Australian energy policy: no vision too small

Let’s talk about Australia’s energy policy failure.

At a time when most of the developed world has woken up to the facts that a) fossil fuels are really bad for people and the environment and b) fossil fuels are more expensive than non-polluting alternatives, the Australian federal government policy continues to shovel enormous subsidies at our failing fossil fuel industry.

Yes, that’s right. Despite having enormous reserves of oil, coal, and gas, a modern(ish) banking sector, and the best solar resource on Earth, Australia continues to operate some of the oldest, most polluting power stations on Earth while enduring some of the highest energy prices in the world. Even small pacific island nations with no local fuel supply have lower energy prices!

Of course, confronted with this continuing cascade of failure, the official response continues to be “more of the same”.

That solar and batteries, installed today, could meet >100% of Australia’s electricity demand at about a tenth of current retail prices, is beyond doubt. Solar energy reached price parity in Australia in about 2011 and has gotten more than twice as cheap since, while the costs of operating Australia’s ancient, poorly managed grid has only grown.

So why hasn’t the policy evolved?

Could it be that Australians are backward, ill-informed people, propagandized by a monopolistic and opportunistic media industry? To some extent. After all, Australia is the only country I know where the entirely fictitious “wind turbine syndrome” continues to get media airtime.

Could it be that our leaders have never been particularly visionary and usually take their cues from industry-financed lobbyists? Sure, some of them, probably. Indeed, some Australian MPs are spruiking this article, a veritable cornucopia of discredited energy ideas.

Don’t believe me? It summarizes the government’s so called “policy” to use coal and gas, combined with carbon sequestration, to produce hydrogen to feed the “hydrogen economy”.

Where does one even start?

Carbon capture and sequestration (CCS) is the idea that maybe we can take CO2 from smoke stacks, compress it and store it somewhere, perhaps underground. This has basically never been practical, as the costs of storing the CO2 will always be higher than the value generated by producing it. This inconvenient detail is often concealed as an excuse to go on burning stuff. Indeed, every CCS project I know of has been a dismal failure, with the most glaring example occurring at the Kemper plant in Mississippi, in 2017. After consuming $7.5b and running years behind schedule, the project was scrapped entirely, with the DOJ later opening an investigation. Now, almost 4 years later, the Australian government’s consultants think they’ve fixed what the hopes and cash of the entire dying US coal industry couldn’t? If you believe that you’ll believe anything.

And that’s not even getting to the “hydrogen economy,” the 1980s-level out-dated idea that in the future we’ll use hydrogen instead of gasoline to power our vehicles. While hydrogen doesn’t produce CO2 during combustion, it is difficult to make, store, and move around as it’s a low density hard cryogen with the antisocial habit of leaking through metal containment vessels. Fifteen years ago Tesla decided to produce electric cars using laptop batteries and by 2008, their performance had already exceeded the theoretical upper limits of hydrogen fuel cell technology, which has never been demonstrated even in a laboratory. No hydrogen-powered car has ever been mass-produced. Nor will they.

In summary, the “technology stack” currently advocated by the Australian government is a fail-centipede of bullshit. It can’t work, it will never work, and it’s not really even meant to work.

Edit: I’m not the only one saying this. Just 2 weeks after I published this blog, the Australian Academy of Technology and Engineering has said much the same thing. Two days later, a set of extraordinary and detailed policy documents dropped from Beyond Zero Emissions. Now The Guardian has joined in.

Of course, just as coal mining companies continue to talk up CCS, traditional automakers continue to “invest” in fuel cell technology. Both are yardsticks that haven’t moved since I was a child. And both industries are now being utterly crushed by predictable applications of competing technology that could have been foreseen by a disoriented penguin.

Why do they do this? Imagine being a business development executive at General Motors. (I would use an Australian automaker but, oh snap, our elected representatives spent decades watching while our manufacturing sector collapsed. By the end of this blog, you’ll understand how to fix this.) You have to pitch the board on your plan to spend billions developing electric car technologies that will only cannibalize existing sales, drastically depreciate existing tooling, supersede engine manufacturing, and require massive capital outlays. It’s never going to happen. Why sacrifice the next few profitable quarters doing business as usual on a gamble to reinvent the industry, especially when innovation is usually led by suppliers?

So, same old shit, day in, day out.

Traditional automakers’ business models are predicated on expensive service for the existing fleet out of warranty, and are not compatible with developing compelling electric vehicles.

This is how a tiny upstart Californian company was able to eat their lunch to such a degree that it’s gone from “Tesla will die any day now” to “Tesla is a decade ahead of the competition and it’s all over bar the shouting” in about six months.

Would it surprise you to learn that Australian energy policy is basically the same? Let me explain.

Energy is really important. I was taught from birth by my bleeding heart liberal tribe to hate petrol and burning coal, but the reality is that petrol makes cars and trucks and tractors go. Yes, it’s a terrible poisonous dirty corrupt industry, but without it (or any part of it) Australians run out of food and starve in a matter of weeks. Keeping the lights on and the vehicles moving is at the core of Australian security and it’s a serious matter, especially when we depend on foreign imports for literally everything. This unspoken reality, I believe, drives a lot of otherwise peculiar obsession with the similarly-motivated US policy of bringing “peace and democracy” to the Middle East, at least before fracking was commercialized at scale.

That said, mining and exports is basically the only productive part of the Australian economy that’s left. To say we depend on it is an understatement. Every year that the government can avoid making tough decisions on the future of Australian industry is another year we can live off selling our coal to China, while being slowly baked alive by climate change.

I’m going to oversimplify here but there are a few different ways that economies can build wealth. Let’s talk about primary, secondary, and tertiary parts of the economy. Primary production is mining, extraction, farming. Getting bulk raw materials. Secondary production is manufacturing, where raw materials are combined to produce commercial products. And tertiary services are human-to-human tasks where a lot of people are now employed, be it in health, education, tourism, or retail.

The Australian economy is strong in primary production. We have fabulous wealth in basically everything: mining, agriculture, timber, etc. Without this we would probably have an economic situation more like Mongolia. Primary production is great, as far as it goes. But it leaves a lot of wealth on the table.

Australia has a strong services sector, but like any business where wealth is created through one-on-one human interactions, it’s not fit to be the engine of wealth creation. The economy can’t operate without it, but it still needs a strong underlying system to create real things.

Let’s talk about wealth. Wealth is created when humans or machines perform a process that improves the value of something. Normally wealth creation is equated with superannuation or investment, but the other end of that transaction is (hopefully) someone actually doing something useful, which you (the investor) get to profit from, because capitalism.

My favourite example here is an iPhone. An iPhone is about half aluminium by weight, and let’s say it began its life as bauxite (aluminium ore) in northern Australia. As bauxite, it was put on a ship and sold for $0.40, with a margin in the single digit percents. Once smelted into aluminium somewhere in Asia, it was worth about $2.50. Once machined into the right shape its Bill of Materials cost is around $15. The phone costs about $370 to produce and is sold for $999, so the consumer’s cost for that aluminium chassis is $40. The process of mining, smelting, machining, and sales increase the value of the raw materials by a factor of more than 100. Of that $40, $25 went to Apple to cover R&D, shipping, sales, and other overhead. $12 went to the machinist, most of which is needed to cover the cost of the tooling. $2.10 went to the smelter, most of which covers the cost of electricity and carbon electrodes. Finally, the (probably foreign) mining company’s revenue was 40c, its profit was about 2c, and the tax the government earned was less than a cent.

Every year, Australia exports $4.5b of bauxite, which is a decent sum of money for a few big holes in Queensland. After smelting, that aluminium is worth $25b. After its conversion into parts for planes, cars, laptops, and soft drink cans it’s sold for more than $100b. By failing to exploit Australia’s ludicrously cheap solar energy to onshore more material processing, we are giving away nearly all that value for free.

I cannot be more emphatic about this. The failure of Australian domestic manufacturing will destroy our way of life forever.

But, I hear you cry, Australia weathered the global financial crisis just fine. Boomers who own houses are doing fine. If the economy is screwed, why is real estate still out of control?

It’s a bubble. Housing prices are determined by supply and demand. But unlike other commodities, housing demand is extremely inelastic, since everyone needs to live somewhere, and supply is also relatively fixed. As a result, housing prices are a direct function of credit availability. The one and only reason for rising house prices is rising availability of enormous mortgages, enabled by continual deregulation of the rent-seeking banking industry and a government happy to trap the next generation in a lifetime of loan servitude in exchange for a small piece of the action.

Okay, so it’s morally questionable and hugely inconvenient, how does that make it a bubble? The intrinsic value of the underlying asset is fixed. Houses that get ten times more expensive cannot house ten times as many people. They are infrastructure that actually depreciates as they wear out. They don’t produce anything. For my entire life, the bulk of Australian consumer’s discretionary spending has been poured into servicing loans that have starved the rest of the economy for capital, and with predictable results.

It’s not real wealth growth. We can’t sell all those houses and get the money back. We can’t even tax this empty price growth or the impact on demand will crush the market overnight, destroying years of “invested” GDP. Its deliberately undersized impact on the consumer pricing index obscures its true impact as basically inflating away the value of any other part of the economy. This money is gone. The opportunity it could have bought, with steady investment in secondary industries that actually make something, is gone.

Try buying any kind of specialty equipment in Australia. Try to get a sales rep or engineer on the phone who actually knows what they’re talking about. Try walking to a retail electronics store and buying a transistor. There are market booths in Shenzhen with a greater range of selection than every electronics shop in Sydney, combined. This is a big problem. A country that has forgotten how to make anything is strategically vulnerable.

We’ve talked about how materials traverse the value chain, mostly outside of Australia. We’ve talked about how misplaced “investments” in real estate have burned up 30 years of Australian economic output with nothing to show for it. But we haven’t yet covered the single most important source of wealth for any nation on Earth. People.

Every day, people generate wealth. Every single part of the economy depends on people to operate it. To do the work. And while the global west employing a 40 hour working week has had a continuing labor surplus since the end of WWII, a vibrant domestic manufacturing industry can’t be imported. It needs to be built up, in Australia, by Australians. This stuff isn’t taught in school, and probably never was. Building a competitive industrial sector is taught through experimentation in garages, factories, and backyards by motivated people who cannot succeed without a critical supply of existing industry knowledge and a fungible supply chain. I don’t believe manufacturing consumer electronics is the answer to Australia’s industry woes, but kids can’t build robots without them.

Knowing that a technologically literate and constructive workforce is essential to Australia’s future, government policy has consistently promoted innovation in education, skilled migration, entrepreneurship, and critical infrastructure, right? Right? Hahahahahahahaha. In just my lifetime, I’ve seen the growth of the complete antithesis of these values, and for no apparent reason.

Got an idea in the US? People will line up to buy you lunch to offer to invest, even expecting that you’ll fail the first three times. Got an idea in Australia? “Nah mate, that’ll never work.” Our universities have been subordinated to the tourism industry. Too many places have been sold to non-immigrant foreign full fee paying students spending insane time and money for a piece of paper that is already in the throes of self-inflicted devaluation. Ever tried to get an Australian entrepreneurship visa? It doesn’t exist. And finally, let’s not forget the national broadband network. After blowing incredible sums of money on politically expedient (and wrong) technology, Australia is 50th in internet speed. Many online scammers actually skip Australia specifically because its terrible internet infrastructure costs them too much to be worthwhile. This isn’t a good thing. It’s an international disgrace, and the people responsible should be ashamed.

Let’s sum up. The Australian economy is in deep shit. Primary production ships >99% of the value overseas and, like any commodity business, has terrible margins at the best of times. The bloated real estate sector has sucked the life out of domestic manufacturing and the rest of the economy. Infrastructure sucks. The education system has left a generation literally propagandized into thinking that technology is something that comes from overseas, if and when a foreign sales team is desperate enough to try to corner the tiny Australian market. And on top of this, the best and brightest national leadership continues to shovel what little disposable development cash it has into propping up the fossil fuel export industry, window dressing it as some antique discredited technology to sucker the rubes into agreeing.

It sounds pretty bleak. A few years ago, when I decided to stay in the US, I was convinced that it was only a matter of time until Australia, too, had its moment of reckoning with the inevitable collapse of the housing market taking everything down with it. Argentina 2.0.

Obviously these are huge problems, they can’t simply be wished away. However, through no fault of our own, salvation may be at hand. Or at least an alternative to continuing to dig a deeper hole.

It’s time to begin the process of bringing advanced manufacturing back onshore in Australia. How? China makes stuff cheaper than we could ever hope to. This is true and it’s unlikely to change – economies of scale mean that even with the cost of shipping Chinese factories will make goods more cheaply than Australian factories can.

The answer lies in energy-intensive industries. It may seem odd given Australia’s habit of selling its gas overseas and then acting surprised that energy prices increase, but the right government policies could actually reverse this trend, giving Australian consumers and industry the cheapest electricity on Earth, forever.

How can this be done, and what can it be used for?

World_PVOUT_mid-size-map_160x95mm-300dpi_v20191015

In adoption of wealth-building technology, Australia lags most of the world by decades. How is it possible to catch up? Consider the above map. Australia is basically the only (business friendly) western liberal democracy that has huge (developed) mineral resources AND enormous (undeveloped) solar resources. Nearly every competing country has to mine stuff somewhere, and ship it elsewhere to be processed somewhere where energy is cheaper.

With commercially available solar and battery storage technology, Australia could easily deploy a gigawatt of solar production annually, at a combined cycle price of about 2.5c/kWh. That’s 10 times cheaper than current retail prices and less than half the price of electricity in Iceland, which exploits its cheap geothermal energy to smelt enormous quantities of aluminium. Why ship bauxite to Iceland when it can be smelted right by the mine and sold for 6 times the price? Electricity is the main cost of aluminium production. Secure an infinite supply of much cheaper electricity and the rest is pure margin. Usually when we think of a country charging 100 times production cost for mineral wealth we think of Saudi Arabia or Kuwait. In our solar future, Australia can have oil-level wealth while saving the planet.

Solar energy continues to get cheaper by about 10% a year. No matter how good a competing business case may be, it’s only a matter of time before the tech that powers trees crushes it completely. Australia’s current energy production capacity is 66.5 GW. At current prices, 100 GW of solar power would cost about $100b to deploy, which is almost nothing compared to current fossil subsidies when spaced over a decade. This power would be too cheap to meter 99% of the time, driving material processing onshore.

Indeed, Australia could build almost any quantity of solar power purely with international finance. No expenditure is necessary, just a scrap of legislation opening our electricity market for business. Of course, owning such a wealth-producing system is better than renting it from foreign financiers, but I’m not picky. Whatever works!

What can you do with nearly free electricity? We’ve discussed smelting aluminium, but there are many other energy intensive processes for which Australia should be the only place on Earth that they get done. Mass desalination for irrigation. Comprehensive recycling of basically anything. Hard rock, zero impact mining using tunnel boring machines. Anything requiring refrigeration.

Just because Australia can’t export solar power the way it exports coal doesn’t mean that the wealth embodied by Australia’s enviable solar resource can’t be monetized. Smelted aluminium contains the huge quantities of energy used to create it, and the same goes for anything else where any amount of onshore processing exponentially increases the domestic value creation.

Australia does not deserve to escape the consequences of its consistently small-minded and backwards economic policies. We are incredibly fortunate that foreign investment in solar technology has created an opportunity ripe for the picking. We would be wise to exploit our natural resources to electrically re-industrialize our secondary manufacturing sector before competing nations get around to it. With solar costs falling 10% a year, Australia’s failure to move could cause competing nations to get to low cost onshore mineral processing first, at which point Australia will have blown yet another golden opportunity.

This window, this undeserved path to salvation, will not remain open forever.

22 thoughts on “Australian energy policy: no vision too small

  1. “That solar and batteries, installed today, could meet >100% of Australia’s electricity demand at about a tenth of current retail prices, is beyond doubt.”

    This sounds as though you’re mixing retail cost and production cost. Solar installation and operation benefits from economies of scale, although less so than many things. Off-the-grid solar is feasible, but I don’t expect it to be the winning option. Electricity is cheap enough already that we can and do expect reliability and convenience, even if it means a significant relative increment in cost. Transmission on a grid means that a problem with the electricity is something for the power company to deal with, not the homeowner or business manager. So transmission will still be part of the picture. And replacing cheap coal with even cheaper solar doesn’t obviously affect the cost of operating a reliable grid.

    More later.

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  2. “The intrinsic value of the underlying asset is fixed. ”

    Land and buildings would gain and lose value in an ideal market, in two ways, same as other capital assets. The value of an asset is the present value of the goods or services it will provide in the future. That can change because the expected future value changes, or because the rate changes at which future value is discounted.

    If there are wondrous innovations available to invest in, the option of building a house has to be weighed against those high-return investments. So a rational market uses a high rate of return when discounting future revenue. So fewer houses get built, and more labor goes into the other stuff. House prices are low relative to current rents. Likewise, if competing rates of return are low, then building houses is a relatively good way of using today’s labor to produce tomorrow’s value, so house prices are high relative to current rents. Interest rates can also vary from the savings side. Any particular interest rate can be considered as a risk-free interest rate plus a risk premium, which can change, with corresponding effects on asset prices.

    The other way is for the expected future value of housing to change. If gold is discovered at Sutter’s Mill, houses nearby can be expected to be in high demand in coming years, so their present value increases correspondingly, if interest rates remain unchanged. Likewise if expectations of population growth are revised upward.

    Then there’s market manipulation. Interest rates can be skewed by policy changes. Throw credit at a sector, or choke off access to borrowing, and you change asset prices.

    But that’s not the same as a bubble. Bubbles are an inherent failing of any market that doesn’t have a constant reality check in the form of needing to provide real value to current consumers. It doesn’t take any manipulation to get a bubble, nor does it take any real reason. It just takes a radical disconnect from reality.

    Suppose that Alf and Beth are isolated in a place that has loam and sand and gravel and podsol, but no clay. And suppose that they have no money except for one coin, which belongs to Alf. One day, Beth finds a lump of clay. It’s novel. You can squish it, and it feels different from any kind of dirt. So she sells half of it to Alf, for one coin. They both get to play with clay. Cool. Next week, Beth decides it would be fun to play with more of the clay again. Alf isn’t particularly interested in selling, but he’s not completely unreasonable about it either. So she buys half of Alf’s clay, a quarter of the original lump, for the only available price, one coin. A week later, Alf wants backsies. But Beth says hey, you doubled the price on me, and turnabout is fair play. With nothing to lose but an otherwise useless coin, Alf agrees. But then they see a pattern: clay doubles in value every week. And they are such prodigies that they immediately achieve a level of disconnect from reality that real people can reach only by means of an impenetrable and costly wall of CDOs, tranches, and shell corporations. So they keep selling ever-decreasing amounts of clay back and forth. Soon both of them are clay-market billionaires.

    Until one of them tries to buy a bowl of gruel with part of their fortune, and the market crashes. The greater the disconnect from reality, the higher the market can soar, and the more easily it can crash. Manipulation of interest rates can help the process along, but it isn’t strictly necessary.

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    1. What has happened in Australia is a conflation of consumer wealth storage and real estate, due entirely to tax and mortgage policies that artificially increase the relative value of “investments” in housing. The outcome is that both rents and prices are high, consume a huge fraction of GDP to interest revenue, and systematically devalue productive parts of the economy while transferring wealth to the finance industry.

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  3. I think you have the right idea: increase wealth creation by moving up the value chain. In Australia’s case, going from rock to metal leveraging this new age of cheap locally produced energy is right on target. Its almost like you understand economics!

    I am amazed when I hear people suggesting USA will increase its wealth creation by moving down the value chain. Economics and capitalism is so rarely taught in schools. Bizarre.

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    1. Revenue increases up the value chain but not necessarily profit. In this case Australia has the solar resources necessary to exploit a persistent geographical advantage.

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  4. Maybe with the cheaper solar power you could electrolyze water to generate hydrogen as a commodity to be shipped off in tanker ships in liquid form. A climate-friendly substitute for oil. I wonder how much market there is for the hydrogen?

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    1. Practically no market for imported hydrogen. The cost of storage and transport is so high it’s always cheaper to electrolyse it at the point of use.

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      1. What about using the electricity to make hydrocarbons from water plus atmospheric CO2? I know the technology for air capture of CO2 isn’t up to the task so far, but this is relatively long-term speculation.

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  5. What are the theoretical limits on fuel cells? I hadn’t thought there were any, that don’t also apply to batteries. In fact, I didn’t think there was a theoretical difference between batteries and fuel cells at all. Reactants turn into products in a device that won’t let them do so unless a current flows. If you look at the reaction without the device and think “fire”, it’s a fuel cell; if you look at the reaction without the device and think corrosion, it’s a battery. What am I missing?

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      1. I know that, theoretically, hydrogen can react with oxygen fast enough to generate half a million pounds of thrust in a 96″ diameter, 168″ long engine.

        What I don’t know is any theoretical difference at all between batteries and fuel cells. So if a given current can be generated in a given volume with a reaction that makes people think “corrosion”, I don’t have any theoretical reason to doubt that the same current could be generated in the same volume with a reaction that makes people think “fire”. Except that you say so, and you have a good track record of knowing what you’re talking about. But that reason isn’t exactly a theoretical one.

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    1. Desalination is a way of spending lots of energy to make something that can be transported, but it’s not exactly a high value per kg product. Rather than being transported as actual water, it makes more sense to use the water and transport the resulting goods, particularly food. But I don’t think that even with implicit transport, desalination is going to compete well with water that falls from the sky for free.

      Alkanes are a traditional thing to ship, as a way of transporting energy. We need to take a bunch of CO2 out of the air anyway. It might make sense to capture the CO2 where energy is cheapest, un-burn it to make fuel, and burn the fuel where energy is expensive but CO2 sequestration is cheap.

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  6. Casey, thanks for sharing, love the idea. A couple questions/comments:

    1. Do you know how easy it is to ramp aluminum smelting? Capacity factors may become problematic if the ramp time starts to cut into the daylight (sure you can use batteries, but that adds to the electricity cost).

    2. I feel like maybe there’s a zero missing here: “At current prices, 100 GW of solar power would cost about $15b to deploy”

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    1. 1) I don’t know, but primary power draw is for heat and electrolysis. If cryolite cells are well insulated then ramping up and down diurnally seems straight forward.

      2) 15c/W at industrial scale.

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