Australia The Giant Coal & LNG Exporter Turning into a Clean Energy Superpower

in Japanese

In 2022, Australia was the world’s second largest coal exporter (26% global market share) and second largest liquefied natural gas (LNG) exporter (21% share). 1 On the one hand, decarbonization efforts towards carbon neutrality in Northeast Asia (i.e., China, Japan, and South Korea) – where most of Australia’s coal and LNG productions are consumed, threaten the survival of the Australian fossil fuel industry. On the other hand, Australia’s rich natural resources, as well as the significant domestic expansion of solar and wind power, offer the great opportunity to turn the country into a clean energy superpower. This column first describes Australia’s three key nascent industrial plans the “Critical Minerals Strategy”, “Hydrogen Headstart Program”, and “Solar Sunshot Program”. It then focuses on the decisive role rapidly growing renewable energy (RE) electricity plays to support the transformation of Australia’s economy.

Critical Minerals, Hydrogen, and Solar Photovoltaic as New Strategic Industries

Despite being historically heavily reliant on fossil fuels for both its domestic energy consumption and as a source of incomes thanks to exports (especially coal and LNG), Australia has pragmatically decided to embrace the opportunity of becoming a clean energy superpower. 

This transformation is made possible by a combination of factors owing to the world’s needs for greenhouse gas emissions reduction and Australia’s own strengths and positive reputation.

On a global scale, the energy transition requires a massive expansion of affordable, environmentally friendly technologies (e.g., batteries, electric vehicles (EVs), hydrogen electrolyzers, solar photovoltaics (PV), wind turbines…). 

At the national-scale, Australia is blessed with excellent natural resources, and it has the human and financial resources to exploit them. This enables the development of clean energy supply chains and of domestic clean energy infrastructures to support mining and manufacturing activities. Moreover, Australia is internationally recognized as a trusted trade partner which is an asset to attract investors and customers.

Eager to turn its country into one of the world’s leading clean energy superpowers, the current forward-thinking Australian Government, under the leadership of Prime Minister Anthony Albanese, recently unveiled a set of new industrial plans to realize its vision. 

Three of these plans have been selected due to their noteworthiness: the “Critical Minerals Strategy”, the “Hydrogen Headstart Program”, the “Solar Sunshot Program”. They are separately described below, but they should be understood as complementary pieces of a comprehensive strategy.

For Japanese stakeholders, it is essential to understand that with these new industrial plans the Australian Government now unequivocally expresses its intention to capture more added value by developing downstream processing activities in its country, thereby reinforcing its economy and energy security. This revolution will reshape geopolitics of energy and traditional trade relationships based on fossil fuels. 

•  “Critical Minerals Strategy”²

Published in June 2023, the “Critical Mineral Strategy” presents the Government’s vision to grow Australia’s critical minerals sector. 

It first highlights that Australia is well placed to seize the opportunities of the clean energy transition thanks to the country’s rich geological reserves, expertise at extracting minerals, and track record as a reliable producer and exporter of energy and resources. 

In 2023, Australia was the world’s largest producer of lithium (global market share of 48%), and fourth largest producer of rare earths and cobalt (5% and 2% shares, respectively) (Chart 1). In terms of reserves, Australia ranks second for lithium and cobalt, and fifth for rare earths. These three critical minerals are especially important for batteries and EVs. 

Chart 1: Lithium, Cobalt, and Rare Earths Top-5 Producers 2023

In addition, Australia produces significant amounts of energy transition metals such aluminum, nickel, and copper. Aluminum and copper are important inputs for solar PV and electricity networks (e.g., cables and wires for power lines).    

The strategy also identifies priority technologies for critical minerals. These include batteries and battery components, rare earth permanent magnets, catalysts for hydrogen production, semiconductors for micro-chips and solar PV.      

Then, several objectives are set among which: create diverse, resilient, and sustainable supply chains through strong and secure international partnerships, build sovereign capability in critical minerals processing, and extract more value onshore from Australia’s resources, creating jobs and economic opportunity.

To achieve these objectives a list of actions to conduct has been established. These actions include providing targeted, proportionate support from the Australian Government to de-risk strategically important critical minerals projects (e.g., chemicals and refining, production of precursors…). They also include collaborating with States to develop industrial hubs (e.g., the Kwinana-Rockingham Strategic Industrial Area in Western Australia where critical minerals processing facilities support the RE industry). Other actions are to encourage international partnerships to grow Australia’s downstream capability, and engage and share benefits with local communities. Finally, educating a skilled workforce (e.g., mining engineers, geologists, metallurgists…), as well as developing a regulatory framework enabling fast environmental approvals (upholding robust protections) are pursued too. 

Among these actions, engaging and sharing benefits with local communities should not be overlooked because in Australia critical minerals are often located in areas where First Nations communities (i.e., Aboriginal and Torres Strait Islander groups) are key stakeholders with whom land access and use must be negotiated. To ensure good social acceptance of projects, the Government will hold informative roundtable forums, and work to build the capacity of First Nations communities to engage effectively with critical minerals proponents.

In May 2024, the Australian Government announced a 10% production tax credit totaling $ (= USD throughout the column) 4.7 billion over the coming decade for all critical minerals to drive critical minerals processing in the country.³

•  “Hydrogen Headstart Program”⁴

The Australian Government is investing $2.7 billion in the “Hydrogen Headstart Program” which provides revenue support for large-scale green hydrogen projects (or hydrogen derivatives such as ammonia) through competitive hydrogen production contracts. Green hydrogen is obtained by electrolysis of water powered by RE electricity.

All applicant projects must deploy a new facility producing hydrogen from electrolysis and be 100% powered by RE (existing power plants may be utilized). They must also have at least 50 megawatts (MW) in capacity on a single site. 

Successful projects can receive funding as production credits delivered over ten years. The goal of these funding credits is to cover the current commercial gap between the cost of producing green hydrogen and its market price. It is expected that by including these subsidies, it will be possible for producers to offer green hydrogen to consumers at a price that will stimulate demand. 

In December 2023, the Australian Government announced six shortlisted projects totaling electrolyzer capacity of close to 3.6 gigawatts (GW) across various end uses (Table 1). Funding recipients should be announced in late 2024.

Table 1: Australia “Hydrogen Headstart Program” Shortlisted Projects

At this stage, specific available details about these projects are quite limited. It can however be indicated that electrolyzer projects should be parts of hubs comprising utility-scale RE power plants generating electricity to produce green hydrogen, heavy industries consuming hydrogen or its derivatives, and transportation infrastructures (i.e., pipeline or harbor) (Chart 2). It is understood that most end uses are related to green ammonia because gaseous ammonia can be used as a fuel and for other decarbonization purposes (e.g., green steel), and because liquefied ammonia is easier to store and transport than hydrogen (i.e., hydrogen carrier).  

Chart 2: Simplified Illustration of Typical a Green Hydrogen Project

For Japanese stakeholders, it is worth stressing that this program by subsidizing green hydrogen production puts the emphasis on its production not its transport (even if exports are allowed). Given the poor economics of transporting green hydrogen or its derivatives from Australia to Japan, it is understood that it is preferable to consume these products in Australia rather than exporting them to Japan. This is an economically rational approach, consistent with the ambition of Australia to develop domestic downstream processing activities. 

For example, if we consider iron & steel, at present Australia exports iron ore and metallurgical coal to Japan where iron is produced. In the future, however, it is likely that Australia will directly export green iron to Japan because it will be more cost efficient – as well as more profitable for Australia and thus in its own interest – to produce green iron in Australia using domestic iron ore and green hydrogen.            

In other words, importing green hydrogen or its derivatives from Australia to Japan is technically feasible, but it will certainly remain expensive. This also means that these products will be precious. As such they should be imported only when national supplies are limited, and they should be used wisely (i.e., only when there are few alternatives to them, as for example in the production of virgin steel). In this regard, the idea to cofire imported green hydrogen or ammonia for baseload electricity generation, as contemplated by some Japanese politicians and businesses, may be deemed absurd. Instead, RE and batteries will be more efficient and economical options to meet the bulk of electricity demand in Japan.

•  “Solar Sunshot Program”⁵

In March 2024, the Australian Government announced that it will invest $0.7 billion in the “Solar Sunshot Program” providing production subsidies and grants to help Australia capture more of the global solar manufacturing supply chain. Symbolically, this announcement was made at the site of the former Liddell coal-fired power station (2 GW) in New South Wales, where the possibility of constructing a new solar manufacturing facility is explored. From an employment perspective, this type of reconversion project is vital to ensure a smooth transition from fossil fuels to RE. In Australia at the end of 2023, roughly 43,000 people were employed in coal mining and 18,000 in oil & gas extraction.⁶

In this program, it is pointed out that whereas one-third of Australian households have solar panels – the highest uptake in the world – only 1% of those have been made in Australia. Since solar PV is the trump card of Australia’s decarbonization, excessively depending on solar PV equipment imports is unsatisfying from an energy security perspective. Even more so when the global solar PV supply chain is overwhelmingly dominated by one country, China (which share of global manufacturing capacity exceeds 80% in all the stages of the solar PV supply chain). In recent years, diplomatic relationships between Australia and China have sometimes been strained because of issues from human rights to tensions in the South China Sea.

For the time being, this program is only at an early stage with the Australian Government currently collaborating with the industry to design and deliver it. It is, however, already clear that opportunities across the entire solar PV supply chain are being investigated: from ingots and wafers to cells, module assembly, and related components, including solar glass, inverters, advanced deployment technology and solar innovation.

Evidently, it will be difficult for Australia, just like it is for any other country, to challenge China in terms of cost. This is due to oversupply capacity in China which results in cheap Chinese solar PV exports flooding the world. Nonetheless, this effort deserves to be praised because it participates in diversifying the global solar PV supply chain. The same can be said for similar initiatives in the European Union (EU) and the United States (i.e., the EU Solar Energy Strategy and Inflation Reduction Act, respectively).

Furthermore, one may expect that local manufacturing will stimulate Australia’s economy by creating a new source of incomes and jobs, and that it will make the country’s public opinion towards solar PV even more favorable as domestic products may benefit from a national preference. Ultimately, these developments should contribute to accelerating the spread of this technology and of RE electricity.

Measures implemented to reach 82% renewable energy by 2030

To truly become the clean energy superpower it envisions to become, Australia is fully aware that it needs to make RE the cornerstone of its power system and create new advanced technologies and products for domestic use and exports. This is why the country now aims for RE to account for 82% of its electricity generation mix by 2030.

According to the International Energy Agency, in 2023, with a RE share of 38%, Australia was the leader among Asia-Pacific’s largest economies (Chart 3).

Chart 3: Asia-Pacific Five Largest Economies Electricity Generation Mix 2023

There are two major power systems in Australia: the National Electricity Market (NEM) in eastern and southeastern Australia (New South Wales, Queensland, South Australia, Tasmania, and Victoria) where over 80% of the country’s electricity is generated and consumed, and the South West Interconnected System (SWIS) in western and southwestern Australia (Western Australia) where more than 15% of the country’s electricity is generated and consumed. In northern Australia (Northern Territory) there is a minor isolated power system. These three systems are not interconnected to each other. As for electrical networks, in the NEM, each political jurisdiction has a transmission company, and several distribution companies, and in the SWIS there is only one transmission and distribution company.

At the State level, Tasmania and South Australia offer a glimpse of the future with RE shares in electricity consumption (i.e., consumption = generation + imports - exports) of 93% and 72%, respectively (Chart 4). While Tasmania’s high RE share is largely owe to hydro (73% of electricity consumption), South Australia’s high RE share is mainly thanks to wind (45%) and solar (26%).

Three solutions are implemented to manage the integration of high shares of wind and solar in South Australia. First, gas power plants are flexibly operated. Second, two electricity interconnectors with the neighboring State of Victoria are used to import and export power as necessary (i.e., the 650 MW “Heywood” interconnector and the 220 MW “Murraylink” interconnector)⁷ . Third, batteries are installed (e.g., with the pioneering “Hornsdale Power Reserve”, South Australia became the home of the world’s first large lithium-ion battery project in 2017: 100 MW, expanded to 150 MW in 2020)⁸.

Chart 4: Australian States RE Share in Electricity Consumption 2023

In Australia, the expansion of RE is and will keep being led by solar and wind power. On the one hand, this is because the natural conditions to deploy these two technologies are advantageous, including high-capacity factors: for solar PV 15-22%, and for onshore wind 29-44%. On the other hand, this is because these technologies have reached maturity. The combination of these factors results in remarkable cost competitiveness: according to BloombergNEF, for new utility-scale projects in Australia, the levelized cost of electricity (LCOE) of solar PV is around $0.05 per kilowatt-hour (/kWh) and that of onshore wind $0.07/kWh.⁹ For comparison, the same source estimates that in Japan the LCOE of solar PV is about $0.07/kWh and that of onshore wind $0.11/kWh.

Although, one may argue that Australia – unlike Japan – has a vast landmass and a low population density which make it easier to develop utility-scale RE projects, the fact that nearly two-thirds of Australian solar electricity generation comes from rooftop solar PV should not be ignored. This is because the LCOE of rooftop solar PV systems very favorably compares with retail electricity prices. For instance, across Australia whereas rooftop solar PV systems with sizes between 3 and 10 kilowatts typically have a LCOE of $0.05-0.10/kWh, the range of residential electricity prices is $0.17-0.28/kWh.¹⁰ This gap between the LCOE of rooftop solar PV and residential electricity prices is a powerful incentive to maximize self-consumption which contributes to minimize curtailment (for more information about solar and wind curtailment in Australia read the column: “Curtailment Increases Across Japan Economic Dispatch and Negative Prices Are Key Solutions”).

To accelerate RE growth the “Powering Australia Plan” is instrumental.¹¹ With this plan, the Government committed $15.4 billion to grow and modernize the country’s electricity grid, boosting energy performance and supporting electrification.

The main policy under the plan is called “Rewiring the Nation”. This policy provides $13.4 billion in concessional loans and equity for investment in transmission infrastructure projects.

Among the projects the Government committed to in this framework, Tasmania’s “Marinus Link” and “Battery of the Nation” projects are particularly interesting.

The “Marinus Link” is a proposed high voltage direct current interconnector between Tasmania and Victoria, two States in Southeastern Australia (Chart 5). It is envisioned that this interconnector will enable Tasmania to import RE electricity generated from solar and wind power in the mainland, to store it thanks to its pumped hydro storage potential, and to export it back when needed. From a technical viewpoint, the “Marinus Link” comprises 345 kilometers (km) of cables, out of which 255 km are undersea and 90 km are underground. It will be delivered in two stages: initially as a 750 MW project (stage 1) with a second 750 MW link to follow later (stage 2). The final investment decision on this 1.5 GW interconnector will be made in late 2024. Construction could start in early 2025 and commissioning is expected for 2033.

Chart 5: Simplified Illustration of the Marinus Link Project

The “Battery of the Nation” is a concept to maximize Tasmania’s hydro and pumped hydro storage potentials to optimize the power system integration of solar and wind.¹² Based on this concept, two projects are progressing: the Cethana project and the Tarraleah project. Whereas the Cethana project aims at developing a new pumped hydro storage facility with a capacity of 750 MW, the Tarraleah project aims at redeveloping an existing hydro facility by increasing its capacity from 90 to 190 MW and by improving its flexibility and efficiency. Final investment decisions for these projects are due in 2025.

Beyond the “Powering Australia Plan”, another important policy is the “Capacity Investment Scheme”.¹³ This scheme promotes the installation of 32 GW of new capacity by 2030, including: 23 GW of RE capacity and 9 GW of clean dispatchable capacity (i.e., mainly batteries). Capacity is to be allocated through competitive tenders held approximately every six months between 2024 and 2027.

In late May 2024, Australia’s biggest ever RE auction will be held with 6 GW of solar and wind capacity on offer.¹⁴³ As a reference, according to the International Renewable Energy Agency, in Australia at the end of 2023, solar and wind cumulative installed capacity stood at 33.7 GW and 11.3 GW, respectively.¹⁵ For comparison, in Japan solar cumulative installed capacity was 87.1 GW and wind 5.2 GW.

In conclusion, in light of the deep energy interdependency between Australia and Japan, it is obvious that Australia’s dynamic quest to become a clean energy superpower will have major consequences on Japan’s economy and energy transition. Therefore, collaboration between these two countries needs to be intensified to avoid misunderstandings and seek mutual benefits. If conservative energy policies focusing on fossil fuels keep prevailing in Japan, frustration and the risk of being left behind will only grow. This is because, as Australia demonstrates it, the future belongs to RE.