13 May 2024

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Renewables alone won’t get us to net zero, and there is a policy gap that needs filling to get us there.

While setting Australia on the pathway to net zero, a lot of time and effort has been spent on the important job of building electricity transmission and connecting renewables.

Of course, renewables will play a significant role in helping us reach our emissions targets.

As we’ve previously highlighted, large mining businesses across regional Australia are showing us how it can be done. There is real momentum in terms of these large customers harnessing wind, solar and batteries to economically support 70-80 per cent of their energy needs. 

But an important piece of the net zero puzzle continues to be overlooked – and that is the alternative source of reliable, dispatchable power when the wind isn’t blowing, and the sun isn’t shining.

Until long duration storage solutions like pumped hydro or compressed air storage become economically viable, we must look elsewhere to fill the gap and ensure that power is available 24/7.

That gap will be filled by gas powered generation (GPG).

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South Australia is a world leader in renewable energy, but the low wind generation in April offers a clear example of how important GPG will be once all the coal power stations are retired across the country.

For three consecutive days in the middle of April, there was little wind across South Australia. GPG stepped up to fill the gap, providing over 60 per cent of the state’s power needs at peak times when the sun went down and solar generation went to zero.

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Figure 1 GPG supporting energy reliability in South Australia in April 2024 (Source: OpenNEM)

Gas stepping in to fill the gaps is not an uncommon occurrence. South Australia closed its last coal power station in 2016, and since then there have been many occasions where periods of low wind and solar required GPG to provide long duration dispatchable generation.

AEMO’s Integrated System Plan (ISP) recognises how important GPG will be when Australia’s coal power stations close. In the draft 2024 ISP, released last December, AEMO increased its 2050 GPG supply forecasts by around 60 per cent.

A recent Griffith University paper by Simshauser and Gilmore found a ‘surprisingly intensive role’ for GPG once coal exits, particularly during winter months when solar is at its lowest and wind generation drops considerably. The recent Grattan report Keeping the lights on recognised the important role of gas in doing exactly that. 2

This takes us to the gap in the policy framework.

Over recent months, Australia’s energy ministers have commenced policy development processes to support various generation projects across the NEM:

  • In November 2023, the Australian Government announced an expansion of the Capacity Investment Scheme (CIS) to a total of 32 GW of capacity. In February 2024 a consultation paper was published seeking views on the design of the CIS. 3
  • In December 2023, energy ministers announced the development of an Orderly Exit Management (OEM) Framework to support the exit and compensation of coal generation across Australia. 4

The CIS and OEM frameworks are expected to provide financial support to renewables and coal through the energy transition.

However, despite the need for at least 13GW of new GPG to support the increase in renewables and provide security to the NEM, there has been no policy development to support investment in GPG.

In 2022 the Energy Security Board (ESB) recognised that the NEM’s in-built investment signals may not be sufficient to encourage investment in enough generation to maintain a reliable system. 

In its February 2024 CIS consultation paper, Australia’s energy ministers recognised that the proposed design of the CIS may further undermine the ability of market price signals to incentivise new generation investment.

Given its increasingly important role as coal retires from the NEM, government policy must support long term investment in new GPG. 

Consistent with the ESB’s findings, state and federal governments need to consider whether alternative policy arrangements, such as long-term availability or capacity payments, are needed to support this.

Including GPG in the CIS or a similar scheme could help extract jurisdictions having to keep coal power stations open for longer than necessary.

Coal power generation emits approximately twice the emissions of GPG. Keeping coal power stations open for longer than necessary will increase the risk of jurisdictions missing their interim emissions targets.

The right policy settings for GPG, and the bringing online of critical new gas reserves, will go a long way in helping reduce the risk of this happening.

 

1 Simshauser and Gilmore, Solving for ‘y’: demand shocks from Australia’s gas turbine fleet, Griffith University, March 2024

2 Grattan Institute, Keeping the lights on, April 2024

3 Commonwealth Department of Climate Change, Energy, the Environment and Water, Expanded Capacity Investment Scheme – Design Paper, February 2024

4 Energy Ministers, Orderly Exit Management Framework Consultation Paper, December 2023