Energy Transition: Embracing the Inevitable

Some shifts in the economy are inevitable. The transition to renewable energy is one such shift. In the past few decades, every single company and industry disrupted by the process of digitization wished they moved earlier. Waiting to adapt to exponential technologies never ends well for incumbents, because when the economics cross the chasm, it’s usually a mass consumer exodus.

Because these changes are rarely incremental, there’s never enough time to catch up. When a change in business can’t be avoided, the best financial strategy is to bring it forward as quickly as possible.

Despite attempts from our federal government to thwart it, the renewable energy sector in Australia is much farther along the path than is widely known. According to the Clean Energy Council, 2021 was a bellwether year. Some key statistics for the year 2021 alone that demonstrate our progress:

• 24 per cent of Australia’s total energy is now from renewable sources
• 32.5 per cent of electricity is derived from renewable sources
• 390,000 households in Australia installed a solar rooftop
• 30 large-scale battery projects went live in Australia
• 40,000 small scale microgrid batteries were installed (68 per cent more than a year earlier)
• 19,000 new jobs in the renewables sector were created (over half of the number the coal industry currently employs)

On top of this, battery storage costs have dropped 88 per cent in the past decade. We should anticipate a curve jump beyond lithium ion to a new technology that further reduces the costs and weight of energy storage.

Energy now behaves a lot like information technology, with exponential improvements in cost-to-performance ratios. This is because the energy industry has intelligence built into its development.

Fossil fuels can’t compete economically, so their demise will only accelerate. Fossil fuels largely feed large-scale, unchanging infrastructure. In contrast, renewables combine artificial intelligence with materials science to inform development.

Just like computing, small-scale innovations, coupled with quick innovation cycles, mean that energy will fragment into a decentralised infrastructure for generation and storage. It’ll be a lot like the internet, but rather than us generating content, we’ll be generating energy and trading it across the ‘energy internet’. 

Data and Energy to Merge

Technology often creates new kinds of convergence. With increasing access to people and their devices, Big Tech has entered the content game to compete directly with Hollywood, albeit in people’s loungerooms. In a similar parallel of how industries step on each other’s turf, energy and data retailers are starting to enter each other’s market space.

Energy giants like AGL and Origin Energy now tack on home internet plans to their existing offerings. Telstra is aiming to obtain retail energy licences by the end of the year. As part of its 2025 strategy, Telstra’s ambitions include entering the top five energy retailers by securing more than half a million additional customers by providing clean energy.

This makes sense for both sectors, given that data and energy have similar infrastructure requirements and business models to be piped into houses. In the short to medium term, energy will behave like data, becoming an ‘all you can consume’ subscription service.

However, the key long-term play will be understanding the usage of energy, tracking the smart devices used in each home and facilitating household energy trading across the country.

Big Tech Energy Play

Although Big Tech hasn’t chased the ISP space in Australia as they have overseas with Internet.org and Google Fiber, it does make sense that they’ll enter the energy market.

They are already among the world’s biggest energy consumers with their energy hungry data centres. By arming themselves with renewables as a cost reduction strategy and selling a purpose-built excess capacity, they could find their next arena for revenue growth.

This was in fact the strategy of Amazon Web Services (AWS) by building out 100 times more than they needed for their own growth. By selling their excess, Amazon became the world’s biggest web host.

If Big Tech were to make this move, it could have the dual effect of lowering energy costs for consumers in an inflationary energy market, while escaping regulatory scrutiny.

Energy may be one of few large-scale growth opportunities left for Big Tech that aligns to their business model, and conveniently, won’t attract further anti-trust action.

Electric Vehicle Market

Likewise, the shift from internal combustion engine (ICE) vehicles is happening more quickly than we expected. By current growth rates, the transition to EVs globally will beat government mandates. EV sales have doubled every year for the past seven years. At this rate, by 2026 the majority of cars sold will be EVs, so long as we can mine enough raw materials for batteries. (See my comments about curve jump above.)

Even Australia, which is lagging behind the rest of the world, enjoyed growth rates of 191 per cent in EV sales last year. Web searches for EVs rose 40 per cent in the past month, while the waiting lists lengthen. Car manufacturers are responding by bringing forward transition times. We should expect EV car cost parity across all car sizes by next year.

But here is the kicker. The cost to operate an EV is already much lower than an ICE. Savings from the running costs of an ICE vehicle is enough to fund annual finance costs of a new EV. The average annual distance travelled by car in Australia is 13,000km. With the price of petrol at $1.85 per litre, the savings on petrol and maintenance alone are approximately $3,500 per year. 

Since Australia no longer has a local car industry, it might seem like the transition to EVs is irrelevant to our economic well-being. That would ignore the significance of the infrastructure install opportunity.

With over 20 million vehicles registered in Australia, every single one will need its own charger. Many transport industry experts suggest we will need at least two EV chargers for every car. With a minimum price of an EV charger at $2,000, the install opportunity lies at somewhere between a $40 to $80 billion market opportunity.

Whether it is going into our houses, buildings, factories or cars, energy is about to become a zero marginal cost situation. While this is a financial boon for consumers, it also creates an infrastructure opportunity that hasn’t yet been embraced by our leadership economically.

Vote-Winning Strategy

Incentives shape behaviour. The cryptocurrency market is often derided for using as much energy as the entire country of Finland.

However, cryptocurrency has a financial incentive built into its system to reduce the cost of energy, so it becomes a vital component in bringing forward renewables. Current estimates are that over 50 per cent of energy used for cryptocurrency mining is from renewable sources. Just like our domestic retail energy, fossil fuel crypto miners just won’t be able to compete.

This is a very different incentive pushed by the ‘old energy’ sellers. Just last week, electricity wholesale suppliers stated that retailers could be sent to the wall, unless the national energy regulator sufficiently raised benchmark power prices to reflect a huge surge in wholesale prices, due to escalating prices for coal and gas amidst the war in Ukraine. Electricity wholesale suppliers have little choice but to heed global energy prices to maintain margins. As recently as last week, they lobbied the federal government to increase the DMO (Default Market Offer) of energy per MWh.

As we approach the federal election, all these shifts in the energy market point to what would be a simple, election-winning strategy. Let’s call it an Energy Election. Embracing the inevitable now would simultaneously address three of the key issues across all electorates in one clear plan. A rapid investment and shift to an all-electric renewable energy economy would simultaneously address:

(1) The climate change issue

(2) Growth in costs of living during an inflationary and rising interest environment

(3) Job creation across all regions due to its decentralised nature  

It’s astounding that not a single politician in this country has embraced a single focus policy that has the ability to branch out in a multitude of directions. This can only point to a lack of understanding in emerging technology or being too generous to donors and vested interests rather than focusing on constituents they should represent.

Being overly focused on the needs of too many fringe interest groups and whatever is happening in the latest political 24-hour news cycle is not helping us as a country. What people really want from leaders is a strong, single-minded vision for a better country. Historically, this has always worked better than fragmenting policy to keep every micro cohort happy.

Sometimes it isn’t just knowledge that’s needed to create a better technological future – it’s the conviction and courage of leaders. Let’s hope we get some soon. Our environment and our economy both desperately need it.