Will Australian investors back the country’s $36bn opportunity in clean fuels?
CEFC’s new report maps the country’s comparative advantage in producing clean fuels for mining and aviation
In May this year, when Qantas, Australia’s largest airline, along with Ampol, a fuel supplier, and Sydney Airport announced a large fuel import it was hardly atypical. Some 80% of Australian liquid fuel demand is serviced from overseas. Yet, this was no ordinary import. The 2 million litres of unblended SAF were Australia’s largest ever commercial import of sustainable aviation fuel.
Demand for such low carbon liquid fuels (LCLF), from airlines and mining companies, is on the rise. A new report from the Clean Energy Finance Corporation, a government-backed investor, and Deloitte has found that Australia has a comparative advantage in capturing that demand. An advantage that, by 2050, could be worth $36bn.
First movers
32% of Australia’s national emissions are attributable to liquid fuel use. Over a third of that demand comes from road transport – where electrification is underway. Mining and aviation account for nearly a third of remaining demand and are harder to electrify.
For these industries, LCLFs are the next best hope. “Low carbon liquid fuels are a present-day necessity for sectors that can’t electrify”, says Ian Learmonth CEFC’s chief executive. “If we get the settings right, Australia can lead in clean fuels innovation and production - not just supply the feedstocks”, he adds.
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Getting the settings right, the report says, could yield significant rewards that investors should take note of. “Policy accelerators, including mandates, certification schemes and offsets, are key components to assist the industry reach scale. The first movers will reap the rewards of this global market”, notes Learmonth.
Home advantage
The production of LCLFs relies on feedstock - things like waste, agricultural residue, biomass, sorghum and used cooking oils. This plays into Australia’s large agro-industrial footprint, the report claims. These industries provide feedstock such as tallow and canola – which are currently being exported for LCLF production.
“We export the raw materials but miss the opportunity to build the industry here at home. This is about regional development, national resilience, and emissions reduction, all at once”, says Rupert Maloney, CEFC’s executive director.
The report includes a production cost analysis as well as estimation of Australia’s LCLF cost curve. The findings highlight the importance of cost reductions in the years ahead – where LCLF innovation and lower feedstock costs could play a key role.
Demand, meanwhile, is expected to rise significantly as offtake mandates replace carbon offsets in industries such as aviation. Over 50% of LCLF demand under all modelled scenarios between 2030 and 2050 will come from aviation.
“Clean fuel plants could revitalise manufacturing hubs and create skilled careers in some areas hit hardest by the decline of fossil fuels. But we need investment commitments this decade to avoid missing the window”, said Maloney.
Investment risk
For investors this remains risky business. As the report highlights, LCLF market is still relatively immature. To be viable, projects require complicated supply chains and a steady roster of feedstock suppliers and offtake partners. In addition, the market itself is fragmented and the cost gap between LCLFs and traditional alternatives needs trimming.
These uncertainties add to the LCLF risk premiums, making capital more expensive.
Here, the report identifies seven ‘market accelerators’ that could pave the way for a LCLF boom down under. The use of concessional finance to de-risk private investments is one of the report’s key recommendations. The implication being that other forms of capital might need to take a seat at the table before institutional capital considers one.
As Australia decarbonises, its legacy industries -notoriously emissions-intensive - will come under stress. Somewhat unsurprisingly then, the country’s financiers might look for the next big thing. The report makes a convincing case for LCLF to be amongst the candidates, courtesy of a first mover advantage up for grabs. Its caveats, however, are noteworthy. Scaling up Australia’s LCLF industry would require cautiously optimistic navigation of waters that are simultaneously risky and rewarding.
