Financial sustainability

Since its inception, the QMPPR has not just reported on the outlook for major project activity but has also been a strong advocate for the long term sustainability of the pipeline and the broader industry.

Sustainability can be considered in many contexts:

  • Ensuring sustainable levels of infrastructure investment to meet projected needs;
  • Sustainability of funding and finance for infrastructure projects; and
  • A financially sustainable industry that can continue to efficiently deliver long-lived infrastructure projects; and
  • a visibly funded pipeline that enables the industry to invest in training and innovation that will improve productivity.

Many of the challenges associated with financial sustainability have been addressed in previous QMPPRs. Progress on meeting QMPPRs recommendations in Queensland has been mixed.

This year’s QMPPR shows an increase in the value of the pipeline, with the public sector committing more funding to a range of projects – in turn, this is helping to reduce the projected downturn in major project work in 2019/20 that was forecast in last year’s report.

There have been improvements ensuring the budget allocations are spent on infrastructure as planned, a greater willingness to utilise cheap debt to finance productive infrastructure investment (helping to smooth the path of investment despite economic volatility), as well as steps to develop a new SEQ City Deal.

The formation of the Infrastructure Industry Steering Committee (IISC) has resulted in discussions taking place between Government and Industry focused on increasing collaboration in areas such as pipeline of work, procurement, project delivery, management of project risk and supporting design and innovation. However, these discussions are still yet to result in the development of clear and quantifiable infrastructure investment metrics and targets, or reforming procurement and contracting relationships to reduce costs, boost productivity, and target long term value and quality infrastructure instead of minimising up front capital cost.

There is also little progress on key policy reforms and initiatives that will help sustain infrastructure investment and its efficient funding and delivery over the long term, including moving away from inefficient, pro-cyclical funding and financing streams, effective encouragement of private investment (which in funded terms, remains very low in the current QMPPR) and leveraging from other financing and funding models, such as those used successfully in New South Wales and Victoria.

An action plan for financial sustainability

  1. Governments continue to seek collaborative, long term value approaches to tendering and procurement to achieve sustainable industry outcomes.
  2. Australian and State Governments to include resilience and adaptation work in infrastructure audits and develop a list of at risk infrastructure.
  3. Government and industry to work with community to implement diversification strategies to enable a positive transition for regional economies currently dependent on fossil fuel industries
  4. Industry takes a leading role engaging with Queensland communities to achieve a greater understanding of the sustainable ways to fund and finance our growing infrastructure needs, with the aim to increase private sector investment in traditionally public sector infrastructure.
  5. The Queensland Government to continue investigating the benefits of lean construction and finalise the policy to provide certainty for industry to invest in productivity improving tools and processes.
  6. Government and industry to develop a suite of policies to reduce the carbon footprint of the construction industry in Queensland.
  7. Governments should partner with industry to provide funding for further research into the impacts of climate change on the built environment.
  8. Australian and State governments to have consistent plans to reduce carbon emissions in the spirit of the Paris Agreement.
  9. Government and industry to focus on asset management and take-up of technology to improve productivity outcomes.

Environmental sustainability


Environmental sustainability is a visceral issue for many Australians, particularly with recent disastrous bushfires across eastern Australia and crippling droughts and floods. These events are highlighting the risks and challenges associated with ensuring environmental sustainability.

From an infrastructure and major projects pipeline perspective, our role includes:

  • Acknowledging the risks and opportunities to the pipeline from anthropogenic (human-induced) climate change;
  • Supporting structural adjustment policies and reskilling for new industries;
  • Embedding impact design principles in new infrastructure, especially in coastal zones;
  • Ensuring infrastructure is resilient to dangerous climate change impacts; and
  • Taking steps to address root causes of anthropogenic climate change and minimising
  • the carbon footprint of our industry.

Queenslanders are particularly exposed to the impacts of global warming and climate change.

The first step in addressing environmental sustainability is recognising the climate is indeed changing due to a build-up of greenhouse gases in the atmosphere.

Greenhouse gases (including carbon dioxide, methane, nitrous oxide, ozone and water vapour) are relatively transparent to short-wave infrared radiation (such as heat from the sun). This means that they allow sunlight to enter the atmosphere and heat the Earth’s surface. These surfaces then re-radiate that heat as long-wave infrared radiation, which greenhouse gases tend to absorb rather than transmit. The result is that the long-wave infrared radiation is ‘trapped’ and heat accumulates in the atmosphere causing a warming process. This process is known as the ‘greenhouse’ effect because it is similar to the effect that glass has, trapping heat in a greenhouse.

Carbon dioxide is a greenhouse gas and the increase in the burning of carbon-based fossil fuels (including coal and gas) and increased deforestation since the Industrial Revolution is leading to higher rates of global warming as a result of more carbon being concentrated in the atmosphere.

Despite some uncertainty regarding the severity of the temperature response to a given increase in carbon dioxide in the atmosphere, there is a general consensus by climate scientists that:

  • The earth’s climate has always changed over timescales ranging from thousands of years to millennia;
  • Greenhouse gases from human activity are warming the world (anthropogenic); and
  • Effort is needed to reduce emissions and to adapt to the changes that are likely to occur from the gases already in the atmosphere.

Over 60% of the total economic cost of climate-related disasters over the decade to 2016 was focused in Queensland.

 

Figure E4B: Annual Mean Temperature for Queensland between 1910 and 2019

Annual Mean Temperature for Queensland between 1910 and 2019

Source: Bureau of Meteorology

 

The Queensland economy is dependent on climate-sensitive industries such as tourism, agriculture and mining. The state is also more exposed to negative impacts such as increased heatwaves, droughts, fires, floods, cyclones and rising sea levels.

Unfortunately, even in an extreme scenario where all human-induced carbon emissions were to cease immediately, many decades of high anthropogenic carbon emissions has already locked in some amount of global warming. Most climate science now recognises that a best case scenario may be to limit global warming to just 1.5C above pre-industrial levels. Given slow global action on mitigating carbon emissions, it is now more likely that global warming will reach 2C above pre-industrial levels or higher, with catastrophic consequences not just for the environment but also the Queensland economy.

By contrast, the most current drought and bushfires have played out in the context of the current 1C of warming above pre-industrial levels. Natural disasters and extreme weather events such as heatwaves, droughts, fires, floods and cyclones are predicted by climate science to become more frequent as warming moves towards 1.5C and 2C (or higher). Warmer and more acidic seas are also expected as the climate warms, affecting coastal and ocean ecosystems and increasing coral bleaching of the Great Barrier Reef. Rising sea levels have been estimated to impact on 27,000-35,000km of road and rail assets Australia-wide, with a net replacement value of $51-67b (in 2008 dollars).

Climate change is happening and Queensland is already experiencing its negative impacts.

These negative impacts will only increase in coming decades, even if global carbon emissions were to fall steeply. This means that resilience, adaptation and climate mitigation strategies need to be employed simultaneously. Resilience and adaptation strategies will need to take into account the current and potential impacts of warming, but carbon emissions reduction will be necessary to keep warming contained and minimise the costs associated with adaptation.

Importantly, Queenslanders are increasingly aware of the risks and challenges posed by climate change and want action. Following the most recent Federal election in May 2019, the ABC/Vox Pop Labs Australia Talks National Survey revealed that 84% of Australians wanted at least some action on climate change, with 65% of Queenslanders saying that climate change was a problem personally and the single biggest issue keeping them up at night. Even in rural and regional Queensland where employment in coal and gas industries is most focused, there is only 30% support for more coal as a source of energy, with 72% and 56% supporting more solar and wind, respectively, in the energy mix.

Environmental sustainability provides Queensland with a massive economic opportunity which is potentially far greater than the fossil fuel industry.


Our industry’s role in environmental sustainability


Resilience and adaptation strategies will become an increasing part of the major projects industry, allowing the industry to lead and contribute to better outcomes.

Fundamentally higher levels of spending on infrastructure will likely be required, and this may drive a bigger major projects pipeline over time. The billions spent on desalination and recycled water in Queensland (and other states) during the millennium drought is one example of how expensive adaptation is, and how it impacts the major project industry. In general, given the very long life required of new infrastructure (typically up to 100 years), and the uncertainty of how far climate change will go (depending on the success or otherwise of mitigation strategies), infrastructure planners and builders will need to embed significant resilience principles into new infrastructure design, as well as adapting existing infrastructure to withstand potentially severe climate change impacts.

Transport infrastructure is highly vulnerable to flooding and heat damage (e.g. rail buckling, road cracking, bridge washout), airports can be closed during severe electric storms and their runways may be rendered unusable by flooding, and seaports are vulnerable to storms and storm surge.

In Queensland, cyclones and flooding between 2010 and 2013, led to $6.4 billion in transport network reconstruction costs to repair 8,741 kilometres of state-controlled roads and 1,733 bridges and culverts.[1] Mitigating costs from climate change on existing assets will need to reduce risks from flooding (whether from rising sea levels or storms). Increasing exposure to seawater will reduce the lifespan of transport assets and increase maintenance costs. Rail networks will require replacement of wooden sleepers and upgrades to overhead wiring to minimise fire damage risks. New infrastructure will need to take account of future rainfall/storm and sea level projections, so that infrastructure can be raised or lengthened as needed.

Utilities infrastructure is particularly susceptible to climate change impacts, as seen in the recent bushfire disasters. Increasing storms, dust storms, bushfires and heatwaves can damage or impair the function of water and sewerage systems, electricity generation and transmission as well as telecommunications infrastructure. Droughts and floods both threaten water supply security, with pipes susceptible to cracking. High service demand (e.g. electricity during heatwaves, telecommunications during extremes) can lead to electricity supply interruption (planned as rolling blackouts, or unplanned) and closure of mobile phone networks to the general public.

Here, adaption and mitigation strategies should involve burying transmission and distribution networks where feasible to minimise storms and fire risks. Existing water networks are already mostly buried, but costly work will be required to upgrade leaking pipes. New water infrastructure should take into account tapping into increasing stormwater retention for urban areas, increasing use of recycling, building pipelines to increase water security to rural areas, and locating or enhancing existing dams located where future rainfall is projected by climate science. In both electricity and water sectors, seeking a better balance between regulation (aimed at keeping consumer prices down) and funding costly resilience-enhancing works will be a key policy challenge.

Finally, residential and non-residential buildings that satisfy more stringent environmental standards for energy and water use will also impact on the major projects pipeline. With current data suggesting that 40% of energy used by households is to maintain ‘comfortable’ room temperatures, higher energy-rated building codes have the potential to limit growth in demand for energy, ultimately reducing the need for more power stations compared to ‘business as usual’. Similarly, stricter standards for water in new building developments (e.g. water tanks, recycled water schemes) as well as tougher rules for industry and agricultural water use may reduce the need for the construction of new water infrastructure relative to a ‘business as usual’ case.

[1] Queensland Tourism Industry Council, Submission to the Senate Environment and Communications References Committee, Current and future impacts of climate change on housing, buildings and infrastructure, p8.

 

Reducing carbon dioxide (CO2) emissions

While adaptation and resilience strategies are required, tackling climate change impacts at a lowest economic cost basis entails reducing carbon emissions as quickly as possible. While

Australian carbon emissions are lower now than in 2005, current policy settings are highly unlikely to see Australia meet its Paris Agreement target of 26-28% below 2005 levels by 2030, making it more difficult and expensive to reach the longer term Paris Agreement goal of zero emissions by 2050 that aims to limit temperature increases to 2C.

The most recent official projection of emissions published by the Australian Government indicates that Australia will miss its 2030 target of reducing CO2 emissions (by 395 to 462 Mt between 2021 and 2030) unless it includes 411 Mt of over-achievement on a separate agreement, the Kyoto 2020 Protocol.[2] Including the ‘Kyoto credits’ means that Australia has already met its Paris Agreement 26% below 2005 target and is currently projected to only require further emissions reductions of 51 MT between 2021 and 2030 to meet the stronger 28% target. However, this approach has been rejected internationally and by economic experts[3] as it does not result in actual emissions reductions. Consequently, it will contribute to global climate change and likely substantially increase the cost of reducing emissions later to meet the 2050 zero emissions target.

Data from Department of the Environment and Energy show that Australia’s CO2 emissions (excluding the volatile Land Use Land Use Change and Forestry (LULUCF) sector) have been increasing since 2014, when the Australian Government repealed the carbon pricing system, which was the biggest single driver of carbon emission reductions between 2010 and 2014, as shown in Figure E5. Actual CO2 emissions are projected to fall only 4% in total during the 2020s.

Figure E5: Australia CO2 Emissions by Sector

Australia CO2 Emissions by Sector

Source: Department of Environment and Energy

[2] DEE (2019) Australia’s emissions projections 2019, Department of the Environment and Energy, December 2019, Canberra. The 411 Mt Kyoto Protocol overachievement is, however, itself based on a substantial spike in Land Use Land Use Change and Forestry (LULUCF) emissions in 1990 (the base year for Kyoto calculations) that unwound substantially in subsequent years.

[3] https://www.smh.com.au/politics/federal/using-kyoto-credits-to-meet-paris-agreement-misses-the-point-garnaut-20191209-p53ic7.html

 

The projections show that reductions in CO2 emissions is projected to be overwhelmingly focused in electricity generation (-23%, or 40 MT of CO2 over the decade), with small decreases in industrial emissions, fugitive emissions (from production, processing, transmission and distribution of fossil fuels) and waste. By contrast emissions from direct combustion, transport and agriculture are expected to increase by 2.2%, 6.5% and 10.5% respectively over the 2020s under current policy settings.

 

Figure E6: Changes in Emissions by Sector over 2020s

Changes in Emissions by Sector over 2020s

Source: Department of Environment and Energy (2019)

 

Emissions reductions in electricity are expected to come through the transition from fossil fuel (coal, oil and gas) generation to renewables including solar, wind and hydroelectric power. While retirement of coal fired generation is still expected to be mostly limited to ageing Victorian and New South Wales plants over the 2020s (given the relatively younger age profile of Queensland’s coal fired plants), the recent Integrated System Plan by AEMO for the National Electricity Market projects that growth in energy demand will increasingly be met by solar and some wind projects through the 2020s, with the closure of coal fired plant in the 2030s met by a mixture of renewables and pumped hydro storage. This is a fundamental finding of its Optimal Development Path-Central Scenario which targets lowest cost to meet security, reliability and emissions expectations of energy consumers while also increasing system resilience to be able to better deal with future challenges. What is particularly remarkable but not unique about the ISP is that the case for utilising gas as a ‘transition fuel’ is effectively rejected given the lower costs of meeting future demand, reliability and emissions targets through a combination of renewables and storage technologies. Over time, installed capacity from peaking gas plants and combined cycle gas turbines (CCGT) are also expected to decline, along with coal.

 

Figure E7: Queensland Installed Generation Capacity, Optimal/Central Scenario: 2022-2042

Queensland Installed Generation Capacity

Source: AEMO ISP (2020)

 

The AEMO analysis has significant implications for the major project pipeline. While the value of funded electricity projects in the pipeline has fallen substantially since last year when Queensland enjoyed a mini-boom in renewable generation work, the projections indicate that much more renewable and pumped hydro capacity will be required in coming years, presenting significant upside potential for major project work.

Conversely, the outlook for new coal and gas-fired power generation projects contains significant downside risk. On top of generation projects, the ISP also targets major transmission works to support grid reliability, including the expansion of the Queensland-New South Wales Interconnector (QNI) as a priority, a further upgrade of the QNI by 2028/29 and a host of future grid augmentation projects to be decided by 2022. The ISP also targets the optimal development of renewables energy zones (REZs), which in Queensland include Darling Downs (wind and solar), Fitzroy (wind and solar), Isaac (solar) and Far North Queensland (wind).

Recent analysis indicates the potential for substantial renewable energy and transmission investment in Queensland, which provides upside potential to both the major projects pipeline and the extent of carbon emission reductions from the electricity sector. This will likely be necessary if Australia is to meet its commitments to CO2 reductions under the Paris Agreement without relying on Kyoto ‘carryover credits’.

However, underwhelming emissions reductions projections from the Australian Government’s Department of Energy and the Environment suggest that other sectors, notably transport and agriculture, may need to do more to reduce emissions over the 2020s to avoid a more costly adjustment later on.

Driving deeper cuts to transport emissions will also have significant impacts for the major projects sector. With passenger vehicles accounting for around half of all transport emissions (and having increased over 60% since 1990), making more serious inroads into emissions includes policies to cut the number of car trips (through congestion charges, road user charges and encouraging sharing services), switching to mass public transport solutions and lower carbon technologies (including fast rail over air travel) and encouraging the uptake of electric and low emission vehicles.[4] Again, moving to the low emissions economy has positives for the major projects industry, particularly in the development of new, low emissions transport networks such as fast rail, although the increasing use of intelligent transport systems (ITS), road user charging, connected and automated vehicles (CAV) and sharing services is likely to dampen future demand for roads.

Reducing the carbon footprint of the construction industry

Apart from contributing to broader economy-wide CO2 emissions reduction targets, the construction industry can also target reductions in its own carbon footprint as an environmental sustainability goal. Carbon emissions from the Australian construction industry are estimated to represent around 18% of all emissions, with energy and materials key contributors. CO2 is generated throughout the entire construction process including extraction, manufacturing, transportation, construction, maintenance and disposal.

There are a range of strategies which the Australian construction industry can employ to reduce carbon emissions, such as increased use of sustainable materials, reduced waste, increased recycling, reduced transport requirements, utilising less carbon-intensive transport, reduced on-site generators by establishing grid connections and utilising spatial technologies to minimise idling and distance travelled by construction equipment.

Optimising the use of less carbon-intensive materials is likely to be an important way of cutting embedded carbon in new infrastructure.

International studies indicate that up to half of all CO2 emissions in the construction industry are from cement production, both in the manufacturing process and as a by-product of the chemical reactions. However, a significant proportion (up to 43%) of these emissions are re-absorbed as cement ages and weathers over time in a process called carbonation. This illustrates the importance of looking at the full lifecycle of construction materials in determining their carbon emissions intensity. Even so, low-carbon cements are available which are less energy-intensive to produce as they often include magnesia, enabling the absorption of carbon dioxide during curing. Other ‘sustainable’ materials such as timber, straw and compressed earth have lower carbon footprints than cement, as well as absorbing CO2 while growing.

Apart from choice of materials, increasing industry productivity through new technologies and by implementing strategies and policies that result in less re-working and waste is also likely to lead to the strongest reductions in emissions over time. With productivity falling 30% over the past five years at the national level, a large potential benefit in terms of CO2 emissions could be realised if previous productivity performance is restored. Consequently, achieving productivity goals not only assists with reducing costs of projects and avoiding capacity and capability constraints, but can also be a strong weapon in the fight against climate change.

Embracing circular economy principles would provide the industry a common platform for reform.

 

Transitioning to a low-carbon economy

Overall, while Queensland is at the forefront of climate change impacts in Australia, it is also well-placed to benefit from movements towards environmental sustainability and a zero-carbon economy. The global and national need to sharply reduce carbon emissions over coming decades adds considerable risk to thermal coal mining and coal electricity generation industries. The growing risk premium means that, increasingly, the private sector is unable to raise finance for expanding existing facilities or building new mines and plants. In the major project pipeline, there are many unfunded coal projects which could add significantly to major project activity, but there remains a high level of uncertainty as to when or if they will proceed.

Global efforts to reduce carbon emissions will not stop all future investment in thermal coal and gas projects in Queensland. They do, however, represent a considerable downside risk, not just to the estimated 32,000 Queensland jobs that are directly linked to fossil fuel mining and power generation industries, but also the $4.8 billion in royalty revenues (of which $4.2 billion relate to thermal and metallurgical coal) which the Queensland government currently collects to help fund the provision of public services and infrastructure.

Modelling undertaken by the International Energy Agency (IEA)[5] shows a stark variation in the coal outlook between its Stated Policies Scenario (STEPS) and Sustainable Development Scenarios (SDS). Under STEPS, which captures existing policy frameworks and today’s policy ambitions, global coal demand is essentially flat, but growing in Asia which is Australia’s export market. However, under SDS, which is completely consistent with the objectives of the Paris Agreement, global and Asian demand falls rapidly. The IEA itself note that what happens in Asia will be pivotal, given the region’s large coal supply industry and the young average age of the coal-fired fleet. Meeting Paris Agreement targets will also require large-scale deployment of Carbon Capture, Utilisation and Storage (CCUS) technologies alongside a major reduction in overall coal demand. However, given a lack of a widescale rollout of CCUS technologies to date, meeting Paris Agreement objectives will likely require deeper cuts to thermal coal generation than modelled in the IEA SDS.

[5] IEA (2019) World Energy Outlook, November 2019

 

Figure E7A: Coal Demand by Region and Scenario: 2018-2040.

Coal Demand by Region and Scenario: 2018-2040

Source: International Energy Agency

 

Even so, the IEA analysis suggests that thermal coal mining and global electricity generation will continue for some time yet, even under more stringent environmental sustainability scenarios. Meanwhile, the relatively younger age of Queensland’s thermal coal generation fleet keeps loss of Queensland jobs in thermal coal generation focused more in the second half of the 2030s under the Australian Energy Market Operator’s (AEMO) optimal development path in its latest Integrated Systems Plan (see Figure E7B).

 

Figure E7B: Coal Generation and Retirements, National Electricity Market.

Coal Generation and Retirements

Source: AEMO (2020) ISP

 

This suggests that there is still time to develop an appropriate and just transition plan for Queensland workers and regions that may eventually feel the negative economic consequences from lower global thermal coal demand and closure of thermal coal generation capacity. However, this is no time to be complacent, as heightened concerns regarding climate change or faster than anticipated transition to renewable generation globally or in Queensland could easily accelerate these timelines. Such a transition plan should involve elements which have worked successfully overseas, including:

  • A social compact achieved through setting up a Transition Commission that will negotiate with all stakeholders including unions, coal regions, local communities, industry associations and scientists – as achieved recently in Germany as it transitions towards a full closure of its coal industry by 2038.
  • Looking for opportunities for regional diversification. It may not be a simple case of transitioning directly into the renewables economy if new facilities are not built in the same location as existing coal mines and generators.
  • Making contingency plans in case closures arrive earlier than expected.
  • Being prepared to fully fund the transition process which will require negotiation between Queensland and Australian Governments as well as the coal industry. In Germany, legislation has been proposed to provide €40bn in funding to support coal regions.


Realising opportunities


Environmental sustainability provides Queensland with a massive economic opportunity which is potentially far greater than the fossil fuel industry. Supporting the global effort to reduce emissions will benefit very important industry sectors to Queensland – tourism and agriculture – which are highly susceptible to climate change impacts.
  1. Queensland can leverage from its own natural and comparative advantages to build new industries that will help drive down carbon emissions. This includes Queensland’s world leading solar resources and access to “next generation” commodities including copper, lead, zinc, silver, phosphate and rare earths.
  2. Queensland is already the national leader in terms of installing new renewable energy generation, particularly solar, and Australia is outpacing the world in renewable energy generation installation per capita. This illustrates how quickly a fossil fuel-dominated industry can transition to cleaner renewable energy sources given the right incentives. While the Queensland Government maintains a 50% renewable energy target, the end of the Australian Government’s 2020 renewable energy target and lack of a replacement target is – alongside transmission challenges – negatively impacting the pace of new renewable installations in Queensland.
  3. The development of more economic ‘green’ hydrogen production processes which utilise renewable energy also offers considerable opportunity for new Queensland jobs and exports. In 2019, the Queensland Government released a 2019-2024 Hydrogen Industry Strategy with a vision of making Queensland the leader for Australian hydrogen production by 2030. This followed CSIRO’s successful demonstration of their world-first technology for refuelling fuel cell electric vehicles (FCEVs) from ammonia at the Queensland Centre for Advanced Technologies.