1.5 Degree C aligned – what does it actually look like?

Earlier this month, the CSIRO published economy-wide modelling looking at how each sector in Australia could transition to a 2^oC and 1.5^oC aligned world respectively.

With mandatory climate disclosure laws kicking in next year, which will see companies required to assess how their businesses fit in a 1.5^oC aligned future, this modelling is illustrative of some of the opportunities and challenges that lie ahead.

Here we take a closer look at the 1.5^oC scenario, with a particular focus on what it means for the electricity generation sector.

Temperature aligned scenarios – what are they?

The two core temperature goals that dominate climate policy debate are embedded in Article 2 of the Paris Agreement:

Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change

Australia has incorporated these temperature goals into domestic legislation via passage of the Climate Change Act (2022).  

These temperature targets reflect the findings of repeated scientific reports about what is needed to avert the worst, and often irreversible, impacts of climate change. In recent years, momentum has grown for climate action to be aligned with 1.5^oC, driven by acknowledgment that greenhouse data and future climate modelling is inherently uncertain, and even small overshoots could result in significant weather impacts.

This momentum has shaped the mandatory climate disclosure framework starting next year, which will require large Australian businesses to prepare climate resilience assessments against two possible future states:

• An increase in global average temperatures which “well exceeds” 2°C above pre-industrial levels; and
• An increase in global average temperatures limited to 1.5°C above pre-industrial levels.

These two future scenarios essentially represent two ends of the transition spectrum: a slow transition where the world falls well short of reaching net-zero, and a smooth transition where the world achieves net-zero by 2050, or preferably earlier.

As part of the climate resilience assessments, businesses must consider:

• Physical climate risk – how rising global temperatures, and accompanying extreme weather events (e.g. droughts, heating, intense storms) might impact a business’ assets. For the power generation sector, these risks could include things like how droughts or changing rainfall patterns impact hydro generation, or reduced capacity at coal-fired power stations because cooling stations are too warm on hotter days. The UN Environment Programme has published guidance on Climate Risks in the Power Generation Sector, as has the Australian Government through its Electricity Sector Climate Risk Assessment Framework.
• Transition climate risk – how the scale and pace of the climate transition might impact the commercial and financial trajectory of a business. In the electricity context, this can include things like the risk of fossil fuel generation assets becoming stranded or changing regulations that create new costs (such as a carbon price or carbon border adjustment mechanism).

Modelled pathways to 1.5^oC -aligned scenario

Reporting businesses will likely leverage existing, independent modelling to assist with preparation of their climate resilience assessments. Relevantly, the CSIRO recently published its Modelling Sectoral Pathways to Net Zero Emissions work, which scales down the two global scenarios under the Paris Agreement to the Australian context:

• 2^oC alignment (called “A50/G2”) – Australia meets its current 43 per cent target by 2030 and is net-zero by 2050.
• 5^oC alignment (called “A40/G1.5”) – Australia achieves a 75 per cent reduction by 2035 and is net-zero by 2040.

Figure 1: Emissions by sector

Figure 2: Rate of emissions reductions by sector

Source: CSIRO, Modelling Sectoral Pathways to Net Zero Emissions, p5-6.

To draw out some of the key takeaways from the 1.5^oC scenario:

• The electricity sector would need to aggressively decarbonise, with all coal-fired power stations phased out by 2035 or earlier. Renewable generation should be over 98 per cent by 2040.
• Around 250GW of electricity generation capacity needs to be built by 2040, with gas-powered generation playing a very small role.
• This capacity is needed to cope with substantially increased electricity consumption as other sectors (notably transport and the built environment) decarbonise through electrification.
• Electricity consumption also increases due to demand for hydrogen production via electrolysis to decarbonise hard-to-abate sectors. The CSIRO models for hydrogen uptake of about 350 PJs in 2040, increasing to 500 PJs by 2050, which “implies an additional 113 TWh of electricity production by 2040 and 155 TWh by 2050”.
• There will be gradual uptake of Carbon Capture and Storage (CCS) technology to drive abatement in the industrial sector, to the effect of about 12 Mt Co₂-e each year by 2050.
• Negative emissions (e.g. direct air capture, future land sequestration) will play a substantial role, abating 177 Mt CO₂-e per year by 2040. This reliance on negative emissions is needed to offset slow decarbonisation in agriculture and industry.

These assumptions around negative emissions and CCS are consistent with what the International Energy Agency (IEA) says is needed in its global roadmap to net-zero. Nonetheless, it can also be a flashpoint for businesses looking to rely on these technologies because it can be perceived as delaying real abatement.

Furthermore, individual business scenario planning often, accumulatively, has a much larger reliance on carbon removal technologies than what is budgeted for economy wide. This creates awkward policy questions about how negative emissions should be fairly allocated.

With respect to hydrogen, the Federal Government has committed substantial funding to accelerate hydrogen production in Australia. However, recently there has been some hiccups with major prospective projects being discontinued due to slower than anticipated commerciality.  

The electricity sector has its own temperature modeled pathways

In line with the CSIRO’s modelling, the major accelerator of decarbonisation under any 1.5^oC scenario is the electricity sector. This is because of the commercial maturity of low carbon technologies and the ability of electrification to assist other sectors.

Every two years, the Australian Energy Market Operator (AEMO) publishes its Integrated System Plan (ISP) which looks at different transition pathways for the electricity sector. The two most recent iterations of the ISP have included a 1.5^oC aligned scenario – this was labelled as the Hydrogen Superpower scenario in the 2022 version and has been renamed the Green Energy Exports scenario in the 2024 version.

Under this 1.5^oC scenario, the National Electricity Market (NEM) has been allocated a carbon budget, which requires:

• All coal-fired power stations to close by 2033-2034 – Victoria’s brown coal-fired stations must close first (by 2028-29) due to their higher emissions intensity, followed by NSW (2031-32), and Queensland last.
• Around 250GW of renewable capacity must be built by 2033, approaching nearly 600GW by 2050. This capacity will represent over 99 per cent of electricity generation from 2035 onwards.
• Mass buildout of the transmission network, partly to enable hydrogen production via electrolysis, in the vicinity of 10,000km over the next ten years, and 26,000km to 2050.

While the ISP is generally considered the most authoritative planning document, other bodies have considered what a 1.5^oC aligned electricity sector looks like. These models generally test different assumptions about the right technology mix of renewables and storage, CER orchestration, and transmission buildout. But the fundamentals are the same: all coal-fired power generation needs to be phased out before 2035, with renewable generation pushing into the high 90 per cent range.  

Figure 3: Projected share of renewable electricity generation

Source: Climate Change Authority, Sector Pathways Review p30.

The dilemma of system-level planning

As illuminating as these modelled pathways are, it nonetheless creates a headache for individual electricity businesses contemplating how to align with a 1.5^oC future. This headache stems from the reality that electricity businesses provide an essential service which is coordinated through system-level planning by an independent market operator (AEMO). This means electricity businesses cannot operate wholly independently from one another and the closure of fossil fuel assets must be managed around the necessary buildout of new generation (often by competitors) to maintain reliability and system security.

Incidentally, this dilemma has currently been put in front of the Australian Energy Market Commission (AEMC) via a proposed rule change. In short, Delta Electricity, which operates the Vales Point coal-fired power station in NSW, has been unable to secure a bank guarantee because of ESG commitments from financial institutions. They are subsequently proposing alternative credit support mechanisms to continue operating in 2025 and beyond.

The AEMC must consider the merits of this rule change by weighing the potential emissions benefits of Vales Point closing early, against risks to reliability and system security that may arise from a large coal-fired generator unexpectedly exiting the grid early. The Vales Point closure date nominated to AEMO is 2033.

While it is still early in the consultation phase, the AEMC has already given some indication of which way it is leaning:  “our initial view is to weight the reliability, safety and security components of the NEO higher than the emissions component as we consider the potential costs from reliability and security risks are likely to be more substantial than emissions benefits from any outage of Vales Point”.

What might make a 1.5^oC scenario more realisable?

Australia’s current electricity sector policies are about incentivising new renewable generation, but this is occurring absent of any coordinated approach to asset closure or carbon constraint (e.g. a carbon price or budget). Pushing Australia closer to a 1.5^oC scenario would likely require a combination of these to enable transparent system-level planning:

• Coordinated coal closure schedule – as was adopted in Germany, a coordinated coal exit plan would send clear investment signals to the market about when new renewable generation and storage needs to be built and how much. It seems though the ship has already sailed on this policy, with state governments forming their own closure agreements with these stations.
• Economy-wide carbon pricing – the implementation of a carbon price would substantially increase the commerciality of low or no carbon technology assets (both in and outside electricity) relative to fossil fuel intensive assets. However, the political climate is not conducive to reopening this idea.  
• Setting of carbon budgets – The Climate Change Act currently sets an emissions budget for Australia from 2020-21 to 2020-30, which is 4,381 Mt Co₂-e. The Federal Government could, as part of its sectoral pathway work, consider how to distribute this budget across sectors according to different temperature goals. This would require careful policy design to disincentivise exceedance (e.g. setting scaling penalties based around the temperature goals) and ensure a fair allocation across sectors and businesses.

Conclusion

Businesses are increasingly approaching the upcoming mandatory climate disclosure laws as an opportunity rather than a risk. The public and forward-looking aspect of scenario analysis provides businesses with a chance to assess and compare how they respectively fit in with the transition to a lower carbon economy.

The shift from analysis to alignment will take time, and it is true there are policy obstacles that make any immediate 1.5^oC alignment, particularly in electricity, difficult. But as global momentum builds, we can expect industry, policymakers and other stakeholders to continue to explore ways to achieve accelerated decarbonisation.