Federal Budget 2020-21: What it means for energy transition investors

Key takeaways

After some period of apparent policy gridlock, in the last few weeks the Australian Government has made a number of announcements setting out its pathway for the energy transition.

Taken together, the key aspects of this plan as announced are investment in priority technologies as set out in its Low Emissions Technology Statement issued in September, the development of gas as a transitional fuel and the repositioning and recapitalisation of Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation (CEFC) to drive development and investments in the priority technologies.

For energy transition investors seeking policy stability and a recognition of the systemic issues which have resulted in steep declines in investment over the last 24 months this has been welcome. 

This week the Government released their delayed 2020-21 Budget. A critical question for investors is how these announcements have been reflected in the budget priorities.

The shift to Low Emissions Technology will be encouraged by the repositioning and recapitalisation of ARENA and CEFC 

As anticipated, the budget confirmed the provision of $1.9 billion over 12 years from 2020-21 to support research, development and investment in the five priority technologies being clean hydrogen, energy storage, both low-emissions steel and aluminium, carbon capture and storage and soil carbon.

The budget further identifies that over that 12 year period $1.4 billion of that will go to ARENA, with a direction to prioritise investment in the research and development of technologies related to Low Emission Technologies. 

To deliver on this directive ARENA will have its investment remit expanded and will (together with the Clean Energy Regulator) oversee the deployment of part of the $2 billion Climate Solutions Fund (formerly the Energy Reductions Fund). The detail on this aspect is still to come. 

Like ARENA, CEFC will have its remit expanded to facilitate investment in Low Emission Technologies and will no longer be required to ensure that half of its investments are in renewable energy. 

Consistent with the Low Emissions Technology Statement the Government is providing little direct funding for the gas fired recovery and renewable technology.  

Despite centring part of its energy policies on a gas-fired recovery plan, most funding has gone towards accelerating the development of new and emerging technologies such as hydrogen and carbon capture (see the table below).  

Only $52.9 million over four years has been set aside for gas related infrastructure investments.  

However a further $134.7 million has been allocated to fund dispatchable generation and reliable energy supplies. This should also be seen in the context of a budgeted investment of $1.5 billion over five years to support a Modern Manufacturing Strategy, which the Government has flagged it anticipates will need to be powered by gas in the short to medium term.

There is no additional direct support for renewable energy technologies.

Significant funding has been allocated to addressing system constraints by investment in transmission infrastructure and reliability

While no direct investment has been allocated to renewable energy, funding of up to $250 million for the VNI West project connecting Victoria and New South Wales, Project EnergyConnect (between South Australia and New South Wales) and the Marinus Link Project (between Tasmania and Victoria) is an important step to this transmission infrastructure being built and creating the system capacity to allow additional renewable energy projects to connect to the network. It will also help address an important constraint on investment in the sector.

In addition the CEFC maintains its mandate to manage the $1 billion Grid Reliability Fund.  To be eligible to access this fund a project will to need to fall within one of the following categories: 

• energy storage (including pumped hydro and batteries), 
• transmission and distribution infrastructure and grid stabilising technologies. 

An unspecified amount has also been allocated to upgrade the coal fired Vales Point Power Station presumably consistent with the Government’s stated aim of ensuring there is sufficient ‘dispatchable’ supply in the network to ameliorate the imminent retirement of the Liddell plant.

Limited funds have been allocated towards the electrification of transport

A common theme of initial energy sector commentary on the budget has been the relative lack of funding available to support the electrification of transport with $74.5 million over four years being earmarked to assist businesses to integrate new vehicle technologies, perform integration analysis and develop improved information on electric vehicles and charging infrastructure and $5 million to establish an electric vehicle manufacturing and assembly facility in South Australia. 

The impact of the budgeted funding on Australia’s Paris Agreement commitments remains unclear 

Perhaps consistent with its position of de-emphasising of emissions targets, the Government has not indicated whether the budgeted funding associated with the Low Emissions Technology Statement will assist Australia to meet its commitments made pursuant the Paris Agreement to reduce greenhouse gas emissions to 26-28% below 2005 levels.

However, given the priority technologies supported in the Low Emissions Technology Statement, it is unclear how Australia’s Paris Agreement commitments will be facilitated or progressed.  

Further, in the context of the catastrophic bushfires of 2020, there was a relatively modest investment in environmental protection of $1.8 billion over 5 years.

The Government has previously indicated its unwillingness to commit to a zero net emissions target with this budget not providing anything further to support this either way.

Energy sector budget outcomes at a glance