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 Podcasts, Apple Podcasts, Spotify, 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.
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