Sustainable Investing weekly blog: 18th March 2022 (issue 30)
Story tags for this blog
Our weekly summary of the key news stories, developments, and reports that are impacting investing in the wider transition to net zero carbon and a greener/fairer society.
This week we continue our temporary one headline story format, digging down some more into the possible mid term impacts for investors of the plans to reduce dependence on Russian gas (& oil). While we expect some measures to be a like for like replacement, getting gas from a “friendlier” supplier, its hard to see this crisis not leading to an acceleration of the shift to electrification. This week we look at a case study of an electricity grid (South Australia) that has pushed up to c. 60% renewables, and examine the lessons that Europe could learn. In a future blog, we will look at another case study (Denmark), which has an even higher level of renewables, but with some material differences in terms of where its generation comes from and how the grid is stabilised. Why focus on renewables & electrification, its because they can be rolled out in only a “few” years” and they are proven technologies at scale. So, our main story starts in Australia, looking at the potential for South Australia to become the first GW scale grid in the world to operate without synchronous (mostly fossil fuel) generation. Or putting in it the context of the current debate – running an electricity grid on close to 100% renewables, with a high degree of security of supply. We finish with our ”one last thought”, a story from the Guardian that suggests that thousands of victims of the recent Australian floods may be unable to claim for the damage they have suffered.
Top story : Could South Australia be the world’s first renewable grid ?
Main points of the story as published
South Australia – already leading the world in the uptake of wind and solar and operating its grid at high levels of renewables – could be the first gigawatt scale grid in the world to operate without synchronous generation. The possibility has been flagged by the Australian Energy Market Operator in one of a series of stakeholder briefings that canvass the changes to technology and operating procedures that were once unimaginable.
South Australia is unique in the world because it is the first gigawatt scale grid to operate at such high levels of wind and solar, which in the past year have accounted for 64 per cent of local generation (according to the Australian Energy Market Operator or AEMO). It’s also unique because it runs this high level of renewables without hydro, or geothermal. And the big challenge now is how to remove the remaining fossil fuel generators, which are primarily gas with some diesel.
AEMO is looking to run the grid for extended periods with no synchronous generators, meaning no fossil fuels. Up until recently, at least four gas units were required to be online even if there was enough wind and solar to meet local demand. The installation of four synchronous condensers (syncons) – spinning machines that do not burn fuel – means that this requirement has been reduced to just two gas generating units, operating at very low combined capacity of 80MW. Sometimes that’s a mere fraction, less than five per cent, of the amount of total generation.
The next step is to reduce the need for those two gas generators. The answer will come with either more syncons, or more preferably, inverter technologies capable of providing “grid-forming” services, meaning that they can provide the system strength and inertia needed to maintain grid security. AEMO expects to be able to provide updates on the findings of its desk top analysis and plans for the next steps by the middle of the year.
Our take on this
Can we get electricity grids to 100% renewables or at least close? This is becoming a really important question especially for Europe, as it starts to work out the detail of its plans for “disconnecting” from Russian gas. And its not just Europe, longer term, a large number of countries and/or states are targeting 100% renewables. If its a realistic possibility soon, then it gives Europe a real alternative to sticking with gas (or gas like substitutes such as green hydrogen).
Before we dig down into this question a bit more, its important to be realistic – even South Australia’s target is 100% renewables by 2030, although many commentators think they may get there well before that. So this is not going to be a short term fix, but then if you have been reading our blogs over the last few weeks, short term fixes are in very short supply.
There have been a number of “desk studies”, mainly in the US, that suggest that a 100% renewable grid is possible. But, as the well regarded NREL points out, because 100% renewable grids do not exist at the scale of entire countries, we rely on models to evaluate and understand possible future systems. So having real world role examples such as South Australia (and Denmark) is really important.
Briefly, what are the challenges – other than the obvious one of building enough renewables, its variability of supply and grid stability. Or putting it into the current debate – its about electricity security of supply. The evidence of South Australia and Denmark, suggests that security of supply in a renewables dominated grid is a solvable problem, at least at average renewable generation levels of around 50-60% (South Australia reached 60% in 2021 & Denmark was even higher at 67%, although that includes 11% from biomass). Just for reference, the average in Europe is 38%, so a roughly 50% plus increase before they face similar decisions.
The first point is around battery storage. While the four big systems they have in South Australia, including Hornsdale, Lake Bonney, and Dalrymple North, are tiny compared with the total demand on the grid, they play a really important role in grid stability. So the argument that we need multi day storage to get electricity grids to say 60-65% renewables, doesn’t seem to hold much water. As we flagged last week Europe is behind both the US and China in developing battery storage, so we suppose the positive spin is that the region can take lessons from others & grow rapidly, if the political will exists.
On the subject of battery storage, batteries without good software are like a chocolate tea pot, not much use. Its a topic for another day, but in the meantime the good people at “Redefining Energy” did a great podcast on this topic recently. If you have a listen be prepared to be challenged, the concepts are easy but the detail can be a bit mind blowing if you are someone like me who thinks in hardware terms rather than systems. We think this is going to become a massive investment opportunity over the next 5-10 years.
The second point to note is yes, they do have interconnectors. The Murraylink & Heywood transmission lines allow them to bring in electricity from the Eastern States. Plus they are currently building a A$2.3bn high voltage transmission line into the nearby state of New South Wales, due to be completed by Dec 2024. The project will allow surplus (renewable) electricity to be feed into the NSW gird. Its expected to deliver net annual savings of about $100 for a typical SA household and $60 for a typical household in NSW.
The third point is around future actions – South Australia is leading in the roll out of inverters that can provide synthetic inertia and act as “virtual synchronous machines”. At a basic level, inverters convert the variable DC current from say a solar farm, into the AC current needed by the grid. But, the technology is advancing rapidly and they are able to do much more than this. Like battery software its one for another day, but our view is that grid forming inverters will be a step change for electricity grid stability, allowing renewables and battery storage to fulfill some of the roles currently carried out on many grids by fossil fuel generation.
But its not all motherhood & apple pie. An estimated 40% of households in South Australia have rooftop solar panels. To ensure their safe and effective incorporation into the grid, the flow of electricity across the distributed network must be carefully managed. And to be fair, its a real problem. Regular readers will be aware of the debate in California on so called net metering. This is the policy framework that allows solar owners to send excess electricity back to the grid and receive a bill credit. As we covered at the time, the California Public Utilities Commission issued a proposed decision in December that would reduce the amount of the credit while also imposing a monthly fee of about $50 per month for a typical solar customer.
Their argument was that rooftop solar customers should pay more to help to cover the utility’s cost of serving those customers, and help to reduce a shift in costs to non-solar customers. The debate rages on, and we don’t really have a timing on when a final decision will be made
South Australia has its own version of that debate. Energy Consumers Australia, a lobby group formed to promote the long term interest of electricity consumers, has been highlighting this issue for a while. As in the California case, part of the debate is about the cost for people that won’t have solar on their roof, or batteries in their garage (such as renters, vulnerable consumers and the disadvantaged). One of their points is an interesting one, while these consumers may not have the hardware (roof top solar or batteries), they do have load (or demand). So maybe some of the gains from the massive over supply of solar (at times) can flow back to these consumers, either via cheaper bills (subsidised from the sale of renewable electricity to NSW via the new interconnector) or via demand management payments (another technology we consider is due to boom).
This issue cannot be ignored, especially as there seem to be solution’s, just not traditional ones. The NREL looked into how referrals are pivotal to roof top solar adoption in under served California communities, giving pointers to how existing programmes can be redesigned. And a recent study into the use of neighborhood batteries in Australia, which has some similarities to the rooftop solar debate, highlighted the importance of social justice if such schemes are to get wider acceptance. Given how divisive the renewables debate can become, such as the appointment of FERC commissioners in the US, we need to focus on more than just the technology.
One last thought
According to an article in the Guardian, thousands of victims of the recent floods in New South Wales and Queensland will be unable to claim on their insurance due to exclusions in policy fine print, the Financial Rights Legal Centre says. “There are going to be a lot of people who think they’re covered,” Drew MacRae, a policy officer at FRLC, said. But many will find they are not because the fine print excludes particular types of damage, MacRae said. This is an issue we have touched on previously. For many communities around the world, insurance to cover the increasing occurrence and severity of natural disasters is simply not going to be available. For some, the government may step up, but for many this is not a viable option.
Some process and semi legal stuff . The format of the blog is simple. First our summary of the key points of the story (click on the green link to read the original) and then what we think it means for investors (asset owners, asset managers and companies). We are really keen that you read the original report or article. Lots of people out there are doing some really interesting and valuable work and part of purpose of these blogs is to bring this to your attention, while at the same time giving it context.
The focus is on news flow that we think should change the markets perception of the investment risks and opportunities coming from the big themes around the climate transitions and ESG. So not the place to come to for news about the latest ESG or net zero promise, or that has already been well covered in say the FT. Our approach is unashamedly long term, this is a multi decade investment theme. So we ignore short term noise.
Finally, and very importantly, nothing in this blog should be construed as providing investment advice. For company and/or fund specific investing advice and recommendations, you need to look elsewhere. In more formal language, this blog does not constitute Investment Research as defined in COBS 12.2.17 of the FCA’s Handbook of Rules and Guidance (“FCA Rules”).