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Australian government declares gas as essential beyond 2050

Australia’s Future Gas Strategy (FGS) highlighted a commitment for Australia to remain a reliable trading partner for liquefied natural gas (LNG), while underscoring the role of gas in Australia’s energy mix until 2050 and beyond, according to Wood Mackenzie. This strategy may lower perceptions of “sovereign risk” for investors.

However, challenges remain in attracting investment to Australia’s gas industry, including government intervention, legal challenges, and difficulties in accessing affordable capital. “A turnaround in sentiment will not be quick. In parallel, the government must be seen to support and implement this strategy, and back away from hasty interventions” said John Gibb, research director, Australasia upstream.

The FGS prioritizes the development of existing gas discoveries in basins with existing infrastructure to prevent domestic supply shortages. Dr Anne Forbes, senior analyst, Australasia upstream said: “A “use it or lose it” policy on existing discoveries may be implemented to drive development of discovered gas resources. This would need careful consideration, with potential issues from misalignment of resource and infrastructure ownership, which has long stymied gas development on Australia’s North West Shelf, to LNG plant backfill schedules–where these long-term investments often require decades’ worth of gas discoveries in store.”

Additionally, the strategy commits to further releases of offshore acreage for greenhouse gas (GHG) storage assessment, which has been highly sought after in recent years. The FGS also pledges to review the offshore regulatory regime for Carbon Capture and Storage (CCS) and introduce measures to further cross-border CCS. This could encourage international investment in CCS projects in Australia.

Emissions reduction is a key focus of the FGS, aligning with Australia’s commitment of reaching net zero emissions by 2050. Reduction in gas demand will be addressed by six upcoming decarbonisation plans, while the management of unavoidable emissions will be covered by the forthcoming Electricity and Resource Sector Plan and the Safeguard Mechanism (SGM) legislation.

How higher interest rates could hold up energy transition investment

  • What can policymakers do about it?

The energy transition won’t come cheap. Most of the investment in the transformation to a low-carbon energy system will be debt-financed, whether the US$52 trillion we project in our base case over the next three decades or the US$75 trillion to deliver net zero. So how will higher interest rates affect investment across the energy and metals and mining sectors? I asked the authors of last month’s Horizons insight on the topic, Peter Martin, James Whiteside, Fraser McKay, and Srinivasan Santhakumar.

Will interest rates be higher in future than investors have been used to?

Most likely. Interest rates may come down from the current highs in the next few quarters, as inflation falls towards central banks’ targets of around 2%. But structural inflationary trends are intensifying – global trade realignment, deglobalisation and production onshoring. That points to a period of tighter monetary policy in the coming years. We think the ultra-low rates of the decade after the Great Financial Crisis were the anomaly, and interest rates will normalize again through this decade at a higher level.

How do higher rates affect different sectors?

Most projects across the energy and mining sectors are capital-intensive but between sectors, there are differences in balance sheet exposure to debt. Wind and solar projects and nuclear power are typically financed by debt secured against long-term power purchasing agreements (PPAs). As a result, corporate gearing (net debt/equity) is relatively high, averaging 50% to 60% for the renewables companies in Wood Mackenzie’s Corporate Strategy and Analytics Service.

The bankability of these project revenue streams can reduce the cost of debt, but the high leverage leaves renewables companies sensitive to interest rate rises.

Higher rates will reduce renewables’ competitiveness in power markets. Our analysis shows that a 2% increase in the risk-free interest rate pushes up the levelised cost of electricity for a renewables project by 20% compared with only 11% for a combined cycle gas plant.

Oil and gas and metals and mining companies are less exposed to higher rates. After a period of assiduous capital discipline that has strengthened balance sheets, gearing now averages around 20% in both sectors. Also, project financing is less common for developments exposed to volatile oil and gas or mining commodities. Among the exceptions in the oil and gas value chain are LNG and midstream projects, which have comparatively stable revenue streams.

Are higher rates bad news for emerging green technologies?

Nascent technologies that are essential for the transition to net zero are also capital-intensive and will require high levels of investment to scale up. So higher rates will pose another challenge for many projects to get off the ground, whether low-carbon hydrogen capture, utilization and storage and direct air capture (DAC).

The lack of economic incentives for both carbon capture and a hydrogen market are the most significant obstacles to investment in these sectors. But for projects that could progress, higher interest rates hurt the economics. Developers will either have to take lower returns on the chin or demand higher prices.

Can governments step in to compensate for high rates?

Ideally, governments would boost incentives to ensure investment in low-carbon technologies doesn’t stall but gains momentum. However, many governments’ own debt and debt service costs are increasing. Some may be forced to reduce supportive subsidies and tax incentives or cut direct public capital investment in a low-carbon economy. China has already reached the limits of its available funding capacity to subsidize new renewables projects.

What other levers can policy makers pull?

We think there are three main ones. First, ensure that subsidies have the maximum impact on global decarbonisation. The most efficient are targeted and non-discriminatory. Second, a fully functional, tradeable global carbon market is critical if countries are to meet their emissions targets. Ratifying Article 6.4 of the Paris Agreement at COP29 in Azerbaijan in November is a must.

Third, drumming up climate finance, be it from the private or the public sector or both, is critical to supporting green investment in climate change mitigation and adaptation in developed and developing economies. In addition to improving the availability of finance, so-called ‘green rates’ could offer preferential interest rates to finance low-carbon projects and offset the higher rate environment.

Source: Woodmac


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