Make no mistake, energy transition will be difficult and costly

Here’s an inconvenient truth: the transition to net-zero emissions will be hard and expensive.

Russia’s invasion of Ukraine has exposed how deeply embedded fossil fuel is in the world economy and how wrenching rapid change can be. Cutting off the world’s largest gas exporter, the second biggest exporter of crude oil and the third largest coal exporter is the shot heard around the world because when you make essential goods rare, the price rises.

Here the fallout is a surge in wholesale power prices, as the highest cost of generation sets the dispatch price in the National Electricity Market and our gas and black coal prices are linked to international benchmarks. Putting more renewable energy on the grid will not guarantee lower prices because all the talk about how cheap it is rests on an average, or “levelised”, cost of generation, not the actual cost of sustaining a power source that cannot deliver continuous energy unsupported.

As J.P. Morgan’s annual energy paper points out, those costs include transmission, back-up thermal power and, eventually, utility-scale storage. Whatever fills the intermittent power void won’t be cheap – a study commissioned by Industry Super Australia calculated the cost of battery storage for Australia at $6.5 trillion. To that add the rising cost of ancillary services needed to keep the retooled electricity system secure and reliable, a service that was once a byproduct of electricity generation in old-world power stations.

Germany is expanding its national power grid as a necessary infrastructure measure to accommodate new wind and solar electricity parks. Credit: Getty

Germany stands as a stark testimony. It has spent more than €500 billion ($743 billion) transitioning its electricity system, boosting wind and solar to more than 45 per cent of generation since 2000. But it had to keep 89 per cent of its fossil-fired capacity to deal with the problems caused by calm, dark days. It now boasts Europe’s most expensive retail power and is strategically exposed because the country can’t function without imported gas.

Europe has at least acknowledged the difficulties involved in decarbonising electricity by designating gas and nuclear energy as “green” investments. The EU’s commissioner for financial services, Mairead McGuinness, says this is because, “we firmly believe that this recognises the need for these energy sources in transition”.

If the energy transition is to succeed here, the road runs through more gas and an end to state moratoriums on exploration and development. This recognition is beyond the wit of some state and territory governments as, once again, extremists rule the debate, putting Australia on the road to a self-imposed disaster that will hit the poorest hardest. It’s the same mindset that allows green activists to demand rapid decarbonisation while reserving the right to oppose building wind farms and ban nuclear energy.

And decarbonising electricity generation is the tip of the iceberg because it represents only 19 per cent of the world’s final global energy consumption. As one of the world’s leading energy experts, Professor Vaclav Smil, details in How the World Really Works, “the decarbonisation of more than 80 per cent of final energy users … will be even more challenging”.

Electricity generation represents only 19 per cent of the world’s final global energy consumption.Credit: Bloomberg

“We have no readily deployable commercial-scale alternatives for energising the production of the four pillars of modern civilisation solely by electricity,” Smil writes.“This means that even with an abundant and reliable renewable electricity supply, we would still have to develop new large-scale processes to produce steel, ammonia, cement and plastics.”

One of the pillars, ammonia, is the foundation for industrial fertilisers on which half of the world’s agriculture depends. The chemical process that creates it relies on natural gas, coal or oil. When the fuel used by the farm machinery and the trucks that transport food to the supermarket is added to the mix, Smil calculates the embedded energy in a 250 gram baguette at two tablespoons of diesel. A 125 gram Spanish tomato bought in a Scandinavian market is five tablespoons.

Last year Sri Lanka conducted a real-world experiment in rapidly changing this equation by banning chemical fertilisers in favour of organic farming. There followed the decimation of tea and rice crops, food shortages, soaring prices, riots, the resignation of the prime minister, a presidential apology and the abandonment of the fertiliser ban.

Fossil fuel is embedded in the modern world. In the 20 years Germany has been transitioning its electricity system, the share of fossil fuel in the country’s primary energy supply has only declined from 84 per cent to 78 per cent. The International Energy Agency’s review of the world’s stated policies shows fossil fuel demand will fall from 80 per cent in 2019 to 72 per cent by 2040.

The IEA notes that getting the world on track for net-zero emissions by 2050 requires transition-related investment to rise to around $US4 trillion a year by 2030, “but only a minority of these investments immediately deliver zero emissions energy or energy services”.

The energy transition is inevitable, but it will be a lot harder than politicians, activists, service sector chief executives and billionaire energy hobbyists would have you believe. In trying to solve the current crisis, the political class should keep one thing in mind, no one ever won an election by promising to make voters colder, poorer and hungrier.

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