APA Group (APA) Earnings Call Transcript & Summary

Good morning, everyone. I'm Kynwynn Strong, General Manager, Investor Relations at APA Group, and thank you for coming. Welcome to our 2022 Investor Morning. As the event is being held in Sydney on behalf of APA, I would like to acknowledge the Gadigal people of the Eora Nation, the traditional custodians of the land on which we meet. We pay our respects to elders past and present and extend that respect to all aboriginal and Torres Strait Islander peoples joining us today. Safety first. The room is well signed with exits. In case of an emergency, please follow the staff who will guide us to a safe location. You have seen today that the presentation is titled, Responsibly Transitioning Energy. Over the course of this morning, we'll take you through the important role APA is paying to ensure we have secure, reliable and affordable energy. As the agenda shows, we have split the morning in 2. The first session starts with an overview of the transition, then a presentation from Aurora Energy Research, followed by a moderated panel with Aurora and L.E.K. Consulting. We will take a short 20-minute break before commencing the second session to cover off APA's investment considerations, ESG and then a second moderated panel. A point to note on the panel sessions. As many of you know, I have called around the market to ask you to nominate the questions you most want answered. We have compiled these. And instead of taking questions from the floor, we will ask the questions at the panel session. And rest assured, we haven't left any of the hard ones out. And with that, I'm delighted to hand over to APA's CEO and Managing Director, Rob Wheals, to talk to you about the energy transition.

Thank you, Kynwynn, for that introduction, and good morning, everyone, and thank you for joining us today for our investor morning, both those that have joined us in the room and those that are joining us virtually. I'd like to begin by to acknowledging the traditional custodians of country right across Australia and pay my respects to elders past, present and emerging. And I'm joined today by members of the APA team on the lands of the Gadigal people of the Eora Nation. Now most of you -- well, all of you should know APA as a leading energy infrastructure business. And today, I'm going to take you through -- and step you through the energy transition, as I said, unfolding in front of us. In particular, I will step you through the transformation of the energy sector and the important role that the energy sector will play in the decarbonization of the Australian economy. Now what's going to be important in all of this is the important role that technology will play in the energy transformation. And APA is well placed, and I'm extremely confident that APA is really well placed to play a leading role in a number of different ways. Firstly, through the transformative energy solutions that we will deploy by leveraging the existing and the skills that we will develop over the course of the energy transition. But importantly also, through the gas infrastructure that will play a very important role in the energy transition to ensure that there is an orderly transition over the course of the next number of years. Now let's get directly into it. Half of Australia's emissions come from the energy sector. And you can see in this chart that the energy sector contributes around about 50% made up of the electricity sector and also stationary energy. Now when you think about that, what's so important is that the energy sector plays a critical role in the transformation of -- and the transition -- the transition of the Australian economy as it decarbonizes. Otherwise, we will not achieve our net-zero ambition. Now if we look at the energy sector, and particularly the national electricity market, 65% of our energy comes from coal, which means that if the energy sector is going to decarbonize, then coal has to come rapidly out of our system, which means that we can have a fundamental shift in our energy mix as the energy transition plays out. And that's exactly what's happening, and it's accelerating at an ever-increasing pace. And we've seen that play out just over the last number of months with the announcement, Origin Energy with the [indiscernible] power station coming out many months or years earlier than it was originally planned. Now as I said, technologies are going to play, and the introduction of new technologies are going to play a really, really important role in this energy transition. And you can see that shown on this chart. Now some of those technologies are very well developed and proven in commercial and some have some way to go over the next number of decades. Mostly around how they're going to be able to be commercialized at scale, what does that mean is that some technologies are available today, some have yet to be proven. And it means that the transformation that we need to see in the energy sector has some way to go, and therefore, is uncertain. And it's probably best described when we think about it as an uncertain future. Now while that future is uncertain and unclear, that doesn't mean to say we don't want to have an orderly transition. We need to have an orderly transition. If we don't have an orderly transition, we will not be able to ensure security of supply and reliability. And as part of that, also affordability. Now you can see here on this slide is there's a range of different technologies which will be part of our technology road map as we see the transformation playing out over the course of the number of decades. And all of these different technologies will play a key role. They will all play a key role in different ways, particularly as we said, play out a more technology-neutral approach. But they all come with risks and challenges and even the more proven and commercial technologies today come with risks and challenges. Some of them are, as I said, technical and commercial, but also environmental and we have to consider the social impact of how we roll up these new technologies. What does that mean? It means that this energy transition is not going to be easy. We've got a rapid withdrawal of coal, a rapid deployment of renewable energy, backed up by firming, and that is a monumental effort when you think about what has to be achieved over a number of decades. And as I've said before, it's a kin to rebuilding the national energy market in a very short order. And when you think about taking out one major fuel source, 65% of our energy system, it doesn't make sense to be taking out more another fuel source at the same time. And in fact, what it does do is it underscores the critical role that gas and gas infrastructure will play to ensure that we do have an orderly transition. Now that idea of coal coming out of the system and renewables coming in and the important role that gas plays is probably best explained by giving you an example. And the example here is one in the U.K. Now what we saw here in the U.K. is over a period of a decade, we saw the rapid retirement of coal out of the system. You can see that in the black at the bottom of the chart. And the rapid deployment of renewable energy to the extent that it's now made up about 40% of the energy mix in the U.K. Now the U.K. faced the renewables drought over the last 12 months. And the important role that gas and gas infrastructure should have been able to play to provide security of supply to net renewables drought meant that -- because there was actually a low levels of gas production and low levels of gas and storage. Gas was unable to step up the way we would have expected it to be able to step up and share of supply. So what does that mean? And I think the chart is pretty self-explanatory. We saw, over the course of 12 months, a three to fourfold increase in wholesale energy prices. Three to fourfold increase in wholesale energy prices exacerbated by what was playing out with the energy crisis in Europe. And that increase in energy prices has flowed through to consumers to what is now being called a real issue starting to happen in the U.K. around what's been called energy poverty. Now we must and we can avoid that situation happening in Australia. And I'd like to quote the Macquarie CEO, Shemara Wikramanayake. She said just recently that we need to have a balanced transition and people need energy. And if we create energy scarcity, then we'll lose the mandate for the energy transition. So what does this now mean? Well, with this in mind, the energy transition is well underway in Australia. And this chart that you can see is the AEMO step change scenario in the integrated system plan. And there you can see the rapid retirement of coal in our energy system, the increase in renewable generation and gas and other dispatchables playing a critical role. And with coal rapidly retiring, it only underscores the important role that gas will play in firming the renewables in the market. And importantly, the way we need to think about it is gas generation is not competing, it's complementing the introduction of more renewables into the system. Complementing, but not competing. So what does this mean for Australia? Well, I'm extremely confident, and I've said this before that I see Australia being in the box seat. Why do I say that? We have abundant natural resources in our wind and our solar, in our sun. And we also have abundant gas resources, which need to be developed and should be developed to ensure that these abundant natural resources like wind and sun can come to fruition. Gas, of course, has been much lower emissions and been able to provide the firming capability. Now there are multiple opportunities for APA as this energy transition plays out. You know well that we have extensive experience in owning and operating energy infrastructure. And we really do believe we are well placed to use those skills to deploy in areas such as electricity infrastructure, variable renewable energy, hydrogen, and of course, the area which we are most known for which is our gas infrastructure. Gas, of course, been so important, as I said, for the energy transition. And I'll now step through these opportunities, the electricity, the variable renewable energy, hydrogen and gas over the course of the next few slides and to demonstrate how we see these opportunities playing out and where we can participate. So firstly, electricity transmission. And you've probably heard before that there can be no energy transition without transmission, and let me explain why. With that rapid coal retirement coming out of the system and more renewables coming in, we need to have a planned energy transition. We can't have that new energy coming in, in a health-hazard way. And as we've seen already with many of the proponents of renewable energy unable to get the energy dispatched through the electricity transmission networks. So it needs to be done in a planned way. And maybe the best way to think about it is when you see a new housing estate being developed. The first thing that happens is access roads get built, roads get built in the housing estate, all the utilities go in. And only after that, the homes get built. And this is exactly the way we see these renewable energy zones playing out. Develop the transmission infrastructure first so that the generators can come in and know with confidence that when they build their infrastructure, it's going to be able to be dispatched to market. And this approach by government on the East Coast, in particular, the government of New South Wales, means that billions of dollars of firming and generation and thousands of kilometers of how voltage transmission links need to be built. And at this point, I would like to congratulate the New South Wales government on the foresight and their proactive approach to thinking through how this will play out in New South Wales, meaning that we can have a more orderly transition and, at the same time, create real opportunities for investment and jobs. Now APA is participating, as I think it is well known in the renewable energy zone processes here in New South Wales. And we formed a very strong consortium, which is called Network Resolution. Our consortium partners being the CIMIC Group companies, Pacific Partnerships, UGL and CPB contractors. And we've now been shortlisted as 1 of 3 to participate in a competitive process for the design, the development, the financing and ultimately, the ownership and operation of the Central West Orana Renewable Energy Zone in New South Wales. This is an incredibly exciting and significant opportunity. And we do believe that a zone is an operator of significant infrastructure here in Australia, together with our consortium partners, we have the skills and expertise to build and develop what will be in New South Wales' first renewable energy zone. And so that process will play out over the coming 6 months, where we will be preparing and then submitting our proposal as part of the competitive RFP process. On to renewables. Now you well know that we are a significant owner and operator of renewable infrastructure in Australia. And our focus is all the well-being how do we work with our customers to help them on their decarbonization journey. And we've been very successful of doing that. And I think the most recent example that I can point you to is the development of the 88-megawatt solar farm, I call the Mica Creek Solar Farm in Northwest Queensland. And there, we are developing that solar farm for our customers backing up the energy with the gas generation in that region. And that's exactly how we see the energy transition playing out. That makes sense because we've got these 2 forms of energy able to complement each other, leading to a customer and being able to have lower cost of energy and also at the same time, lower their emissions, but have the reliability provided by gas generation. Now that's not just happening in Queensland. But a lot of our mining customers in mining rich regions like Western Australia are looking to do the same thing. They're looking to do the same thing because they want to green up their operations. And so we actually see this as a major growth opportunity going forward. These hybrid energy solutions being developed for our customers combining the reliability of gas generation with renewables and as the case maybe the deployment of batteries, and we've got one of our mining customers over in Western Australia, where we're doing exactly that through the development of a hybrid microgrid. So now turning to hydrogen. And you can see on this chart, the hydrogen value chain all the way through from the -- and this depicts the green hydrogen value chain all the way through from the development of the renewable generation, the Electrolysis, the transportation of the hydrogen all the way through to liquefaction and putting it into -- taking to the export market. And so we see significant opportunity in this hydrogen value chain as the energy sector -- this particular technology develops over time. Now we have core skills, which we believe are very much transferable into the sector and already have those core skills in the renewable energy, the pipeline sector, for example. But we recognized we're not experts in all parts of the value chain. And that is why we will be partnering with other experts that can bring their core skills where we don't have those skills and to complement them. And no better than to give a real-life example. And here we are showing the example of the Central Queensland hydrogen project, where we've commenced a feasibility study, where we're looking to develop at extremely large-scale hydrogen project together with a very strong Australian-Japanese consortium where our consortium partners bring, again, between all of us, have the skills right across that value chain. Now I think you can see by looking at the slide that this has the potential to be an extremely significant project and could underpin hydrogen export to Japan. Now all these technologies are going to develop over time. Started off with electricity infrastructure, which will be deployed. It's not a new technology, but there's significant electricity infrastructure, which will need to be deployed variable renewable energy, hydrogen. But as these technologies develop, there's no doubt that gas will still be an important part as it is today as part of our energy system, particularly, as I said, with coal rapidly coming out of the system. Now when we look at our market, it's really a tale of -- almost a tale of 2 cities. On the East Coast, the growth in demand for gas infrastructure is very much driven by how we need to bring new gas supply to the market because it could change your dynamics as to where the gas supply is coming from. But that's to be contrasted with Western Australia, where the demand for gas infrastructure is very much demand-driven. It's driven by the demand from mining customers in reserves rich areas, which are trying to respond to the requirement for more minerals and so forth and therefore need additional energy to -- for their mining processes. Now when I go back to the East Coast, it's very clear that APA's East Coast gas infrastructure is extremely well placed to support the changing supply dynamic. We have our 7,500 kilometers of East Coast gas grid. And that connects all the way from Queensland through to the southern markets in Sydney and Victoria. And therefore, we are able to connect in new gas supply sources in Queensland and also further afield in the Northern Territory. And in fact, we are already responding. And as you know, we have a staged expansion of our East Coast gas grid by as much as 25% through a very efficient incremental expansion. And you would have seen more -- just recently, we also announced an efficient expansion of the Southwest pipeline in Victoria, which connects Port Campbell with the Melbourne market and importantly, provides additional capacity from the underground storage facility in Victoria. And as I said, in Western Australia, demand is very much driven by the growth in demand for resources. A lot of it driven by the new economy. I think this chart is very self-explanatory. You can see the increase in demand for resources. And you can see where those opportunities are, and you can see how well located, they are next to our existing infrastructure. So we remain very confident about the growth in opportunities in Western Australia, both for those hybrid energy solutions, which I talked about earlier, that backed up with a reliable supply of gas generation, which again confirms the confidence that we have around the development of our Northern Goldfields Interconnect in Western Australia. Now while the East Coast and the West Coast, as I just described, have different drivers around gas demand, the one thing that is common is that gas is critical to the economy today and it will be into the future. And that's important as we think about it from 3 perspectives, and they're shown on this chart. Firstly, our residential and commercial customers. There are millions of customers that today use gas for space heating, for hot water, for cooking. And that's not easily replaced. When we look at our industrials, many of our industrials, and as we know, and it's shown on this chart that our industrial customers use half of our gas consumption on the East Coast, half. And that use of gas is not easily substituted. Our industrial customers, manufacturing customers use gas for providing high heat as well as in the industrial processes. And as I said, that's not easily replaced. Now if you were to go through the theoretical example of trying to replace that energy consumption from an electricity equivalent perspective. It's equivalent to that half gas consumption on the East Coast used by our manufacturing industrial sectors equivalent to the New South Wales electricity generation, the whole New South Wales market. So it's quite an undertaking when you think about looking for alternatives for our industrial customers. And of course, gas is important in the power generation sector. And I've talked to that already coal coming out, gas been so important to provide that firming capability. So I'm now going to summarize the key messages from my presentation. The energy transition is unfolding around us. The energy sector is critical to ensuring that we have a decarbonized our Australian economy given it contributes around half of the emissions in Australia. And that energy sector is so -- the decarbonization of the energy sector is so much dependent upon technological change, both the introduction and deployment of existing technologies, but also emerging technologies over time, and as I said, is by no means certain. It's an uncertain future. But I'm confident that APA is very well placed to play a leading role in this energy transition. And as I said, we'll do that in 2 ways. One is through deploying transformative energy solutions, leveraging our core skills that we have today and building on that into the future, but also through our gas infrastructure, which is going to be so critical to ensuring an orderly transition. But don't just take it from me. A little later this morning, we have a panel. And on that panel, we have David Ogilvy from -- who is a partner at L.E.K. Consulting. And L.E.K. Consulting undertook an assessment of the impact of the energy transition on the manufacturing sector that was done for manufacturing Australia. So David, no doubt will talk a little bit more about that and his observations from, as I said, the impact of the energy transition on the manufacturing sector. But before we have the panel, I'm going to hand over to Hugo Batten. Now Hugo is the Managing Director at Aurora Energy Research. And Hugo, amongst other things, is responsible for markets and grid modeling and has done a lot of work on how the power system will evolve through the energy transition, and Hugo is here to share his insights. So thank you very much for listening to me today. And I'll now hand over to Hugo.

Thanks so much, Rob. I might just wait for my presentation to come up, there we go. Thank you again for that warm introduction. Aurora is a company essentially that models wholesale electricity markets and tries to unpick some of the complexity that Rob discussed in his presentation. So we take a long-term view on how we think electricity markets are going to play out here in Europe and the States and particularly focusing on the decarbonization journey. Before we get into it, I'll address the analysis in this report was based on some independent work we conducted for our subscriber group, which is about 100 organizations across the NEM renewable developers, infrastructure funds, government, project finance banks [indiscernible] mix of groups that are involved in the transition. The reason we did this dedicated report on net zero is somewhat obviously, increasingly, investors are asking to have price and capacity mix forecasts that are consistent with net zero. So they want their base case to be a net zero electricity system moving forward. And so that's why we modeled these scenarios for them. We'll get into it, but there are a number of different policy pathways to get there, each with quite different implications. The presentation is going to be split into two parts: one, looking at the drivers of net zero electricity systems. So how are they different from BAU? And then the second, what does the net zero electricity system look like? How do you keep the lights on and what's the role of firming? And why don't prices crash when almost all of the generation is from zero marginal cost renewables? So let's get into it. So what drives a net zero electricity system? Well, there are a few key features. And again, Rob touched on it the first of these, which is rapid electrification. So AEMO in its step change scenario, the NEM is about 200 terawatt hours at the moment. They see a doubling to 400 terawatt hours if you electrify the rest of the economy, so transport, heating, industrial processes. So I mean, that is pretty extraordinary, right? We're at 200 terawatt hours and going to 400 terawatt hours by 2050. So literally a doubling of the system. And as you can see on the top left-hand side there, we've talked about base level growth, but then also the demand that comes from EVs and then hydrogen in particular, in this case, for domestic consumption. The other part of the story that we see is it's difficult to envisage a world where this happens entirely through grid scale. So we think there is going to be a big role for behind the meter generation. And I think rooftop solar and the rapid growth in Australia of something like 3 gigawatts a year has been an extraordinary success story and kind of unparalleled globally in terms of the rate of growth. So we do factor in quite big growth in rooftop solar, but also increasingly behind the meter storage, whether that's at the household level or at the community battery level. And later in particular, has talked about that through this election campaign. So built into these forecasts that we're going to step through is not just rapid growth of grid scale generation, but also behind the meter. The third part of the story is just -- and Rob again touched on this -- is the growth in transmission. So if you really believe in a net zero electricity system, you think doubling of demand is incredible. Somewhat obviously, we need to invest in grid infrastructure. So our modeling indicates that if we are to hit these targets, then we'll need to spend somewhere between $14 billion and $23 billion of additional grid spending to unlock spare network capacity over and above what's in the ISP optimal development pathway. So significant investment in transmission over time. Now on the bottom left-hand side, we talk about in a slightly simplified way, what are a couple of different policy mechanisms that could get you to a net zero electricity system. And we'll talk about 2 through this session. One is a carbon price. Clearly, that's unlikely given the current political environment in Australia. But we've kind of backs of what the carbon price would need to be to deliver a carbon budget that's consistent with AEMO's 2-degree carbon budgets for the electricity system, and it's something around $50 a tonne. That's actually relatively low by international standards, if you compare it to the EU ETS or California's cap-and-trade system as examples. But it's probably at least in the short term, not going to go down the carbon price road. The way we're getting renewables onto the system at the moment, some through corporate PPAs, but we touched on it again earlier the New South Wales road map. It's a lot of direct support for renewables, right, whether that's VRET or QRET or the New South Wales road map. So bilateral contracts for renewables through government. It's driven by state policy is the lever we're pulling at the moment. And the way we get to net zero matters, and we'll get to that in a second. Where does this get us to in total emissions? We can see Aurora's BAU scenario there in the orange. If we keep policy basically as it is at the moment as it's announced. But as I said, if we want to do something consistent with what AEMO saying is required to keep temperatures below 2 degrees and meet our Paris commitments, it's somewhere in that kind of 780 to 860 carbon budget. And so basically, we need to transition faster than BAU through 1 of those 2 policy mechanisms I described. Terrific. So I don't want to spend too long on this. And to some degree, these slides are a little bit out of date only because the futures markets, as people would know, have gone up reasonably significantly to put it mildly over the last quarter or 2. But it's just making the high level point, the way we get to net zero matters, particularly for prices. So a carbon price, I think as people understands, lifts the wholesale electricity price because when thermal assets are setting the margin, the price goes up. If we support renewables through direct contracts, that tends to have the opposite impact and you force lots of price insensitive renewables into the system and you tend to drive wholesale prices down. Now wholesale prices are obviously only one component of customer bills, right? So in a world where we're writing lots of contracts for difference for renewables, we're likely to see the green levies portion of our bill go up materially. That's what the U.K. has done. So the green levies part consumer bills in the U.K. are really material. And that's partly because Europe supported renewables when they were really expensive. Australia is in a fortunate position that renewables are the cheapest source of generation. And so the top-ups are required are less, but very different impacts on wholesale markets depending on the policy mechanisms we choose. Terrific. So to the second part of the presentation, what does the net zero electricity system look like? And in particular, how do you keep the lights on when your when the bulk of your generation is intermittent renewables? So there's quite a lot going on in this slide. So forgive me if I spend a little bit of time explaining it. On the top left-hand side, and we've picked Victoria as an example, and we're looking here at 2021 and 2050. And what we've got mapped here is what we've described as residual demand. So this is the demand that is not met by renewables and not met by interconnector flows. So this is basically the amount of firm capacity you need through the year to keep the lights on. And you can see the gray line is 2021, and the green line is 2050. And this is a feature of all renewable systems, not just Australia. But you see in the green line that there's sometimes on the left-hand side of the chart, when you need a lot of firm capacity to deliver because you've doubled demand, but the sun is not shining and the wind is not blowing. So the peak firm capacity you need there is 12 gigawatts, but you don't need actually 12 gigawatts for that much of the time. It might just be a few half hours in the year. As we follow that down because you built a lot of renewables, there's lots of time in a year where renewables are actually an oversupply. And they might be getting curtailed, the price might be zero or they might be getting exported to neighboring states. But you can see when you compare it to 2021 that it's a system of greater extremes, right, either under production to meet high demand or over production, and that's the nature of intermittent renewables. On the top right-hand side there, what we've done, I suppose, is map the peak firming capacity required by the length of time we need it to run. And it's basically making the slightly obvious point, but you can't keep a system secure if you're just building a lot of 1-hour batteries, for example, and not that anyone is suggesting that. So you do need peak capacity of 12 gigawatts. But in most you might only need that for 3 consecutive half hours, right? And so a battery will do the job, that's terrific. But there's a decent chunk of the time, particularly in Victoria, which is a wind-dependent system, when you might look at periods of long -- low wind output. And so you might need something that can run for up to a week there to keep the lights on, and you might need at least 2 to 3 gigawatts of that. So this is a feature of wind-dependent systems as well. The U.K. is exactly right. It's very heavily dependent on that Northwest wind, which is highly correlated across the continent. There is what the Germans called Dunkelflaute periods of low wind output. And through those periods, you need something that can run for extended periods of time. I won't spend too much time on the bottom part of that chart, but it's just pulled out a sample week for 2050. You see most of the time the wind is blowing and the sun is shining, but there are periods there where you need that significant firming capacity, 10 gigawatts in this given week to meet demand at that time. So again, it's making the slightly simple point, albeit probably in quite a complex way that we're going to need a variety of firming technologies to keep the lights on in high renewable penetration systems. So this kind of tackles the same problem from another angle, but also trying to describe what the system looks at. And again, the AEMO step change is not materially different to this. You can see where we are in 2022 in the NEM. And it's a mix of thermal and renewables and firming assets and the firm capacity is about 44 gigawatts. What does the net zero system look like by 2050? Well, I think the headline message is there's huge growth in absolute gigawatts, right? These are nameplate gigawatts. And that's because, again, the sun doesn't always shine and the wind doesn't always blow. So there's -- it's a much bigger system in absolute gigawatts. Some of that will be behind the meter generation. But you do need to see some growth in firm capacity as well, and that's in those bubbles at the bottom. On the right-hand side, what we've done is mapped peak demand, which is that red diamond against firm capacity in 2022 and 2050. And you can see that in all states, you've got more firm capacity than you need to make peak demand. But clearly, issues like coal outages matter or interconnect is going down. And that's often why we see some of the price spikes we've seen recently. By the time we get to 2050, we've still got more firm capacity than we had, but a lot of that is behind the meter, that theme we touched on before. And we are increasingly going to rely on more interconnection to move that power around from places where the sun is shining and the wind is blowing to places where it's not. I think a global theme that I see, particularly in our work in Europe and the U.S., is that politicians of all stripes are increasingly concerned about security of supply through the transition. And so for this to be true, you do need to believe that the story about behind the media generation, virtual power plants aggregating it and dispatching into the wholesale market, active demand side response. Those technologies are here, and there'll be more of them in the future, but it is a vital part of the story. So this is what the system looks like and another cut on how we keep the lights on. What does this mean for gas assets or in the future, potentially hydrogen? So there's something like 10 gigawatts of gas at the moment in the NEM and annual generation varies pretty significantly year by year. But in 2021, it was about 15 terawatt hours. And so you can see that broken out by states there. What do we see as the role for what we describe as peaking capacity in 2015. Now again, this could be gas or hydrogen or gas with CCS, there are a few different options there. We see a little bit more gas capacity, but actually roughly around the same. I think what's interesting here is that the gas output will vary pretty significantly by weather here, right? So you see the low high there on the bottom of the right-hand side chart, in years where we have really good wind output, we might only see 8 to 9 terawatts of peaking capacity required. In low weather or low renewable output years, we may require more peaking output to meet demand in any given period. So whether is not a more in renewable intensive systems, but we do see a need there for peaking capacity moving forward over time. The kind of almost the #1 question we get asked by people who are thinking long term about electricity markets is, if we've got all this zero marginal cost assets on the system, why don't wholesale prices crash essentially? And it's a terrific question, and I think one that makes intuitive sense that modeling can shed light on. So what we've tried to do here, again, is in these net zero scenarios, stack the hours from lowest price hours to highest price hours within our model. So you can see in the lowest price hours, they're going to be the ones that there's more renewables than we actually need in the system, right? So actually, renewable output is 150% of demand in that half hour, give or take. That's obviously when storage is going to be charging. So whether it's shorter duration or longer duration batteries, pump to hydro, whatever it might be. And as I said, prices are typically going to be pretty low or negative during those periods. We then move up in terms of price through the year. And you can see that basically, what's driving it is low renewable output. There's still a lot of renewable output all the way through 30% or 40% of the year. But once you start getting to the other end, you see that actually, there's not quite enough renewable output to meet demand, and therefore, batteries are discharging the power they stored, but there's also an amount of peaking in there, again, gas or hydrogen or gas with CCS over the long term. Now even that might only be 3% to 10% of total generation in any given year. It's actually playing still quite an important role in setting the margin between 40% and 60% of the time. And again, it depends on the scenario and year. So this is quite a subtle but important point that even though the vast majority of your generation is being delivered by zero marginal cost technologies, it's the flexible technologies that play a really important role in setting the margin, at least we think, over the long term. And you can see that it's actually gas capturing those much higher prices, right, when the price gets above $200 or $300, its assets that are not running frequently that are there to provide capacity but play a really important role, keeping the lights on at those times. I think I'd also make the point that whilst at the moment, we think of batteries and gas is competing flexible technologies. I think as we move into this world, they're actually playing reasonably different roles. You've got 1, 2, 4, 8 hour batteries, and they're doing the intraday arbitrage, right? They're charging when the price is lower in the middle of the day and solar output is high, and they're discharging into morning or evening peaks or periods of particularly high demand. I think peaking technologies will then play a slightly different role. It's more what we looked at in Victoria when there are extended periods of low renewable output and you need something that can run for quite long periods of time. So just we are kind of, I suppose, bullish as a company on the future, particularly lithium-ion batteries. But we recognize that the system will require different types of firming technologies over time to keep the lights on. I think the other interesting thing about this slide is that most of us grew up in a NEM where coal set the margin, the vast majority of the time. And if you look at the distribution of spot prices, it's really centered around $50 or $60 when New South Wales Black coal is setting the margin. In a net zero world, and again, this is true of all systems that we model, you move to a much more bifurcated world where prices are quite low when renewables are setting the margin or quite high when flexible technologies are setting the margin. And actually, the middle of that price distribution has actually been hollowed out because you don't have any coal really anymore to set the margin there at whatever is $50 to $70, depending on the cost of coal and those types of things. Terrific. That was everything I wanted to cover in this presentation, but hopefully, an overview at least about how we're thinking about net zero systems and about the role of firm capacity as we move forward over time.

Thank you, Hugo. It really does highlight the massive change that our generation system needs to go through with the volatility increasing and underlining the need for flexible generation like gas. So thank you. If I can invite you to take a seat for our panel, that would be great, where we're going to discuss the challenges and opportunities in the energy transition. I'd like to also invite David Ogilvy from L.E.K. to the stage. David is senior partner, leader of L.E.K's. industrial practice in Australia and a leader of L.E.K's. sustainability team. He's been a key contributor to the manufacturing Australia report titled Low Emissions Manufacturing in Australia. And just as a quick note, you can actually get the report from L.E.K's. website, and you'll see that the links there in the slide pack. Right. Thank you very much for joining us today. We really appreciate you taking the time to do this. You heard Rob earlier talk about the importance of the industrial sector as a significant user of gas. And in fact, the industrial sector, it uses close to 50% of the gas supply on the East Coast. So David, if we can start with you, can you share with us some of the key findings from the report and the importance of the manufacturing sector for the Australian economy?

Sure. I might first start by just saying that the report really covered 2 areas of investigation. One was the importance of the manufacturing sector to Australia, which we'll come back to in a moment. And the second part was really around what are the opportunities and pathways available for decarbonizing some of our largest and hardest rebate sectors and what's the opportunity from doing so. So really sort of 2 parts to that. Regards the question about how important manufacturing is to Australia, what we determined at the end of the day was a very large contributor, not only to exports, GDP and jobs. But many of those jobs, for instance, the semi-skilled and highly-skilled jobs, which are very attractive to advanced economies, that the manufacturing sector in Australia plays a pretty key role in helping to close the loop around the circular economy as well. So there are outputs from the manufacturing sector that feed back in. And similarly waste products that come out of others that feed back into the manufacturing sector. So it's quite important, given that's a strategic ambition of our country and many developed countries to start doing more to manage the circular economy. 25% of business investment in R&D in this country is made through the manufacturing sector. So it's a big part of our innovation spend as we look to continue to advance our economy. And I suppose another really key point is at the end of the day, it provides us a sovereign capability around some pretty key industries. I think we've probably got a pretty good picture of an understanding of how important that was during the course of COVID with all the supply chain disruptions that we've been dealing with. But I think even more recently, thinking about the geopolitical tensions and the rising nature of those, just how important some of these sectors are to actually have a capability in going forward.

Yes. And so just thinking about the key points that were in the report. A couple of the themes that come through very clearly is that the manufacturing sector is obviously very important, as you've highlighted, and people's jobs, the GDP, the exports. Can you talk a little bit to the impacts that the transition could actually have within some of those key sectors that you talk about within the report and some of the pathways that you have explored in order to help the decarbonization happen?

Yes, sure. Okay. I think firstly, I think that -- well, the perspective that we've developed at the end of the day is this actually an opportunity. It sure it's going to be quite difficult and challenging to make this transition, but there's a lot of good reasons to go for it, 5% to 6% GDP, 1.3 million direct and indirect jobs. Sovereign capability that we talked about before. But then even thinking about what the opportunity could be if we do this transition right. Rob talked earlier about the wonderful solar resource, the wind resource that we have in this country. We've got a lot of available space. We have a lot of domestic capability in and around manufacturing and then technologies that sit behind that. So a pretty big opportunity for this country to make that transition, and there'll be a lot of additional jobs that could be created from doing that. So I think with that in mind, then I think we also need to be quite realistic about the kind of things that we've got to work our way through over time. And so we really did focus in on 4 of the hardest to abate sectors. So steel, alumina and aluminum, spend on concrete and then ammonia, big industrial gas users. Not that, that was the focus, it was more around how do we decarbonize them. And there are some technological challenges, in particular, that exists for each of those different industry sectors, more of them are the longer-term end that we need to work through. So as an example, in steel, 2 of the biggest challenges to work through are we are yet to commercially prove at scale, the long-term technologies that will underpin the decarbonization. We think we know what they are. We're working through pilot scales around the world, but we haven't proven that categorically yet. So that has to happen. There is an enormous base of capital infrastructure investment that already exists in steel today, not just in this country but around the world. That will most likely need wholesale replacement in order to ultimately make these changes effective in terms of decarbonization. If we flip over to alumina and aluminum, to get from bauxite to alumina, the pathways are really around electrification and green hydrogen. We're talking about in this country alone, if we wanted to make the transition, we'd need more than 7 gigawatts of renewable power just to manage that, and that's before you think about potentially needing to overbuild for intermittency. That's pretty big investment set. And then for aluminum, so taking alumina through to aluminum, that must have firm power. And that firm power needs to be green. So there's a big challenge to it. But recognizing also that aluminum, for instance, is a trade exposed industry as steel is. And as a consequence, that power has to be cheap. It can't be high cost. If we turn to ammonia, the technologies are actually a bit closer. So green hydrogen is clearly the sort of the interim pathway for ammonia production in a green sense, but that requires to be competitive with steam methane reformed hydrogen, which is what we do here on East and West Coast today. The power, again -- the input power and nimble power needs to be quite low cost. So right now today, if we were pumping $70 a megawatt hour into green electrolyzer, if we ignore all the capital cost, we'd be pumping hydrogen now at $4 a kilo. That's more than double what it cost us to make it with steam methane reformed on the East Coast, even though gas is $8. So there's a gap there that we've got to bridge over time. And then on cement and concrete, that is actually really quite a challenging sector to get to zero on its own. There's certain elements of the process, which you cannot completely remove carbon. So it's going to be very reliant on carbon capture and storage as being part of the answer there. That's a technology that we've been working on around the world for 20 years already. And we've still got a ways to go. So there's a path there to work through, and there will also be a need for some green hydrogen in there as well for it. So I suppose the story is on the positive side, actually, we've got a pretty good handle on what the pathways are. But there's still a lot of work to go through on the technology side and the cost side in particular, as we go through that.

Yes. And if I can just pick up on one point that really jumped out at me from the report. When you were talking about ammonia and doubling the cost, if you double the ammonia cost, it will double the fertilizer cost in simple terms, and that could result in more than a 40% increase to food costs.

Yes. The math does go through. And the other thing we need to be aware on the whole way through this too is that these are -- many of these regional and global industries. So we've got to think about how we're going to incentivize and make the transition in this country in relation to what's happening around the world, particularly with the other sources because we've got to make sure at the end of the day, we don't offshore the emissions reduction.

Yes, yes. And Hugo will come to you [indiscernible] but just one more question for David on this. So when you're looking at the steel and ammonia in particular, where it's using gas as a feedstock, we really need to see some advances in technology in order to be able to reduce the carbon intensity of that. So there's a high dependency on them as we stand today on having that gas component.

Yes. So I mean, this is going to take time. It really is. And I think there's a few elements to this. At the end of the day, where they were going to need to facilitate on the way through. So in order to make the transition, it's not just having the technology proven commercially at scale, which I think we all believe will happen in time, but it's going to take time. We need to make sure that at the end of the day, low-cost power is going to be a big input to this. So how are we going to facilitate the build-out of a green renewable base in this country, whether it's behind the meter or in the NEM or in the Swiss or wherever it is, that's sufficiently low cost to ensure that we're competitive. And then lastly, for those sort of trade exposed industries how are we going to ensure that the -- that there's a level playing field that we're not offshoring the emissions to somewhere else that we're making sure that we're sort of making it all balanced out.

And I'll come back to the reliability and affordability component in a sec. But if I can just switch across to you, Hugo. So when you're actually modeling out the NEM to net zero in 2050, how do you think about the manufacturing sector, specifically as we need to change it to allow for that, not only increasing electrification, but to bring in the hydrogen as well?

Yes. It's a terrific question. And I think historically, people like us, but also the system operator and policymakers saw kind of demand as an input, something that was kind of fairly immutable and then supply had to meet demand. I think increasingly, everyone is thinking harder about not just the absolute level of demand that I discussed there, theoretically a doubling of demand over 20 or 30 years but also the shape of it and the required firmness. And so there are various kind of policy mechanisms underway to address these problems. So for example, a more active role for demand side response. But I think the fundamental question is people like us and policymakers have to think much harder, not just about the absolute level of demand, but also the shape. So that's very true in manufacturing, but it's also true in EVs, hydrogen and heating. I think EVs is a great example, right? We will have to massively overbuild infrastructure if we assume everyone comes in and plugs in their car at 5:00 p.m. when they get home from work. We really need to create a system where EVs are charging in a price responsive way. So we're not adding to our peak electricity demand. So I do think there's going to be more opportunities in the manufacturing space to think creatively about either supplying themselves or about the role that they can do to flex their own demand. Within that, we do need to make sure that we're supporting our manufacturing base and delivering the firm power we need. I think the other kind of challenge around demand, and the CEO of Rio Tinto was talking about this, this morning, is there is just uncertainty on 2 fronts. The demand increases that we think we're going to have to see to get to net zero, have not really started to eventuate yet, but we kind of know that coming. At the same time, we've got coal coming out in a disorderly way. So if you think about it, this portion of the pie is getting bigger and bigger, and renewable investment cases are challenging at the moment for a variety of reasons, grid and price volatility and a whole part of other things. So how do we make sure we're building both renewables and firming assets fast enough to support our manufacturing sector without gold plating, both the transmission and the generation, and that is difficult. And that's why I think we're seeing state governments, in particular, come up with programs like the New South Wales road map. A core part of that road map was turning New South Wales into an energy superpower and making electricity cheap for the manufacturing sector to come full circle there.

And can I just also get you to share your thoughts on how hydrogen production fits into that mix? Or if that will increase the amount of electricity we need again. So how does that kind of get captured in your thinking?

Yes. Well, it's difficult, I suppose, is the answer. I'm sure David has done a lot of work around this as well. It depends a lot about what you assume as to the -- what business model will be successful. But I think, increasingly, people are of the view that it will be kind of dedicated renewable assets, feeding an electrolyzer. There will be a certain amount of flexibility that's sustainable there. But at the same time, it will require some firming. We've come up with numbers, but it's very difficult that, that could be an extra 40 to 60 terawatt hours of demand just for hydrogen to decarbonize different industrial processes and other things. I'm sure there's a really wide variety of very plausible numbers there, though. So not suggesting ours are right, but it is really material.

And David, did you want to add any thoughts there on the hydrogen component?

Yes. Look, I mean, I think what is obvious is that particularly for many of these hard to beat sectors that we've looked at, hydrogen, green hydrogen, whether it's blue, green is absolutely part of the answer in a material way. So if we want to have these industries, we're going to have to find out a way -- we're going to have to find a way to make that work. The technology is coming, it's basically there. We've just got to drive the cost down. So that's really what the question is about. And the level of investment is huge. It really is material. I think we estimated that just if we thought about the renewables to feed into the electrolyzers, not counting electrolyze capital cost, over $100 billion, just to make the transition for those sectors, the 4 sectors that I mentioned before. So if you add the transmission and distribution on top of that, the electrolyzers themselves, we're talking about pretty big numbers. But with big numbers come big opportunities, too.

It really does bring to life the challenge as well as the opportunity, doesn't it?

Yes.

If I can switch back to affordability and reliability, David, when you think about the manufacturing sector, how do you see those sort of 2 factors, not competing necessarily, but playing out because we want both, but we can't necessarily have both easily. If you could give your thoughts there.

Yes. Yes, how do we trade those off, reliability and affordability. Look, I mean, I think that many -- not all of our manufacturing sectors in Australia are trade exposed, but those that are who can't pass the cost on have to build affordable products because they're competing in a global playing field in a global market. So affordability is a really hard thing to trade away for many of our sectors. And certainly, that will be true for the steel, the cement, for ammonia and for aluminum, in particular. And then if you go to reliability, our industrial manufacturing base, not just Australia but around the world, have been built around this premise of maximize utilization, keeping capital down. So not really made to be run intermittently, and very difficult to run something intermittently. Like an aluminum potline, I mean, you don't want to turn that off for very long. Otherwise, that's the end of your manufacturing facility. So I think these are difficult things to trade off. As we make the transition, we'll -- as Hugo said, we'll need to think about clever ways that we can manage that through. There is a chance -- or there's an opportunity, for instance, for green hydrogen to actually be produced intermittently, some of the technologies permit that to happen. But that just means we're going to need even more renewable infrastructure sitting behind that. We're going to have to overbuild on electrolyzers, on solar, on wind, et cetera, and so that we can produce more during daylight hours or when the wind is blowing and we'll need the storage and the distribution network that sits behind that then to be able to feed that in on a constant basis back into the manufacturing complex.

So it's pretty clear that the reliability component is critical to many parts of the manufacturing sector, as you highlighted, like you don't want to turn it off or things just going to go solid when you're making them. Thinking about the NIM as a whole. Like, Hugo, you've illustrated the volatility is going to increase within the system as we bring in more renewables. And as a consequence, the need to be able to firm that. How do you think that sort of pans out recognizing affordability for manufacturing is critical, the reliability is also critical. But again, it's that tension between the 2. How do you think about that?

Yes. I suppose at 2 levels. One is the kind of policy and political and the second is an economic. I think, at a policy, political, as we're discussing the energy transition, it is very difficult to have a nuanced debate where we're making trade-offs between decarbonization and cost if the lights are going out. And that's not just true in Australia, that is true globally. So again, to use the U.K. as an example, the way they thought about this was to introduce capacity markets, because The Daily Mail was insistent the lights were going to go out every winter. And what they wanted to do is take reliability off the table as an issue, so they can have a more straightforward debate with the public around cost versus decarbonization and what trade-offs were there. So I think globally at a political and policy level, it's very different to have a free part debate that we do need to make sure the lights stay on because that allows us to then accelerate decarbonization and have a kind of better conversation with the public and amongst policymakers around the trade-offs there. That's sort of a high level. I do though, as you think it is getting more complex, whether years matter, commodity price volatility has always mattered, but will matter more. And I think what we're seeing is there is going to be a real premium, both on the generator side, sophisticated analytics, risk trading capabilities, those types of things. But also on the demand side, we're working with a lot of clients now who care much more about electricity than they ever used to. Whether that's big tech and Google wanting 24/7 green power and doing matching and in some ways, really stimulating the debate around the U.S., around long-duration, 0 carbon firming or whether it's smelters or whether it's any big energy user, they are having to think much more hard and in some ways, controlling their own or playing a more active role in their own electricity and power supply chain because that volatility will be a feature of a high renewable penetration system. It's difficult to get around them.

And I think the chart that really brought that to life for me was when you were showing the Victorian...

They do get more costly.

Can I just sort of dig in a little bit more around what could happen from state to state. So they have different approaches to net zero and renewables. Can you talk a bit about how that could impact the system? Like if one is doing something and something is doing something else? Or do you see it becoming more interconnected. Can you just give us a bit of your thoughts on that?

Yes. I mean I think there are 2 competing impulses. I think, again, to Rob's excellent point, there is a kind of broad acknowledgment that we will need more transmission over time. Now you can debate the timing and the cost. So in that sense, we will need more capability to move renewables around the system. And so in that, like literal physical sense, we will probably become a more interconnected system over time. Project EnergyConnect between South Australia and New South Wales is a great example of that. and we will need more intra-regional transmission as well. But I think the competing or opposite impulse is that in the absence of integrated energy and climate policy, states have filled that vacuum with often quite good policy frameworks, but increasingly state-based reliability targets and decarbonization targets. And in that world where states are concerned with meeting their own supply at any given time, to some degree, that does lessen at least the economic case for additional interconnection. So the NIM came together a little while ago. I think it's going too far to say it's fragmenting, but states do have their own objectives, their own time lines. They want to see jobs and resources deployed domestically, and they are thinking hard about solutions in their own states. And that is a slightly different dynamic from arguably what we've seen over the last 10, 15, 20 years.

And just staying with the policy components a little bit, David, in your report that you touched on the need for policy to encourage the changes that we have to have in the manufacturing sector to keep it affordable and ticking along. Can you just talk to some of the points that you've raised in your report there?

Yes, sure. I think we see there's a need for 4 sort of broad areas of policy support from government to facilitate the transition. The first is really around helping industry to scale the solution. So the technologies, as we talked about before, have a ways to go to be fully proven out. That requires R&D investment. That requires piloting, trials and scaling up to commercial scale. And we feel government has a role to play in that. And we're already seeing that to some degree through Arena and [ CFC ], et cetera. So the government is sort of moving in that direction, that needs to continue, and it probably needs to get more material in sort of in terms of the sort of the coinvestment the government makes. There's certainly that need around facilitating a very low-cost renewable power generation network that's kind of like key to everything for the manufacturing transition. The government clearly has a role to play in that. But balancing that, there's actually sort of -- there's really 3 things that need to be balanced out. One is the sort of the direct low cost of energy -- of clean energy, rather. There's the piece around facilitating and encouraging the green premium or the demand really for green products. So government can do that through its own procurement policies, for instance, by leading the way. And it can also do it around things like standard setting and sort of setting expectations around product mixes that sort of move into various different networks. And then there's a price policy and then trade revenues at the end of the day. So we've got to make sure there's a level playing field for those that are trade exposed. Otherwise, we'll just end up offshoring the emissions to another country that actually doesn't have the same sort of targets in place that we do and we'll just find that high emissions products come back and to replace the ones that we weren't able to make here because we didn't level the playing field side of it. I mean, those sort of elements are kind of like fairly obvious. And we're seeing examples of those emerge around the world in other markets as well. It's about getting the balance right because you can move more in one dimension to make room in others, but they all kind of need to be worked on in conjunction with one another.

Yes. Thank you. Offshoring certainly doesn't solve the problem. Hugo, if I can throw another question to you. We get lots of questions around batteries. And I know you've touched on it already in your presentation. But if you could just some more of your thoughts around what they can actually do and where they can't yet, or maybe ever, meet the needs of the market in terms of topping up for when the wind isn't blowing and the sun isn't shining?

Yes. No, completely. And batteries are just going to be kind of a massive asset class in any net zero electricity system. So again, we're very bullish. And we're seeing huge growth rates globally. California delivered 2 gigawatts of batteries just in a year last year. If you look at the Australian pipeline, just have kind of announced committed projects, we're going to get to 3 gigawatts by somewhere between 2026 and 2027. So where you see big opportunities for batteries. The story of battery investment cases tends to be that initially, you see shorter-duration batteries, and they help with things like ancillary services, right, keeping the frequency at the right levels, and that's what the home sale battery did quite profitably. And a lot of the batteries at the moment have done very, very well providing those kind of niche services. The next generation of battery investment cases are going to be longer-duration batteries, anywhere between 4 and 8 hours, and they'll be doing more of the kind of bulk moving around of power, right? Again, charging when the sun is shining and prices are very low or even negative and dispatching when demand is high and during that daily cycle. And so you're getting whatever it is, a certain spread each day, and that's what your -- and that's what's kind of driving the economics of the asset. So we've seen that story play out in a number of different markets. And Australia has certainly been at the leading edge because it is a solar-dominated system with quite an extreme DUC curve. And that role will persist moving forward, right? So again, there's going to be gigawatts of batteries, we think, on the system doing that. And we think lithium ion, but there are other top technologies, redox flow, ion air and others that can play that role. And we're seeing auctions globally of 8-hour batteries, California again, and lithium ion is winning, but there are other technologies competing in those auctions. And there's quite a lot of hype in the U.S. about some of the new battery chemistries, and we'll see how that play out. What is harder to see is like how -- at least how the current fleet of battery technologies will provide a kind of 1 week of power. And again, that matters more in wind-intensive systems like Victoria or Europe, and that there will be a different type of firming technology that can keep the lights on for longer periods of time. And so again, new technologies may emerge, but they're not here at the moment that can run at those types of durations. I think the other part of the battery story that's quite interesting is the idea, and we're working with a few parties on this, is batteries is like helping augment the transition network now. So rather than building poles and wires, we build batteries at the right part of the grid, whether it's REZes to store power, so we're not overloading our transmission lines, and then delivering when those transmission lines are less constrained. So particularly as we think about social license and where we're going to build renewables, we want to build them in these REZes and contain them to some degree. But without gold plating the transmission, we think batteries have a role there to play. So again, we're certainly not kind of bearish on the future of batteries. We just think there are going to be a range of firming technologies required to keep the lights on through the decarbonization journey. And we think peaking gas or hydrogen or gas with CCS is going to have an important role to play.

Yes. Thank you. Conscious of time. So just in closing, David, if I can ask you what the opportunity for the manufacturing sector in Australia is if we get this transition right?

Yes. I think at the end of the day, we've sort of made this point before, but we've got this wonderful renewable resource base here in this country, lots of room for it, and we have the existing capability in this country around manufacturing. So we're not looking to build new industry necessarily. We're just looking to transition it. And given that base, I think that actually gives us a wonderful position to actually make this transition relative to other parts of the world and potentially expand beyond that. And the example I come back to is if we think about what happened in the U.S. through the shale gas revolution. So they had a reset through the introduction of shale gas, and that led to a manufacturing renaissance in that country. We have an advantage in this country because of those points I made just before, which could potentially set us up for the same sort of thing. And if we went through that, not only we would transition our existing industry, but we can build new industries off the back of that, and that could lead to some substantial gains for the country, not just from an employment standpoint, but otherwise.

Thank you. And Hugo, did you just want to leave us with any thoughts on the opportunities in the generation space?

Yes. But I think we've touched on a lot of them. But I think there are just the size of the opportunity, as David touched on, is enormous. And I think once we get beyond tens of billions, it all gets a bit meaningless, it's really, really big. In my mind, the future is going to be diversified portfolios of renewables, a range of flexible assets firming them up and people with the right capabilities to develop and trade those assets and provide the supporting infrastructure. I think that is the direction that not just Australia's market is heading, but globally as well.

Thank you, David, and thank you, Hugo. Really appreciate you taking the time to share your thoughts with us today. We'll now take a break for 20 minutes. So we'll ask you to be back in your seats at 10:40. [Break]

Okay. Welcome back, everyone, and let's get started on the second session. As a reminder, we've already had your questions for our panel discussion, so won't be opening up to the floor. However, you are more than welcome to stay afterwards and continue chatting to the APA people that we have here. With that, I would now like to welcome to the stage APA's CFO, Adam Watson, to talk to you about APA's investment considerations.

Welcome, everyone, and so good to see everyone in the flesh. I was just reflecting before, sitting back, looking around the crowd, and my lord, we have got a lot of capital in this room. From our debt investors, I actually had a couple of our debt investors at my table just try and compete on who's got the biggest balance sheet. But we've got some very big debt investors here, and we've got equally some very big equity investors in the room, and you should all be incredibly proud of the role that you've all played in the energy transition so far. It's been pretty slow over the last 100 years that you've been not only in the energy transition, but investing and putting the funding to work to develop Australia's infrastructure, and there's clearly a lot more to be done in that space in the near term. As proud as you are, we're very proud at APA, and we're very proud of our history. We're very proud to be a company with a proven track record of success. And we're proud to be a company with a very strong purpose, which is to strengthen communities through responsible energy. At APA, we believe we've got a great strategy. And I think you've heard today, and we've been talking about it for some time now, but when you look at the energy transition, it's certainly moving along. And we're playing a major part in the new technologies, whether it'd be electricity transmission. And again, we announced today being shortlisted -- or we didn't announce, the government announced us being one of the consortium shortlisted in New South Wales First Renewable Energy Zone, which is very exciting. The work that we're doing around renewables, the work that we're doing around hydrogen. So we're -- point number 1, from our strategy, we're in the new energy markets. But point number 2, which is really important, is coal is coming out, and that's inevitable, and it's coming out faster than anyone predicted. And I'm sure it will come out even faster again than any other forecast we're seeing. And the third part, which goes to that is it is inevitable, certainly, in our view, and I think you're hearing it from many experts, including Hugo and David today, that gas is not going anywhere. In fact, the demand for gas and therefore, gas investment, we see only increasing not only in the short term, but over the long term. So we think we're very well positioned as it relates to that energy transition. But a great strategy is ineffective if you don't have the capability to win. And we believe we've got that capability. We believe we can win. And a great strategy also means very little if you don't have the right foundations. And at APA, we're very proud, and we believe we've got the right foundations in place. Core to our foundations and core to our financial capabilities are our defensive operating model, our strong balance sheet and the ongoing investments we make in our core operations, investments that we know are critical to ensure that we deliver sustainable growth. So let's start with our operating model, and we presented this at the half year. So that's not new. It's being rehashed, and it's rehashed because it's very important, it's very timely. And firstly, we've got a very attractive revenue profile. And it's attractive for 3 principal reasons. First, it's highly contracted. Second, it's diversified. We're diversified across a spread of customers, a spread of services or spread of industries. And thirdly, very topical, but very importantly, we are strongly linked to inflation. And without doubt, we're in a period of high inflation, and that represents a real tailwind for our business. We've got significant balance sheet capacity. We've got strong liquidity. We've got plenty of headroom in our credit metrics and it gives us the flexibility to create value through either investments or capital management. Retaining this capability enables APA to be nimble. And our most recent example of this, the investment we made in Basslink. We're able to make that investment using our existing balance sheet, and we moved quickly and we moved creatively. And while it currently makes sense to retain this capacity given the confidence we've got in the market and the confidence we've got in the growth opportunities before us, we do have other capital management tools at our disposal. I'll talk a little bit about those in a moment. But they're designed to give us flexibility to continue to create value for you, our security holders, if circumstances evolve or change. Now most of you know me really well in this room, and you know I love to talk about a good debt maturity chart. [ I don't know Mr. Kos ]. So I can talk about this in my sleep. And I probably do. But to me, one of the key responsibilities of a CFO is to ensure that we've got a debt book that is sustainable and minimizes future refinancing risk. Our recent work on the APA debt book has really put your company in a very strong position. We've got a low average cost of debt. We've shielded our exposure to rising interest rates and we don't have any material refinancings due until around 2025. There's a quick call out on the chart, and that's just to remind people that when you look at that 2025 stack, we've got a range of tenors. We've got a range of different interest rates there to be refinanced in terms of the existing stacks. The rates of that -- those stacks go up as far as 7.5%. I think it's about 7.4% for one of those, but they average around about 5%. And that's pretty consistent where we see rates if you were to take our 7-year average debt book. If you were to do a 7-year average or 7-year APA bond today, we'd be pricing it in that early to mid-5% range. So we're in a reasonably good shape to be able to continue to create value as we move forward with those maturities. So we're often asked about how we think about funding our growth. And importantly, how we go about determining our investment returns. Most of the time, we get the question, what hurdle rate do we apply to each investment, and that's the -- one of the few times we get to say we can't tell you that. But what I'll try to do is talk to you about the process that we go through. And the sources and uses of funds summary before you on this slide is a real highlight of the areas that we focus on when it comes to capital allocation at APA. The sources side of the equation is another reminder of our strong foundations that I spoke of before. Our revenues, again, they're highly contracted, they're diversified, they're inflation-linked. Our balance sheet is strong. We've got high levels of liquidity, attractive credit metrics, prudent debt exposures. And we've got access to deep pools of capital, both debt and equity, hopefully measured by the number of people again here today. And with these strong foundations, we start our allocation process or the uses side of that equation by making sure we're investing in the base business to keep APA economically sustainable. Our stay-in business CapEx is designed to ensure our assets are safe, reliable and efficient. And this largely sits with our operations team who use life cycle models to regularly maintain, upgrade and improve the efficiency of our critical infrastructure, and they do a fantastic job. While our current operating and technology systems have served the company well to help get us to this stage of our journey, we know we need to continue to invest in our systems and processes to ensure we're even more efficient and more scalable as we continue to grow. And I'll talk again a little bit about that in a moment. So when assessing our investments, when assessing our hurdle rates, we know they're very critical to creating shareholder value for you. Our investment hurdle rates incorporate a buffer above our WACC. It's all pretty simple stuff, but they incorporate a buffer. And we review them regularly, at least every 6 months, to ensure that they reflect changes in the business and changes in the market. Now we don't change them every 6 months in terms of the hurdle rate. But what we do consider from time to time, if we see a sustained period of adjustment, for example, a sustained rising interest rate environment, then that may cause us to modify our hurdle rates. And we also apply different hurdle rates based on the different investment classes dependent upon the risk profile of those investments. We don't necessarily apply a different hurdle rate to a different asset class just because one transport electricity through a wire, and the other one transports gas through a pipe doesn't mean that their risk profile is different. We assess our hurdle rates based on that risk profile. So at one book end, we look at our regulated assets. At the other end -- book end, you may be looking at renewable energy, power generator that, in the tail end of its life, might be a bit exposed to some merchant risk. And then there's the contracted business in between. So we apply a different hurdle rate based on that different risk profile. And then the other thing that we do is we also apply metrics such as cash payback to our investment evaluations. Again, it's all pretty 101 sort of stuff, particularly for those of you in the room, but it's really important because it's about making sure that we generate an appropriate cash return on those investments, particularly where the longevity or the useful life of those investments are uncertain, which is obviously the case when you're in a market like we are where the energy transition continues to evolve. Our capital strategy is also designed to ensure that we have other tools, and that's just not M&A and organic growth, but other tools to create value for you, our security holders. And that may include things like liability management which, in simple terms, is the early refinancing of existing debt. We did that in February last year. I wish I could do it again right now, but we'd like to and we continue to monitor. But really proud of the work that we did in February last year, and you can see that we created significant value as part of that process. And we've got other tools at our disposal as well. So we've got DRPs that we could implement. We've got buybacks that we could implement. And again, they're all designed to create value if and when we need them. In fact, today, there's an announcement that was made around the changes to our constitution to facilitate a buyback. It's not saying we are doing one. We are not doing one. It's to facilitate that so that we've got the tools to be able to move quickly if we ever need to, should circumstances change. And that's because we're constantly working on ways to create value. At APA, we've got a history of consistently delivering solid growth. Creating from what was a very small spin-off 21 years ago, the large company that you see before you today. And to keep growing, we always need to look forward and challenge ourselves to do things differently because we know that by doing the same things that we did in the past is not going to achieve the same success for us in the future. We need to continue to invest in our business for a sustainable future. I'm going to give you a couple of examples. So first, if you take our business development investments that we've made and you look at what we've done over the last 18 months, which came from the significant investments we've been making in those teams, a lot of it is people and investing in our people and building capability in that space. And you don't achieve a $1.4 billion organic growth pipeline without that. So there is a direct correlation between the investment we've made in our BD teams and our organic growth pipeline and the recent announcements we've made, and it's been a fantastic return on investment. And we also continue to expand those BD teams, and we will continue to expand those BD teams as we pursue new opportunities in the new exciting growth markets like the renewable energy zones here in New South Wales. The other investment, which is very clear, is the work that we're doing around Pathfinder and the investments we're making in that program. We're doing research. We're doing testing. We're investing through JVs to responsibly transition that energy system. We're looking at batteries and storage, and we're looking at hydrogen. And you heard David speak before about the importance of the manufacturing industry and the fact that you've got to get these new energy products low cost and certain. And that's why we're doing JVs with the likes of Wesfarmers. There was a media release on that too today or yesterday around the work that we're doing with them coming into the hydrogen testing that we're doing with our Parmelia pipeline, and we feel very excited about that, but there's a long way to go, and we've got to keep making those investments. We need to continually do more for our customers and our communities to ensure that we've got a sustainable future. We need to ensure that our developments are even more sensitive to the environment than they ever were before. And that's a real competitive advantage for APA. We're really good at this. And when you look at the energy or the electricity transmission lines that need to be built in New South Wales through the REZ projects, we're really good at building infrastructure that impact communities and impact land. So we're going to use that as a competitive advantage and work with governments to really help them move forward in a positive way for the community. We need to further strengthen our relationships not only with our communities, but also our First Nations people, and it's really important to us. And we also need to invest and do things differently to support our own net zero ambitions, and we'll talk about that as part of our full year results as it relates to our interim targets. We're making investments in our systems and processes, ensuring that our technology platforms are modern and easy to use for our 2,000-odd employees. And by way of example, we're making investments in a new ERP. I can't believe I'm up here saying I'm doing another ERP. I think I promised in another organization I wouldn't do that, but we are doing an ERP because it's the right thing to do, and we want to make sure that our systems and processes are modern and efficient and value enhancing. We're also investing in technologies to make our workforce in the field more agile and more mobile. And we're really working closely with Darren's team and the operations team to make sure that they have the tools they need to be able to work efficiently and effectively. And there are really exciting -- there are exciting investments to make to ensure that we're an employer of choice. And they're a huge part of our employee value proposition, and we've just got to keep doing better in that space and they create stronger foundations for the next-generation APA. And we're strengthening our risk management and our governance capabilities as companies always are as that evolves. And an example of that is the work that we're doing around physical security and cybersecurity. But above all, it's our people who are core to our success, and we're investing in them. We're upskilling. We're improving our training. We're developing our graduates and our interns, and we're developing our leaders at APA. Now the cynics in the room are going to sit there and say, "Well, that's Adam just telling us that costs are about to increase." And the answer is yes, that's what I just did, our costs are going to increase. But so is our revenue, and so is our free cash. So is our development pipeline. And they're growing because we're making these investments. We're in a fantastic period at the moment with strong tailwinds. We've got lower interest costs because of the liability management exercise that we undertook last year. We've got lower tax paid because of all the accelerated depreciation on all of the growth projects that we're investing in. And we're effectively reinvesting this cash into enhancing our capability and again, making sure that we've got a sustainable future, and we know it's the right thing to do. So thank you for your attention today. At APA, we know we've got an attractive operating model. We know we've got a strong balance sheet. And we're certainly, as I just said, investing in the future for sustainable growth and a sustainable future. I will now hand you back to Rob. Thanks, everyone.

Thank you very much, Adam, for that presentation. We are now going to change gears and focus on ESG and our commitments around ESG. Now I could stand up here and give you a presentation on our sustainability road map and our commitments around ESG, but I think far more powerful is to hear that directly from our people who are living it every day. And so we've got a video, which will now play. [Presentation]

Great. We'll just wait for everyone to take a seat, and then we'll kick off. Okay. Well, good morning, everyone, and thanks for the opportunity to be the [ Tony Jones ] to your Q&A today. My name is Ben Pratt, and I'm APA's General Manager of Corporate Affairs, that normally means I'm anxiously pacing in the background when execs are answering questions, today, I get to ask them. Look, it's great to have the opportunity to join you and to facilitate the discussion. I hope you enjoyed video that you've just seen. I think it shows some great examples of the work that our people are doing out on site, working with community and the work we're doing with community partners. As Rob said, strengthening our ESG performance is a really significant area of focus. And so I think that provides useful things to the discussion today. We'll drill into some of the things we saw there some of the ESG issues that we discussed and also some of the broader issues that, as Kynwynn said, you've identified as being priorities and things that you want to hear about.

We'll start, as we always do, I think, with safety. And Darren, I might ask you a question firstly around safety. And I know there's a particular focus on both people and process safety at the moment. We've seen some good improvements, but we clearly have work to do. So I wonder if you could maybe talk us through our approach there.

Sure. Thanks, Ben. And where I'd actually like to start is just acknowledging our 2,000 employees and 1,000 contractors that work for us pretty much every day of the week. The last couple of years has been pretty tough, particularly in the Southern states. But through that period in the last 2 years, we've reduced our total recordable injury frequency rate. So that's how often we injure people, our own people or contractors by 50% to a point where we're reasonably pleased with where we sit and have a solid foundation to improve over the next couple of years. And when we think about safety, we don't just think about personal safety. We think about health and well-being. We also think about process safety. So just to touch on health and well-being, which is very topical at the moment and has been for the last couple of years. At the back end of lockdowns in Q3 last year, it was really timely for us to go out and do a cultural survey. So that's to go out to every single employee that we have across the country and ask them how they're feeling, what is topical for them in their regions. And on the health and well-being front, we had over 90% of people believe that their leader cares about their health and well-being. And that's from a response rate of over 80%. So of those 2,000 surveys we sent out, we've got more than 80% back, which is top quartile performance in terms of the culture survey. So that was really pleasing and it's pleasing that we operate a business where people know that we care about their health and well-being. In the last month or so, we've also initiated a training module called leading well-being, which I actually did a couple of days ago, and it's really structured around the are you okay methodology, which is a pretty simple 3-step process where you engage with the person you're talking about, ask them how they're feeling, redirect them to services, if required, but importantly, do the check-in and that maintaining the social fabric of who APA is. The third element that we focus on is process safety, which is a bit more technical and a bit more engineering related, but it really speaks to the more infrequent events. But when those events occur, they have serious impacts for people, plant and businesses. So we've spent the last 3 years really building a solid foundation with our process safety framework, implementing that across the business, including corporate-wide process safety awareness training, and really putting us on a good foundation to now leverage those skills over the next couple of years to really mature that process safety framework within the business. And so just referencing back to that culture survey of last year, when we talk to our employees and we ask them about how they feel about safety, over 95% of those employees feel that the task they're undertaking and the environment they're in is a safe place to be. So that's a good indicator of the people that are distributed right across the country, how they think about working at APA in a safe way. And that's the mindset that we wanted APA and that comes with a workforce that care about the work they do and staying safe. I talked about our improvement plan, and we're actually coming to the end of our last 3-year improvement plan. And what we're doing is launching the next 3 years. And the way we've gone about that health, safety and environment and heritage strategy is actually to ask our employees what they think about it. So we did it quite differently this time around in that we sent out a group of people to do face-to-face or Teams interviews as it turned out at the back end of last year. And we talked to around 100 of our employees, all levels, all locations and ask them about what's important to them on safety and how we could improve. So we've used that really rich data to structure a top-down, bottom-up improvement plan that we're now really looking forward to execute. And so if I combine those 3 key messages around personal safety, health and well-being and process safety, ultimately, that goes to the performance of the business and the report card that we get. And in particular, that report card is the foundation that sets us up to grow. Often when we're tendering for business, we're talking to customers' safety and how we go about our business comes to the fall, and we're really confident that we've got the right people to execute on that and support our growth.

Great. Thank you. Julian, we might go to you. And particularly, I want to ask you about the East Coast Grid and the state of play on the East Coast grid. That's a question we get asked regularly by our investors.

Thanks, Ben. And so I think Rob has talked about in his presentation on the shift of suppliers from North to South, our existing infrastructure. We've made the contracts with customers like Origin and AGL is effectively fully contracted, and we've got existing customer discussions that we expect to fully commit Stage 1 of that expansion. So that's the current status on Stage 1, which we're committed to today.

Great. And where are we at with Stage 2?

Stage 2, again, given that changing pattern of supply-demand balance on the East Coast, and I'm sure people are aware of the G2. We've got visible customer demand across a range of customers that will be a multiple of the capacity required to Stage 2. Now maybe not all that sort of comes through. But given the dynamics in the market and given that visible demand for Stage 2 expansion, we are -- I think fair to say, studying that stage expansion very closely at the moment.

Great. Okay. Thanks. And Darren, what about in the West? Maybe if I can get you to talk about what we're seeing in terms of customer demand in the West?

Yes, I was actually talking to a few people in the break actually. And the West is a pretty exciting place to be doing business at the moment. There's really strong demand and good growth. And if you look at our -- the main asset that I'd like to talk about is the Goldfields Pipeline. So the Goldfields Pipeline goes all the way from the Northwest up in the Pilbara, comes out to Newman, travels north, south, gets down to Kalgoorlie, then heads out into the Eastern Goldfields. It's beautiful country. It's 1,800 kilometers long. And when we -- that pipeline when it was initially built had 5 foundation customers many years ago. We've now got 27-plus firm connections to that pipeline. And the strength of the demand is really around the diversity that a couple of speakers put up earlier and Rob's slide in particular. But it's the diversity of the mineral resources that are the exciting part. So whether it's gold, nickel, some of the more rare earths around lithium, cobalt and potash, most of those minerals require energy, they require energy in remote places. And fortuitously, many of them are closely located to that existing infrastructure. And so as we're a customer-driven business that really looks to deliver services that the customers value, what they're telling us is they are looking to decarbonize their supply chains. And they need gas to do it, and they're looking to link that with renewables, whether -- it's predominantly solar in those regions, but wind also, how you combine that with the battery to decarbonize, but importantly, as we talked about earlier, how is that supply secure? And it has to be secure 24/7. So we are in the middle of commissioning our first microgrid in the West. We're looking forward to that being a success, but we're really well positioned to leverage that existing footprint, to work with our customers, the way they're looking to decarbonize to continue to grow our business in the West.

Great. And so I guess, Julian, are we seeing similar demand for off-grid solutions on the East Coast?

I think the best example on the East Coast, Ben, is the Mica Creek solar farm, which about 88 megawatts. So Mount Isa, we've got a range of gas generation there, gas firming, if you will, use the modern terminology and we're then putting in additional renewables in that market. So that's becoming, in effect, a large microgrid, if you will. I think it's the biggest solar farm now will be. I'm sure you won't hold that title for very long, but I think it's the biggest solar farm outside of NEM that we're delivering there. And so that's an example in that Mount Isa region, and again, the mineral region in Queensland is very prospective for renewable power, but effectively because we've already got the gas in situ , it's firmed renewables in that market.

That North West mineral province is particularly interesting and topical. I'm sure it's got nothing to do with the election timing, but CopperString regularly comes up. We've got no unmet gas demand. We've got projects like Mica Creek servicing customers. I wonder if you can talk a bit about our views on CopperString, I know we made a submission to the process there.

We did our submissions on our website. So I highly recommend people read them. So I'll say probably 3 things on CopperString. One is this is not required infrastructure. So we're delivering infrastructure on the ground. We're building effectively, if you will, on-site renewables with earnings for customers. Customers want back because they're signing contracts. CopperString, actually, it's an interesting project that's being socialized through or attempted to be socialized through customer charges. In Queensland, there's a uniform tariff policy. So I don't think people may not be so aware in the region, but that means people in the regions pay the same tariffs as people in the cities to spread that cost because CopperString is actually going to increase the cost across the whole of Queensland because of that uniform tariff policy in Mount Isa in the Gulf Country region, the cost for moms and dads in Mount Isa is actually going to go up as a result of CopperString. So I don't -- that's probably not well appreciated, but CopperString claims to take prices down, but actually is going to increase costs. It's not just the generation cost, it's the transmission costs as well. So it's going to increase prices for moms and dads in Mount Isa. Second, it's really an efficient project. So if you look at the projects in the ISP, so the AEMO system plan, pick a product like a [ mono line ] or something like that, a lot of the interconnects around $2 million per megawatt of capacity. So that's a rule of thumb. The REZ projects actually are even cheaper than that. So obviously, cheaper is good because we want to keep cost of transmission down. I mean CopperString is probably a $3 billion project for a 300-megawatt load in Mount Isa, so that's $10 million per megawatt. So 5x, if you like, the sort of average in the system plan or reputable projects. So certainly, I don't want to get into politics, but you're seeing a political debate around who pays the transmission and should we be doing all those transmission projects because that cost has to be paid. I'd submit that we shouldn't be doing the most inefficient projects. It seems like an odd choice or priority. And so my third point would be part of the CopperString selling pitch is access to an [ Empower ] $50 -- $50 anyway because you get line losses and other things, so the cost to the Mount Isa region, if it did connect to NEM, even if the Queensland [ node ] price is $50, it would be higher anyway. So it's not an accurate representation, but everyone would know now if you look at the wholesale prices in Queensland, New South Wales, a well above $100, $100, $200. So if Mount Isa was connected today, not only would you be paying for infrastructure, you don't need a connection infrastructure. You'd also be paying wholesale prices are more expensive than what they're claiming that we're charging. So it just doesn't stack up and it's a sort of infrastructure that people should actually say, you know what, that's not right. That's a bad project, we shouldn't be doing that.

Okay. While you've got the floor, you mentioned [ Marenas ] in your answer there. And maybe to think of where we are with Basslink, we own 100% of the debt, why not 100% of the equity.

Thanks, Ben. I know you're going to ask that. The sales on Basslink, obviously, people have seen the news flow. We acquired 100% of the secured debt. Look, it's an interesting asset. We think it's a good asset if it's managed in the right way. It is the critical infrastructure link between Tasmania and the mainland. And we understandably, I'm sure we'll talk about the REZ as well, but that thesis that we've seen in the materials today around increasing renewable generation, the transition needs transmission, right? So we think there's a good story around Basslink. Certainly, there's a significant market benefit for that to exist. And [ Marenas ] linking further links could easily be justified as well using that methodology. So we're in the process. There's an administration and there's a receivership process. So we're working with the various stakeholders around that, talking to the government and Hydro Tasmania as well, given the confidentiality, I won't go into sort of details around that. But obviously, we're seeing a stakeholder in that asset at the moment, and we would like to move to full acquisition in a smooth time line and the operation of the asset, and then we'll start investigating further augmentation opportunities, which I think are pretty exciting.

And we've talked about converting that to a regulated asset. Can you talk us through the rationale for that?

Yes. Look, I think if you look at multiple links across -- between the same market and obviously, there's examples in Europe, there's multiple parallel links in Europe. It makes sense that they're on the same commercial or regulatory model. So having the [ shandy ], if you will, one on top, one or the other doesn't really work. And so we think the best model is to move to a sustainable footing around a regulatory model that aligns incentives around investing in the asset, it's fair to say. I don't think the legacy contracts really had that design. It was -- did really incentivize the previous owners to respond to events and augment the asset. So we think in the right way, having that model invest in the asset, roll it into the asset base, improve the asset and you bring on a second link and you have the same model and then everyone understands that the restructure is priced, how the power should flow, et cetera. And so I think it's very aligned with APA's customer-centric model, working with solutions with the major stakeholders there. And then the long-term best model for that market is to convert that links to regulated asset, spread under regulation, socialize the cost to the people that benefit from it. And then for Tasmania, that would provide more capacity for some fantastic renewable resources that they have in Tasmania there.

And speaking of connecting renewables since you've got the floor and we're talking about transmission. Central West around a REZ, we've obviously -- Rob and Adam have talked about that this morning. Exciting opportunity for us now having been shortlisted with our consortium partners. What are the next steps in that process?

Thanks, Ben. Yes, I think Rob covered a lot of it in his presentation. Clearly, we're well positioned to work with the government. Really excited to be shortlisted, pretty competitive. So really pleased that government incentives is the right path and the right capabilities in that process. I think the process details are confidential. But the only thing I can share is, I think that process will run through the balance of this year in terms of the government working with the short list of parties. Obviously, we're 1 of 3 there and then doing the selection and then into a financial close will be next year. I think what's important there as well, and there's quite a lot of information on the energy road map sites. So they've got a quite interactive site there that I'd recommend for people. There's a few key cuts and things you can look at there. And -- but what is clear is the government is going through this generation tender. A lot of acronyms on the REZ process, unfortunately, they have this thing called LTSA, which is the long-term support agreements for generation. And so I think it's really important that the real premise to what is a REZ and what they're trying to do is there's obviously been history in the past around congestion between renewables and transmission that just haven't niched. So think about going back to central planning school and saying, okay, we're building a renewable energy zone, we're going to have some transmission there, we're going to match that transmission to the generation. And therefore, we're going to ensure that when that's delivered that the -- there's good comparability in terms of the capacity that's required and avoiding congestion, which obviously comes at a cost -- as cost of the community. And so what they're doing with their tender process is they're working with the generators to do the generation bid, and then they'll be working with the zone tenders to bring that together. So we'd expect all of that work to be done this year and then the final selection and financial cost will be next year.

Great. Thank you. Kevin, obviously, one of the challenges we're building major infrastructure like the renewable energy zones and gas pipelines is the importance of community engagement. That's going to be key to the REZ. I guess we heard a bit from Helen and Gerard, particularly on the video about our approach to community engagement. But from your point of view, what differentiates APA from the others?

Thanks, Ben. Well, first of all, we've been doing this for 20 years, I suppose, and we've invested billions in infrastructure assets around the country. And the engagement with all stakeholders is certainly dramatically increased over the last few years. I might deduce the NGI as an example. So it's a large greenfield project and our engagement with all the authorities to even get the approvals being much more significant than we've experienced in the past, but that's something that we've worked really hard at and now we're underway with the community. We have a community development initiative over there. We are working with a local community, how are we going to invest in the community for the benefit of the community. So we will do that with jointly with the local communities and the farmers. When I think about traditional owners, you heard in the video that we signed up relationship agreements with traditional owners on that project, along the [ 580-kilometer ] pipeline it is. So it's a significant length of pipeline. And those relationship agreements articulate how we work together, expectations of each party, pathways to business and employment opportunities for those traditional owner groups. So that's a first for APA and something we will be doing more of in the future. When I think about the land owners, we have agreements with all the land owners along the pipeline. And when I think about landowners, I mean we have 15,000 kilometers of pipelines around the country and 11,000 landowners that we deal with because of the reasons where we crossed their land on a minimum on an annual basis. So we are used to doing this. And finally, I might just say, we have, for the first in our construction contracts on that project, we have hard KPIs in those construction contracts where we have dollars linked to the level of indigenous and local employment. So there's hard dollars linked to those construction -- contractors where they must deliver on those KPIs.

Okay. While we're talking NGI, I guess probably a good opportunity to ask where we're at with the construction of that project.

Well, we've just commenced construction on the compressor station on site. So we've been doing a lot of work, prefabrication work leading into that, but we now have approval to start and we started this week on the compressor station. And the pipeline, we will be commencing clear and grade activities, which is the first real construction sort of activity next week. And if all goes well, which we -- I'm hoping it will, we will be complete March next year.

Right. And Julian, contracting on the NGI?

Thanks, Ben. I think Darren has talked in the presentation, I think in his presentation he talked about the market outlook in WA for mineralization and mining demand. And I think it's fair say market goes on NGI and the West has actually gone up since we made the Fed decision. So that's the first thing I'd say. The addressable market is actually bigger than when we did our initial business case. And Darren also talk about [ GGP's goal ]. And so the MGI as required infrastructure. We've got a number of customers on that, as Darren has talked about. And so what's important there, I talked about this cases before, is you got the AGL, the Origins, which are big aggregators of load and they've got the customers themselves with the NGI, with the GDP, we deal with the end customers. And so their timing and the contracts with those end customers is all customer by customer and it's the NGI and the GDP conversations. It's a combination of some new projects and also some incremental load. The existing customers are seeking to buy because they've got incremental mining demand. So it's a mixture of different things. In terms of the priority customers at the moment, we got, I call it, customer engagement with about 42 days of load in terms of the initial priority work we're doing. Involving customer engagements, I mean, there's some fully documented GTAs that we're negotiating with customers, there's some early works agreements, which our language, but that's effectively pre-works that customer is paying for is a precursor to a GTA and then there's also customers who are getting priced up tariffs from us to feed in their investment decisions and their decision-making is around contracts. So that's initial priority customer base we're targeting. And then from there, obviously, as I said, there's a long list of further customers that we intend to engage with in that, that longer list exceeds the capacity at the bottom line. So again, that the bigger market in WA for mineralization and mining demand is very positive.

Great. Ross, great to have you here. I think this time last year, your presence on the screen because of COVID restrictions. So it's great that we've got you here in person. And we haven't spent a lot of time talking about the U.S. today, but a good opportunity to ask you what's happening in the U.S., what your areas of focus have been.

Basically, what I've been doing.

Basically, yes.

You wouldn't be the first person to ask me that today, including from my boss. The -- I'll start off with just refreshing everybody why we're doing what we're doing. We talk about the size of the price locally. But reasonable estimates would suggest that the scale of the opportunities is 40x to 50x that in Australia. And combine that with a favorable regulatory environment and I think a pretty favorable risk-return environment does continue to suggest to us that the opportunities are there. And those opportunities are most likely going to be in the electricity side of things. We started initially on the gas infrastructure, the distribution networks, pipelines. But consistent with our Australian direction, we are focusing more to diversify into the electricity side of things. And the growth there is quite phenomenal. Just to reinforce the existing networks and to grow those existing electricity networks to manage the electrification that process has started and is underway and undoubtedly will happen over the next 20 to 25 years. So we are confident that the opportunities are there. During this time, we continue to develop relationships. Relationships are key in the market. And we have boosted the team to further develop those relationships. The understanding of the different regulatory areas. Different by state by state. We continue to, if you like, absorb the issues around that and comfortable that we're in a good position to respond to the opportunities that arise. We have been looking at it for a while, and I hope you would accept that a recognition that we have been patient and will be continued to be patient, and we'll be financially disciplined in any acquisition that we may do. I often get asked the question about the prices in the U.S. for these type of assets. And yes, there were no bargains in the U.S., but I also respond that when I see some of the valuations that come up in the Australian market, the U.S. market isn't particularly expensive compared to the Australian market. So I have confidence that with continued patients that we have every opportunity to come up with an acquisition that ticks all the boxes for APA security health.

Great. Thank you. We might switch gears, Caroline, and maybe ask you a question about hydrogen. There was a bit of footage in the video of the work that's going on down at Wollongong University on the Parmelia Gas Pipeline. Could you maybe talk to us a bit about where we're at with that?

Yes, sure. Thanks, Ben. And so just a little of a recap, the testing we're doing on the Parmelia Gas Pipeline, we're testing the southernmost section 43 kilometers to see if it's compatible to transport 100% hydrogen. The reason we chose that pipeline is because there's 1 customer sitting on that pipeline who has an alternative source of natural gas. So there will be minimum to no disruption if it converts if we convert the PGP to hydrogen. And also, it leads straight into Kwinana where there's lots of hydrogen usage today. So that's why we chose the PGP. We finished Phase I testing, which we completed last year. We're now in Phase II. So what Phase II is doing is testing samples of that pipeline in gaseous hydrogen to see whether we can transport hydrogen in there and whether we can transport it without reducing the operating pressure of the pipeline. So that should be confirming the results from Phase I. We have actually sent a sample off to the U.S. to test in a lab in the U.S. So they've tested that under gaseous conditions. And is giving us more confidence that actually the results from Phase I are true and that actually, we should be able to transport 100% hydrogen in the pipeline. There's still a lot of work to do. We've got -- at the University of Wollongong, as Ben said, you saw in the video, we had to test multiple samples across the pipeline, so that it's a representative of that pipeline. So that testing is going to take probably the rest of this year. The preliminary results are due out mid to late May. So unfortunately, I can't share those with you now. But at the moment, it's looking positive, but there's a long way to go.

And just this morning, we had an exciting announcement, which I think is only sort of been touched on this morning. So maybe you could give us some update on that.

Yes, we did. Thanks, Ben. Yes. So we have had a lot of interest in the Parmelia Gas Pipeline work that we're doing there, both internationally from other pipeline companies. And so we've shared our results in Phase and also some hydrogen users in the Kwinana region. And today, we announced that we've actually signed an MOU with Wesfarmers to conduct a prefeasibility study to test the viability of hydrogen production and hydrogen transportation of green hydrogen through the Parmelia Gas Pipeline in order to deliver it to Wesfarmers ammonia production facility in Kwinana and this will actually ultimately help Wesfarmers in their net zero ambition in order to decarbonize their operations by displacing natural gas with green hydrogen.

Good. Exciting times. We've got another couple of MOUs underway on the hydrogen front. Maybe if I could just get you to update us on those, as Rob touched on this one.

Rob has and also Rob touched on the fact that the partnerships are really key, and Adam mentioned it as well. So in all of our hydrogen projects, the ones in the public domain and the ones that we're working on behind the scenes, we're all working in partnerships with people because we have to work across that value chain. We want to understand the whole value chain, and we want to make sure that we're sharing the risks in this new industry. So the Central Queensland Hydrogen Project, which Rob mentioned before, that's the Japanese-Australian consortium that is being led by Stanwell. That's nearly finished feasibility. We should have the feasibility results imminently for that. So hopefully, so we can make a decision whether we progress into feed. This is a large-scale export hydrogen projects, green hydrogen, which is -- comes from renewable from Central Queensland through Gladstone and then liquefied and shipped up to Japan. So this actually helps us underpin the Japanese supply of hydrogen to actually meet the Japanese net-zero targets as well. So APA has brought a lot of experience to this project, both in land and approvals, doing linear infrastructure and obviously in pipeline sizing, et cetera. So hopefully, if this project goes ahead, then we are looking to partake in the hydrogen production and hydrogen pipeline part of that project. The other project which Ben referred to is a blue hydrogen project which is made from natural gas where you break the natural gas down into carbon dioxide and hydrogen. This is over in the West Coast in the Midwest. We're doing that with Pilot Energy and Warrego Energy and that project, we are looking at taking the CO2 from the hydrogen production and piping that offshore to be buried underground in a depleted oil reservoir at Cliff Head. And that feasibility study is also due to complete by the end of this financial year. And once again, in that one, we're looking at being involved in hydrogen production, the hydrogen pipeline and also the CO2 pipeline as well.

Megan, hydrogen and future fuels are going to be important to our net zero ambition. I wonder if you could update us on where we're at with our work on net zero.

Yes, sure. Thanks, Ben. Really, our work at the moment has been concentrating on establishing our interim targets and really the plan around how we're going to get there. So our thinking is very much focused on how -- what's the right fit for our business, particularly given that there are different parts of our business that are decarbonizing at different rates. What are those opportunities for reductions? And also what's the role of offsets more widely in our approach? So with that in mind, we're really considering what -- whether we have -- what kind of targets we have? Are they absolute? Are they intensity? And how do we actually embed that in our business moving forward, so it becomes part of business as usual? At the same time, we haven't forgotten about Scope 3, and we're working quite heavily on trying to understand what our scope through emissions are, what the boundaries are and trying to quantify that more widely as well as looking at evolving our transition risk assessment work as we go at the same time. So you'll start to see all this come together around the time of our full year results, and that will be disclosed fully in climate plan, is TCFD aligned, as we've said.

Okay. And Adam, how do we price that into our investment assessments?

The crystal ball would be -- a very clear crystal ball would be great in terms of how much offsets are going to cost and those sorts of things. The reality is we all know it's going to happen. So whether it's an offset cost or it's an investment that we need to make in our business, we need to build that into our risk-adjusted cash flows and our return expectations as we look at those projects that we're continuing to invest in. The challenge is trying to get the modeling right. But given it's so far out in many instances, we've got to be careful that we're not trying to get so precise when we know it's going to be wrong. We just need to make sure that we've got an appropriate level of investment factored in or additional investment that we would have to make factored into those. And we're starting to do that. And obviously, the work that Megan and the team are doing around our interim targets, that's a big part of that process, and that will continue to evolve.

And Amanda, I won't ask you to breach Board confidentiality, but this must be a big area of focus for the Board as well.

Yes. Thanks, Ben. So our Board and our executive team are really focused in this area. We are committed to conducting our business in accordance with high standards of corporate governance. So as you'd expect, we have a range of governance policies and practices that are really robust and help facilitate the creation of long-term value for our investors that we've spoken about today. And importantly, also help us meet the expectations of our other stakeholders. ESG and climate are actively considered by our Board. So for example, climate change, including its risks and impacts on our business and strategy is one of the key areas of our Board's responsibility under our Board charter. At a practical level, we conduct governance roadshows as you'd expect, Chairman met recently with some of our investors to talk about our net zero ambition, to talk about our processes, our approach to that program of work. As you'd expect, we also have standing committees of our Board. So our directors are deeply engaged on matters of health, safety, environment and heritage. As Darren spoke about earlier, safety performance is a really top priority. So we have active regular discussions in that space. Coming within the organization, of course, we have a range of systems that support that governance framework, including advanced risk management system that considers all aspects of sustainability risks. Thanks, Ben.

Great. Thank you. And Adam, ESG considerations in our capital markets, could you maybe talk us through how that's playing out?

Another crystal ball moment. It's interesting that the governance frameworks and being a listed company is a real competitive advantage for us, both in terms of access and pricing with capital, and we get that feedback a lot and it's not just through our equity and our debt investors, but our insurers and other service providers tell us all the time that they get a lot more comfort knowing that we're a listed company with all the governance and the scrutiny that we appropriately received from the markets ensures or gives them greater comfort that we're doing the right thing and allows them to achieve their requirements. I've been saying this for a while, and I'm quite controversial here and as much as I don't want to upset all of our lenders in the room. But I truly believe that in the next few years, sustainability link loans and green bonds and so forth, I can't see them being a thing because I just think that -- and again, I've been saying this for a long time, I just think all of the ESG and governance requirements, climate, all of those ambitions and commitments that we need to make will become a covenant, for want of a better term, I'm stealing that from Yoko. But Yoko keeps describing to me that as well that it will be just a covenant that you have to be doing all of those things to be able to get access to markets regardless of what you are.

Good. Thank you. Jane, Adam tried to steal your thunder at the end of his presentation earlier, but I want to ask you some questions about labor markets. Clearly, they're pretty dynamic at the moment. And just interested to get your thoughts on how APA is dealing with that.

APA is very, very clear about their talent strategy, our talent strategy. And the reason why is because of the tight labor market. I think most people would have heard about The Great Resignation. So attract, retain and develop is core to us. And what's really exciting is that we've actually gone out to all our people, as Darren has said, 2,000, and we've got this overwhelming response. That means the rate of return was, as you said, 85%, I was talking to my Macquarie friends. And normally, you have to push people to respond anywhere between 30%, 50% is pretty standard. So the fact that we had 85% of our people telling us what they like, what we could improve, that dialogue is really, really special for any kind of culture. So again, you have a look at the actual result, we had 65% as our engagement score. When you have a look from a global point of view, that is quite a top quartile is actually 75%. So clearly, we are doing something right. But we've got a little way to go. Through that survey, everyone's mentioned, the videos mentioned safety, safety and safety. Again, the response was overwhelming, which is great from our perspective. The other thing that was really, really good was it identified the areas we need to work on. And that was senior women in leadership. That was also women in traditional male roles. So what we've done about that is a number of things. So we said, how are we going to do that with our parental leave? Because that's male and female. So we went with market-leading place, and that was increasing our weeks for the primary giver. So that was up to 18 weeks. We also went with the partner to get 4 weeks. We're actually at 2. So again, that is a real attraction for senior women but also men and women, in general. The other thing that we really, really concentrate for women and also our young talent pipeline is we do 50-50 male, female in our internship and our grads. So again, to achieve that in this kind of industry is pretty phenomenal. And the good news is that we've actually increased from about 60 last year of that, what we call early talent pipeline to about 80. So again, we're concentrating in that area about young up and coming and actually rejuvenating our culture. Lastly, and I know Ben is probably looking at me saying speed it up, Jane, is yesterday, we were told that we actually are #14 in Australia for the top intern program. That's pretty awesome because we were at 90 and then 60 and we've got -- we went to 14. Some people will say, well, surveys, surveys. Who actually filled in that survey were the actual undergraduates. So they're saying, APA is pretty good. So I'm very proud of the investment into people and how it's making our culture very, very competitive edge.

Great. Darren, I'm no CFO, but I think that's flashing negative number, it means that we need to wrap it up. But I do want to get you to just add a view from the operations from site just to add to Jane.

Yes, and I'll be very quick. So obviously, Jane's team and mine work very closely together. We're 1,400 people in operations spread across all states and territories, except for Tasmania that we've got Julian working on that. And we have 50 operating sites across the country. So -- and they range from sites that have 6 people through to about 100. And so that's a big regional employer. We have a big regional workforce. And in the video you saw, it's the small things like the Dongara mentioned, the bigger associations like Clontarf and the Fred Hollows association, but they're very aligned to where we work in the regions and the people we work with. Jane lightly touched on the 60 graduates. And I should say apprentices and interns that we have now, that will be more than 80 in FY '23 and it will be 50-50 split or thereabouts between male and female. Just likely on the last couple of years that I mentioned, it has been a tough couple of years. So as -- particularly for our Southern colleagues, as they are going out to work in the field, often under quite strict conditions with mass controls, their family, friends, colleagues were locked down at home. That's a pretty tough place to be for such an extended period of time. But we kept the energy flowing. And importantly, what got us through was the social fabric of APA and the way we connect and treat each other. So we are really confident that in combination across the business, we've got the right skills for now. But importantly, we're working really hard on either transitioning those skills for the energy transition that's ahead of us or getting those skills from outside the business so that we are ready for that transition.

Keep us always powering ahead. With that, I'll ask you to please thank our panel.

Right. It's been a big morning. And I think according to my watch, we just slipped into the afternoon. But I really wanted to thank you all for your participation this morning. You've heard about the challenges and the opportunities that the energy transition presents as we see them. You've heard about the critical role that where we see gas playing in this energy transition as coal comes out and importantly, renewable energy comes in needing to be firmed up by gas supply. And therefore, the important role that gas will play in Australia's decarbonization. You've heard from Adam, our CFO, around capital allocation and how we're going to fund our growth strategy, which we feel very confident about. You've heard from the APA team on that wonderful video about our commitment to ESG. And on that point, and I know Darren just made that point a moment ago, but I wanted to be able to publicly thank our APA people right across the business, all 2,000 of them for their unwavering commitment over the last 2 years. It's been a really tough time and they've done just a tremendous job continuing to deliver for all of our stakeholders. I'd also like to thank the panel who was just up here. I think that was a very useful discussion and importantly, also thank the APA team who've held put this morning together. You've also heard from our industry experts David and Hugo, who've been able to share their insights on how they see the energy transition impacting on the manufacturing sector, which is such an important part of the Australian economy and also our power generation sector. And I wanted to thank David and Hugo for coming along and sharing their insights, which I think have been very valuable. And again, I wanted to thank you once again for your attention and joining us here this morning. I hope that you've come away as confident and feeling as confident as we do about the role that APA will play in this energy transition over the coming decades and confident in our ability to be always powering ahead. Thank you very much.