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The Energy Revolution

The Energy Revolution

Michael Thorpe  ●   25 October 2017

How will we finance the energy revolution that is underway?

The evolution and innovation underway around the world to finance the transition to a lower carbon future is a topic that I spoke about at the Clean Energy Council Summit in Sydney in July. It was also discussed at our third Austrapalooza conference, a large gathering of Australasian debt issuers and US investors held in Australia biennially.

Financing a lower carbon economy

Countries with an abundance of water and topography have a distinct advantage over others pursuing a low carbon future. Other countries less blessed have created frameworks to encourage investment into renewable energy.

The UK has a very proactive positive policy stance that has driven a consistent rise in renewable energy penetration. They have implemented a number of mechanisms including Renewable Obligation Certificates, Feed in Tariffs/Contracts for Difference and outright requirements for coal fired power stations to close within defined time frames, all designed to optimise the transition to a renewable future and minimise the impact on the consumer.

The US has promoted investment in renewables through a range of Federal tax incentives comprising of Accelerated Depreciation, Wind Production Tax Credits and Solar Investment Tax Credits. In both countries the various schemes have stimulated substantial investment, enabling the governments to scale back the schemes over time while still meeting renewable energy targets and consumers’ energy needs.

Growing demand for power

At Austrapalooza, Dr Stefan Hajkowicz, Senior Principal Scientist at the CSIRO’s Data61 Foresight Unit, predicted that by 2040 the world will consume 33% more energy and 70% more electricity.[1]

Dr Mark Bonnar, Managing Director, Southern Cross Venture Partners, says the challenge and the opportunity is to be open-minded about new financing structures needed to underpin such a generational transition. Whatever the source of electricity, it must be both cleaner and cheaper to balance the needs of the economy with our environmental obligations. Electricity bills have risen by more than 100% in the last decade while 2016 was the hottest year since records began in 1880.

Consumers leading the charge

However Dr Bonnar doesn’t believe a desire to curb carbon emissions or stem global warming is the main reason for consumers’ growing interest in renewable energy. Rather the driving factors are consumer choice, energy empowerment, energy security and combatting the rising cost of living. “It is because people have a choice…a choice enabled by the availability of new technology at a lower price, and because the customer experience is better,” he said.

As in other industries, new technologies, combined with data analytics and the internet, are moving the energy sector to a radically different level of customer insight and engagement. Smart meters and consumer insights from companies like Wattwatchers are turning electricity into a data-driven industry better aligned with consumer benefits.

Lessons from history

Dr Bonnar believes an energy revolution is underway as we shift from centralised fossil fuel generation to distributed energy generation and demand-side management. But it isn’t the first energy revolution.

By the middle of the 19th century coal gas had replaced whale oil and kerosene to light streets, factories and affluent homes. The arrival of electrical lighting ignited uproar.

Thomas Edison’s invention of a suitable filament bulb made electrical lighting viable yet in the 1870s he spent years seeking financial backing. Eventually he found a principle supporter and angel investor in the Edison Electric Light Co. This backing enabled Edison to build a central generator station supplying power in bulk. “It was the world’s first electric distribution ‘utility’ and it was enabled by innovation, the availability of new technology, and lots of capital,” said Dr Bonnar.

Certainty brings capital efficiencies

Around the world capital flows to where there is the greatest level of certainty.The lowest cost capital will always find its way to those transition mechanisms that are simple, transparent and take into account the requirements of all stakeholders. A complex system results in inefficiencies and therefore sub-optimal outcomes.

So if Australia can get to a reasonable outcome that takes into account the drive that renewable energy, solar,wind and others, is delivering from a cost perspective and passing that through to the consumer in the most simple mechanism then we will end up with the best outcome for everyone.

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Michael Thorpe
Michael Thorpe

Managing Director, Global Head of Infrastructure & Utilities

Michael Thorpe is the Managing Director, Global Head of Infrastructure and Utilities, for the Commonwealth Bank. He is responsible for strategic advice, client relationships and financing across the utilities sector globally. This includes operations in Australia, Asia, Europe, the United Kingdom and the United States. Prior to CommBank, Michael held various executive and analyst roles in project finance at Lloyds Banking Group, Bank of Scotland and Westpac. He has worked in Sydney, Perth, Brisbane and London.