The Australian Energy Market Operator (AEMO) has just published an update to its Electricity Statement of Opportunities of 2023 (ESOO). Valuable reading for those in the industry, this document gives an outlook on how the decarbonisation of the electricity sector is unfolding – the most important indicator of Australia's progress towards its emissions target. AEMO's message is clear: for the next few years, reliability risks are expected to be above the standard defined for the National Electricity Market (NEM). This is primarily driven by delays in delivering necessary network, renewable and storage investments.
Balancing Australia's energy quadlemma: ESG challenges and reliability concerns
We expect there will be plenty of close analysis of the updates to the ESOO across Australia. No doubt plenty will be written in the media about how to address these issues. The focus here is how ESG factors beyond greenhouse gas emissions are at the core of these delays – and how it is critical for Boards and Management across all sectors to up their game on ESG issues.
The energy trilemma has been widely documented: how to balance reliability, affordability and emissions. Some say it is now a 'quadlemma' – the fourth limb being balancing the interests of landowners and other stakeholders.
The recent AEMO update indicates a reliability issue is expected for the next few years. It announces a tender for Interim Reliability Reserves. A tight energy market (in addition to the tightness of the gas market), necessary network investment, plus system costs suggest that the affordability dimension is likely to rear its head. This is not a problem specific to the energy sector. The energy sector's mission is important for the whole economy and its success depends on dealing with a variety of ESG issues.
ESG complexities and project delays: AEMO's latest energy transition concerns
The AEMO update discusses the many delays to the development and commissioning of Transmission, Batteries, Hydro, Solar and Wind projects. Each project has its own story, and there is limited information about the specifics of each delay. However, it is clear many of the delays relate to ESG issues.
For example:
- local communities opposing the build-up of transmission and/or wind farms;
- skills, equipment, and materials shortages to deliver projects;
- bottlenecks in approval processes;
- changing regulatory frameworks, such as new ring-fencing rules for transmission; and as a consequence,
- growing in costs that make the economics of these projects less attractive.
The energy sector, particularly the subsector dedicated to the energy transition, enjoys an expanded social licence supported by the urgent need for decarbonisation of the economy. However, this does not shield it from the ESG issues that accompany large investments. Many project developers have limited experience in delivering large-scale projects in Australia, given the emergent and growing nature of the sector. As such, the sector must quickly develop top-tier capabilities to address aspects such as:
E - Biodiversity and land use
S - Health, safety, and wellbeing
S - Community relations and engagement
S - Labour management and employment practices
G - Management of the legal and regulatory environment
These are all ESG dimensions – not directly related to decarbonisation, but nonetheless critical areas for the electricity sector, and where other sectors have honed their skills. To accelerate progress, energy transition organisations need to assess their ESG exposures, understand where their gaps lie, and work to close these gaps.
These delays also affect the ESG performance of the broader economy. As companies strive to comply with incoming mandatory climate-related financial disclosures, their management and boards are preparing to declare targets and the trajectory of their own carbon footprints. For many, their Scope 2 emissions trajectory is directly linked to the performance of the electricity sector. While companies have limited control over the sector itself, they must be prepared to address the risk of missing their own targets – and be ready to make the tough decisions imposed by their operating environment. For some, this could mean purchasing additional carbon offsets to compensate for decarbonisation delays. For others, it could involve setting conditional targets or exploring alternate solutions. The chosen path will depend not only on financial impacts but on stakeholder expectations regarding ESG performance.
It is foreseeable that other sectors will blame the electricity sector for failing to deliver the promised infrastructure projects. In turn, this will increase the pressure on the core ESG issue for the energy sector – decarbonisation. This pressure, along with the associated challenges, such as access to capital, will add further complexity to their operations. This chain reaction can evolve into a negative cycle, potentially making decarbonisation in Australia an even greater challenge than it is currently.
At MinterEllison, we appreciate that ESG encompasses everything that companies do which impacts on, or is impacted by, the environment in which they operate. ESG requires organisations to view themselves not as standalone entities concerned solely with maximising shareholder value, but as integral parts of a larger ecosystem. Their actions have tangible consequences on people and the planet, which can reveal both financial and non-financial risks and opportunities.
Most ESG challenges and opportunities begin as stakeholder expectations and evolve into legal requirements. We have augmented our legal expertise with consulting capabilities to assist organisations on the full breadth of ESG issues, whether they are related to the law or not. Please reach out at any time to find out more.
