it and it was funny. 

One of the things we did mention so through all those cycles, occasionally you get somebody who sticks out as not playing the game. And here in Brisbane, there’s one that I know of, which I have used if I’ve run out of fuel. And if the false sense of Puma is still higher than Keith Mackay at Red Hill, who does his flat, he has a flat level price that he tries to change very infrequently. And so sometimes, he’s for instance, is $1.79 At the moment, so he’s a good 16 cents less than most. And so that’s the place to go for fuel if you feel conscious and having to fill up at this time. So, I want to give a shout out to Keith Mackay for sort of, being an independent out there. 

Gene Tunny  39:36

What’s the problem? I mean, because it’s on a busy road and not everyone’s going on Waterworks road, you sort of, have to be going past Keith’s place for it to work for you to get there. Is that right for it to be economic for you or optimal? No, for anyone else?

Tim Hughes  39:52

For anyone, you have to go in person. You have to be going the right direction for that particular, I guess is the same for a lot of all analysts shorter corner. That’s pretty much the same for anybody getting fuel. If you’re on the wrong side of the road, you’re not going to go there.

Gene Tunny  40:06

But there are fewer servos here in Australia than there were 20 or 30 years ago. That’s a fact. I mean, I remember seeing a chart and in an ACCC report years ago when I was in Treasury, and I think, I don’t know the exact numbers, but at one time, there would have been 15,000, maybe, and then it’s well below 10,000 now, in terms of retail outlets in Australia.

Tim Hughes  40:29

Well, we can get onto that in a sec, because I imagine will change with part of the landscape, moving towards EVs that’s going to be impacted, massively. 

Gene Tunny  40:41

Oh, yeah, well. That’s right, all of that space that’s currently devoted to petrol stations to their forecourts, we may not need that anymore but let’s see. We should move on to that. Because we’ve had a good 41 minutes or so, so far of chat. So, we’re going to get on to EVs, which was one of the key things you’re interested in. But that fuel price cycle stuff, that’s fascinating, isn’t it?

Tim Hughes  41:09

Yeah. I just want to add with Keith Mackay, his main gig is tyres, which I think, he’s not there as a fuel guy. But it’s interesting and nice to see that somebody isn’t affected by the, the cycle as much or as standing up to the cycle and just sort of, leveling out.

Gene Tunny  41:27

Yeah, so it sounds like he’s willing to; he wants to offer a service to people in local area. He’s not as motivated by profit as a lot of the other retailers, or maybe he’s trying to profit in another way.

Tim Hughes  41:44

I think it’s his main gig. So, it’s just part of what he does, but like, it’s not a main one. But we’ll have to get Keith on here one day to explain.

Gene Tunny  41:53

I’d be interested in his logic and also, what does he think of this whole fuel price cycle? How does it work? Does he have any insight? We’d like to know. 

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  42:38

Now back to the show. 

We better move on to EVs, Tim. Okay, so you had some questions about EVs. So, do they reduce greenhouse gas emissions? I mean, it’s a key one. 

Tim Hughes  42:53

I think what it was is like, looking at the whole process, from the making of the EV, to any waste products to them, the end life of an EV. So, the amount of, lithium being one, there’s a lot of resources needed; a lot of resources that go into making an electric vehicle. Yeah, they still have to be dug out of the ground, like, you know, 200 kilos of

Gene Tunny  43:19

Copper too, it’s got copper in there?

Tim Hughes  43:23

Yeah, I’ve only seen this from one source. So, this is unverified and people will know far more about it than I. But clearly, there’s an environmental cost of building an electric vehicle. There’s an environmental cost of running an electric vehicle; obviously we’ve discussed, you know, the fuel source of producing that energy, and in this transition phase, and that’s going to be coal or gas, or whatever, it may be some, you know, part of it would be solar or clean, but certainly not all of it. We’re not there yet with that capability. 

I imagined that the future, ideally, would be a point in the future where we can do all of our electricity needs, and including the ability to power electric vehicles from clean energy. So, that I imagine is, you know, that’s a worthy place to head towards. And that transition phase is going to be a certain period of time where we do need fossil fuels of some sort, like coal and gas or whatever to get us to that point. And that infrastructure is going to change massively in that period of time.

Gene Tunny  44:26

Yeah, okay. So, just on EVs, I think it’s difficult to say but all of the credible studies I’ve seen suggests that they do result in lower emissions and then, they’re better for the environment than petrol driven vehicles. I think we can confidently say that. 

There’s a Queensland Government website shifting to zero emissions vehicles. I’ll put a link in the show notes and it says across Australia, battery electric vehicles, so, your Tesla’s, emit on average, 29 to 41% less lifecycle emissions than a typical fossil fueled vehicle for every kilometer driven in Australia. And then the extent to which electric vehicles can lower emissions varies depending on which state and territory you live in, much depends on how much electricity is generated from renewable sources, such as solar, wind, and hydro. So, my interpretation of less lifecycle emissions means that they should have taken into account the manufacturing process, but look, that’s not guaranteed. So, I’d have to dig more into their sources. But I’d be fairly confident in saying that they’re better for the environment than petrol powered vehicles, I think that’s pretty clear. The problem is that they’re still so costly, and they’re just not economic for most consumers yet.

Tim Hughes  45:45

Yeah. And the thing is also that we would hopefully become more efficient in the manufacturing of electric vehicles, you know, in the manufacturing of batteries, and the disposal of batteries and other parts of that whole process when it comes to it.

Gene Tunny  46:03

I think all those costs are coming down. Before battery technology, I don’t think it’s improving fast enough. Maybe it is for cars. But one of the issues with batteries is that we really need them to back up the electricity grid, we really need them to be able to absorb the solar energy that comes during the day, and then allow us to power the country during the peak periods. That’s one of the big challenges we’ve got at the moment. I mean, we need more Tesla power walls, and we need big sort of, batteries across the suburbs. Really, we need big Tesla Powerwall type batteries in local areas.

Tim Hughes  46:50

And the charging time as well. Obviously, when you fill up with fuel, it’s relatively quick, five minutes and you normally done; 10 minutes tops, if you’re getting a cookies and cream connoisseur from the freezer. But I know I’m fully behind this move towards greener energy. And I think it’s really exciting to see how quickly it’s moving. But it’s that transition phase we’ve mentioned, which seems to be happening organically anyway, because it appears that people are able to charge EVs at the moment and that sort of, they’re selling more EVs. So, it seems to be the way this is happening, you know, appears to be working, but for everyone to be expected to have an EV or the majority of people. Clearly the infrastructure is a long way from being what it needs to be.

Gene Tunny  47:43

Yeah, we could talk about that in a minute. So, just on this is happening quickly. Look, the growth rate is, is high. I think they’re growing; I don’t know 200%. EV sales have grown by some really high rate over the last few years in Australia. But, so in the first half of 2021, there were 8,698 EVs sold in Australia. That compares with 6900 EVs sold in 2020. I think a stat I saw was that there’s been 40,000 electric vehicles sold in Australia since over the last 10 years or whatever the period was. But look, we have to compare that with 20 million registered motor vehicles in Australia, right? So, it’s really small relative to the total stock. It’s going to take a long time, decades for EVs to become the predominant vehicle type in Australia. And we’re actually a global Lagarde. This is according to a Grattan Institute report. The Grattan car plan Australia is a global laggard on electric vehicles. So, electric vehicle sales as a proportion of new vehicle sales in 2020. Australia was 0.78%, United States, 2.3%, global average 4.2% China 6.2%, Sweden 32.2%, Iceland 45%, Norway 74.8%.

Tim Hughes  49:15

Iceland makes sense. So, because small place, they can be far more agile with this kind of infrastructure and technology. And the energy that they have at their disposal with geothermal energy is just enormous. I mean, that just drill down and away you go.

Gene Tunny  49:31

Well, that’s better as a renewable, is it renewable, or whatever it is. I mean, it’s greenhouse friendly. It’s better for the environment than fossil fuels. But that’s a more constant source of energy, isn’t it? than say, wind or solar, the problem we’ve got is, the renewable energy sources, we’ve got are intermittent

Tim Hughes  49:52

Yeah, and the geothermal, from what my understanding is very stable and it’s 24/7.

Gene Tunny  50:00

Yeah, I need to get an engineer on here to explain it all. But this is a challenge with trying to understand what’s going on and this whole debate. There are all these engineering issues and scientific issues that it’s challenging for any economist to comment on.

Tim Hughes  50:17

And also, after so with Iceland, they do have the possibility of something cataclysmic happening as well over there. I think anywhere where you’ve got geothermal availability, you’ve got the possibility of something crazy happening.

Gene Tunny  50:30

And I think the fact that it’s a small place to means they don’t have that range anxiety, which is a big issue in Australia, where you could be driving hundreds of kilometers to your next destination, particularly if you’re in the outback. Or if you’re in regional Queensland and New South Wales, you might have to travel 200-300 kilometers to the next town. And you’d probably rather have a petrol driven vehicle with a big tank than an EV which, I mean, what’s the range? Is it 300 kilometers maybe? I’m trying to remember; I hope to look it up. But I know that’s an issue here in Australia. I know that EVs are getting better at that. But there are some people still are concerned about whether they can go the distance, so to speak. But then look, Norway is a big place and they seem perfectly comfortable. So, they’ve obviously set themselves up well, with the necessary infrastructure.

Now there are two more issues I want to chat about, because we’re sort of, approaching the time limit. You want to talk about how much more energy is required? There is just quite a bit more. There was a report in Drive Magazine that suggested that it could be equivalent to 12 million more houses. So, like one new electric vehicle is equivalent to a house. And I was struggling to find a good figure for the proportion of electricity that’s consumed by households compared with business and industry. But it’s going to be a fraction of the title. So, it’s not as if we’re going to double the amount of electricity needed. But it could be 50% or something. Yeah, I think it’s probably Yeah, maybe 30 to 40%, I think I saw an estimate. So, we’ll need 40% More energy, electricity. And yeah, the challenge is that at the moment where we’ve got all of this coal fired power stations that are retiring or projected to retire over the next two decades, and we’ve got a challenge, just replacing that capacity with renewables. And doing that in a way that we don’t screw up the liability of the energy system, where we’d end up having blackouts and all that; we need to avoid that with the firming with the battery power. If battery technology gets cheap enough that everyone can have a Tesla Powerwall, or whatever the competitor’s product is, if we can have grid level storage, big batteries dotted around the suburbs, or if we have more pumped hydro, that’s a challenge because environmental considerations, raising dam walls building new dams, I mean, that’s, that’s not going to be popular.

Tim Hughes  53:16

All comes back to energy at that every point really, isn’t it? We’re going to get our energy from and what’s the most efficient and clean way of getting that energy? And to be able to increase the capacity.

Gene Tunny  53:28

But we do need more, we’re going to need more energy for EVs. The authorities are aware of this. So, the Australian energy market commission published a paper in 2020, that dealt with this issue. And I’ll put a link in the show notes. They had a paper integrating electric vehicles into the power system. And its press release to the AMC says Australia needs a forward-thinking plan to get the energy system market ready for an electric vehicle future. Now, are we going to get that forward thinking plan? I don’t know. We’ve had a lot of problems in Australia getting an energy policy that makes sense; that sensible that everyone agrees on. I mean, we’ve had the climate wars, the big debates over climate change policy. This is going to be a big challenge. But look, people are aware of it. They know it’s an issue. There’s an issue with apartment buildings for sure. So, in that drive magazine article I mentioned, electric cars could have big impact on Australia’s energy supply. They quote this Mark Hartje, who’s CEO of charging installation company, Harman electric. His business regularly encountered developers who are unaware of the demands electric car charging good place on energy supply. One of the issues in this building we’re working on is the amount of power they have available. It sounds like a lot, but it’s running lifts, a lot in aircon, so the building doesn’t have the capacity to provide any more energy and we could burn the substation down. So, not good. 

So, he claimed the risks are high developers and body corporates were dealing with don’t really realize it’s an issue until we tell them. It will be like the pink bats cladding issue, once a couple of buildings go up in flames, they’ll do something. And then what he’s saying is that as a result, our chargers have automatic load management. So, if demand gets too high, like when all the air cons on the Chargers will throttle back, how we notify owners, we’re still not entirely sure about I think what he’s saying is that, yeah, basically what’ll happen is if there’s always EVs getting charged the system, there’s some intelligent system that is, an IT there that will just throttle, that turn the power down. So, it’ll shut down some of the EVS or the charging or shut down some air cons, or they’ll have to manage that it’ll cause all sorts of problems.

Tim Hughes  55:55

And, of course, this is a problem that’s not currently there. So, it’s, like, you know, the general population, we’re not great at dealing with new problems, like we, you know, like things to get easier and better. So, it is, I mean, I can only feel that whatever these issues are, that they will get sorted out, you know, it seems to be that we’re on this path towards electric vehicles. And, you know, we’re moving fairly quickly in that way, even though those percentages that you talked about are really very small. Well, percentages of how many electric vehicles we have actually have here. It’s not a lot. So, like, we’re massively predominantly having fuel driven cars. But the changes that we’ll need to make, I mean, of course, all of this stuff doesn’t happen with everything in place, you know, like it evolves and the challenges get met along the way. So, clearly, there are some big challenges here. And I’ve got no doubt that they’ll get met, which will be really interesting to sort of, see, because there will be some challenges, as we’ve outlined, with getting these EVs powered for everybody.

Gene Tunny  57:04

Yeah, and bringing them down. So, they’re cost effective, and people can purchase them. One of the challenges, or one of the reasons that they’re so expensive, is that these companies are making the EVs are trying to recover all of the R&D that they’ve spent developing the EV.

Tim Hughes  57:22

The last two years have been felt, of course, with supply of any new vehicles. That is still getting caught up with that.

Gene Tunny  57:30

Title mess, supply chain problem;

Tim Hughes  57:33

It will be really interesting to see how this changes and just want to briefly mention on that, like, we’re talking about the infrastructure changing. And the amount of fuel stations that there are here at some point, those fuel stations just become charging stations, then that infrastructure doesn’t necessarily change too much, but they’re just going to be selling, because they’ll have to sell it at that point to recharge, you’re not going to get free electricity to charge your EV as an ongoing basis. I think that’s just a bit of a perk to get people. Right. So, Tesla are doing it’ll happen at some point. That’s not going to continue. 

Gene Tunny  58:10

Well, if you’re offering that if you’ve got your recharging station, then that’s taking up land. And yeah, you’ll need to;

Tim Hughes  58:16

Somebody’s got to pay for that, no matter how its generated. But I’m sure it’ll get worked out. But it’ll be interesting to see how all of all of this unfolds.

Gene Tunny  58:25

Exactly. Okay. Just one more thing. One of the issues that economists are thinking about at the moment is, as we move away from petrol driven vehicles, we’re going to get less revenue from fuel excise here in Australia. So, that’s currently bringing in, well, before we cut the rate temporarily, I think it was running at about 10 billion per annum or something like that. I mean, it’s, it’s a big amount of money. I’ll put the exact figure in the show notes; might be 11 billion, there was a great article by John Freebairn an economist at University of Melbourne. What is petrol excise? And why does Australia have it, anyway? I’ll link to that in the show notes. 

So, there’s a big debate about well, how do we make up for that revenue? Should we have an electric vehicle tax, as Victoria has implemented? There’s currently a high court case on that. I think the Commonwealth is taking them to court and say no, we don’t want you to have that. That’s not the right way to go about it. And where economists are going is that, that’s probably not a good idea. Because at the moment, we want to encourage people to take up EVs. So, you don’t want to go and tax them. But there is a legitimate debate about how we charge for the use of roads and the damage that’s done for roads and the fact that roads can be congested at times. So, there’s a big debate about road user charging. And so there’s a lot of thinking going on about that. And that’s something I’ll try and cover with Marian Terrell from Grattan Institute in a future episode. She’s written a great piece in the financial review this week on that. She’s opposed to that EV tax in Victoria as I am, I think we should take the opportunity to think, more laterally; think about what’s the appropriate way to pay for the roads. And so, what John Freebairn writes in his article is that in an ideal world, we would charge explicitly for road use pollution and congestion in the cities during peak hours. Fuel excise is an increasingly inappropriate way of charging for road use. Because more and more cars, including hybrids are using less fuel per kilometer, and some, including all electric vehicles are using none. So, look, I don’t know how we do this, we probably need some sort of, chip or tag to keep track of you. 

And then the one of the ideas is that on a really congested road, you could charge people if they’re driving on that road. You know how there’s the congestion charge in London? I think we were probably talking about that before you got standby. 

Consider a London and getting the thing. Yeah. So, yeah. So, there’s a lot of thinking going on about what’s the right way to charge for roads. So, I’ll cover that in a future episode. Does that makes sense because we are losing fuel excise and a lot of people will point to the fact, that’s partly paying for the roads well sort of, I mean, it goes into the big pot of money. That is a whole bunch of things. Money is fungible that. Okay, it’s a legitimate thing to be to think about that. Yeah, we’re going to be getting less revenue to pay for services, including roads, goods and services.

Tim Hughes  1:01:53

Because it gets complex, doesn’t it? Like HGVs and obviously, you know, different size vehicles and heavy vehicles, potentially do more damage to the road. 

Gene Tunny  1:02:07

There’s a system for charging heavy vehicles. We’ve got that. Yeah. 

Tim Hughes  1:02:11

So, it makes sense that it would be done on a per kilometer basis. I don’t know. I mean, I’m also in favor of less, certainly personal tracking, you know, over the last two years, the whole of the pandemic and throw no liberalism and freedoms. That’s another conversation as well. I think it’s really hard to give up ground on personal movement and you know with your vehicle, although that would be the fairest way. If you travel a kilometer, you pay X amount per kilometer.

Gene Tunny  1:02:43

Very good, Tim, I should have thought about myself. As someone who just went to the Friedman conference, in July in Sydney, as someone who’s had a long-term association with center for Independent Studies, which is a great proponent of liberty in Australia. I think I should have thought of that point myself. It’s a very good point. I mean, it’s tracking to be able to implement this road user charging system, you need to have some way of tracking people as they drive. 

Tim Hughes, we better wrap up. Any final words before we close?

Tim Hughes  1:03:12

No. Just that it’s a fascinating subject that I know a lot of people talk about, it comes up in conversations everywhere. We’ve done just a broad overview of this, to the best of our knowledge at the time, but these are individually little areas that we’ve talked about, that will dive deeper with industry representatives, or colleagues or people.

Gene Tunny  1:03:35

And experts, yeah. I’ll try and get some EV experts on charging the energy network. Because, there’s so much complexity here, you almost have to be an engineer, an economist, a philosopher in a way as well, to try and grapple with these issues.

Tim Hughes  1:03:51

And as a consumer, you sort of, like, see this unfolding. And it is really interesting. And my driving principle, for me, personally, is about, you know, the environment and what’s best for the environment. So, I’m interested to see that discussion further, with the greenest possible solution to how we move from A to B and back to A again.

Gene Tunny  1:04:13

Okay, so long as it doesn’t cost us too much. We want it cost effective, but, we want to look after the environment, that’s right. We want to make sure it’s done in the most cost-effective way. We want to minimize the pain going forward. 

Tim Hughes  1:04:28

It’s got to be practical, you got to be able to do it, you know, like the green options now, which is to walk or cycle, you know, but that’s not practical for me to by the time we get to work, I’d have to turn around and go back again. 

Gene Tunny  1:04:41

All the way was set up as cities. We’re all living in these big cities, and we’re all time constrained. Yeah. 

Tim Hughes  1:04:48

So, the overriding principle for me anyway, like is, what’s going to be best for the planet in our hippie at heart, and, but you got to be realistic as well. But I’m excited because that’s the way that EVs seem to be heading. And that can obviously be tweaked and fine-tuned to be better and better and more efficient and less impact on the environment as we move ahead.

Gene Tunny  1:05:13

Okay. Tim Hughes, is it’s been great chatting with you. We always enjoy our conversations. I think you’ve raised some really important issues here. And yeah, really enjoyed our conversation. And we’ll try and get some experts and other industry people on in the future and we can have a further chat with them. So, thank you. 

Tim Hughes

Thanks, Gene.

Gene Tunny

Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

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