Stephen Wilson is an adjunct professor at the University of Queensland, and the author of a recent report on the future of nuclear energy in Australia. In this episode, Wilson talks about the “church of electricity free markets,” why coal continues to be a dominant fuel for electricity production, the attraction of the “romantic poetry of renewable energy,” and why regulators must play a bigger role in managing electric grids. (Recorded August 11, 2022.)

Episode Transcript

Robert Bryce 0:04
Hi, everyone, welcome to the power hungry Podcast. I’m Robert Bryce. On this podcast we’re talking about energy, power, innovation and politics. And I’m pleased to welcome my friend Steven Wilson. He’s an adjunct professor at the University of Queensland in Brisbane, Australia, Stephen, Good day to you.

Stephen Wilson 0:20
Good at Euro. Great to be on the power hungry podcast. Well, thanks.

Robert Bryce 0:24
It’s evening here. It’s morning there. I’ve warned you that guests on this podcast introduce themselves. So if you don’t mind, please imagine you have about a minute you’ve arrived somewhere and you’re introducing yourself to people you don’t know, please.

Stephen Wilson 0:39
Well, Robert, I often jokingly introduce myself to students as engineers think of me as an economist and economists think of me as an engineer. I started off studying engineering, back in the day mechanical engineering. And, and then I went into energy efficiency consulting. And I’ve my career wasn’t planned this way. But it’s just turned out this way. I’ve, I’ve sort of moved from the customer and all the way up to the upstream resources. And so that might seem like going backwards. But you know, there’s an old joke about electricity being a commodity that moves backwards at the speed of light. So I’ve actually followed the electrons backwards. Blown.

Robert Bryce 1:25
TriCity is a commodity that flows backward toward the speed of light

Stephen Wilson 1:28
backwards at the speed of light. It’s an old joke, British engineer. So yeah, so anyway, I’ve worked from energy efficiency back up through the networks and, you know, generation and transmission and network economics and then into gas on a journey that took me from Australia to from Melbourne, Australia, to Hong Kong to London, and I’ve worked in about 30 countries around the world. And I’ve covered basically all forms of energy, electricity, gas, and the upstream primary fuels. And then into the mining industry. I did a stint about five years, with a big mining company, covering coal and uranium and getting my head around nuclear and, and of course, renewable energy policy and climate change and all those issues. So and then, in more recent years, I became an academic for a few years, I was a full time, professor at UQ. And now I’m an adjunct professor, and working on technology development, commercialization of new energy technologies in the startup space, as well as doing advisory work.

Robert Bryce 2:30
Gotcha. Well, I want to talk about your recent report, was came out December of 2021, on nuclear in Australia, but we’ve corresponded and we have several mutual friends in common. Patrick Gibbons among them and Tristan presser, and they’ve been heard and other other Australians who are interested in energy policy, and particularly a nuclear. So I want to talk about your nuclear research paper and what’s going to be needed for Australia to kind of break out of where it’s been for a long time in particularly so coal reliant, but tell me what’s happening with the electric grid in Australia. I’ve been following it for some time, your prices have been skyrocketing. What What the hell’s going on?

Stephen Wilson 3:12
Yeah, so the main grid, so careful saying V grid, you know, we’ve actually got several, right. It’s such a big country with such a small population, you know, thinly spread. We’ve actually got a few electricity systems in Australia, but domain and they’re and they’re not interconnected. Is that right? Or though the main one is interconnected. So it’s basically the Eastern Australian grid. So it’s, yeah, it spans the eastern seaboard. So it wraps around more or less following the coast, from South Australia, Adelaide, South Australia, and then ran through Melbourne and Canberra, Sydney, and then up through Brisbane and up the Queensland coast, and then the Tasmania and the small system in Tasmania is connected by submarine DC cable. So that when people say the done national electricity market or the NAM for sure, that’s the that’s the physical system they’re talking about.

Robert Bryce 4:02
I see. And then and then Perth and Western Australia is all separate then not.

Stephen Wilson 4:06
Yeah, so there’s a thing called the Southwest interconnected system, or Swiss, which is the much smaller grid around the city of Perth in Western Australia. And then there’s a Northwest interconnected system, which is a small grid around the iron ore mining towns in the Pilbara region. And then and then there’s another small system in the Northern Territory, Darwin Catherine interconnected system, and then, and then across the vast interior, there’s what I call a constellation of small diesel remote systems. Right. Gotcha.

Robert Bryce 4:39
Okay. All right. So then bring us up to speed because I’ve been reading about skyrocketing electricity prices, your wholesale prices in earlier this year, were up something like 100 and some odd percent over a year ago. You have abundant coal is this a reflection of of higher coal prices? What’s, what’s going what’s driving these electricity prices? So much higher in Australia?

Stephen Wilson 5:06
Yeah, there’s actually a lot of factors in play, Robert, that. So on that big Eastern Australian grid, we have a competitive market overlaid on the physical system is a is a competitive market system, which is based on the is something that’s fundamentally the same as the the original so called gross pool system in the UK. So an energy only wholesale spot market is the core design feature of that market. It’s the market, the details of the market rules have evolved and continue to evolve at a breathtaking pace. But that’s that’s fundamentally what the market is around that core of the spot market. There’s, there’s a number of other markets that we have where people trade other services and products, but that’s the core of it. And the price is under the rules in place, the price is allowed to move up to over $15,000 per megawatt hour, on a on a five minute spot basis. And it can also go down to minus $1,000 per megawatt hour. So what we’ve seen historically, that that market, that spot market tended to clear around the short run marginal cost of generation. And so if you, if you plot the data historically, what you would see is something that looked very much like the short run marginal cost curve. And that’s basically a textbook competitive electricity market of the of the type described by Chevy and the guys at MIT in their classic book back in the late 1980s. And that’s sort of the basis for the design. But

Robert Bryce 6:48
so what, so I’m sorry to interrupt, but if you don’t mind, just explain that just a little bit. Because I’m, you know, I’m getting better at understanding electricity markets, but they are all they’re all incredibly complex, as you just referenced. So explain the cost curve, you’re saying that the cost of the fuel then would would set the price then is that did I follow you there?

Stephen Wilson 7:10
The Yeah. What what economists in their jargon call the short run marginal cost is how much does it cost you to supply the last little bit that exactly satisfies the demand at that moment? Right. So what is the

Robert Bryce 7:25
cost of that last watt? Or if you’re gonna be talking about an energy though? Yeah, an hour, right.

Stephen Wilson 7:30
Yeah. At the at the bulk wholesale level, it’ll be the last megawatt hour. Okay. So what does it cost to produce that last, that last megawatt hour? And that? So that’s how the, that’s the market design is designed to reveal that, that through the price mechanism, Okay, gotcha. That’s the basic philosophy. And so, as you said, we’ve got a lot of coal in Australia, we’ve got a lot of physical coal, a huge amount of physical coal in the ground, but also, our generation system is dominated by in eastern eastern states by 16, large coal fired power plants still, which are aging, we’re getting older, that most of them were built in the, in the 80s, and 90s. So but we’ve also got some hydro, in the, in the snowy mountains, right, the big Hydros in the snowy mountains between Sydney and Melbourne. And, and we’ve we’ve got an increasing amount of wind and solar. And we’ve also got gas, we’ve got a lot of gas in the ground, we’re one of the world’s largest exporters of liquefied natural gas. And gas plays a crucial balancing role in the electricity grid. It’s kind of a go to fuel to balance the physically balanced the system and to balance fluctuations. Historic historically, it’d be balancing fluctuations in demand, but now you’re balancing both demand fluctuation and renewable energy generation fluctuation.

Robert Bryce 9:04
So no different than other countries, especially the US where you were balancing renewables with natural gas. Primarily.

Stephen Wilson 9:11
Yeah, well, so there’s an element of that here in Australia as well, but it’s not on the same scale as, of course, right. So yeah, so there’s a lot of there’s a lot of factors in the dynamic at the moment with high prices, one of them is extremely high international gas prices, right. Another one is extremely high international export coal prices. So those factors are having some influence on what’s going on. In the market. In Australia, we’ve seen our we’ve seen at gas block prices go extremely high.

Robert Bryce 9:54
So on watt per Giga Joule or million Btus What are you talking about there?

Stephen Wilson 10:00
Well, they, they went, they went high enough, and cumulatively for long enough to trigger a price cap coming into effect in the in the gas market at $40 $40. A Giga Joule was a cat. So the shadow price behind that at times was I think $800.

Robert Bryce 10:20
So if it had been allowed to float yours would have gone to 800 if it was if it was unrestrained.

Stephen Wilson 10:27
Yeah, that’s that’s what the shadow prices is supposedly signaling. But yeah, price is basically you got this very tight, tight tight spot market and finding it extremely hard to clear and, and prices just going astronomically high. And then and then the cap gets triggered under the rules at $40. And then,

Robert Bryce 10:52
so the gas is priced at what sounds like an artificially low number. And but the spread between what would be the spark spread between turning that gas into electricity would be much. I mean, at $40 gas, you could still make a lot of money at $15,000 a megawatt hour, right?

Stephen Wilson 11:09
Well, it Yes. Except what happened in the electricity market is is the electricity market also has what’s called a cumulative price cap. So if the if the five minute spot prices, you know, added up over the space of seven days or above a certain trigger level, then what happens is a ceiling gets a cap gets triggered in the electricity market. And that number in the electricity market is $300 a megawatt hour. So you can have a five minute $15,000 price, you can have quite a few of them. But if it stays at high levels, you know, not not necessarily even anywhere near 15,000. If it stays bouncing up and out high levels for long enough, then these, these cap gets triggered and then bang, automatically the price is fixed at $300 for a period of time. So what that occurred, but at the same time in the background gas is at $40. And then there was a whole lot of generators who couldn’t turn $40 gas into $300 electricity. And then and then they said, Okay, we need to withdraw capacity, because otherwise we’ll just be losing money. Yeah.

Robert Bryce 12:14
And that dissipating in the market.

Stephen Wilson 12:16
Well, they they, you know, rebid right, in effect withdrew capacity from the market. And then we found ourselves in a situation where there were a whole lot of manual directions, was becoming very hard to balance physically balanced the market. Because remember, you’ve got, you’ve got generators bidding to meet demand. And you’ve got a computer model that’s matching those bids to the to the demand at the lowest overall clearing price. But you’ve also got to take into account all the transmission constraints and all those things in the physical network as well and make sure it’s actually going to going to work and going to flow properly. And then there were all these manual instructions being given. And then they got to the point where the dispatch engine, which is the what the computer model that works out which generators should run to produce the lowest price, the dispatch engine couldn’t solve the dispatch for for a number of intervals of the coming day. And at that point, the CEO of the of the market operator this the AMO Australian energy market operator, who is also the system operator, he made an executive decision exercise one of the obscure powers under the rules that have never been used before and just said, I’m suspending the market. We’re just going to manually manually dispatch all the generators, just like in the old days, and that place that that that order was in place for a week or two, I believe.

Robert Bryce 13:43
Well, so I hear you saying the Steven, I can’t help but think the ERCOT nodo market protocols, the government the model the or the rules of governance. It’s 1800 pages long. Right.

Stephen Wilson 13:57
Okay, so you’re you’re you’ve got the silver medal, I think.

Robert Bryce 14:02
I thought you have the gold medal.

Stephen Wilson 14:05
No, no, no, we have the bronze. Our the Yeah, the national electricity, the rule, the detailed rules that run the electricity market, or last time I checked, it was, I think 1317 136 pages, something like that.

Robert Bryce 14:18
Well, so. So who wins the gold medal here?

Stephen Wilson 14:22
PJM. I heard the other day, is it 4000 pages? So when they’ve won by the length of the strike, right? So more than the length of this, right? So yeah, so these market rules. It’s not just that they’re long and complex. Last time I checked there in version 181. For the last two or three years, they’ve been changing the rules on average about every two weeks. So imagine if we change the road rules every two weeks. I don’t I don’t think there’s anyone who could honestly claim to fully understand the entirety of the rules. There’s a body that job is simply to rip view and update and change the rules. It’s big. It’s a sort of a growth industry. Yeah, so that’s the world we’re in.

Robert Bryce 15:06
Well, so as you’re saying this, Steven and we, we’ve talked about this before, offline, but it was the, what, what we been discussing we discussed was how Australia, the UK now Texas, California, they’ve fallen all in a similar kind of rut, I guess, would be the right word that this idea, oh, we’re going to have this kind of competitive market, but the consumer gets screwed that the I’ll just do a quick vignette. 20 years ago, I was writing my book on Enron, right, there’s my first book. And as I was researching it, I was one of the guys who was a former he worked for Houston natural gas before the company became he changed his name. And he just in passing said, Well, I think this whole deregulation of the electric market is bad for the consumer. And here we are now 20 years later on that it seems that this this conceit, and maybe I think that’s the right word that we can let the market decide how to govern this most critical energy network. It just isn’t working. And because as I hear you talk about this, it’s just failing because of the possibility of manipulation but also that the complexity of the system becomes so extreme that it just can’t work. Right. Is that am I am I off base here?

Stephen Wilson 16:19
A partly agree with what you what you’ve said there. Okay. Well,

Robert Bryce 16:23
tell me tell me where I’m wrong and will tell me what it because but I’m in the we’re in the same church here, right. I’m in the wrong view. What’s your Tell me? Well, I

Stephen Wilson 16:31
like your like the church analogy, because, yeah, there’s this there’s this thing, that sort of the faith in the market? Yeah, belief system. Right. And what I’ve been saying for probably, I don’t know, five or six years now is that, you know, there’s this, there’s this idea that you can just leave electricity to the market. Right? You know, the idea. You use the word conceit, and it feels like you’re channeling Hyack, with the fatal conceit, which was a was, of course, was his critique of communism or socialism. There was a sort of fatal conceit at the heart of that. And of course, what we’re talking about is like the opposite, almost almost like the opposite extreme of a, of a state owned centrally planned, you know, socialist, if you like electricity system, right? We’re talking about a supposedly laissez faire completely free market electricity system. I say, supposedly, because it really was that but yeah, so there’s this belief of the 1990s economists, which which I think in a way was a sort of an overreaction against socialism, or communism, or those ways of thinking, almost almost, it’s almost an overreaction to the opposite extreme. And the way I think of it is this idea that look, all you have to do is pass a well drafted well written Electricity Act in the in the parliament. And then you put in place underneath that act, you put in place a set of technical rules, which is this is the 1000s of pages of rules, we were just talking about, right put in place, a good set of, you know, tech, technically robust rules, and you have some, you have some sort of regulatory supervision from like a competition authority or some form of regulator, and you have an independent market system and market operator, or an ISO or a TSO in or not to in the American jargon, right? And, and then, congratulations, you know, politicians, you’ll never have to worry about electricity ever again,

Robert Bryce 18:34
because leave it to the market, because the market is going to sort it all that

Stephen Wilson 18:37
that’s the that’s the that’s the naughty, naughty sort of strong belief, this sort of a church of electricity free markets. And the thing is, no one really believes it anymore, as far as I can see. So it is still going to church, but they don’t believe it anymore. And so what went wrong? Is, is a good question. I think we should ask ourselves what went wrong along the way? And your question was implying that it was always doomed to fail. I’m not sure that that’s the case. The problem is that we started running this experiment in the 1990s. And then we didn’t let it run long enough like to to see if this experiment is really going to work. You’d have to let it run for longer than the life of the assets. So you need to let it run on in you need to let it run unimpeded for like at least probably 2530 years, at least. Right through a sort of a whole asset cycle. Right? And then, because the big skepticism about markets was always about, okay, so you’ll get operational efficiency in the in the sort of five minute or half hour or the five minute dispatch. But when you get investment efficiency, will you really get the right investment in the right place at the right time of the right type or not. And the skeptics always deeply doubted that Right. But nevertheless,

Robert Bryce 20:02
if I can interrupt because that’s the key issue. I mean, we see it here in ERCOT. And I just looked at their numbers so that there’s been a no new gas fired generation built in ERCOT. In 20 years, we’re have the same amount of thermal generation in the ERCOT system, as we did 20 years ago. Meanwhile, because of these massive subsidies for wind and solar, the the amount of wind and solar on the ERCOT grid will exceed by the end of next year will exceed the amount of gas fired generation. So yeah, okay, so, but bankers won’t lend on new gas fired generation, because they can’t be sure that they’ll make any money. So I’m just following up on because I think that’s a that’s a good example of what you’re talking about.

Stephen Wilson 20:44
Yeah, these are, these are great questions. And if I can just sort of take that apart, I think there’s, there’s several issues there. So one is the bankability issue, right? You know, bankers will or won’t do certain things. They want to know,

Robert Bryce 20:57
they want to be paid back. They’re so selfish,

Stephen Wilson 21:00
like, I like a certain, like a certain amount of certainty, right? Yes. Understandably. And then the other issue, you’ve mentioned, gas fired generation, you mentioned renewables. And you mentioned, the amount of each that’s been built, you know, almost all renewables and basically no gas. And you can see similar patterns in Australia and other places. Now, that the question of what, what type of generation is the investment going into? That’s an interesting and important question. But in and of itself, you can’t just look at a system and say, Oh, they’re only building this one time, therefore, there must be a problem. Because if you’re looking historically, at most power systems, what you’ll see is that at any given moment, and by moment, I mean, like an entire decade, or maybe two decades, at any given moment, you’ll find they’ll tap this system will tend to be investing in just one kind of generation. Like there’ll be this big surge of investment in hydro, like this, that the snow at the original snowy scheme in Australia, you know, sort of they started building I think, in 1947. And they finished that in 1974. So there’s like a big sort of surge of hydro capacity coming on sort of in one big period of time. And then you see other periods of time where it’s all coal, or, or like in France in the 70s. It’s like all nuclear, or like the dash for gas in the UK. It’s like all gas. So what we’ve what we’ve been in what you’ve been in Texas, we’ve been in the same thing in here in Australia for the last about a decade, plus, sort of since about 2010, Nish? 20 1011 ish, right? We’re just been building wind and solar. That’s it, basically. Right. And, and so what what I would, I would say is, that’s just the typical pattern in any electricity system, that at this moment in time, there’s this sweet spot, where that’s the thing that made sense. Like when you sort of compare it all that that’s, so that’s where the money goes, right? And the mistake people are making is they’re saying, oh, okay, so we’ve found this sort of magic forever solution. And all we’ll ever build forever now is wind and solar and a bit of storage. And, you know, all you need to do is have a bit of historical context. And you say, well, that’s probably not true. You know, it’s going to, it’s going to saturate, it’s going to reach its limit, right. And I think what we’re seeing in the market with the price volatility that we’re seeing, so apart from your issue, you’re raising about price level, which is a real problem at the moment, right. There’s also an underlying problem of price volatility, which has been observable in our market for at least half a decade. And you can see very clearly, that extreme volatility is driven by wind and solar volatility. And it links back to your point about the bankers, which is that the price no one can produce a price forecast at this market. This is a quote directly from one of the most experienced bankers. We talked to five years ago when we interviewed all of them about about these related issues. So you can’t you can’t bank a power plant on the basis of a spot price forecast in Australia.

Robert Bryce 24:03
Because there’s no there’s no, there’s no certainty on or visibility into the capacity factor for the plant. And therefore what whether that money that limited that loan will be paid back. Is that Is that what you’re going

Stephen Wilson 24:18
to mentally, fundamentally that That’s right, and that the price is the price formation mechanism is it’s not working the way it was designed and intended to work under the original market design, right? So it’s designed to signal the marginal price and when the market gets tight to signal scarcity and encourage new investment, but we’re in a when you build a system that’s got a very high, a high to very high share of wind and solar. The price mechanism starts signaling scarcity and abundance, but on a wildly volatile five minute basis.

Robert Bryce 24:58
Well, it’s interesting I Follow you now that that’s interesting, because one of the things I’ve published on this recently was that you can see it in the ERCOT data that as demand has been peeking here, it’s been very hot in Texas, as you’ve probably heard, you know, gets hot in Australia as well, but very hot this summer. And when on these hot days, the wind almost goes, in some cases, almost zero as the system starts to peak. So it and we see it in Europe where power prices are fluctuating based on how much the wind is blowing. So we’ve got this incredible system, you know, development where the entire marketplace is dependent on the weather, which to me is well wait a minute, we’re facing more extreme weather due to climate change. Why the hell are we making our most important network depend on the weather? Am I misunderstanding this? Steven? I don’t think this is complexes Yeah.

Stephen Wilson 25:49
Yeah, the kids. Yeah, that, that that’s a that’s a fundamental part of the problem. And the fatal conceit that you alluded to earlier, that you can leave everything to the market is that you can distill, you can distill all this complexity into a very simple price signal. But the problem is, if you engineer a system that’s that’s dominated by weather dependent renewable energy, you end up with a system where nothing and no one has the power, if you will, the authority in control control language, right? The control authorities lacking so there’s this screaming loud price signal coming out. And there’s nothing and no one with the authority with the physical, the machinery that’s got the capability to respond to that price signal. And so that’s why that’s why I’ve been saying for years now, we are testing this market to destruction. And you know, what happens if you go into the lab and do a destructive testing program? You know, by definition, you keep testing till you destroy it? That’s what we’re doing.

Robert Bryce 26:58
And consumers are going to pay the bill.

Stephen Wilson 27:01
Oh, yeah. There’s no one else is it?

Robert Bryce 27:05
Well, I was interested to in your thoughts, because it hadn’t occurred to me that this is this reaction against the monopoly utility system, right. That was the, you know, this idea of particularly in the US, I think about well, we we trust markets, but you talked about that idea about the faith in the market. What did you say the Yeah, the faith in the market was a reaction to socialism and the end of communism that now we’re going to show we’re going to, I thought that’s fascinating, because I was looking at that, that famous Lenin quote, which was something like communism is solely the ideology and plus electrification or something like that. Right, that this was right. But But Lenin understood that that that electrification was key to the strength of the nation is the way I read that that speech that he gave, right, but But I guess the here’s my question, the point that I hear you getting to, or maybe the point that I think we’re coming to together is, the system just doesn’t have accountability, that at the end of the day, there’s no the buck doesn’t stop anywhere, that there’s no, there’s no backstop, there’s no one who ultimately is responsible to make sure the damn thing works. Is that is that is that is that

Stephen Wilson 28:17
that is? That is one of the problems that and so part of the part of the sort of over faithfulness in Adam Smith, if you like, when it comes to electricity markets, is the idea that you don’t need to worry about security of supply. And, you know, security supply and reliability will largely take care of themselves as a byproduct of these market forces and the the, the incentive that that investors have, and so on. So that is an issue. And I think we’re discovering that in a few places, including Australia at the moment. Well, then,

Robert Bryce 28:56
as I recall, you said that renewables neither in renewables nor nuclear can work in will function. Well, in these D. We’re calling them deregulated markets, but I don’t I don’t even know that that’s where you call them competitive markets. But am I recalling that correctly? Did you say it that way? Or what would it get to the nuclear part of this? What what effect in this these attempts to have competitive market? Can? Are they just ultimately doomed to fail? And how to and how does the fuel how do they affect the fuel mix?

Stephen Wilson 29:30
Yeah, I think definitely renewable energy doesn’t really fit within the competitive market. So I think that this is related to what we were talking about earlier that you know, the investment cycle, the sort of long multi decadal investment cycles, so it was almost like no sooner had we implemented these markets based on this very strong faith in in the role that economic forces can play. We just leave it to the lever to the market belief view. No sooner and we’ve done that and we started violating our own fate, let’s say, by subsidizing renewable energy into the system. Right, right, right? Well, if you can leave it to the market, then you shouldn’t be subsidizing things. And if you’re subsidizing things you shouldn’t be leaving to the market. So I think there’s a deep, deep incompatibility between between renewables and markets. And I think it’s revealed in the in the decision to subsidize and in Australia, we do that in a very tricky way where we, we hide this subsidy in a way that ordinary people can’t really see that there’s a subsidy going on by the subsidies are huge.

Robert Bryce 30:39
So how is it hidden, Stephen? How is subsidy hidden?

Stephen Wilson 30:45
So the Renewable Energy Target creates, creates a marketing pieces of paper and and the need the need the legal obligation to buy those certificates, those pieces of paper creates a whole lot of complex cross subsidies, between between, you know, the haves and the have nots, if you will,

Robert Bryce 31:02
on the generation on the generation side. Well, I mean,

Stephen Wilson 31:05
you know, those those who have rooftop solar and and those who invest in wind and solar farms, yeah. Right. But you said so it’s it’s all it’s, it’s the subsidies are sort of flowing internal to the to the electricity system. It’s not like someone’s sitting in the government writing checks to subsidize things. There’s a little bit of that, but that’s not the main game.

Robert Bryce 31:26
I see. Where’s your Where’s us? Those tax credits are coming from the federal government largely, and that that those are, those are the incentives that are queering the market in terms of the the investment because the wind and solar providers, the wind and solar project developers, they’re after those federal tax credits, and they’re not responsible for liability or anything else. Yeah.

Stephen Wilson 31:50
So that the financial pipe, the channel that it happens through in the US is the tax system. Warren Buffett said that, you know, we only do that we only build these wind farms. So the production tax credits, that’s the only reason we

Robert Bryce 32:02
do it. Oh, yes, I’m well familiar. Yes, but they, but it’s a

Stephen Wilson 32:05
production tax credits, so you only get it if you’re producing. So if you produce a megawatt hour, you generate a megawatt hour of electricity from your wind farm or your solar farm, then you collect the credit. And so at that level, the mechanism is the same as in Australia, it’s only if you’re generating it’s only if your wind farm generates the megawatt hour that it gets the certificate. Right. So yeah, that’s a strong similarity. And that drives by the way, that drives some pretty interesting bidding behavior. Because it turns out when you work, the logic through turns out that the logical bid for those assets is actually right at the bottom, it’s at the minus 1000 level, in order to ensure they get dispatch, so if there’s a constraint anywhere, you don’t want to be the guy who bid 999, and the guy next door bid 1000, and you got constrained off, right. So they all as a herd go and bid the floor price. But then they hope like crazy that someone else elsewhere in the system is setting a much higher price and hopefully a positive number. If the market starts clearing at minus 1000, then they all start trying to withdraw those bids. It’s very unstable. Yeah. So

Robert Bryce 33:14
how do you solve this, Stephen? I mean, it just seems like a complete and utter mess. And it’s being exacerbated by these fluctuating fuel prices. You mentioned coal price, I’ll just interject that the Newcastle marker, which is the for thermal coal out of the Newcastle port in Australia, then check it today. But it’s been around $370, it was $50 at the beginning of 2020. So we’ve seen nearly eight fold increase, which is just enormous. And

Stephen Wilson 33:44
yeah, so those price, those kinds of coal prices are a reflection of the short global market that’s been triggered by the Russia Ukraine war, right. So the, you know, the over the high dependence of Europe on Russian gas, well, Russia is a big gas producer, and it’s also a, you know, a non trivial coal producer. Right. And, and the, you know, the West is basically trying to, in very, very short order, stop using Russian gas. And then Russia is also playing a slight game of withholding as well. And that’s that’s the that’s the fundamental thing that’s driven gas prices to these astronomical levels. And then of course, you get a lot of coal to sorry, gas to coal switching the opposite of what people usually talk about. So which puts pressure on the coal market, and you know, the coal market is configured in a way that it doesn’t have huge amounts of spare capacity just sitting around. So, you know, the International seaborne traded coal price goes to extreme where these are extreme levels you know, when thermal coal goes above metallurgical coal, which is a tragedy, because people stopped putting the good steelmaking coal in the, in the boilers to generate power. You know, the markets are extremely tight and at these kind of levels, just astronomically tight Uh, some some of our Australian coal generation has exposure to internationally traded coal prices, but a lot of it a lot of it’s actually not really exposed to those prices. It’s just it’s just on a mind mouth. So all the lignite plants in Victoria are online now supply not exposed to those prices. And there’s all

Robert Bryce 35:19
right, so their mind mouse. So the the utility generator owns the mind. So they’re not they’re not affected by these Yeah,

Stephen Wilson 35:24
yeah, that’s right, I gotcha. It’s a captive supplier at a very low cost. And some of the black coal, the power plants using black hole are also on mine mount supplied, it’s not exposed to export prices. But there is some exposure to the, to those prices in some parts of the system.

Robert Bryce 35:41
Well, and one of the things that I thought was interesting about Australia, and I’ve been there twice and loved it, it’s just an amazing country, and the people are all incredibly friendly. It’s just it’s like a well, but your internal gas market is very constrained. And as I recall, when I was there, there was even talk about bringing LNG into Sydney because you couldn’t get enough pipe capacity to provide enough gas in different parts of the eastern coast of Australia. Is that the difficulty of building gas pipelines? Why is that?

Stephen Wilson 36:10
It’s, it’s the its size and scale and distance. You know, I spent, I spent eight years in London, a lot of time working on European gas. And, you know, they have serious like, in America, you’ve got a big gas system. And in Europe, they’ve got, there’s places where you’ve got 1056 inch pipes running from from Russia, towards Europe, right? It’s just just enormous. And, you know, we’ve got, you know, big long pipes from gas fields to cities that are, you know, 24 inches or something 124 inch pipe, this kind of thing. It’s just so relative to the American system and the European system, the Australian pipeline gas system was like this tiny little toy, right? It’s very small. It’s long and skinny. And then and the West Coast is completely separate from the East Coast, there’s no pipeline into connection because you know, you’ve got a vast continent across 1000s of kilometers, you know, you’re really going to build a skinny little pipe across the edge, just you do the numbers doesn’t make sense. Sure. So on, on on the economics, you know, you would, you would probably would pull LNG from one side to the other. But there’s, you know, with with trading and other mechanisms, there’s probably smarter ways of doing it than that. Yeah. So you’ve got this, you’ve got this small, relatively small physical pipeline gas system in eastern Australia that used to be completely isolated, not just from the Western Australian export market, but from the whole world. And then, when the Queensland coal seam gas was developed, and the LNG terminals on Curtis Island, just beside Gladsome were developed, we then became connected with the Asian LNG market. And then with Okay, so So then we’re exposed to like Tokyo Bay netback. Pricing. In other words, what’s the price in in Tokyo minus the shipping cost and the liquefaction cost? That should be in theory, the price in Australia? And that’s what the that’s what the when the competition regulator thinks there’s problems, that’s what they look at, right? It’s like, are you charging your domestic customers more than the Japanese price minus shipping and liquefaction? Why is that? That’s the kind of question that competition guy will ask the big gas companies. But the but it’s more complicated than that. Because of course, the LNG customers in Asia have written long term contracts for their guests. They’ve written a 20 or 25 year contract probably linked to the price of crude oil, right? Whereas the domestic industrial customers, they’re not writing 20 and 25 year contracts, they’ll be nervous to write a five year contract. To get the big gas companies tell these gospel, you can’t expect you know, you’re not you’re not signing a long term contract, how can you expect the same sort of price terms? Sure. And then people say, well, but you know, we’re Australian, and this is our gas. And you know, you should make sure we have enough.

Robert Bryce 38:53
Right? And after they stopped laughing, they say, yeah, yeah, that’s funny. Well, so let me you worked at Rio Tinto and we’re very familiar with the global coal markets. And we talked a little bit about that price. But I’ve written about the surge in demand for coal in China and India together increase of 700 million tons. I forget which one is it? 300 million increase the others 400 million. These are just massive numbers. And I’ll ask the question this way. Why is colbyn Such a durable fuel? I mean, here we are 140 years after Edison used it on Pearl Street, and yet, it still accounted for 36 38% of global electricity generation. Why?

Stephen Wilson 39:38
Well, it’s cheap gigajoules. You know, $100 per ton, high quality calls, like four bucks a giga Joule or something. Yeah, it’s cheap energy. There’s no quick

Robert Bryce 39:48
scan of giga Joule just for Americans. That’s roughly equal to a million Btus. So I was looking at looking at Henry Hub today, prices was $8.70 or something like that. So Yeah, you’re saying $100 per tonne for thermal coal out of Newcastle at high quality wood equally for $4 per MMBtu. Like that.

Stephen Wilson 40:09
It’s that kind of design. Yeah, that’s right. So, yeah, so it’s cheap energy and lucky in China, it’s what they’ve got. Right? You know, security. So if you’ve got a fuel right there under your feet, you’re not having to import it, you know, risk of blockades or, you know, any other issues, you know, sanctuary fluctuations, whatever. Yeah, it’s, you’ve got it, it’s there, it’s under your feet use as a miner. That’s, that’s security of supply, right. So it takes the it takes the economic box, and it takes the security of supply box. And in the old days, if you could just scrub up the emissions, you know, get rid of any sulfur emissions SOX and NOx and those things which which you can do with technology, then you you, you can be happy about the environment. But of course, the problem now is co2 is very difficult to, to deal with charcoal. So to get to get to sort of Red Cross in the in the environment box, but a nice green tick in the in the cost and the security of supply boxes. Right. So that’s basically why that we use a lot of, well, why China and India and Australia and they use a lot of coal.

Robert Bryce 41:16
So is that going to end anytime soon? I mean, you you did a forecasting with Rio Tinto, you you’ve been looking at this for a while is this? It seems that well, let me ask it this way. The inflection is the Russia invasion of Ukraine an inflection point in how these hydrocarbons are seen and how the energy security security of supply dynamics change? How enduring is this going to be? Can you can you speak to that? You’ve got to get you got to Ukraine flag on your deathbed, back there behind you, which is one of the other reasons why I think this is germane.

Stephen Wilson 41:52
I, I was given that Ukrainian flag by a professor colleague of mine, who’s Ukrainian it, you and I, I do like to keep it there and remind myself every day what the Ukrainians are doing, you know, for all of us, actually. But yeah, so it coal is it’s very, very hot, it’s much harder than people appreciate to get coal out of the global mix. It’s, you know, because of it’s because of its characteristics, because of the attractiveness of coal to the people that are using coal. And because of the, you know, relative attractiveness of the alternatives, you know, the alternatives tend to be more expensive, the alternatives tend to reduce your security of supply, or make it even more expensive in order to mean in order to achieve the same security of supply. Without coal in China, and without coal in India. It’s even more, you know, makes life even more expensive. Right. So those that that’s just this is just the reality. And when we, when we looked at this, you know, a decade ago, we did some pretty serious scenario work, and some pretty rigorous modeling work around that, that was one of the findings that just was really clear in the results is just how hard it is to get coal out of the system.

Robert Bryce 43:18
And it’s not, so it’s going to stick around for a while.

Stephen Wilson 43:21
I think so. I mean, it’s, you know, people might like it. But, you know, that’s, that’s the most realistic view of the future, I have to say, you know, you do the numbers, you know, I gave it a talk. Gosh, it must be. It’s about a decade ago, I think it was 2013, at the Australian Institute of Energy Conference in Sydney, just sort of explaining the China energy system to people. And the, and the amount of the amount of investment even back then was clear that they were putting into nuclear, you know, huge, huge industrial development program. You know, Nash came from sovereign capability, technology designs, you know, plants, you know, they just did building a really big nuclear program, no question about it. very steady, very patient. And, you know, with visions, there was an official one said, you know, we might have 500 gigawatts by 2050. You know, I don’t think there’ll be at that level, but, you know, it’s, it’s going to be big China will have the largest nuclear fleet, it will overtake France, and it will overtake the US will have the largest nuclear fleet in the world. And I said to people, so you might be thinking, wow, it’ll be like some kind of Asian version of France, you know, 70% nuclear? No, just to get China to this is what I was saying in 2013. You know, just to get to like 15% nuclear, it’s really hard work. Right? It’s just the

Robert Bryce 44:48
scale of the scale of the country is so large this Sure. Well, so let’s talk about nuclear because I read through your your December report. And it was that you that was published by UQ University of Queensland and that was the caption on it was what would be required for nuclear energy plants to be operating in Australia from the 2030s. And you wrote that the country needs to commence a national public private program of work as outlined, define the roles the Australian Government will play. And then you concluded a natural next step is for the government to sponsor a scoping study on deployment and then infrastructure for suitable for SMRs. Wasted issues you’ve got, you still have to overcome some bands on nuclear that are internal to the different states in Australia. Is is nuclear going to make headway? Now? I think we’ve seen the beginnings of a renaissance here in the US. And we’ve seen it especially after Russia’s invasion of Ukraine, Poland, Romania, the UK announcing ambitious ideas. Is it going to is this an inflection point? Is Australia going to finally get on the nuclear I hate to say bandwagon but but make progress on nuclear now? Do you think?

Stephen Wilson 46:05
Yeah, I’m going to be cheeky and rephrase your question. Are we going to get serious? And I think the answer is we are. The other polling, Robert shows that more slightly more than half of the population already is in favor of nuclear energy. All the only thing I said in that report was that the minimum we need to do which we must do is we must, we must seriously consider this. And we must start preparing real options. Like not sit around having a theoretic academic debate, but actually do the preparatory work. So that when we get to say 2030, the late 2020s 2030, we’ve got a real option that we can actually deploy if we so choose, as a nation, collectively, it’s a collective decision. Right? It’s no point having an academic discussion. And it’s not just state government bands, there’s there is a there are bands in federal legislation that will need to be removed. But the way that the way that our study sponsor, Mr. Barry Murphy, a UK alumnus, former CEO of of, of Caltex, Asia Pacific, by the way, he understands, you know, the role that nuclear can play, and probably should play in the Australian energy system, and we need to do that preparatory work, it’s not just remove the bands and will magically have, you know, nuclear power plants popping up. You know, that’s the least of it. I was on an expert panel in Adelaide last weekend, and I said when we remove the band and be just like removing a splinter at the end of a long day’s hike, you know, there’s there’s a lot of hard work ahead. And that’s just one small part of it. But yeah, I think

Robert Bryce 47:46
but you do have bands, you have bands in in the states of Victoria, New South Wales, Queensland and the Commonwealth, right, which is where Canberra is, right? So. And then you said the first three major tasks are detailed review of existing legislation, institutions, analysis of gaps and regulatory capacity, and work on repealing the bands. But it seems like this was, I won’t say no brainer, but this would be an obvious choice for Australia, given huge uranium resources, you’ve got a strong and stable government, you have the the intellectual capital and universities that can help support the development of the mental and intellectual infrastructure that you’re going to need right to make all this happen. But I want to say, well, let’s damn well get on with it. Right. You know, this is, this seems like the obvious thing, regardless of whether you co2 Is your first second or third priority. This is I think, the obvious way to go if we’re serious about long term stable electricity prices, but let’s go back to how would nuclear work in the this I’m going to say mess of a revenue electricity market system that you set up couldn’t work in that kind of system without a strong hand of government?

Stephen Wilson 49:01
It nuclear can’t work in this kind of market mess that we’ve got.

Robert Bryce 49:06
Right? Cannot cannot work? I don’t think

Stephen Wilson 49:09
so. No. And and, and when you talk to the when you talk to the Renewable Energy totalitarians, right, so if if you’re a person who says we need 100% wind and 100% Solar then congratulations, by definition. You’re a totalitarian. Okay. You’re saying the totality, the totality the entity should come from the wind of this app? Right, right. If you talk to the wind and the solar totalitarians, you know, and you and you say, What about nuclear guys? And they, they don’t eat literally say this, but the feeling you get is they go, no, no, no, no, we’ve got nothing you can do. And then it’s like, oh, yeah, we’ve got this market that makes it impossible for nuclear power plants. Yeah, too bad. Right. Yeah. And, and yeah, and with that, you know, get used to the blackouts, you know, get used to the astronomically high prices, and wait for the political backlash guys, you know, that’s the world we’re in, Robert.

Robert Bryce 50:03
So what’s the what’s the way forward, then? I mean, you outlined these potential steps, but the public acceptance is going to be one of the first jobs. Right, you. And I think there has been all around the world a and I think I can see it here in the US, the polling has changed, that there is much more public acceptance around nuclear is. So is it going to? Well, walk me through those, you’ve listed a whole bunch of things, but you know, give me items one, two, and three, then?

Stephen Wilson 50:35
Well, it’s a dual reform process. So we whether we like it or not, I think we are facing another big reform of the electricity market. The subsidization of wind and solar has destroyed the 1990s pure market theory, right? It hasn’t completely destroyed it yet. But it’s, it’s well on the way and it will completely destroy it, become it. So that part of the conceit of the economist is this idea that you could, that you could create a market for renewables, and it’d be compatible with the market for electrons. And it’s, it’s not, so that there’s got to be a program of reform happen there anyway, whatever we do. And then if you if we really want, if we’re serious, and we really want to decarbonize our electricity system, we need to understand that the system’s just not going to work as a decarbonized system, if it doesn’t have the right amount of nuclear in the mix. Right. I don’t think it’s going to work. Technically, it’s definitely not going to work economically. And I don’t think it’s going to work politically. You know, people just won’t accept low reliability and astronomically high prices. Why would they? Right? I mean, the middle class will be okay. Right. You know, the middle class will go and buy diesel backup generators. Yep.

Robert Bryce 51:52
Which is what we’re seeing here and well, there. It’s natural gas, generally fired generators. But I just wrote a piece on what’s good for Generac is bad for America, which they’re the big three quarters of the state home standby generators, but their sales are booming. I mean, absolutely booming. Yeah.

Stephen Wilson 52:07
And I think we’ll see the same here. I’ve actually it’s on my list from it. For your own home for your personal we had the like, Yeah, we had the electricity and yesterday installing a fan or something. And I said, I want to, can you give me a quote to install the backup generator?

Robert Bryce 52:20
And what is that going to be roughly? How do you How much do you think it’ll cost you?

Stephen Wilson 52:23
They’re not that expensive. But But I think you know, a bit of get on it. Now that I’m saying it on your podcast, is I reckon we’ll get to this situation. There’ll be none left in the shops.

Robert Bryce 52:35
But here in the US, I’m, you know, a friend of mine in Houston, she’s buying a 20 kilowatt system, it’s going to be 12,000. American, right? That’s a lot of dollars.

Stephen Wilson 52:44
Yeah, if you want to go if you want to, if you want a system that can run a big American house, and it’s going to be big and expensive. If you want something that can just keep the fridge cold and make sure that food doesn’t go off in in a 24 or 48 hour blackout, then it’s you know that that’s probably closer to $1,000. Right? Yeah. Okay. Depends what you want. Yeah. Fair enough.

Robert Bryce 53:05
A couple of quick things. So I’ve been to UQ. I think, you know, Chris Greig, who’s worked there. And he invited me I gave a presentation there back in 2016. And I came across this paper by Simon Bartlett, who you may know, and he wrote this rather remarkable, very short paper called the pressure cooker effect of intermittent renewable generation in power systems. And it just seems that this has a I mean, it’s so short, and so kind of to the point that it’s remarkable, but it brings to mind a comment that there was a guy named Ben Foulke, who is now the outgoing CEO or the former CEO of Xcel Energy, which is a big utility here in the US. And he testified before the Senate. He said as you add more renewables prices go up and affordability goes down. I mean, and they’re investing hugely in renewables. But Bartlett’s things is his, he says this in this pressure cooker paper, he says the scale up of intermittent renewables not only diminishes the robustness of a particular power system, but can also magnify the short and long term risk of investing in non renewable generation assets and the power grid itself. I mean, what a robust sentence that is, I mean, there’s just so much that it’s describing about the dynamics and things we’ve just been talking about here. Is Bartlett still publishing on these issues?

Stephen Wilson 54:27
Don’t know where that Simon’s publishing? You know, he’ll still be saying the same thing it was what year was that? Can you remember what 2016 2016 Yeah, yeah. So any any experience power system engineer, you know, with a sprinkling of gray hair and it worth his salt will will tell you the same thing. So what I find is that, you know, the more experience people have when I say these things, the more they agree and tell me I’m not, you know, there’s also this and this and you didn’t mention that it’s like yeah, Yeah, it’s this is this is the issue. And we’re seeing it in, in the research that I’m involved with, on lots of different topic areas. We’re seeing this problem, this same problem being becoming very, very clear in the research findings from all sorts of different perspectives.

Robert Bryce 55:18
Well, and also in different in different geographies, as we’ve been talking about in the in the UK, in Australia, in Texas in California, that the results are the same. And as you add more renewables, the affordability goes down. reliability problems increase. And I think it takes the the thing that I think renewables have is that they have won this very positive kind of political, you know, press right that the, you know, a lot of people just liked the idea of wind and solar, right. That’s just the case.

Stephen Wilson 55:53
I call it the romantic poetry of renewable energy,

Robert Bryce 55:57
the romantic poetry of like.

Stephen Wilson 56:02
That’s why I love it. That’s why I fell in love with renewable energy when I was 15. Right. I was totally, I mean, I was so in love with it. I didn’t like anything with moving parts, either. You know, like, if there was a moving part, it could break down. I didn’t like that. So I liked the passive solar home. I like the Trump wall and all these things. I find them to be so beautiful and so wonderful and so elegant. Thermal

Robert Bryce 56:27
thermal mass, right, that was the Lovering get a bunch of Denton tires and put those in your house. And then you’ll have this big thermal bank that you can write. Yeah, that was? Well, I’m familiar with that. That was the 70s. Right. That was? Yeah. But you mentioned as well, you said, you mentioned Dick Smith, who’s one of the most famous businessmen in Australia, but he was recently on on television talking about these things, and that it was that he’s become well, he just blasted the Australian energy market operator saying that they were lying, that wind and solar are cheaper than coal. And he said, because of that lie, and it’s a lie, we’re going to delay moving to nuclear. So how important is that? Because, you know, I think about public perception public, you know, who goes on TV, right. But in the US for a long period, there was a guy named T. Boone Pickens who was from Oklahoma and Ville, Oklahoma, and he would be on TV, and he would kind of talk about the oil and gas industry and being in a very robust way, and he was an advocate. But we don’t have in the United States still, I think anyone who’s identifiable as the leading voice for nuclear, particularly someone from industry. So how important is it someone like Dick Smith, who is one of your most recognizable businessmen to be speaking so publicly about this, you know, in a way that’s irreverent toward, you know, calling out a mo and zany while you’re there, bunch of liars? How important is that?

Stephen Wilson 57:55
Yeah, I think it’s very important. I mean, deck is a dig as sort of an entrepreneur and an adventurer, and a businessman. You know, he’s, I think it was the first person to fly solo around the world in a helicopter, and he’s done, you know, five, aerial circumnavigations. And he’s done all sorts of interesting things. And he’s a, he’s a serious environmentalist. He, he found an Australian Geographic Magazine, he supported the protest against the Franklin dam in Tasmania. You know, he’s, you know, really, he’s a he’s a, he’s a boy scout. He’s a rover Scout, you know, he’s, he’s been out in the bush in the environment and loves the environment all his life.

Robert Bryce 58:35
And he’s lost fortune, mainly in retail. Did he not is that really had an electron?

Stephen Wilson 58:39
Yeah. So in the, in the early days of electronics, when, you know, home hobbyist electronics, and all that sort of thing was big, he made money there. And he and also, I think, with car radios, you know, cars didn’t used to buy a car, the standard car didn’t have a radio, he used to provide car radios and sound systems. Right? Yeah. So he’s got sort of been in all those, all those sorts of areas, and everyone in Australia recognizes it. And for a long time, he’s been of the view very long time that nuclear energy, you know, is good technology, and it has a place in our energy systems. And so I think, you know, people who are, you know, respected and recognized, saying these things is actually quite important.

Robert Bryce 59:22
So, let’s talk about mining, excuse me, when we’re generally in Australia. There’s a lot of talk about transition metals. And I’m, I’ve been writing a lecture about it. I haven’t written much about it yet. But this idea of the energy transition, and I look around and I look at the numbers and I said, What energy transition I don’t see any evidence that there’s an energy transition Bucha takes us back to the coal, coal business. But mining is a huge industry in in Australia. How is the country a capable of producing the the quantities of copper rare earth elements, the other things that We’re going that will be needed cobalt, other minerals that are going to be needed at scale to get to, to support a significant move toward more alternative energy. What? Where’s Australia in that in that regard these days?

Stephen Wilson 1:00:16
Yeah, so what the mining industry is huge, yes, it’s the single biggest source of export income for the country. It’s very, very important to the country. And the mining sector here is, you know, technologically advanced and sophisticated and all those things. Definitely, if you’re going to go, if you’re going to go away from, you know, mining hydrocarbons to using renewables, you just need to learn other things. And you need to mined huge amounts of those sorts of materials that you mentioned. So in a, in a kind of scenario where the world goes really big time in that direction. I think the general view is Australia would prosper, were blessed with an abundance of lots of different minerals. And we would probably prosper from that would whether whether the, you know, the income that we would earn from all those little things would outweigh the loss of coal and gas exports is an interesting question. Not not sure about that. But yeah, can Australia supply the whole world’s needs for those minerals? I don’t think so. But, you know, we would we’d be part of the game, would we be as a probably the key question would be, would we be as well off, would depend on the margin, you know, the price versus the cost for Australian production, that you see the reason one of the reasons were so well off here, Robert, is because the natural resource rent, in the big commodities we export is very large. So the cost of mining iron ore in the Pilbara is very low. And the international price is very high. Mostly, which is most of which is driven by Chinese demand, right? It’s not quite as extreme in the case of coal and gas, but you know, the margins are still suitably attractive. So could we come on those same sort of margins on all those other commodities collectively to make up I think, is an open question depends on a lot of complexity,

Robert Bryce 1:02:21
when you’d have the issue of processing right, and China dominates processing, for rarer, the lanthanides, and so on. So you would have to move further, you have to be a lot of investment in the downstream, right, if you’re going to capture a lot of that value. No.

Stephen Wilson 1:02:34
So this is a very important point you raise here, and it relates to some of our earlier conversation today, which is that so the processing is is energy intensive. But the other thing to keep in mind is that traditionally, the Australian mining sector, the big mining companies have not tended to like the idea of being forced by the government to do processing onshore here in Australia, they, they prefer to, you know, focus on exporting the raw commodity where the margins are high. And then, so a lot of the processing happens offshore. So that’s why all the iron ore that goes to China, it’s transformed to steel in China. So there’s a large we make, we make a lot of money on the raw material, but the steel mills in China struggle to all compete with each other and make very small margins. And then when you and then when you come to critical which which, which is one of the sources of tension in the in the relationship between Australia and China. And then when you come to critical minerals, you’ve as you rightly said, the processing for those is both it’s both energy intensive and sort of toxic and challenging for the environment. And, and the processing of those minerals has become to be heavily concentrated in China. Now people are starting to think well hang on a minute. These minerals are critical, not just for the energy transition, but things like military applications, right. And so there’s a move to sort of reassure onshore or ratio, some of that processing in places like Australia. But we’re just at the start of that, of that journey. You know, we’re like barely out of the talking about it phase of that journey.

Robert Bryce 1:04:06
Yeah. Well, I think the I don’t think it is clear the US is in the same situation. I mean, there’s a lot of talk about this, but the Department of Energy put out a report in a very good one earlier this year, I believe it was something like 92% of the neodymium iron boron magnets, which are the high strength magnets for both EVs and for wind turbines are produced in China, in there, and that is a very large percentage. And then, so I can see why the the producers, the miners. They don’t want to get into processing because there’s a lot of capital risks. There’s technology risk, and there’s there’s there’s there’s political risk in terms of China that whether the Chinese processors will undercut their prices. I mean, so that brings the government back into play even more when it comes to those those those technologies in those commodities. No,

Stephen Wilson 1:04:55
that’s right. That’s right. So and there’s a very strong echo in all this with our earlier conversation about electricity markets, you know, the role of government in the planning versus the leave it to the market philosophy to the leverage market philosophy and minerals has resulted in an allocation of investment in production and processing. That’s there’s been very pure driven by market forces. Right. And so that’s what, that’s why you tend to get this concentration in whichever place has got the the cost advantage to China has got these kind of strategic advantages, you know, low, low labor costs, land costs, maybe environmental requirements are probably not as strict as they are in Australia or the US. Sure, you know, low, low cost of capital, all these things combined, you know, give them an advantage. And so if the procurement officer in XYZ Company, which might be the US military, or, or it might be a wind turbine manufacturer, but if the procurement officer is just looking for the cheapest one, you know, it’s all going to end up being processed in China.

Robert Bryce 1:05:55
Right? Well, let me bounce back to the to the electricity system, then what what’s the way that you address this, then? Because we’ve identified fairly well, the problems and the fact that nuclear and renewables are bad fit for the way these markets, I would say, have been restructured rather than deregulated? I don’t know, you know, this idea that they’re somehow open markets or they’re competitive markets. Well, yeah, kind of, but so what is the what’s the proper role then was how does the government then because I can I can, I think we’re on the same page here, and that there’s a misapprehension about electricity, in my view that it’s not a commodity, it’s a service. And if you don’t understand that, then you’re just missing the point, right? This is the most important network and we can’t allow it to fail. It’s a service, yes, we sell watt hours, but really, we’re selling power, and that that power has to be there. So how does the government and what does that proper structure look like? Should we be going back to the integrated monopoly electricity system that had dominated for decades? does is that the way to go?

Stephen Wilson 1:07:01
That’s that’s the $64 billion question. That’s the that’s the overarching question of the dual reform process that I was mentioning earlier. You know, we’ve got we’re going to have to take a really hard look at how we do things in electricity. And then we’re going to, in parallel, we need to in Australia, we need to think about, you know, the role of nuclear and things like that. And those conversations will have to run in parallel. So what what’s the role? The question is, you know, what’s the role of the government? What’s the role of the private sector?

In, in this in this industry?

Right? And, and how do we, how do we ensure that we get the security of supply that that we need, and we’re getting the service, I love the way you use the word service, we’re getting the service that’s needed, at a price that’s competitive for businesses and affordable for households. And then, and then also that the environmental footprint or impact of all that is socially acceptable, right. And that and that shooting, obviously, that’s going to include the co2 discussion, but it should not be limited to co2, it should include all the other things as well, including land footprints and visual footprints and all the rest. Right. Right. It all it all has to be considered holistically. And and I think, I think it’s going to be very difficult to escape the fact that there’s a role for planning and collective decision making involving government in all of that, that you can’t just leave that whole thing to the market. I think that’s just delusionary. Yeah.

Robert Bryce 1:08:34
Yeah. It’s it’s, I think that that hits it pretty well on the head. You can’t leave the whole thing to the market. But therein lies the you know, the rub, right, that we I think Australians in this sense are similar the US Well, we, you know, we don’t like monopolies. And so we kind of reflexively against that. But my guest station break here is my friend Steven Wilson. We met in Australia some years ago. He’s an adjunct professor at the University of Queensland, you can find him at the UQ website. You can find him on LinkedIn. Eight with these disprovable with this URL N, slash energy economist. But yeah, he’s also at Cape Otway associates, consulting firm there. So Steven, we’ve been talking a while I just want a couple of last questions on this. So the on these issues, handicap the energy situation around the world. We’re in the midst, I think of what is clearly a global energy crisis, both in terms of cost and reliability of supply. Which countries are better position now than others? And who’s who’s in the worst shape who’s in the best shape? And I would limit it maybe to the OECD countries because I think if we talk about the worst situation we can obviously point to Sri Lanka or some of the other countries but who stands who has an advantage in Now as you we look at the future, given all the challenges that are we’re facing global consumers?

Stephen Wilson 1:10:09
That’s a really great question. And I’m running through country lists, in my mind, trying to think, who’s the who’s the standout? Whose position would you know? Would you rather be in? Right? And it’s not obvious that there’s any superstar country that’s getting all this stuff, right. It’s really not obvious. I think, I think a country like Australia, have, we have everything we need to do really well. But we need to get the decisions, right. You know, we’re sort of our own worst enemy in a way, we’ve got to make really smart decisions, or we’ll just end up with a worse and worse mess. But if we made the right decisions, we could be in a really, really good position. And I think the US could as well, Canada could well, probably, UK is natural advantages, probably not quite as strong in this, as you know, that they don’t have the big landmass and all the resources, but

Robert Bryce 1:11:10
they’ve got to start drilling. I mean, they just have to start and they need to start yesterday. And I don’t think there’s any other way around it. But they still haven’t repealed their fracking ban. So

Stephen Wilson 1:11:19
they’re getting they’re getting things together on the nuclear front, they’ve realized that, you know, there’s going to be a role for nuclear for, you know, really good 21st century nuclear technology, and that they are in a very strong position to play a leading role. I think that that Penny has dropped on Westman.

Robert Bryce 1:11:36
And it remains well, and Rolls Royce is talking a big game, we’ll see if they can make it happen. So the last two questions, Stephen, because we’ve been talking now for more than an hour, and I don’t want to keep you. So what are you reading? What are the books that are on your top of your shelf? Or on the top of your desk? There? What What has your captured your attention in books?

Stephen Wilson 1:11:57
Oh, there’s one that really grabbed my attention recently, which is called the cloud Revolution by Mark P mills. I think anyone with a vague interest in energy or technology or the economy or the future that 21st century investing should read that book. There’s quite a bit about energy in there. And there’s some good quirky trilemma type thinking in there as well. How the world really works by smell, I’ve started reading that, right. I realized that I was I was channeling him without without realizing it back in February in my speech to the four societies. I asked the audience a question, you know, which is more important, your brain or your heart as a just as a thought? provoker. And then he uses exactly that analogy, I think in chapter four or something in that book.

Robert Bryce 1:12:47
Smell it smells amazing. I mean, incredible smart. Yeah. incredibly prolific and grumpy

Stephen Wilson 1:12:53
as well. He’s, yeah, the grumpy old man club. Yeah. Yeah, he emails quite a few things. But the importance of system thinking is what comes through there. Yeah. Look up a guy called Russ a cough, a C, K, O double f, I think it is. I think he’s no longer with us. But there’s a there’s a video on YouTube of, of him giving a talk or a 15 minute talk in a conference. I think that the YouTube tag might be if if, if Ross, a cop gave a TED talk or something like that, he explains in very clear terms, the importance of system thinking. And he’s not talking about power systems he’s using, he’s looking at a different industry. He’s actually looking at the automotive industry. But his explanation of the importance of systems thinking is totally irrelevant to everything we’ve just been talking about today. So

Robert Bryce 1:13:47

Stephen Wilson 1:13:49
I think so I think I’ve got the spelling wrong. Yeah. Yeah. Well, that’s

Robert Bryce 1:13:52
interesting, because I think you’re right, that that that we’ve we’ve have to think more about the system as a system. And that that that has been lost. So last question, then Stephen, what gives you hope we’ve we’ve touched on a lot of things that are fairly well, sobering. I’ll say not not depressing. But what, as you look around, and you look at the future, what makes you hopeful?

Stephen Wilson 1:14:14
I woke up the other morning, and I, I really, you know, I’ve never been in a political party robot. And fewer and fewer Australians and members of political parties, but I woke up the other morning, and I realized, I’m a member of the common sense party. There’s a lot of you don’t worry about talking to people in high places. You just talk to ordinary people, you know, in the street and in the neighborhood and in daily life. And what you find is, these people are way ahead of the elites. Like they really get this stuff, right. My next door neighbor, bear, have you know, she’s like, in a late 80s or 90s or something like that, you know, when I told her three years ago I was going to a meeting about nuclear. She said, Oh, time to I thought, oh goodness. So there’s and then, and then you talk to the 20 somethings and the 20 Somethings, get this stuff. So, and then you talk to the tradies. You know, the electricians and these people. You know, there’s, there’s a lot of common sense out there. And I think the ordinary people are way ahead of the elites on all this stuff, to be honest. So that’s what gives me hug.

Robert Bryce 1:15:26
Well, that’s a good place to stop that we’ll we’ll end we’ll do that right here. My guest has been Steven Wilson. He’s an adjunct professor at the University of Queensland you can find him on LinkedIn. He’s with Cape Otway associates. He has many hats. And we’ve had a great discussion here. Steven, thanks for being on the power hungry podcast.

Stephen Wilson 1:15:43
It’s my pleasure, Robert.

Robert Bryce 1:15:44
Thanks for inviting me. And thanks to all of you for tuning in. Tune in for the next episode. It might be as good as this one. We’ll see. See you Cheers.


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