Interview: "This is one of the most fundamental shifts we'll go through as a society"

Published Mar 6, 2023, 5:00 PM

One of the biggest challenges facing Australia in the near future is our transition to greener energy.

But how do we actually do it? And how do Australian companies manage the process? 

Sean Aylmer speaks to Liam Connolly, leader of the Energy Transition practice at Bain & Co, about how we get to net zero by 2050.

Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. One of the biggest challenges facing Australia in the near future is our transition to greener energy. Having committed to net zero emissions by 2050 and a 43% reduction by 2030, business now knows the environment in which it's operating. But what happens now? How do we actually transition and how do Australian companies manage the process? Liam Connolly leads the energy transition practice at Bain. Liam, welcome to Fear and Greed.

Thanks for having me, Sean.

Let's take it to the very basics. And we talk so much about this, but tell us why are we doing this? What's the prize here?

Well, if we think back over the last 150 years and we look at all of the economic development and improvements in our quality of life, a lot of that is underpinned by having access to a reliable energy source. Now, the challenge with our reliable energy source, historically, has been that it's primarily fossil fuel based. And that presents a number of challenges for the environment, in particular, greenhouse gases, as I'm sure most people are familiar with. And that's led us to the challenge that we're in today, in which the globe is warming at a rate that is beyond what we deem as acceptable, and now we need to maintain a stable energy source, but move away from fossil fuels to greener energy. And so that presents sort of a number of challenges.

Okay. So in this 43% reduction by 2030 that the Albanese government has introduced, net zero by 2050, how important is it that business actually has a number to pin its strategy to?

I think it's very important because it provides a signpost and a signal to the business community around the direction of travel for the country. It enables them to understand what is the government's stance and potential future policy to support the energy transition, and give comfort to businesses that they now need to think through their own targets and how those reductions impact their specific businesses and the circumstances they're operating in.

Okay. We're hearing lots about something called the safeguard mechanism which the government is pushing. I believe actually, it was originally introduced under Abbott, perhaps, the Coalition government. The current government are pushing it though the opposition's not so fussed on it. Can you just explain it to me?

Certainly. The safeguard mechanism, and I'll add the caveat, it's still actively being discussed by legislators and so it's not yet finalised, but in its current form, it's effectively mandating around 215 of Australia's largest emitters to reduce their emissions, year- on- year, to 2030. It equates to approximately 5% reduction that's going to be a required year- on- year. And for any facility that doesn't meet the in- year reduction, the current proposal is a penalty of $ 275 per ton of excess emissions for a given year. And so what it effectively does is outline a path to the reduction to 2030 and also the trajectory of that path, given that there needs to be an annual decrease. And the other thing that they're looking at is thinking about how they think about industry benchmarks so that they can have an approach around those in- year reductions that are based on the average of the industry versus just the average of a single facility.

I know BlueScope Steel came out the other day and talked about the need for certainty around the safeguard mechanism. Steel, of course, is a big carbon emitter. It's kind of the same question I asked two questions ago. How important is it for business that we actually get this safeguard mechanism certainty, whatever the final outcome?

I think it is important to have clarity and certainty, wherever the safeguard mechanism does land. It's required because what we're seeing is different businesses have different challenges to decarbonise their business, and they have a number of choices around that. One of which being is, do we go down and invest in new technology to reduce our carbon emissions, or do we look at using offsets, or what is the right balance between those two? And right now there's a proposal with the safeguard mechanism that provides guidance to that. But I think until there is certainty as to what that looks like, there's still going to be some sort of uncertainty for business around what is the right way for them to proceed as they look to decarbonise their own businesses.

Stay with me, Liam. We'll be back in a minute.

My guest this morning is Liam Connolly, who leads the energy transition practice at Bain. Okay. How worried are you about energy reliability? I know that in recent days, once again, I think it was the Australian Energy Market Operator came out and said, by the end of this decade, we're looking at shortages as coal- fired power stations are turned off. Is this something that you think we will solve or is it a real issue? And obviously this affects households, but particularly businesses.

It is. And I think it'll be an ongoing challenge because part of this transition, if we think about our current energy mix in Australia today, it's predominantly gas and coal. Now, part of the transition actually requires sort of moving away from those, particularly coal, to more renewable sources of energy. So thinking about solar and wind. But that also provides more complexity in how do we manage our energy system? Because as you know, at nighttime, we don't have the sun and therefore we don't have the energy from solar, and wind has its intermittency challenges as well. Therefore, one of the things that we need to navigate through the transition is how do we maintain access to stable and affordable energy, but also at the same time transition to a more diverse energy baseline that includes a lot more renewables.

Okay. Liam Connolly from Bain, how do we do it?

Well, the good news is that, for example, the safeguard mechanism starts to provide guidance and clarity around the direction of travel that we're heading to from an energy transition. We've also seen businesses have set a lot of targets, and you'll see a number of businesses have come out and set targets particularly aimed at the 2030 and 2050 horizons. Now, what's actually required is acting and delivering on those targets. And so that requires a number of things. I think we still need to have greater clarity from government and the regulatory bodies around what will the likely outcome look like for policy such as the safeguard mechanism. And I think what we need to see from businesses is putting aside the investments, and investing in both the technology, but also the capabilities required to transition their industries as well. And that might require more or it will require more work, I think, from both government and business. And look, we are seeing examples internationally where policy is coming into play with the US, and the Inflation Reduction Act as one example, which is stimulating investment in the space. And I think we're going to need to see more of those types of policy measures to help us achieve the goals for 2030 and 2050.

Okay. So the Inflation Reduction Act is a bit of... well, the name doesn't necessarily reflect the impact. It's providing subsidies in that for alternate fuels and that sort of thing. That's a big chunk of it. What I'm wondering is what about businesses? We got this with AGL last year, BHP in the last couple of days have said they're going to sell a couple of their coal mines. How responsible should the business be for making the transition of those assets vis- a- vis selling them? So I mean, last year BHP sold a couple of coal mines to Stanmore Coal, which obviously Stanmore Coal's business is coal. But if I'm Mike Cannon- Brookes, I'm going to say, " Well, actually you should be responsible for making that cleaner rather than selling it. You might look better yourself, but that doesn't actually solve the problem." And I don't want to get into a discussion about BHP necessarily, but you get the gist of what I'm saying.

I do. I do. And I think that's the challenge. I think to really move towards net zero, it requires those typical operations kind of no longer operating at a certain point in time. I think the challenge is, when are we able to do that while still maintaining our energy security and energy supply? Something which, as we've seen with the war with Russia and Ukraine, has been sort of brought into the spotlight around energy security and energy supply. Now, I think what we're seeing from corporate organizations is different pathways. Some are looking to sell off more heavy carbon intensive assets. The private sector is also starting to play a role in some of those assets with a view to decarbonize, and as you say, with Mike Cannon- Brookes. And I think we've seen some examples of where he has said that around looking to decarbonize some of these assets. I think the challenge is a number of different things need to happen in parallel, both the underlying investment in new energy sources coming online at the scale that we need them, and putting in place the right closure plans and timelines around the heavier carbon emitting assets and finding that right balance. And I think that's something which is still being worked through as a nation locally, but also is what we're seeing internationally as well.

It's easy to talk about this, but if I'm a coal miner in Queensland and we start closing coal mines in Queensland, and suddenly you've got a whole community there, which is funded by the coal mine, surely we have some sort of responsibility to help those people transition? And that is just one of many, many examples across the country.

That's right. And the term that's typically used for that is the just transition. How do we ensure a just transition for all given the fact that some industries that exist today aren't going to exist in the same shape or form tomorrow? And what that requires, I think is the right plans and engagement with these communities around, well, firstly, what are the timelines that we see this transition happening? But then secondly, how do we think about the opportunities that the transition presents as well? So one of the benefits of the transition is it's a once in a lifetime infrastructure build- out, and so that's going to require significant jobs and capabilities. And one of the things that we need to think through and how we balance it is, how do we ensure a just transition for those that are in more fossil fuel based sectors to think about the jobs and the opportunities that the energy transition presents?

As a former print journalist, I know this transit, the just transition argument, and it has been going on for a long time, hasn't it, as society changes?

It has. It has. And look, I think it's something which will continue. This is probably one of the most fundamental shifts that we're going to go through as a society, and I think that brings a lot of complexity and challenge around living costs, employment skills, technologies. And so that's something where I think there is still sort of a bit of uncertainty as to how that will play out, and that's also what is part of the challenge around, well, we can't just turn off a coal mine tomorrow, because that has significant implications both on the communities in which it operates, the value of our exports, and also the security of our power supply locally.

A final question, Liam, how do you think Australian businesses are going in this transition?

It varies a little bit by sector. Obviously, some are harder to abate than others. We actually did a survey of CEOs last year, and around 90% of them felt that Australia was trailing behind other developed nations in sustainability. And a large part of sustainability was energy transition and our carbon footprint. I think Australian business has done well at announcing targets. I think the challenge now is the rubber is hitting the road to deliver on those, and the safeguard mechanism now is effectively the stick that has been put in place to ensure that there is consistent year- on- year reductions. And so I think that's good. I think that's important because that provides certainty for business to now think about, okay, now we have a view of how much we need to invest to achieve these goals. And it means the reduction happens on an annual basis versus waiting until 2030 to see how we're tracking versus that target.

Liam, thank you for talking to Fear and Greed.

Thank you for having me.

That was Liam Connolly who leads the energy transition practice at Bain. This is the Fear and Greed daily interview. Join us every morning for the full episode of Fear and Greed, Australia's most popular business podcast. I'm Sean Aylmer. Enjoy your day.

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