Episode 2 - Let’s talk the energy transition

Release date: Tuesday, 29 August 2023
Host: Turi Condon
Guests: Darren Steinberg - CEO, Dexus, Sally Torgoman - Energy Partner, KPMG and Michael Cummings - Co-Head of Infrastructure, Dexus.

Nicole: Welcome to The REAL Deal, a monthly podcast about what’s happening across the real estate and infrastructure sectors.

(Sally): [00:00:00] This is not something that's going to happen overnight. This is about a sector that needs to take progressive steps in the same right direction over the next 20 years. Now, we've obviously got some targets to reach, but obviously, as we move towards 2030, there's going to be a significant amount of investment needed in the range of trillions. So it's obviously a really important piece for investors to take part of.

Nicole: [00:00:21] That's Sally Torgoman, energy partner at KPMG, who along with Michael Cummings Dexus, Co-Head of Infrastructure, joined Darren Steinberg and co-host Turi Condon on this episode of The REAL Deal podcast. They're discussing the energy transition, a very hot topic at the moment in Australia and around the world. So, with energy being such an important part of our everyday lives, what impact do the global goals around climate change have and what is the energy transition “trilemma”? Well, we get to all of it in this episode, so let's get started.

Darren: [00:00:59] Turi, welcome back to episode two, and we've got some interesting guests and a great topic today. We're going to talk about the energy transition.

Turi: [00:01:09] Yeah. Thanks, Darren. And it's certainly a big topic and it's great to have some experts from the infrastructure and energy space. Welcome. Sally Torgoman, who is KPMG's energy partner, and to Michael Cummings, Dexus, Co-Head of infrastructure. So, when I say it's a big topic, it's on the news headlines every day. Can you help us unpack it a little bit? What does energy transition mean and why is Dexus involved? Michael, perhaps you can start.

Michael: [00:01:32] Sure. Yes. And it's hard to go past a day where you can't read a headline about energy. And some would say it's one of the biggest challenges that we've got this decade ahead of us. Maybe try and unpack it a little bit. A third of Australia's greenhouse gas emissions currently come from the electricity sector and of that, 70% of the sector is currently reliant on coal. We've got targets by 2030 to get that 70% reliance on fossil fuel to down to less than 20%. So that's going to require closing our coal plants and building more solar, wind and storage whilst at the same time keeping downward pressure on price and keeping the lights on. So what you'll hear is the energy trilemma. It's a bit of a mouthful, but that's about trying to do all three at the same time. And why this is important for investors. There's about $100 billion, if not more, of investments required at the generation level. That's the wind and solar new transportation. So that's the poles and wires that you see. And behind the meter technology is what we call demand management. And that's very relevant for Dexus as a real asset manager. We're involved in all of these sectors. So we've got Macarthur Wind Farm, one of the largest wind farms in Australia, on the generation side. We own poles and wires across New South Wales, Endeavour Energy and in New Zealand and of course with our offices, our retail centres, our airports behind the meter, we're very involved as well.

Turi: [00:02:58] So you’re investors as well as users. So, Darren, how much energy does Dexus use?

Darren: [00:03:03] So I won't get into the details of how much energy we use, but I'll talk about the property sector as a whole. And I think the most interesting thing is property has been on this journey for a while, probably ahead of many other sectors in the economy, and we've been there not because we're great corporate citizens, although many of the companies are, but because it just helps us run the buildings more efficiently and effectively at lower cost for our customers, the tenants. So we've been reducing power, we've been reducing water, and we've been looking at reducing waste basically since the 80s. So once again, real estate has been a real leader in this in this side of the business and hopefully other sectors have now joined that journey and are following us.

Turi: [00:03:43] And on the other side, you've got investors that are in the infrastructure funds, etcetera, that Dexus has got. So why should Dexus invest in this? You know, why should they invest in clean energy rather than coal?

Darren: [00:03:55] Well, I'm going to actually throw over to Sally on that one rather than answer that. Sally, why don't you tell us why the world is heading more in that direction rather than back towards the coal fire? And I'd also like to talk about gas as part of this discussion.

Sally: [00:04:08] Well, it's a great question. I mean, you speak to some investors and they think that, you know, there is such a strong financial performance in coal yet, today, because some of the sticks are still not out there in the market. But we all know how this story ends. We know that we have to do something about climate change. We know that future generations, not just of Australians but globally, there's been such a strong move to be able to think about how we look at this class. So we can't just ignore it and hope it goes away. We can't just pretend that, you know, the world is going to stop getting warmer. And so there's a strong will to make this class of investment work. Now, is it as profitable at the moment as some of the others? Probably not. But if you don't get in there and you don't understand it and you don't take a role, what does it mean? So I guess many investors are just fearing being left behind at this stage.

Darren: [00:04:53] Yeah, we've seen a lot of super funds move down the direction. They understand the need, the benefit and quite. Frankly, I think we can discuss this further in due course, but it's going to be very hard to hit those 2030 targets without further investment into the renewables space. And how are we going to transition without that? We just won't hit the 20, 30 targets that have been set.

Turi: [00:05:14] Okay. Sally, maybe you can help us set the scene. How far along the journey are we in Australia and how does that compare elsewhere in the world?

Sally: [00:05:22] You can look at this two ways. The first way is you can say, well, we've been trying to get into clean energy for the last 20 years. I mean, some of the experiences that Michael has had throughout his career would give testimony to that. But on the other side, to think then, how much at scale investment has been made in clean energy? Well, you'd say we're still at the very beginning. And I guess that's why the word transition is so important. This is not something that's going to happen overnight. This is about a sector that needs to take progressive steps in the same right direction over the next 20 years. Now, we've obviously got some targets, targets globally for 2050 to reach. You know, for example, Australia has committed to net zero by 2050. We've got, you know, at the moment we've also achieved the RET, which is something that again we have to think about how we meet these renewable energy target, which is what the RET stands for and how we've done it in the NEM by 2030. But obviously as we move towards 2030, there's going to be a significant amount of investment needed and that investments in the range of trillions. So it's obviously a really important piece for investors to take. Part of is going to be such a large area for participants to play in.

Turi: [00:06:28] And how does Australia rank globally? How are we doing against the rest of the world? Are we a leader or are we a follower? There's certainly other countries. I think you've mentioned New Zealand in the past Michael.

Michael: [00:06:36] Yeah. Interestingly, the challenge is to get to 82% renewable by 2030. That's exactly where New Zealand is today. So that sort of gives you an idea. I think you were asking about how much investment - it’s about 30GW of new power that we need, according to the Clean Energy Finance Corporation, and that's a roughly about 300MW per month for the rest of the decade. Or to put another way, it's about 3.6GW per year. Now, last year we did 2.3. So we actually need to step up and accelerate to hit that target. New Zealand is a little bit different. Of course, it's the lucky country from a renewable point of view. It started with a much higher percentage than Australia and in fact its challenge is actually more in the agricultural industrial area and Transport than Australia. Third of all, greenhouse gases come from the electricity generation sector. So that's really our focus. And you know, there's a lot of investment still required.

Darren: [00:07:37] Michael, what kind of returns would investors expect of wind farms or solar farms?

Michael: [00:07:43] That's the million dollar question, Darren. It all depends on risk. And, you know, long term risk adjusted return is what we look after from a Dexus's point of view. And that long term risk adjusted return can depend on and whether you're taking greenfield risk. So are you taking all of the exposure to build to source the materials? Are you taking market risk? So are you exposed to the price on an hourly, half, hourly, five minute, whatever the wholesale market is doing? Or do you actually contract with a large user or an energy retailer to take it? So, Darren, whilst you could have one wind farm or one solar park, the range of risk can be quite varying depending on who takes that risk. Traditionally, infrastructure investors have looked to take some of that risk off the table with having a confirmed buyer of that electricity. So the sorts of returns then you'd be looking at would be around about 10 to 12%.

Darren: [00:08:34] Yeah, and that compares really well to some of the other sectors we invest in, like airports and some of the government triple P investments that we have.

Sally: [00:08:42] But let's be a little bit controversial for you to get to those kind of returns, you have to find a good project that's got a whole range of really good ticks. And those ticks sometimes can be hard to find. It's not easy to find a project with a really strong uptake. It's not easy to find a project that has really good connection and access so that you're not impacted by any of that. So I guess the ability for investors to know what they're looking for is really important in navigating this space.

Turi: [00:09:07] And how hard is it now to build these things? You know, I saw a story in the paper the other day saying a renewable CEO was saying it was easier to build a freeway. This is in Victoria than it is to build a wind farm. Is this true?

Sally: [00:09:20] Unfortunately, it has been. And part of the reason for that is because you're getting to some really strong social licence issues. We've probably got a lot to do to work with the communities to let them welcome the transmission in their backyards, to welcome the wind farm and solar farm in their backyards. This is changing. I mean, we've seen communities across Australia that have had, you know, a complete shift between being against renewables to being pro renewables, but that's obviously not true for all of those parts of the communities. And I guess without bringing them along as part of that journey, we're not going to be able to achieve those targets. We're not going to get those projects built. And if you look at some of the other challenges that are building on that, we're seeing massive increase in. Construction costs, difficulties in finding contractors to build projects. So there's a lot for us to do to make this transition happen.

Darren: [00:10:07] Sally, welcome to the world of development. And that's an area that Dexus does know very well. And we have all those challenges, whether it be office buildings, shopping centres, industrial developments that we do. It's a part of doing business in Australia at the moment, unfortunately. But as you quite rightly say, if we don't get this right and streamline to some effect, Turi. Well once again, it's another sort of barrier to hitting these targets that we have to hit.

Michael: [00:10:30] I think there's also a good news story certainly happening in Australia at the moment in New South Wales was the first off the mark with what they call renewable energy zones. That's where they look to identify an area for investing and concentrating solar and wind with the local community and then having a single transmission line. So it actually concentrates a lot of that disruption, if you like, an investment in one area. New South Wales Central [West] Orana, it's one that is through Endeavour Energy's we’ve been involved with. That's the first one in Australia. So we're going to see more of those. That's 3GW of capacity and investing $5 Billion into that local community. So these are really good examples of how you can accelerate.

Turi: [00:11:12] Now we've touched on Victoria and New South Wales, so are we all rowing together here? Is, you know, do we need a bit more cohesion in how we approach this? Because it's a really big issue. Sally, what do you think?

Sally: [00:11:23] I think it's been terrific to be able to see cases where there's been some differences in approaches because it's told you that you can actually get to a great outcome by looking at it differently. Now, of course, investors haven't always welcomed that because they've got to get their head around the New South Wales approach and they've got to go to Queensland, which is entirely different again, and then obviously Victoria and the others. So I guess one of the things has been is that it does create a situation where you actually, again as an investor need to really know what the different policy measures are. But some of those differences have been quite stark.

Turi: [00:11:55] But I think investors too, from what I've seen, accept that this is a really big problem and it's a really big issue and it's going to be complicated. And there'll be some big chunks and big bites that have to be taken out of it, whether it's in Australia or globally. Are you seeing any particular really interesting projects around the world that you know are really pushing the dial?

Sally: [00:12:14] I just came from a trip out in Mena where we had a look at a project that was making four gigawatts of wind and two gigawatts of solar and two gigawatts of hydrogen. So it was based in Saudi. The project has reached financial close, I believe it was $18 billion worth of investment. We haven't seen anything in Australia to that scale. But what it does kind of really get you thinking is that this is not so much about Australia's transition, it's about the global transition. And one of the things that we would like to see more of is the ability for us to do these really big ticket projects, because that is sometimes how you drive lower cost outcomes. So it's really fascinating to be able to see such massive projects.

Darren: [00:12:53] Sally, did that have a large battery component attached to it?

Sally: [00:12:56] Well, I don't remember that on my visit, but I did remember that one of the things that they were using was gas and gas is actually a really big part of the conversation. If you think about the role that gas can play in this is actually quite profound. And in some cases it has been controversial. But in other cases it's just such an ability for you to think what other fuel is available for you to use in this crazy market sometimes where you need to be able to have some stability and gas is able to offer you that firming.

Darren: [00:13:23] Yeah, this is fascinating. Many people don't realise that with coal fired generators they have to run all the time, 24 hours a day to deal with the peaks and troughs of transmissions. And you look overseas in countries like South Africa right now, they have rolling blackouts because they haven't got the capacity and capability of providing power for everybody. So keeping gas, fire stations. I know it's quite controversial, particularly in light of what's happening in Victoria right now, but it's something that we should definitely look at. But I'll also throw up the nuclear solution as well. You know, it's something that doesn't seem to be getting a look in at all.

Michael: [00:13:56] So I think back to that energy trilemma when you think you're trying to do three things at once. You're trying to keep downward pressure on price, you're trying to decarbonise and you're trying to keep the lights on. The more things that are ruled out, whether that's gas, whether that's nuclear, the harder it's going to be, quite frankly. So you sort of think we need as many levers as we can, or at least discuss them to work out what's the right optimal solution for Australia -because it's going to be different from anywhere else.

Turi: [00:14:22] Well, I know my energy prices keep going up when I look at my bill. What do you think the future is of that? You know, do you think we'll manage to make this transition where we can keep some of the old world technologies going and transition to the new fairly smoothly without it really costing consumers?

Sally: [00:14:37] It's a tough question because in reality we know that some of the price rises that we've seen as of late had nothing to do with the transition. It was so much that in terms of market commodity and the existing mix, I guess the question is, is how will we pay for the transition and where will it come across and how will we contribute to it being a consumer led versus a government led? And I think one of the things that's been really. Really well known to any of us who are in the energy sector is we don't think about building highways and schools and hospitals in the same way that we think about energy. We do treat it differently. And so that's got to change because energy at the same day is an essential it is an important part of all of our lives. And so therefore, to think about the cost question, there's got to be some kind of way that we think about energy in a slightly different way. Now, obviously, the forecast of how energy prices is not looking amazing or you have to do is look about the amount of work that have been done by the federal government to bring in the gas and coal caps in order to help put some sort of water to kind of stop that accelerating price ramp going out of control. But at the same time, that's had obviously some other impacts. And so this is something that we have to consistently toggle with is how are we going to pay for it and who's going to pay for it.

Turi: [00:15:50] And as part of it too, just the geopolitical problems we've had at the moment. Some of it was Ukraine, I think. Do we expect that to keep playing out?

Michael: [00:15:57] Well, I mean, that concept of self-reliance on energy is a big topic in its own right. You know, if I think, and I boil that down to our particular investments, Melbourne Airport, for example, has the largest behind-the-meter solar park in Australia. So there's 30,000 panels. If you're in Melbourne and you know, north of the airport where the Living Legends is, if you look down over the north of the airport, you see 30,000 shining solar panels, which is 12MW of power. That just makes sense, being able to manage our own costs. We're building another 20,000 panels to add to that. And that will equate to about 40% of Melbourne Airport's demand. The other 60%, then we're looking to acquire from green energy from suppliers that are only producing renewables. So there's ways that you can manage it as well.

Turi: [00:16:48] And across all the buildings you've got, then you know, 30,000 here, 20,000 here, there must be a number of football fields worth of solar panels on some of Dexus’s buildings.

Darren: [00:16:56] Yeah Turi we have a number of solar installations right across the country on a lot of our shopping centres and industrial properties. But as we say, the solar can only get you so far. The battery technology is what is required and battery power is somewhere that Australia, we produce a lot of the essential minerals, particularly in the north west of WA, that go towards manufacturing these batteries. It'll be interesting to see what kind of opportunities come up in coming years for us to actually go further down the manufacturing path here. And will Australia become a powerhouse in battery manufacturing?

Turi: [00:17:28] And is the technology there for storage with the batteries now at scale?

Sally: [00:17:31] Oh, absolutely. I mean, some of the amazing battery projects that have been built about around the country are hugely big. The question is, are we putting all our eggs in one basket, putting them all in lithium? I guess that's up for debate. But there's no doubt that batteries are here and ready and they're there to provide strong amount of firming to the market.

Michael: [00:17:49] And with CSIRO, you know, a world leading industrial research housee, they've got a lot of research and evolving technologies around the chemistry. So I think we're really well positioned with some of those base chemicals to be able to do that.

Sally: [00:18:02] But let's not forget pumped hydro, the amazing innovations we've seen in pumped hydro and the ability for it to be able to act almost as fast as a battery that really brings up that technology class into a huge pool of markets that it can now participate in. Now, these assets are very different to batteries. You're not building, you know, towers of modules of batteries being somewhere. You're relying on the perfect site that has got the right height and is obviously permitted to give you that water capacity to both charge and discharge. But having said that, it's a really interesting technology to deploy.

Darren: [00:18:33] Yeah, it's a great example. And it's interesting when you spoke about costs earlier and when you look at what's happened up at the Snowy Hydro, which is obviously going to be fundamental to New South Wales moving forward, and it's just interesting, I was even talking to someone the other day about South Australia and how I think they're currently the state with the most renewable power, but it only works because they're reliant on Victoria and Victoria's got a bit of surplus and what's powering that.

Turi: [00:18:57] Coal and don't they call Victoria the battery for South Australia.

Sally: [00:19:00] And they call Tasmania the battery of Victoria. And here we begin.

Turi: [00:19:05] And it goes around and we've been talking about technology. Can I just bring AI into it? We say costs are going up, it's all going to get harder, but we're hoping to make the transition. Do you think we can accelerate that because AI is coming into play here now? I mean, we all talk about ChatGPT all the time.

Sally: [00:19:22] One of the interesting things about energy, because it has been treated very differently to roads and hospitals, is that every cost component to the whole value chain goes to customers. So the cost of transmission plus the cost of distribution plus the cost of generation plus the cost of retail all goes to customers. There is profound opportunity for AI to play a role in not just bridging those together, but actually in the role of some of these specific segments. A huge opportunity, also risk, in terms of cyber and cyber controls. But no doubt it is going to change the industry that we know today.

Turi: [00:19:54] Do you have any examples? Have you seen it actually play out yet?

Michael: [00:19:56] We were previously involved the CSIRO start up business called Evergen, and that uses AI to optimise on a particular day on a particular minute – the use of solar, the use of battery and the use of grid. So what it's able to do is predict weather, and work out the best way for the three to interconnect. So should I store electricity overnight because I know tomorrow is going to be a cold day? Machine learning to say, well, on a Tuesday I charge up my electric vehicle. So that technology is out there at the moment Turi. There's no reason why it can't be leveraged. Dexus is involved with Taronga Ventures, so there's definitely areas where working together we can really accelerate this.

Darren: [00:20:36] And Michael that's similar to some of the technology which we've used on office buildings for many years, particularly those with other sources of power where it's going to be hot tomorrow. You put the air conditioning on early, you start the gas fired generators, depending on what you've got. And the building technology helps us run the buildings more efficiently looking at the outside weather. So, guys, it's been a great discussion, but I suppose just before wrapping up, there's one topic we haven't touched on and that's hydrogen. So, Sally, I'd be interested just to hear from you on your views on hydrogen as a possible other solution to this. And, and obviously there's a few companies in Australia like Twiggy Forrest, for example, who are putting a lot of money, effort and energy into this sector.

Sally: [00:21:17] I guess hydrogen is like everything else is that it's become a global warming. You've seen countries like Morocco, Saudi Arabia and others really race towards getting to the lowest price per kilogram. We have a terrific opportunity for Australia to be a leader in hydrogen because we can we've got energy at scale, we can get really cheap solar. The challenge, of course is that the formula for hydrogen is energy plus water and obviously relying on how we are going to think about long term. That water is obviously a concern to all of us. It is going to be a real game changer. Hydrogen, in my perspective, is mostly going to impact the transport sector. That's the area that's been hardest to abate and it will be terrific to be able to see these really large-scale energy projects provide an injection point to these hydrogen projects and also a manufacturing point to your point earlier, Darren, and being able to manufacture Electrolysers back home, that should be something that we should take full advantage of.

Darren: [00:22:11] All right, Sally, really controversial one for me to end up hydrogen or nuclear. What's the most cost effective and which ones going to help us get our 2030 targets?

Sally: [00:22:20] As an engineer, I'm going to put my money on hydrogen because the planning rules are easier to manage.

Darren: [00:22:26] Good answer, I suppose.

Turi: [00:22:29] Okay. Well, look, thank you so much. That was a really interesting conversation and I hope gave everyone a better feel for energy transition and what it means for investors and companies alike. And we're really looking forward as well to the next episode when we're talking to the CEO of Melbourne Airport, Lorie Argus, and we'll shift into another infrastructure space. And today I'd just like to thank everyone for being with us. Our guests, Sally Torgoman from KPMG and Michael Cummings, Co-Head of Infrastructure from Dexus. And if listeners have questions, they can send them in to therealdeal@dexus.com. That's therealdeal@dexus.com. Thanks, Darren, and thanks to everyone for listening. Nic: You’ve been listening to The REAL Deal, a podcast for Dexus. Listen to the real deal at dexus.com/therealdeal and Follow FREE on Apple Podcasts, Google Podcasts, Spotify or wherever you listen to podcasts.