Forward
The Smart Energy Council is grateful for the opportunity to provide a submission to the Department of Industry, Resources, Science and Resources consultation paper on the National Reconstruction Fund.
The Smart Energy Council is Australia’s peak independent body for renewables including solar, batteries, and green hydrogen. The council has over 950 members and 65 years of experience in the sector having been established by the photovoltaic pioneers in the 1950 and 60s who designed and built some of the world’s first solar panels and solar hot water systems.
The Council understands Australia’s transition to a net-zero emissions economy will deliver massive business and economic benefits; it will deliver jobs, attract investment, innovate, and make our economy more productive and competitive, all while delivering a safer climate. Achieving a strong economy and a safe climate is not just possible, it is critical if we are to confront the challenges of the future. The SEC’s 950 members provide us with real-world, empirical insights via thematic working groups which assist the SEC with drafting, testing, and advocating for fit-for-purpose smart energy policy. The discussion and outputs of the SEC working groups provide the basis of the evidence provided in this submission.
The Smart Energy Council supports the Australian Government’s establishment of the $15 billion National Reconstruction Fund (NRF) to support, diversify and transform Australia’s industry and economy to help create secure, well-paid jobs, secure future prosperity, and drive sustainable economic growth.
This submission hopes to provide the Smart Energy Councils’ insights into the NRFs’ potential target projects and investments and our general views on how to capture new, value add opportunities to help renewables grow and succeed in the Australian economy.
For the purposes of this response to the consultation paper, the Smart Energy Council will focus on issues relating to renewables and low-emission technologies in particular on projects relating to components for wind turbines, production of batteries and solar panels, new livestock feed to reduce methane emissions, modernising steel and aluminium, hydrogen electrolysers and innovative waste reduction solutions.
Summary of Recommendations
Recommendation 1: The Smart Energy Council recommends that the NRF give preference to strategically important manufacturing capabilities including in the local manufacture of solar products, battery products, green hydrogen electrolysers, and in the mining and value add of lithium and other component battery elements.
Recommendation 2: The SEC recommends that the expected investment return for the portfolio overall be equal to no more than the 5 year bond rate as at February 2022 for a period of 10 years from its inception.
Recommendation 3: The Smart Energy Council also recommends that the minimum funding level of $20 million in the CEFC not be replicated. The SEC strongly recommends that there be no floor in the minimum investment level.
Recommendation 4: The Smart Energy Council also recommends that allowable business failure and default rate set internally within the fund be much broader than the CEFC permits.
Recommendation 5: The Smart Energy Council also recommends that the NRF seeks to invest the majority of its initial $3 billion in the renewables space in the first year of its inception. The SEC believes this $3 billion is a good start to filling some of the investment gaps in the marketplace however this will need to be expanded significantly in order to reach our domestic commitments and even more significantly in order to become an exporter and a smart energy superpower.
Recommendation 6: The NRF should give additional consideration to projects that are in the business of training people, particularly apprentices in the smart energy space.
Investment needs and opportunities
- What are the opportunities for value-add, growth and diversification in each of the priority areas?
- What are the manufacturing capabilities needed to support each priority area?
- What are other capabilities needed to support each priority area?
- What are the strategic priorities for supply chains / enabling inputs in each priority area?
- What are the gaps in or barriers to private sector investment in each of the priority areas?
- How can the NRF help build or encourage stronger pathways for Australian-developed innovation and research, and encourage additional private investment in priority areas?
- How could the NRF consider Government policy priorities in performing its investment function?
The Challenge for Australia and the development of the NRF
The fundamental point that needs to be considered in the context of a world that is moving away from fossil fuels is that if Australia does not start to develop our value-added industries such as manufacturing, we can anticipate that our relative standard of living will decline. The long-term use of fossil fuels like coal and gas which make up a significant share of our current export task is going to diminish over time as the world moves away from them as energy fuel stocks. Luckily, in Australia, there is an abundance of the base-level materials for renewables products that can be coupled with our huge capacity in terms of renewable energy sources to produce a new wave of export opportunities to replace fossil fuels.
The National Reconstruction Fund and the $3 billion invested in the smart energy sector are one of the most significant opportunities to begin the process of building out a value-add pipeline in Australia.
The Smart Energy Council believes this investment needs to be increased, at least to the remaining value of the announced $15 billion in the NRF.
The Australian Government has committed Australia to reduce its greenhouse gas emissions by 43% by 2030 and to deliver 82% renewables within that same timeframe. We also need a renewable energy storage target to meet this challenge. To put this into perspective Australia produced just 29% of its energy mix from renewables in 2021. There are different calculations underpinning the size of the investment opportunity afforded this decade by the energy transition; from AEMO‘s $66 billion in large-scale renewables and $27 billion in rooftop solar and battery storage2 to the Investor Group on Climate Change’s $131 billion.
Whichever way you cut the numbers, the opportunities are considerable. Even within some specific sectors, such as battery supply and manufacturing supply chains, improvements are estimated to be worth as much as $7.4 billion over the coming years.
The Smart Energy Council has long understood that Australia has some of the best renewable energy resources in the world and the greatest opportunity to become a renewable energy superpower that exports significant amounts of zero-carbon energy to the rest of the world – directly or by being embodied in locally processed and manufactured goods.
With the appropriate policy and investment mix, Australia could become the world’s biggest exporter of smart energy within the next 10 years.
Solar Manufacturing
Australia currently possesses a very limited domestic solar manufacturing industry with just one operator still producing product in South Australia. Australia should have the capability to produce the basic materials of a solar panel including the tempered glass, the silicone solar cells, and other component materials. Given Australia will soon be reliant entirely on imports for a product that makes up over 12% of our current total power generation and sits on the rooftops of almost 3.3 million homes this represents a strategic gap that must be filled.
There are a number of current operators that are Australian based however they manufacture solar panels and components overseas. Some of these manufacturers are fast becoming world market leaders in their niches. Many of these companies would very much like to produce all or some of their products in Australia. With some investment from the NRF, these manufacturers could easily onshore some or all of their product manufacturing.
Battery Manufacturing and Lithium mining
The global market for lithium Batteries is expected to hit around $100 billion by 2025 with around half being used in EV batteries and the remainder split between increasingly popular household batteries for behind the metre storage and in other consumer products such as drills, vacuums, etc.
In Australia, we possess significant volumes of high-quality lithium, potentially the largest deposits in the world in terms of accessible deposits. We also possess an obvious competitive advantage in Mining. Currently, Australia is the world’s largest producer of unrefined lithium, and we produced $1.4 billion in exports in 2018–19 (Australian Department of Industry, 2019). The value in 2023 is expected to be $3.8 billion (statista.com, 2023).
This lithium is mined and sent overseas for value add, similar to other valuable metals we export including iron-ore and to a large extent bauxite.
The obvious value add here is to move our lithium process up the value chain. The Lithium-ion battery value chain consists of the six main stages, which include extraction of raw materials, processing the material, creating active battery cell materials, manufacturing of cells, and recycling the product for reuse.
At an absolute minimum, Australia should be developing lithium mining operations with a view to processing the material before it is exported. Projects that include this step should be supported by the NRF.
The next phase in the process should be to build the capacity to produce the precursor, anode, cathode, and electrolyte components of the battery construction phase. Australia currently produces nine of the 10 mineral elements required to produce most lithium-ion battery anodes and cathodes, and has commercial reserves of graphite which is the remaining element and could easily be exploited. Australia also has secure access to all of the chemicals required for lithium-ion battery production (Austrade 2020).
Significant investment in lithium extraction and processing with a view to building batteries in Australia could and should be a huge boost to the Australian economy. Given the size and availability of the resource in Australia, to some extent, we have a moral imperative to exploit this resource as quickly as possible in order to meet the challenges presented by climate change, at the same time we should be attempting to add value to the Australian economy by offering a cleaner version of the product to the world.
Green Hydrogen
Australia is already shaping up to be a big player in the production of Hydrogen. This industry is in its infancy and needs a strong certification policy that will mean Australia develops its hydrogen industry from clean, green fuel sources and not from other traditional dirty fuel sources such as coal or gas.
In December 2020, the Smart Energy Council launched its Zero Carbon Certification Scheme. It is an industry-led Guarantee of Origin style scheme which promotes the uptake and distribution of renewable hydrogen products and their derivatives in Australia and overseas. The scheme, which will be delivered through the Smart Energy Council’s Hydrogen Australia division, will assess the embedded carbon in participating hydrogen, ammonia, and metals produced within Australia.
This industry-led initiative is cognisant of the Australian Government’s work in this area as part of the National Hydrogen Strategy and will complement international certification work. Our aim is to accelerate the development and deployment of renewable hydrogen, green ammonia, and green metals in Australia and around the world. Presently there is a consultation process around the Australian Government’s Guarantee of Origin (GO) scheme which may provide certification to hydrogen projects that utilise fossil fuels in their production. The Smart Energy Council strongly believes any hydrogen project that utilises fossil fuels to create hydrogen should not receive funding from the NRF. Any renewable hydrogen, ammonia or metals projects that receive funding from the NRF should be certified as zero emissions.
There is also an opportunity in creating the many electrolysers that will need to be built for the industry to use in the production of hydrogen. Because these electrolysers are relatively simple to build and manufacture, are in very high global demand, and will be needed at scale domestically there is a very real opportunity now to invest in the manufacturing capability to produce the electrolysers that will power our hydrogen industry. The NRF should strongly consider projects offered for funding in this field.
Green Steel and Aluminium
Replacing coal with green hydrogen in the production of steel offers a viable alternative to our current process. The cost of production is cited as the biggest impediment to this method. However, policy frameworks mandating the use of green steel particularly in Government projects would provide a viable domestic market, to begin with, and once the production methods are refined, they would almost certainly become competitive over time. It is also likely that green steel could be exported at a premium.
The production of steel using electric arc furnaces is not generally regarded as a viable option because the feedstock for those furnaces is scrap metal and iron pellets made from ore that makes up only 6% of Australia’s current iron ore production.
Aluminium production powered by renewables offers a great opportunity for Australia to produce green products. Government investment in offshore wind and renewed investment by producers in smart energy upgrades to ensure grid stability and the lowest input cost are the simple solution to a complex problem. In this instance, the Smart Energy Council encourages The Australian Government to work directly with Aluminium producers to develop a plan to supply the power needs of the producers and for direct investment in any required upgrades. Given the scope of the energy needs for Aluminium providers in Australia, the SEC does not recommend that the NRF’s limited funds be prioritised for utilisation in this field.
Recommendation 1: The Smart Energy Council recommends that the NRF give preference to strategically important manufacturing capabilities including in the local manufacture of solar products, battery products, green hydrogen electrolysers, and in the mining and value add of lithium and other component battery elements.
Returns, financial instruments and working with other investors
- What factors and considerations should inform the portfolio rate of return for the NRF?
- What factors and considerations should inform the setting of acceptable but not excessive level of risk? Should the acceptable level of risk differ between priority areas?
- What types of concessional offerings would be preferred if these were offered (for example, lower interest rates) and why?
- What factors drive or constrain co-investment (for example, by industry, financial sector or domestic or offshore investors) and how should these be taken into account?
- What are the mechanisms and types of finance which will best attract co-investment from the private sector? How can the NRF best crowd-in investment?
Clean Energy Finance Corporation v’s the National Reconstruction Fund
The National Reconstruction Fund is modelled on the Clean Energy Finance Corporation which was originally provided with $10 billion and has already made some $10.6 billion of commitments and spent almost $9.1 billion. This has resulted in more than $37 billion in investments over 276 different projects. Because $3.2 billion of its loans have been repaid the fund still has around $4.7 billion available for new projects. While the fund has its detractors it is providing some good results for both government, the smart energy sector, and the fund itself.
The fund currently has three major investment streams, the Clean Energy Finance Corporation (general portfolio), the Clean Energy Innovation Fund, and the Advancing Hydrogen Fund. The General portfolio requires the Board to target an average return of at least the five-year Australian Government bond rate +3 to +4 percent per annum over the medium to long term. The Clean Energy Innovation Fund and the Advancing Hydrogen Fund require a target an average return of at least the five–year Australian Government bond rate +1 percent per annum over the medium to long term. These targets are measured before operating expenses.
Portfolio and individual-level investment risk screening occurs at the CEFC because of the counterparty risk associated when extending finance to business. Macro risk associated with individual business failure or default is also considered. At the portfolio level, diversification and concentration guidelines are applied to a single asset, entity, and industry-level exposures. The CEFC has clear guidelines for assessing risk through due diligence processes and analysis with their financial modelling (CEFC, 2023).
In 2021 the CEFC portfolio construction guidelines for the year were as per this table.
The Smart Energy Council believes there is scope for similar investment returns for the funding of products in the renewable space. The systems used by the CEFC to assess funding suitability are broadly useful as a guide for the NRF. However, the Smart Energy Council would like to see some changes to these parameters for the purposes of the NRF.
Recommendation 2: The SEC recommends that the expected investment return for the portfolio overall be equal to no more than the 5 year bond rate as at February 2022 for a period of 10 years from its inception. The Bond rate has increased significantly over the past 12 months from 0.598% at the end of February 2022 to 3.305% in February 2023.
The increases in the Bond rate over this period will see larger costs for businesses that are seeking funding and setting expectations at the increasing level will see a large number of businesses miss out on much-needed funding and could mean the fund will miss out on businesses that could have produced a return at the lower rate.
Recommendation 3: The Smart Energy Council also recommends that the minimum funding level of $20 million in the CEFC not be replicated. The SEC strongly recommends that there be no floor in the minimum investment level.
There are a significant number of smaller projects looking to come online that need long capital investment that is not available in the commercial market. For example, smaller-scale battery projects are now becoming viable because of other government settings, many of these vital projects will need much less than $20 million to be viable.
Recommendation 4: The Smart Energy Council also recommends that allowable business failure and default rate set internally within the fund be much broader than the CEFC permits.
The SEC has witnessed many companies who otherwise would have been provided funding by the CEFC leave Australia to seek capital (primarily in the United States) because they are deemed too risky. Many of these projects end up being unicorn investments overseas and generally make up for the overall portfolio failures of the funds they draw upon. The NRF must be a broader investment vehicle that takes significantly more risk than the CEFC.
Recommendation 5: The Smart Energy Council also recommends that the NRF seeks to invest the majority of its initial $3 billion in the renewables space in the first year of its inception. The SEC believes this $3 billion is a good start to filling some of the investment gaps in the marketplace however this will need to be expanded significantly in order to reach our domestic commitments and even more significantly in order to become an exporter and a smart energy superpower.
Complementary reforms
- What are the non-financial barriers preventing businesses from making the most of opportunities for value-add, growth, and diversification in the priority areas?
- Are there non-financial mechanisms that could support priority areas and the objectives of the NRF?
- How could the NRF work alongside other complementary reforms to best deliver on the Government’s policy priorities?
- To what extent are other levers required to support the objectives of the NRF (for example, skills, trade, supply chains)?
- How does the NRF, with other private and Government settings, drive the right ecosystems for sustainable industry growth?
Workforce issues
The scope of the workforce challenge cannot be understated. Australia cannot meet its 43% emissions reduction target by 2030 unless substantially more people can be found, trained, and engaged to work in the sector. Some reports indicate there is a shortfall of up to 15,000 electricians in the system right now and potentially 41,000 engineers not to mention the jobs required throughout to support those roles4. Notably, there is almost no data available on shortfalls in manufacturing because most of our renewables are manufactured offshore. According to Reputex’s modelling of the Australian Government’s Powering Australia policy to transform Australia’s energy grid to 82% renewable by 2030 (to meet our national ambition of reducing greenhouse gas emissions by 43%), 600,000 direct and indirect workers are required by 2030.
The Smart Energy Council is very concerned that by 2030, without significant intervention and investment, the total workforce deficit will cripple our efforts to transform our energy network. There is a clear need for an all of industry plan to embrace these challenges, understand them and organise workforce interventions at a reasonable scale. If we do not we will all look back and realise that year-on-year underinvestment in workforce planning has caused Australia to miss our energy transition and emissions targets.
Recommendation 6: The NRF should give additional consideration to projects that are in the business of training people, particularly apprentices in the smart energy space.
