Chris Bowen determined to keep politics in energy as he opts for nuclear strike
The Energy Minister has opted for cheap politics by eliminating one potential energy solution while other advanced economies are taking nuclear seriously.
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Chris Bowen is too clever by half in his determination to keep the politics in Australia’s energy future. A flimsy departmental study that puts a monster “moment in time” price tag on rolling out small modular nuclear reactors (SMR) is as flawed as the question it attempts to tackle. The Climate and Energy Minister needs to do better.
The serious side of this is that Australia is starting from very a long way behind in an attempt to remake the power grid to deliver reliable, cheap renewable energy and time is running out.
And with no investment in baseload power beyond batteries there is a big question mark around firming once the ageing coal-fired plants are switched off. This means everything needs to be seriously considered to find an answer to keeping the lights on.
Bowen points to his own departmental modelling that shows it would cost $387bn to replace the nation’s fleet of coal-fired power stations by rolling out tens of thousands megawatt equivalent of small modular reactors. And he’s right – the cost would be extreme. Just as it would be replacing the nation’s equivalent 21,000MW entirely with solar or entirely with wind.
Small modular reactors are not designed to deliver a wholesale solution. They should be considered as part of the portfolio of technology mix including batteries, wind and solar – even green hydrogen – as Australia attempts to strip carbon out of the power grid.
Nuclear is politically difficult territory and involves overturning a Howard government ban two decades ago. For years we have mined uranium and sold it overseas and we are now spending up big to build a fleet of submarines powered by SMRs.
Instead of handling it with care, Bowen has taken the easy road. He has sold us short by eliminating one potential green energy solution while other advanced economies are taking it seriously.
Think small
SMRs, as their name suggests, are much smaller than standard nuclear plants and their output – usually less than 300MW – is a fraction of the bigger plants. Their size means they have much lower waste; they can be installed in much smaller sites and importantly they can be largely assembled in factories and this means their costs come down, making them less financially risky.
The plants are not intended to power entire grids but are better suited to industrial applications such as steelmaking, mining, green hydrogen production or even powering desal plants. That by itself takes pressure off the existing public grid.
Indeed it might not be a government using SMR technology – the lower cost and their rapid builds mean it could be a strictly private sector solution. Mining giants Rio Tinto and BHP have studied the technology for use in their overseas operations and it is not a stretch for SMRs to also be added to their remote operations.
The political side of this is that the clock is ticking on Rio Tinto’s Gladstone aluminium smelters with the mining giant acknowledging through a $1.2bn writedown in July that it is losing the race to have renewable energy underpin three plants by the end of the decade. Combined the operations require 1140MW of steady power. Rio and its customers don’t want to be stuck with aluminium underpinned by coal-fired power and it has cheaper greener manufacturing options outside of Australia.
Bowen’s own GenCost report is cool on SMR technology although it acknowledges the all-in cost for 2030 is on par with black and brown coal or gas while providing the equivalent of baseload generation, unlike variable wind and solar.
The report also acknowledges there could be benefits in deployment of nuclear SMR by scale over time with “significant cost reduction” partly driven by modular manufacturing processes.
The US through the Inflation Reduction Act is driving new momentum in SMRs and China is also making big investments. Last year the European Union added nuclear to its list of eligible green funding. Britain and France have plans to roll out many dozens of the plants. The International Atomic Energy Agency estimates there are more than 70 SMR designs currently under development around the world.
Key Australian business figures from BHP’s Mike Henry, Origin’s Frank Calabria and even Wesfarmers’ Rob Scott have recently said Australia is cutting itself off from the race by not considering the technology on its merits rather than the politics.
Tech’s AI peak
Does the mega stock market listing of Arm Holdings represent peak tech or the beginning of another futuristic fairytale?
Masayoshi Son’s tech investment house SoftBank finally backed a $US60bn-plus ($93bn) winner and cashed in on the boom in all things AI through a partial sell down of its investment in chip specialist Arm.
The Cambridge, UK-based Arm started out as a joint venture that included tech major Apple in the early days, with the aim of designing high-performance, power efficient microchips.
It was listed on both sides of the Atlantic and Arm was acquired by SoftBank in 2016 for $US32bn. This meant that SoftBank doubled its investment over seven years after selling 10 per cent of its shares into the Arm float.
Arm’s debut last week on the Nasdaq exchange saw its shares surge giving it a lofty valuation of $US65bn, making it the biggest global IPO this year.
A day later shares had pulled back 4.5 per cent to $US60.75. The IPO had priced the shares at $US51, still giving investors a hefty paper profit. There could be more pressure to come amid talk US interest rates will stay higher for longer. Arm will be closely watched in trading tonight.
But is Arm a play on tech or something a little different? Fundamentally it should serve as a reminder that all tech companies are not the same.
Amid the AI buzz around Arm it is important to remember it has little control over its end product, with its specialisation as a designer and IP house rather than a manufacturer of chips. At the same time its biggest customers remain Chinese tech companies and it sells to them through an arm’s-length arrangement.
More than two-thirds of its $US2.6bn-plus in revenue comes from a royalty stream and its challenge is to grow this income, which has remained stubbornly flat over the years.
Indeed Arm is still collecting royalty revenues for products that were first developed and licensed in the early 1990s. For example, around 46 per cent of royalty revenue last financial year came from products released between 1990 to 2012. That’s looking more like a sleepy fund manager than a killer AI application.
For its part, Arm argues its business model enables the widest range of customers to access its products through an agreement best suited to their particular business needs.
Cloud pivot
Initially Arm’s chips and processing boards were designed for mobile phones and consumer electronics and today the company’s circuits command a formidable 99 per cent share of the global smartphone market.
In recent years, Arm has pivoted into new markets that demand computing horsepower including networking and industrial applications. The most exciting part of this is cloud computing that has chip-hungry data centres that promise to power the world’s data-hungry AI models.
Arm nominates cloud computing as one of its fastest growing business lines with expected annual growth of 16 per cent over the next two years. Arm’s processors and chips used in car making represents its next-fastest growing line with annualised growth of more than 15 per cent forecast for the next few years. Each of these markets are hotly contested by Arm’s rivals in Taiwan, Korean and the US. Significantly, its dominant mobile and consumer electronics business are forecast to deliver 6 per cent and 4 per cent growth over the next few years.
It too has a complicated relationship with China where it sub-licences its technology to a fully independent entity controlled by SoftBank called ARM China. China represents a significant portion of Arm’s revenues for the foreseeable future and it would be difficult to replace in the event that its commercial relationship with Arm China soured, the tech company warns in its prospectus.
Indeed this overreliance on China makes Arm particularly susceptible to economic and political risks. It too faces risks of customers using their own architecture of components to control costs rather than continuing to pay a licence fee.
Last financial year it generated sales of $US2.68bn, down slightly on the previous year. Net profit was $US524m, down from $US676m a year earlier. In terms of revenue this puts it in the league of with an ASX-listed Transurban and a profit line of a Bendigo Bank. However drill down and Arm’s gross profit margins are running at more than 90 per cent.
Arm’s own numbers put the total value of chips containing Arm technology as approximately $US99bn, representing an approximate 48.9 per cent market share of the markets it operates in.
There are mounting expectations the US Federal Reserve could keep interest rates there higher for longer, or at least push through another hike. This has taken the shine off tech companies with names like Apple or high flying chipmaker Nvidia.
Nvidia, which has a valuation of more than $US1 trillion, trades on 14 times forward revenue, at current levels Arm trades closer to 17 times revenue.
johnstone@theaustralian.com.au
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