11 minute read
Accelerating corporate Australia’s transition to net zero
John Pickhaver
Co-Head of Macquarie Capital Australia and New Zealand
Australia’s largest corporations are making ambitious commitments to decarbonise, with many announcing plans to become carbon neutral by 2050. The pathways to achieving these goals are likely to be varied and multi-faceted. In the short term, companies can consider procuring renewable sourced energy or purchasing offsets and increasing energy efficiencies, but there are some hard-to-abate areas that will require longer-term solutions.
At least one-fifth of the world’s 2,000 largest public companies have made some form of commitment to net zero1 .
A large proportion of retail shareholders, institutional investors including superannuation funds and sovereign wealth funds, as well as lenders, want to see change. This means there is an increasing amount of capital available to companies that are prepared to take practical steps towards meeting their ambitions, and transitioning to a net zero future.
As the scale of the challenge and the immediacy of the impacts of climate change are growing clearer, the pressure is on corporates to fast-track creative, yet practical, solutions to decarbonise.
Power purchase agreements reaching further into corporate Australia
One of the main ways corporate Australia is already decarbonising is through clean power purchase power agreements (PPAs). PPAs are a mechanism through which a company agrees to buy electricity from a renewable source, such as a wind farm or solar plant.
Because the energy user enters into an agreement for a set period of time, they receive a level of price certainty that makes switching to renewables attractive. In return, infrastructure developers and investors get the certainty they need to finance and develop a project.
Lal Lal is a 2,100-hectare wind farm that Macquarie Capital developed and owns with Northleaf Capital Partners and InfraRed Capital Partners2. The wind farm was made viable via a PPA to supply the Victoria-based packaging company Orora with renewable energy.
However, even those corporates with more moderate energy needs can benefit from PPAs by grouping together in a consortium. ANZ Bank, Coca-Cola Amatil and the University of
1. Black, R., Cullen, K., Fay, B. et al., ‘Taking Stock: A global assessment of net zero targets’, Energy & Climate Intelligence Unit and Oxford Net Zero, 2021, https://eciu.net/ 2. ‘Macquarie Capital closes project financing and innovative commercial arrangement for Lal Lal Wind Farms’, Macquarie, 19 June 2018, https://www.macquarie.com/
Stage one of Murra Warra wind farm
3. ‘Murra Warra Wind Farm Stage One reaches financial close, construction to commence’, Murra Warra Wind Farm, 14 March 2018, Res Group, https://www.res-group.com/ 4. Green Investment Group (GIG) is part of Macquarie Capital, and Murra Warra II demonstrates the depth and breadth of global expertise in green development within GIG, Macquarie Capital and RES in the context of the Australian market. 5. ‘Murra Warra II Wind Farm to commence construction following successful completion of development phase and financial close’, 3 August 2020, Macquarie, https://www.macquarie.com/ 6. Simon Jessop, Patturaja Murugaboopathy, ‘Sustainable fund inflows hit record high in Q1 – Morningstar’ Reuters, 1 May 2021, https://www.reuters.com/ 7. Asia Pacific Loan Market Association’s Green Loan Principles and Social Loan Principles
Melbourne did just this when they joined Telstra and entered a PPA with the Murra Warra Wind Farm project near Horsham, Victoria3 .
In January 2017, Macquarie Capital acquired 50 per cent of the Murra Warra development from RES Group (RES), the world’s largest independent renewable energy company. Following this, Macquarie Capital and RES split the site into two stages to accelerate commercialisation, with the first stage sold to Partners Group. Macquarie Capital’s Green Investment Group4 and RES are currently finalising the development of stage two5. When complete, this stage will supply electricity to a consortium of 46 Victorian local councils via Snowy Hydro under another PPA.
This is one of the real trends we’re seeing evolve – smaller buyers binding together in a PPA arrangement that lets them achieve the same economies of scale as bigger energy users so that they can keep down costs and achieve their sustainability objectives.
Capital at the ready for transition projects
Dry powder in investment funds has grown to all-time highs across the globe, further accelerated by the impact of COVID-19. In the opening three months of 2021, global sustainable funds attracted a record inflow of $US185.3 billion, a 17% increase in new capital being invested compared with the prior quarter6 . Much of this capital has been specifically earmarked for sustainable or transition projects.
ESG (Environmental, Social and Governance) considerations are high on the agenda for many investors and corporates. The ‘E’ in ESG receives particular focus, given many of those investors and corporates having clearly stated sustainability targets. This also extends to the debt markets, where lenders often have their own targets for ESG loans. One recent project Macquarie Capital advised was Qtectic – Qtectic operates an electric passenger train upgrade for the Queensland government – which was financed through a certified green loan7, making it Australia’s second publicprivate partnership (PPP) to be financed this way. The positive current lending and capital raising environment is unlocking decarbonisation investments in more sectors.
To this end, we recently advised Celsus, the commercial operator of the Royal Adelaide Hospital PPP, on the $A2.2 billion sustainable refinancing from a consortium of 18 banks. The refinance is Australia’s largest PPP green loan and the world’s largest healthcare sector sustainability loan.
What we’re seeing is that finance is helping to create this positive loop when it comes to decarbonisation. Companies can leverage the growing demand for sustainable debt products to secure cheaper finance and gain a real advantage in delivering their transition strategy.
Energy tech: a decentralised future
Australia’s road to decarbonise by 2050 is also built on technology innovation.
Australia is already a world leader in generating renewable energy via distributed networks, or small-scale renewable systems that service a home or business. So much so, that BloombergNEF forecasts that by 2035, as much as 33 per cent of Australia’s entire energy capacity will sit behind the meter rather than on the transmission network.
Several energy providers have launched their own virtual power plants, procuring excess electricity generation from bundles of rooftop solar assets and then on-selling to consumers and businesses. However, the most rapid gains are being made in renewable energy storage.
Dispatchable storage is a great complement to balance out intermittent renewable energy generation. In addition to timeshifting energy, storage can also provide grid stability services, ramp rate control, and can assist in deferring network upgrade expenditure. Such features can bolster the grid for higher penetration of renewables, increasing accessiblity to consumers.
Price signals for flexible dispatchable energy are evolving too, with Macquarie’s Commodities and Global team (CGM) recently entering into virtual storage swap contracts with Hydro Tasmania. Under the terms of this type of instrument, Hydro Tasmania can lock in the price spread between periods of excess grid power in Victoria (typically during times of plentiful renewable supply) and periods of required peaking power in the grid due to high demand or low renewables output. Such instruments help storage asset owners capture the revenue they require and at the same time, allow stored energy to be utilised as a balancing mechanism for the physical market.
We expect to see innovative financial instruments becoming increasingly available to dispatchable new energy assets, and like PPAs, these innovations can improve the bankability of projects, driving down the cost of capital, and ultimately enable lower prices for consumers.
Still, for many of Australia’s heavy emitting corporates, clean electrification will not be an economically or technically viable solution for all of their operations. As such, many corporates are beginning to explore hydrogen as an alternate or additional decarbonisation pathway.
Renewable hydrogen as an industry is still relatively nascent, however a combination of a supportive policy environment across multiple jurisdictions and a path to rapid cost reduction has meant it is starting to feature as a medium-term decarbonisation tool for heavy mobility, heat and industrial feedstocks.
In an Australian context, an opportunity does exist to be a significant hydrogen producer given our access to low cost renewables and an increasing focus by both Federal and state governments. In order to recognise this opportunity and overcome some of the challenges to industry development, priority is being shifted to the development of projects where demand can be aggregated, scale can be achieved and existing infrastructure can be reused. The development of hydrogen hubs of this nature mirrors what is happening in Europe where large industrial clusters are developing around hydrogen and other renewable fuels.
Macquarie Capital is actively involved in a range of hydrogen hubs globally. From our experience there are two key ingredients for success. Firstly, strong and credible partnerships are required. These projects are, by their nature, multi-faceted and no one organisation typically has the capability to bring them to fruition. Secondly, developers of projects need an understanding and capability across broader energy markets, particularly as we see the convergence of gas and power markets becoming important. Ultimately, hydrogen will be a commodity and the driver for cost will be energy input. Accordingly, setting a project up to be low on the cost curve will ensure ongoing competitiveness.
Some companies and sectors have more work to do than others when it comes to decarbonising. But this hasn’t stopped many of Australia’s largest carbon emitters from setting their own ambitious targets – including mining companies and energy providers.
AGL Energy, which operates Australia’s largest electricity generation portfolio, has a significant carbon footprint through its ownership of large coal-fired power plants but also has Australia’s largest portfolio of renewable energy assets. It decided to take a transformative step in order to accelerate its transition by seeking to demerge into two companies: one focused mainly on electricity generation (to be named Accel Energy) and the other on retailing electricity and gas to 4.5 million largely residential customers supported by flexible generation (named AGL Australia).
Macquarie Capital is advising AGL Energy on its demerger – an industry-leading move which will allow Accel Energy to focus on its decarbonisation targets by repurposing existing energy sites such as coal-fired power plants into clean energy hubs. AGL Australia will immediately become scope one and two emissions neutral, and pursue its own unique transition pathway to carbon neutrality with a focus on customer-centric strategies.
The near term: offsetting is key
With global warming expected to reach 1.5 degrees Celsius sometime between 2021 and 20408, corporate decarbonisation targets must balance the longer-term structural changes with the need to take tangible action today. So, while 2050 may be the end goal, Australia’s corporates must still work with what’s available right now.
Carbon offsetting should play an important role in supporting an organisation’s transition to carbon neutrality, especially those in hard-to-abate sectors, such as mining, manufacturing and energy. After all, many have little option but to rely on fossil fuels for their baseload energy needs or manufacturing processes in the near future while new technology such as carbon capture, which could allow them to operate in a less carbon-intensive way, are still under commercial development.
That said, some critics argue that carbon offsets can be too theoretical and too far removed from the carbon that’s being emitted. However, Macquarie believes there are real options upstream, midstream and downstream where offsets can make a difference. One key to making this strategy work is to properly engage with all stakeholders, including the local community. Many carbon projects provide ESG co-benefits, such as improved local community social and economic outcomes for women, children and underrepresented groups. As such, carbon offset projects can provide an opportunity for organisations to integrate their sustainability initiatives with their wider community and philanthropic engagements.
It is also important to frame (and to use) offsetting as part of a wider, mutlifaceted strategy toward decarbonisation – asset owners should communicate exactly how offsets address a project’s emissions today, as well as the emissions and other ESG solutions they are working towards, in order to directly reduce emissions in the medium to long-term.
Offsets can also be used creatively to make historically carbonunfriendly, but necessary transactions, greener. For instance, Macquarie’s CGM team arranged and executed the world’s first major petroleum trans-continental shipment in which the entire crude oil lifecycle was offset. In addition, CGM has executed other market-leading transactions in carbon-neutral refined petroleum products and carbon-neutral ocean freight. These product offerings represent pragmatic solutions that use carbon offsets as a bridge into longer-term, structural decarbonisation efforts that require time, capital investment and, in some cases, additional technological development.
The path to 2050 is a long one and companies need to have short and medium-term goals along the way. Offsets allow these companies to take immediate action while exploring the technological developments that will ultimately allow them to reach their carbon ambitions.
Meeting the defining challenge of our times
For almost two decades we have worked with governments and clients to drive the energy transition and advance practical solutions to climate challenges. We have built market-leading capabilities in investing directly into climate mitigation, adaptation infrastructure and in supporting our clients and portfolio companies to decarbonise their activities.
We are committed to playing a leading role in achieving global net zero emissions by 2050.
8. ‘AR6 Climate Change 2021: The Physical Science Basis’, IPCC, 7 August 2021, https://www.ipcc.ch/
Important Notice
This article is not research and has been prepared by non-research personnel of certain Macquarie Capital entities within the Macquarie Group. This article has not been independently produced by a research team. None of the Macquarie Capital entities are authorised deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities.
For more information please contact
John Pickhaver
Head of Infrastructure and Energy and Co-Head of Macquarie Capital, Australia and New Zealand E: John.Pickhaver@macquarie.com
