7 March 2022

High risk, high reward energy shift for manufacturers

As featured in The Australian Financial Review 7th March 2022

If Australia gets the energy transition right, it can boost manufacturing. If it fails, then it puts at grave risk a sector that it cannot afford to lose.

If Australia is to future-proof its manufacturing capabilities, we need to turn our clean energy advantage into a clean manufacturing advantage.

That’s easy to say, but difficult to achieve, and recent developments in Australia’s energy transition have upped the ante for a sector already walking a tightrope of risk and opportunity.

Cochlear has been an Australian manufacturing icon. Manufacturing accounts for 22 per cent of Australia’s exports and $108 billion annually in GDP, employing nearly one million people. Louie Douvis

Australia has significant opportunities in low emissions manufacturing. But we must also be realistic about the serious risks to Australia’s manufacturing capabilities, and the broader Australian economy, if we do not manage the transition carefully.

Put simply, if Australia gets the timing and nature of transition right, we can grow our manufacturing capabilities, reduce emissions to net zero by 2050, preserve a million manufacturing jobs and create 100,000 new ones.

But if Australia gets the timing and nature of transition wrong, we could lose the very manufacturing capabilities needed to thrive in a low emissions world.

It’s important we get this right because manufacturing is overwhelmingly good for Australia.

Manufacturing accounts for 22 per cent of Australia’s exports and $108 billion annually in GDP, employing nearly one million people.

Manufacturing is easily the most research-intensive sector of the Australian economy, accounting for more than a quarter of Australia’s business expenditure on R&D and employing more than a quarter of all private sector research staff.

Sovereign manufacturing capabilities provide essential ballast and resilience. In times of external shock Australia must be able to provide the basics of life: medical supplies and public sanitation; food, fibres and fertilisers; transport fuels; and building materials.

Australia cannot afford to choose between reducing emissions or retaining manufacturing. We must do both, even as we adjust to a new era in global strategic relations and the global pandemic recovery.

Australia’s success will hinge on three things: proving & scaling up breakthrough technologies, reducing the delivered cost of clean energy, and levelling the playing field for trade-exposed manufacturing industries.

Australian manufacturers are investing in technologies to reduce their emissions in the short, medium and long term, presenting viable decarbonisation pathways for even our most emissions-intensive manufacturing industries.

Direct electrification using clean energy, green hydrogen as a process feedstock, green hydrogen for heat, and carbon capture, usage and storage are four key long-term pathways, which will underpin the low emissions steel, ammonia, aluminium, cement, packaging and building materials industries of the future.

Need to be realistic

In some manufacturing industries, Australia will be a first mover in trialling and scaling low emissions technologies, while in others Australia will be a “fast follower” of global breakthroughs.

But we need to be realistic about timing: some of these technologies are in their infancy globally. Some require significant technical improvements, while others are prohibitively expensive to deploy at commercial scale.

For any of these technology pathways to succeed, Australia must dramatically grow its clean energy infrastructure, while also achieving the world’s best energy prices.

Converting manufacturing processes that are today fuelled directly by coal or gas, to run on electricity or hydrogen is not the same as switching from one form of electricity to a cleaner form of electricity. It’s much harder, it will require a lot more electrons, and they must be competitively priced.

The scale of investment required in clean energy generation, infrastructure, firming and storage to meet demand from electrified manufacturing processes and hydrogen production is massive.

Increasingly urgent

Powering just four key manufacturing sectors – steel, cement, ammonia and alumina – with clean electricity and hydrogen, will require Australia to more than double its total electricity generation. That makes government investments in renewable energy zones, in transmission infrastructure and grid connection, and in gas peaking, hydro and battery storage not only essential but increasingly urgent.

It also makes the disorderly or premature closure of thermal power generators, before they are suitably replaced, a clear risk to Australian manufacturers.

In the National Electricity Market, delivered electricity prices in 2021 averaged between $70-$80 per Mwh. At those prices, switching from fossil-fuel based manufacturing processes to clean electricity-based processes is unlikely to occur. The competitive disadvantage to Australian manufacturing would be too great.

At $40 per Mwh, delivered, we can roughly halve the competitiveness gap between today’s inputs and tomorrow’s inputs. And at $15/Mwh, which is the federal government’s target for low cost solar, we can expect significant investment in both direct electrification and hydrogen-based manufacturing, regardless of what other energy policy measures are in place.

As we have seen elsewhere in the world – notably in the US thanks to its affordable and abundant shale gas – having the world’s best power prices can drive a resurgence in manufacturing, even while reducing emissions.

Research partnerships

There is a clear role for governments.

First, governments should continue investing in research partnerships with industry to scale and reduce the costs of low emissions manufacturing technologies.

Second, when private investors won’t invest in projects that are necessary to firm, integrate, transmit and store clean energy at lowest cost, then governments should invest.

Third, governments can help to stimulate “green manufacturing” demand through consistent national standards and accreditation developed in partnership with industry, and changes to government procurement.

Finally, targeted investment incentives should work to level the playing field for trade exposed industries and reduce the risks to Australian manufacturers of making step-change investments, even when international competitors do not.

Australia has every reason to expect a globally competitive role in low emissions manufacturing. But we shouldn’t expect a straight line from here to 2050. Rather, our transition will resemble a downward staircase, with big reductions in emissions each time a technology matures and becomes commercially viable.

Transitioning Australia’s manufacturing capabilities to a low emissions economy will benefit all Australians. It’s critical we get this right.

Ben Eade is CEO of Manufacturing Australia.