Energy: An industry not for the faint-hearted
15 February 2024
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Australia’s national energy transformation is at a turning point, with evolving investment priorities, technological change, shifting community sentiment and market volatility creating unpredictability in sections of the market. Increased complexity in government policy, intervention and regulation also presents risk across the energy value chain.
Whilst the extreme energy price volatility of 2022 appears to be behind us, we are now seeing more structural issues and diminishing renewable returns as the energy transformation continues. Generator valuations are under particular pressure in coal and large-scale solar (without storage solutions), and retailers continue to have their margins squeezed as consumers shop around for the cheapest price and invest in rooftop solar.
Meanwhile, new transmission infrastructure remains significantly behind what is required to facilitate the transition. The delivery of current grid and storage projects is placing upward pressure on construction costs, labour capacity and skills availability, causing project delays and cost blow-outs.
Stakeholders will also be impacted by governments looking to protect critical energy assets from foreign ownership and interference. We expect further regulation to manage risks in cyber, supply chains, physical security and insider threats.
We anticipate increasing levels of distress in the energy market, particularly where development projects experience ongoing construction delays and cost pressure, large-scale wind and solar grapple with negative pricing or curtailment, and financial players lose bets in the ensuing pricing volatility. Some new projects are unlikely to proceed to construction as the economics become unviable, or they struggle to find willing off-takers.
Opportunities will exist for those with higher risk appetites or differing investment horizons to current asset owners, particularly in energy trading, investment in storage, forced wind and solar asset sales, and new technologies.
We are just at the beginning of the unprecedented national energy transition project and the path is only going to accelerate and become more complex. The energy industry will not be for the faint-hearted in 2024 and beyond.
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