Infrastructure – Kevin Low

Government bashing

The government tends to be an easy target for most of the problems, or the lack of solution towards them. In most cases, the lack of technical solutions tend not to be the barrier towards solving the problems. It is a matter of adoption. And people look towards the government to drive the uptake of solutions. The struggle today, in the market economy where there’s a multitude of technical solutions backed by various different economic interest, there’s some kind of gridlock towards having governments select solutions.

Historically, the popular beliefs, ideas and thoughts drive the directions of democratically elected government. Influence from businesses probably will contribute to some of that. But the options are limited (automobiles or horse carriages, internal combustion engines or electric engines, AC or DC transmission, etc.) and there are certain dimensions by which governments can justify their choices and move forward.

Today, it is less clear. Should we electrify homes completely or allow them to continue using gas, albeit having to encourage the development of renewable gases? Should the government be driving the choice of technologies used in homes or industries by enabling or making difficult the development of more biomethane for grid-injection? Or should they be encouraging full electrification not just of homes but also industries, and even heavy transport, redeveloping infrastructure to be able to deliver lots of electricity, enabling battery swapping or ultra-fast charging along highways?

What are the dimensions that the government should be optimising along, should they be taking positions to propagate certain solutions or standards? Are they in the position to make those choices? Yet some of these innovations and technological adoption can only move forward with enabling policies. The issue is that being in a standstill and not enacting any policy is in itself a choice for status quo, for the carbon-intense way of life, and dooming our system. Yet making a choice can mean excluding certain options or causing certain options to be more or less expensive than they otherwise would be, hence favouring one over another.

Taking policy positions and ultimately making some kind of technological choice implicitly is inevitable. So it is just a matter of what are the priorities.

Markets and distribution

One of the things we learnt early on in economics is that allocative efficiency which the perfect competitive market seem to move towards is efficient in terms of maximising social welfare even if distributionally it is skewed. In other words, by using the ability to pay as the final arbiter for who gets the goods and services, the society moves towards high levels of efficiency about what gets produced and who gets what goods/services without questioning whether things are really ‘fair’ or if in the first place, the ability to pay is properly distributed.

This is a problem that we seem to ignore because it is convenient to think we are already in the best of worlds. The idea of Pareto optimal is powerful – that you stop moving things around as long as you cannot make someone better off without having to make someone worse off even if the one who is slightly worse off is not much more worse than the amount of betterment you can create in another. That comparison isn’t objectively possible anyways.

But by sweeping it under the carpet, economics close itself off to a lot of interesting philosophical debate that really matters and tries to consign itself to an amoral science. Yet championing for markets is not exactly amoral, it is taking the stance that the market approach is morally superior and already deferring to the market in the work of economic justice. Michael Sandel writes and lectures extensively on this and as we ponder over how we marketize various things from infrastructure to healthcare, we can go back to consider those ideas.

Extracting surpluses

I spent many years focused on infrastructure development, particularly working on getting private sector involvement into infrastructure investments, executing the projects, operating and maintaining them for government. The advantage, as we would often tout, has a lot to do with the efficiency of getting private sector with experience to do it. At the same time, it reduces need to use direct state budget for financing such projects, and reduce the need for government to get involved in the complexities of hiring specialists, working on those technical subjects that will not support other areas of government work.

We called these infrastructure projects public-private partnerships or PPPs. It has somehow unlocked lots of private sector financing into the market and supported infrastructure investments. That is all good but it made me wonder whether marketization infrastructure is necessarily a good thing. For one, collecting fees on a piece of infrastructure in order to maintain it sounds right; and that fee will somehow have to be regulated since the private sector party would try to extract all the surplus with its monopoly position. So what should the regulator allow? Average cost pricing or marginal cost pricing? There is a ‘right answer’ in economics but in practice it is always hard to really work out what is the long run marginal cost involved. Particularly if the amount of service you render in each time period varies with demand.

And who is to prevent the monopoly from trying to extract more surpluses by pushing the regulator to allow it to charge certain prices by gaming the criteria or the measurement methodologies that the public sector develops. So the cat and mouse game starts. Is this what we expect when we try to marketize infrastructure? And should we not expect it when we do go ahead to privatise infrastructure? Eventually the tax payers have to fund both the cat and the mouse – the regulator and the monopoly or the private shareholders’ profits. Does that really make sense in terms of overall economic efficiency?

And finally, can such a set up really deal with change? Especially with the energy and climate transition. A lot of infrastructure need to build in resilience, consider the climate impacts on not just their infrastructure but also their customers and the way their demand base will be evolving, whether that is going to impact existing business models. All that is not even accounting for the decarbonisation ambitions of their customers. Meanwhile, can these all become an excuse for extracting further surpluses?

Creating a market II

For some reason most people forget that energy markets were created through a combination of business activities and government regulation. There would be a push of some kind towards energy access, electrification in the beginning of any modern country’s development. There wasn’t that much public consultation around these topics – that was simply how development takes place and everyone sort of aspired towards that. Or so we thought; but systems were built to drive countries and societies towards those directions.

Today, in the struggle to set up an orderly energy transition, policy leadership from government is more important than ever. The challenge is in determining what are political choices and what are really policy-choices that is to be determined through more rigorous research and analysis. There is always the search for market-based solutions even though we might actually have seen in history that a lot of big dislocations are resolved or handled through public sector decisions and investments.

The idea of seeking the market for solutions is a new idea. And while the market appear to have been terrific in generating a whole load of choices and new options, the fundamental innovations are still pulled together by a greater sense of mission than market competition. We probably need to mature further to appreciate this.

Creating a market

We might not realise it but governments have a huge role in creating markets. This is because markets do not spontaneously emerge out of nowhere especially in highly developed economies. One of the reasons is that markets actually requires structures, institutions and frameworks such as rules and regulation can encourage players to step forward more boldly and grow the market.

Today, in Australia, despite the multi-dimensional benefits that bioenergy brings, and synergises with the traditional economy, there’s still little recognition of the low-carbon identity of bioenergy. And it is a shame that methane produced from biological processes are still seen as not too different from natural gas that is extracted from the ground. There is no forward direction by the government to stake the space and define the standards for biogas production, upgrading into biomethane and regulations around treatment and handling of the digestate, which itself is a by-product of the process that can be made useful.

There is perhaps a clear path to create a market not just through regulatory clarity but also enforcing demand. Market for audit, market for inspections, even market for many public services are created by regulations. Sure, there’s a need and the market contributes positively to society and so regulations support that. Why can’t we do the same with clean energy? One that displaces directly the fossil fuels in our system?

Power to liquid fuels

I’m not sure if I’m yet in position to criticise McKinsey – but Mariana Mazzucato did and probably so did some media somewhere somehow that I feel sufficiently assured that I could.

The report they published last year about power-to-liquids for Sustainable Aviation Fuels is honestly trying to popularise something potentially risky and have questionable sustainability credentials. First, the process of producing green hydrogen and then recombining it with carbon dioxide only for the compound to be combusted to release that carbon dioxide sounds really strange given that we are trying to reduce carbon emissions.

Second, the idea of using industrial carbon dioxide for producing power-to-liquid fuel is misguided especially when that carbon dioxide is potentially anthropogenic emissions. By taking that and putting it into jet fuel, one is simply delaying the release of the carbon into the atmosphere by 1 cycle, not preventing it.

Third, using direct air capture carbon dioxide to produce fuel that would then release the carbon dioxide back into the atmosphere does not make that much sense from a thermodynamics perspective. So what exactly is McKinsey up to? Why do they insist that power-to-liquids are not constrained by feedstocks?

Building solar developments in sparsely populated, nonarable regions on just 1 to 2 percent of desert land would provide enough PtL fuel to decarbonize the entire aviation sector by 2030.

What about the pure water needed for the electrolysis of water to produce green hydrogen? Where is that going to come from? Where will the relevant carbon dioxide come from? How are the recommendations or “strategies” really helping to decarbonise the aviation sector? What is McKinsey trying to ‘solve’ or be strategic about when they consider power-to-liquids as a solution for decarbonising aviation? Are they just trying to diversify their positions to take so that they can gain more business from more people? Where is their conviction?

Biofuels vs E-fuels

I wrote about the conversation I had around biofuels and e-fuels that are produced through power-to-fuel approaches. They have rather different chemical pathways, costs and constraints. I’d really like to see someone consider the resource intensity of these different approaches. The challenge for most studies is that they consider biofuels from a standpoint of resource potential as though the agriculture activities are inert. Of course there’s the whole question of whether land should be used for cultivation of food or energy. I won’t get into that.

But I’d be curious to see if people who can organise the supply chain across the land, the supply of food alongside the supply of feedstock towards the bioenergy plants had done their analysis on resource intensity. A good comparison of the resource intensity from the water-intensity, output logistics standpoint would be really good. It doesn’t have to be a full-fledged lifecycle assessment – back of envelope calculation would be helpful.

There is a view that bioresources are limited by the amount of feedstocks available. There is only this much used cooking oils (UCO) that you can convert to hydrotreated vegetable oils (HVOs) or into biojet fuel (typically via the Hydrotreated Esters and Fatty Acids (HEFA) pathway). And that power-to-liquid is theoretically not limited in terms of resource potential. That is not exactly true because we are still limited in our green options for power generation and green power itself can eat into resources required by other sectors. The conversion process to fuel also requires carbon dioxide feedstock of suitable concentration as well as pure water to be electrolysed to produce hydrogen.

It’s strange to think that we can have unlimited power or that we can easily power the world – remember those times when people actually calculated the amount of solar panels and space on land that is needed to power all the earth? The investment to be made in terms of building lines to distribute power, and the factories to take that power and convert them into the fuel needed would multiply the complexity problem of supplying the world’s energy needs.

Green race II

There’s going to be a new kind of entrepreneurship; not necessarily one that is building businesses with an established revenue stream or for a current market need, but one that bets on the needs of a future that the world wants to be creating. And the upcoming green race might unleash this new breed of entrepreneur more strongly than before. In the post-pandemic era where people might have got sick of government stimulus allowing billions of capital to slosh around the system, risking inflation and simply making the richer rich, fiscal policy might be returning to the center-stage as the new means of keeping the public voting base satisfied.

The green race is going to drive new winners in the economy as entrepreneurs who have positioned themselves to make the critical investments needed for the economy. Especially the ones that going to create the very jobs that politicians plan to trumpet about. Being able to think ahead and consider the kinds of businesses desired both by the public sector in an economy that is highly pro-market will be rewarded. The risk is that the public sector decides to take on the direct investments themselves rather than to ‘incentivise’ the businesses to do so. This is why the pro-market orientation of the government is important.

For the markets where the government have the tendency to perform direct intervention or deem infrastructure investments way too strategic to be left to private sector, the green race may take those economy in a different direction. They may choose to create new state-owned and managed entities to make new direct investments or to use the existing ones. And the green jobs will be created within state-linked enterprises. Civil servants who are savvy in these areas will tend to gain within such systems.

Either way, there are going to be new ways smart people will be gaming the system.

Sunsetting infrastructure

At some point in my career I got involved with projects with utilities in Australia. First with electricity distribution networks, then with gas utilities as well. They are all energy networks or utilities because my role as an energy transition consultant is to help players in the economy to navigate the challenges and struggles around our transforming energy landscape. They are struggles that the players and our economy must go through in order to emerge more resilient and climate-relevant.

Electricity networks are seen as important for the energy transition – the drive to decarbonise the energy system – so much so that The Economist ran a cover in April this year that shows a man hugging a transmission tower and the cover text reads “Hug Pylons Not Trees“.

Gas networks and pipelines are on the other end of the spectrum. There’s a lot of concerns around what is going to happen and the expectations of a death spiral. Activists campaigning against the gas networks can sometimes claim that they should be written off completely while contradicting themselves that the assets should not be allowed to depreciate quickly given they still have some operating life or runway. There is a role for gas networks to actually consider the challenging question of getting renewable gas into their network and the struggle has to do perhaps with the question of which gas. Would it be hydrogen, or biomethane, or what? And on the other hand, will they need to transport carbon dioxide? Perhaps captured ones from the industry? What role can the pipelines or network play?

If we keep thinking about molecules and figuring out which molecules, we’ll be somewhat stuck. The trick it seems, is to consider potentially taking the lead. It is still fascinating that Jemena actually took the lead to initiate the Malabar biomethane injection project and saw through it to the recent operation with the first biomethane injection into a distribution network in Australia. Biomethane in most cases is the straight-forward solution – one that is tricky to pull off but can be handled just from supply-side as the end-use equipment will not have to switch from the ones that already use natural gas. Therefore, it is the logical choice for gas networks to start taking the lead on. Perhaps in the next two to three years, it would soon be a no-brainer. But for now, we do what we can to further accelerate the transition.

Hydrogen ecosystem II

When I first penned the blog post on hydrogen ecosystem, I had a couple of ill-fitting ideas that I thought could come together but I did not successfully pull them together beyond putting them in a single blog post. What I really meant to say is that the government will need to do more work understanding and studying the nuances of the ecosystem and industrial value chain that makes sense for green hydrogen and then perhaps take action to ease the struggles of the market in developing projects.

The thing about green hydrogen is that it is something that requires quite a fair amount of new infrastructure. And the situation is uncertain because governments are thinking that maybe electrification will be more dominant and want to avoid investing in white elephants. Or they think that it is all a zero-sum game due to budget and resource constraints and that investing into transmission and distribution which meant favouring electrification would naturally be inconsistent with investing into more gas infrastructure.

In reality however, green hydrogen is made from renewable energy and hence the alleviation of electricity grid issues that foster more wind and solar can also support the development of a green hydrogen sector. The key here again is that the government needs to have better knowledge of how different parts of the value chain works and the value they are contributing.

Only in appreciating that, the governments can make the right moves.