The impact of politics

Globally, we have seen the rise of election and electorate monitoring by pollsters and readers of algorithms. Additionally, both politicians and corporations seek support for their actions. Politicians aim to be re-elected, while corporations desire the social license to continue their activities. At Projects RH, we don’t engage in politics and hold no political views, but we recognize that politics impact investment decisions and valuations. Therefore, we can comment on which policies affect business and create new opportunities.

Meeting “greener” expectations

Australia is following a global trend. After coming to power, the Albanese Labor Government replaced the previous Liberal/National Parties Coalition government, which lost the election in the inner-city teal seats (a group of like-minded independents with a pro-family and financially conservative veneer). The Australian Labor Party had to announce the abandonment of its energy and economic policies. At a time of high inflation, uncertain international politics, and a lack of affordable housing, the government is less than 15 months away from a national election. Suddenly, how do we have our own “Inflation Reduction Act” without the spending? We have a protectionist "Made in Australia" policy with cheap energy. Goodbye renewables and new transmission infrastructure – “ah, more transition fuel.” More export and domestic gas, and even export coal.

The community has set “greener” expectations, and politicians, corporations, and communities have responded accordingly. But winning voters means more and cheaper energy to reduce inflation and create jobs.

Sadly, much of the reporting has driven sham actions and over-reporting. What it means is moving to net zero more slowly and allowing a normalized transition.

From an environmental perspective, the new expectations have led to reform in the energy sector. Many teams, like Projects RH, are proud of what we do, and this pride is clearly associated with meeting community and family expectations. Speaking for myself, as someone who worked with coal for 20 years, it is a chapter less spoken of, but I am very pleased with the communities who benefit from new energy projects.

We cannot simply walk away from the hard facts

Most nations need more energy as their quality of life improves, but politicians aim to deliver what their electorates want. In the case of Australia, this includes jobs, low-cost housing, low inflation, and security. The transition of the economy has been inflationary, with costs being transferred to consumers through higher prices for goods and services. This has been most noticeable in energy bills and at the gas pump. This story is repeated around the world. In one sense, the move towards renewables is creating infrastructure demand and therefore jobs. Across the Australian economy, it is a bonanza as minerals are needed, and there are high prices for staples like iron ore and coal.

As in most countries, the benefits are felt in regions and ripple across the economy. It seems that the answer lies in stimulating more of the distributed economy by increasing manufacturing. Ironically, to stimulate manufacturing and reduce inflationary pressures, energy prices need to go down or rise less quickly. So, the answer lies in having more transition by using non-renewable natural gas. In the case of Australia, the United States, and parts of Europe, the answer is easily delivered by the production of more natural gas. It is said that if volume is increased, availability will rise, and prices will fall. For exporting nations, this is a bonus as there is often some form of export tax, often referred to as a royalty, which helps the national economy.

The Global Experience – we are picking winners

Around the world, we are seeing the phenomenon of governments picking winners, whether it is hydrogen in the United States or solar cells in Australia. Governments are providing subsidies where there is no discernible benefit to the sector or the economy. Under the US Inflation Reduction Act, there is a direct subsidy of USD 3 per kilogram for hydrogen. On the other side of the equation, hydrogen is being regulated with processing rules known as 45V. At Projects RH, we are learning of this as US companies ask if we know of “offshore” energy projects where they can create their own hydrogen without subsidies or government interference. The Holy Grail is to produce hydrogen at USD 1 per kilogram for the market. At that price, it will compete with its rivals and not need a government subsidy.

In many countries, with different political ideologies, this response of making both “guns and butter” is seen as appropriate to rising global tensions and domestic political activity. Self-reliance is seen as key, leading to global inefficiencies, but currently, no one seems to care. The sacrifice of global commitments to net zero by 2035 seems to have shifted in favor of transitioning by 2050. We live in uncertain times, exemplified by the fact that only three years ago, Australia would not let nuclear-powered vessels into its ports, but in less than a decade, Australia will be hosting its own nuclear-powered submarines in its ports.

The need for mountains of copper

There is no doubt in my mind that most economies cannot afford to be all things to all people. While China, the United States, Europe, and India might have the size to be markets that can work in isolation, the reality is they too need resources from other parts of the world. Countries like Australia, Canada, and Brazil have benefited from the fact that they possess many of those needed resources, such as energy and minerals. We will see strategic partnerships similar to those formed during the Cold War.

One of the common demands will continue to be key commodities as we address the challenges associated with a long-term move into renewable energy. There is no doubt we will need graphite, lithium, copper, rare earths, and many other materials to make the transition. For the markets, it may be a slower transition but a more efficient one.

At Projects RH, we continue to see demand for quality natural resources and investors believing that now is the time to invest in renewable energy. Their definition of renewable energy may have broadened, but they are still looking for the same fundamentals as they were two years ago.

The New Challenge

Governments control the printing presses and determine what goes into their coffers to later show their electors what can be given before an election. Supporting the production of solar panels in Australia is not a smart move. The International Energy Agency and research from Wood Mackenzie have shown that the global market for solar panels is led by China at 15c, followed by India at 22c, Europe at 30c, and the USA at 40c per kWh. Given its small market, can Australia expect a lower production cost than the USA, let alone China? Who is picking the winners? It is unfortunate to note that most plants built in Europe are now closed, and in one project reviewed by Projects RH in northern Italy, the solar panels were being subsidized by Germany.

Guardrails, not spendthrifts

For nearly 200 years, Western capitalism has realized the folly of believing that central governments can pick winners and also allow their citizens to enjoy a higher standard of living because of this.

Given the global track record of politicians, should they be making investment decisions in energy and manufacturing for us? Or is it, "It's OK, our children will pay for these mistakes"?

No doubt billions will be spent on winners, but eventually, global economies will revert to "guns or butter," allowing each economy to gain productivity from what it is better at. We will see a smoother transition to net zero and, no doubt, a more productive world, and a higher standard of living for all.

We believe the government needs to provide guide rails and not spend citizens' money on picking winners. Do you agree?

By Paul Raftery, CEO of Projects RH. We are happy to receive questions of comments at paulraftery@projectsrh.com  

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Sources:

Cater, N.; “Green dreams, red flags: Labor’s ‘Future Made in Australia’ will end in tears”, The Australian, 11-12 May, 2024.

Chalmers, J.; “‘Future Made in Australia’ will drive our place in new global economy”, The Australian, 11-12 May, 2024

Coorey, P.; “New gas projects cause Labor unease”, The Financial Review, 10 May, 2024.

Evans, N.; “Fortescue chairman Andrew Forrest slams Biden administration’s proposed hydrogen subsidy regime”, The Weekend Australian, 3 May, 2024.

George, J.; “Without a reliable gas base, the Made in Australia project will run out of steam”, The Weekend Australian, 1-12 May, 2024.

Korporaal, G.; “Budget focus on Labor’s Future Made in Australia policy”, The Australian, 8 May, 2024.

Mooney, A.; “The burning question : Funding Who will pay for the green transition?” The Weekend Australian Financial Review, 11-12 May, 2024 (Reprinted from the Financial Times)

Tingle, L.; “GST and gas show a government that’s still out of tune”, The Weekend Australian Financial Review, 11-12-May-2024.