Clean energy generation is important for a successful energy transition, but the distribution of power is just as critical, IFM Investors says.
In the debate around the energy transition, much attention has been placed on the transition to renewable sources of energy generation. And for good reason. It will take much investment, if not a thorough change in mindset, to phase out fossil fuels in favour of clean sources of energy in Australia.
But with the public debate so focused on power generation, it is sometimes overlooked the importance of the role of distribution to the end user in this transition.
As more renewable and sustainable energy comes online it needs to be passed on to the end user. In practice this means that large parts of the economy need to move from fossil fuel to electrification.
Electric vehicles (EVs) are a good example of this. Reducing the emissions from transport is crucial in reaching net-zero targets.
But despite the rollout of more charging stations every year, it clearly hasn’t been enough. Data shows that the uptake of electric vehicles is slower than initially thought and that many consumers seem to opt first for a hybrid as a kind of transition vehicle.
Hybrid vehicles, which already have a larger market share in Australia than electric vehicles (EVs), saw an increase in sales of 88.4 per cent in July 2024 compared to a year earlier, according to data published by the Federal Chamber of Automotive Industries.
Plug-in hybrid vehicles did even better and were up 128.9 per cent compared with July 2023, although admittedly from a much lower base.
This upward trend in hybrid sales is in stark contrast with the sales of EVs, which have fallen year-on-year. The sales of EVs represented 6.6 per cent of all auto sales in July 2024, compared to 7 per cent in 2023.
In the United States, we see a similar picture: the sales of hybrids grew five times faster than EV sales in February this year.
The stalling uptake of EVs is partly due to the lack of infrastructure, which has led consumers to experience ‘range anxiety’. Although for day-to-day driving EVs are more than adequate, many consumers still are worried about driving longer distances, considering the dearth of charging stations in regional areas.
In New South Wales, Ausgrid is the key distributor of electricity, servicing 1.8 million customers throughout Sydney, the Central Coast and the Hunter Valley.
T&D operators like Ausgrid interface with the end user and their role is to accelerate electrification, facilitate accessibility to transition and ultimately lower costs for customers. Ausgrid has several initiatives to support energy transition, and two notable ones are community batteries and the rollout of electric vehicle charging infrastructure across the network
IFM Investors is part owner of Ausgrid and has a 25.2 per cent stake in a 99-year lease of the company. It was one of three consortium members to take the company private in 2016, besides AustralianSuper and Dutch asset manager APG Asset Management.
The NSW Government retains a minority shareholding in the business at 49.6 per cent. Julian Gray, Investment Director with IFM Investors, was part of the substantial due diligence team that worked on the privatisation of Ausgrid and spent nine months embedded in Ausgrid transitioning the business to private ownership.
Gray confirms that expanding Ausgrid’s electric vehicle charging infrastructure is one of the key pillars in the company’s strategy to accelerate the energy transition.
“T&D (transmission and distribution) operators like Ausgrid interface with the end user and their role is to accelerate electrification, facilitate accessibility to transition and ultimately lower costs for customers,” Gray says.
“Ausgrid has several initiatives to support energy transition, and two notable ones are community batteries and the rollout of electric vehicle charging infrastructure across the network.”
“Community batteries are really about providing a shared solution to harness solar energy and help with access to storage for consumers that would otherwise not be able to justify the investment up front in a household battery, because they’re pretty expensive at the moment.”
“And more EV charging stations are important, because the fact is that 50 per cent of new cars sold in 2030 are expected to be electric,” he says.
Ausgrid is not the only company to roll out EV charging stations, but whereas most other companies tend to target areas of the market where they can make the most money, Ausgrid has a broader based approach.
“The rollout of electric vehicle charging infrastructure has a tendency to be focused on higher socioeconomic areas where companies are likely to get high utilisation. Ausgrid on the other hand is working in partnership with councils and EV charging suppliers to roll out charging across its network area, and that’ll be about 11,000 kerbside EV chargers across the network.
“It’s important from a social licence perspective as we’re helping solve a key transition issue for society and government, and that’s to encourage EV uptake across the network. Not just in those areas where most operators would say they have high utilisation rates of these assets,” he says.
Gray points out that in some areas with high density apartment buildings, residents often don’t have the ability to have charging stations installed, as they often lack garages or dedicated parking. For these people, public charging infrastructure is essential if they are to take up EVs.
“There are around 800,000 customers across the network that have limited ability to charge an EV at their own home, so it’s really about providing a solution to people across the network not only to be able to conveniently charge whenever you want, but also for those people that don’t have access to be able to charge at home.
“It’s really an attempt to provide fair access to all customers across the network, rather than just leaving the market forces at play,” he says.
Data Centres
Data centres are also likely to play a key role in the energy transition. These facilities are heavy users of energy, but their customer base, including hyperscalers such as Amazon, Google and Microsoft, have ambitious decarbonisation targets.
This could drive the development of more renewable and clean energy. But it does require some input from all stakeholders, as many of these multinational companies could source renewable energy certificates (RECs) abroad, rather than investing in Australian sustainable energy generation.
“The opportunity here is to make sure that you connect the dots between upstream, renewable generation and the networks downstream, with the right transmission infrastructure. So it’s important that data centre operators do have the right opportunity to be powering off green energy that’s procured and offset in the Australian market,” Gray says.
“The challenge that we are seeing is that global data centre operators and their customers can procure those RECs and PPAs (purchase power agreements) at the corporate level, and that can happen offshore. So there needs to be a real focus on making sure that renewables get built in Australia and transmission is absolutely critical to that,” he says.
The challenge that we are seeing is that global data centre operators and their customers can procure those RECs and PPAs at the corporate level, and that can happen offshore. So there needs to be a real focus on making sure that renewables get built in Australia and transmission is absolutely critical to that
Globally, there are a lot of developers who are moving quickly to secure land and access to power to build data centres and we are seeing that in NSW. So much so that there could be an oversupply if all of these projects come to fruition.
Between Ausgrid and Endeavour Energy – the operator of the electrical distribution network for Greater Western Sydney, the Blue Mountains, the Southern Highlands and the Illawarra region – there are likely well in excess of 10 gigawatts of data centre power supply applications in the pipeline.
Gray estimates that the industry might only use a fraction of this capacity in the next 10 years, but he is quick to point out that it is unlikely all of these applications will result in actual builds, which also creates challenges for the T&D operators when planning network investment
“The nature of the data centre business model and critical to their success is securing high quality locations with certainty around power supply. So when you combine those two elements as a developer, you’ve got a really valuable asset,” he says.
“In most markets, power and land can be secured for only a small fraction of the overall capital cost of the facility. So what that means is you’ve got this real flurry of developers that are buying land, applying for power connections for sites, and some may never get developed.”
Although there is always a risk of oversupply, the dynamic in NSW is not that different from what can be seen in other markets around the world.
“There is always a risk of oversupply and we’ve seen that play out periodically in other mature markets like in pockets of the US. But over the medium to long term, markets are efficient and that tends to correct itself,” he says.
“Using the hyperscale data centre sector as an example, when you are talking about hundreds of millions of dollars build these assets, only brave developers will build them without line-of-sight on a customer base.
“So really, the assets that get built are the ones that have got an anchor tenant that will underpin that supply,” he says.
The Future – Sustainable Aviation Fuels
While rolling out EV charging infrastructure and securing power supply for data centres are key elements of the energy transition today, there are currently other projects on the go that are likely to play a significant role in the future. Of particular focus for IFM are hard to abate sectors, where electrification or hydrogen are not viable options in the mid-term.
Sustainable aviation fuels (SAF) are one example of this. IFM Investors is working with agribusiness and processing company GrainCorp and Australia’s largest transport energy provider Ampol to explore establishing an integrated renewable fuels industry, which will be able to produce SAF. This is achieved through long-term domestic feedstocks agreements, with supply of crop-based oils, bio-organics, and wastes & residues.
It has an obvious interest in this area as IFM is a co-owner of several airports in Australia, including in Brisbane, Melbourne and Sydney, all of which have plans for airport infrastructure decarbonisation, covering scope 1 and scope 2 emissions across the aviation industry.
Aircraft are costly pieces of transport infrastructure that airlines invest in. The current domestic fleet of aircraft still have 15 to 25 years before they will be replaced, so it is important to find a decarbonisation pathway that does not require widespread change to this infrastructure
SAF is the way that the aviation industry can address scope 3 emissions, which make up a majority of carbon emissions of operations. But Gray warns that it is still early days for this fuel.
“Aircraft are costly pieces of transport infrastructure that airlines invest in. The current domestic fleet of aircraft still have 15 to 25 years before they will be replaced, so it is important to find a decarbonisation pathway that does not require widespread change to this infrastructure,” he says.
“SAF is a so-called ‘drop-in’ fuel source, which means that it will be compatible with the current aircraft fleet and airside refueling infrastructure. While the industry will not be operational overnight, when it is we will see reductions in the carbon emissions of the domestic aviation industry – and it is great to see so many airlines committing to the use of SAF in their operations.
“To date, SAF has been supplied through over 130 airports globally and over 780,000 flights have been flown on SAF blends,” he says.
This article is sponsored by IFM Investors. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
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