14 Feb 2024

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We are nearing the end of coal power in Australia. Aging coal power plants are becoming increasingly unreliable and are gradually being removed from the National Electricity Market (NEM).

The Australian Energy Market Operator’s draft 2024 Integrated System Plan (ISP), published in December 2023, predicts that the remaining coal fleet will close two to three times faster than currently announced.

As coal exits, we need to make sure we’re filling the gap left behind. In the absence of a reliable alternative that can be called on during renewable energy ‘droughts’, governments could be forced to take steps to keep coal power stations in the energy system. This will inevitably result in Australia’s carbon emissions being higher than necessary for longer than necessary.

The draft 2024 ISP provides Australia with a plan to prepare for the exit of coal. Renewable energy, firmed with storage and backed up by gas powered generation, is the cheapest way to supply electricity to homes and businesses as we transition to net zero.

As well as having the ability to switch on and off as needed, gas generation can be located close to major demand centres. This will become critical if there are delays in building the necessary electricity transmission infrastructure to connect large-scale renewable generation projects in regional areas into the system. As recent events in Victoria have shown, we also need to be prepared for significant weather events that will test the resilience of our energy systems.

In 2022, AEMO flagged that without coal-fired generation, the NEM would require 10GW of gas powered generation by 2050 to meet peak demand and for firming intermittent renewable generation if we want to meet our net-zero goals.

AEMO has since revised its forecasts, with gas now expected to play an even more important role. The NEM is now expected to require 16.2GW of gas generation by 2050 – a 60 per cent increase.

Given around 8GW of the existing 11.2GW of gas generation capacity currently in the system is also expected to retire, we need around 13GW from new projects to come online to support the massive increase in renewables1. This highlights the extent of the challenge before us.

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However, just 1GW of dispatchable gas generation capacity is currently expected to come online over the next 10 years2. This includes Tallawarra B, a 320MW peaking power station in NSW that started testing in December 2023, and the 750MW Kurri Kurri Power Station in NSW that is expected to come online in December 20243.

The operating profile of gas generation is very uncertain. Many factors will influence the utilisation of a gas generation facility, including the cost of gas, unpredictable weather patterns, coal power generation outages (which may increase demand), and delays in building electricity assets.

The pressure on gas generators will be further compounded by the completion of new interconnectors that will increase the amount of electricity that can be transferred between jurisdictions (for example Project EnergyConnect, which will connect NSW and South Australia). Which is why it is critical that we establish effective market signals that encourage and facilitate investment in new gas generation facilities.

In November 2023, the Commonwealth Government announced that it would be expanding the Capacity Investment Scheme, which aims to incentivise investment in renewable energy generation and clean dispatchable capacity by underwriting projects. Thermal and gas generation are not eligible for support through the Commonwealth scheme.

In the absence of any form of long-term financial support, such as long-term capacity payments, gas generation operators will need to recover their costs and risk premiums through higher prices in the NEM. Often, this will involve bidding in capacity at the Market Price Cap (MPC), which will increase to $22,800/MWh by 1 July 2027.

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Given the challenges already facing gas generation, there is a real risk that new operators will be unwilling to enter the energy market or worse still, existing operators may exit.

In its July 2022 Consultation Paper, the Energy Security Board (ESB) recognised that the NEM’s energy only design and existing MPC may not be sufficient to encourage investment in enough generation to maintain a reliable system. The ESB’s modelling suggested that the MPC is too low to provide confidence the current reliability standard can be met.

Given its increasingly important role as coal retires from the NEM, we therefore need to ensure that government policy supports long term investment in new gas generation. Consistent with the ESB’s findings, state and federal energy ministers need to consider whether alternative arrangements, such as long-term availability or capacity payments, are required to ensure gas generation is available when we need it.

 

1 AEMO, Draft Integrated System Plan December 2023, p65

2 AEMO, Electricity Statement of Opportunities, August 2023, p46; AEMO January 2024 Generation Information

3 We are aware that CS Energy has announced plans for the 400MW Brigalow peaking power plant, and this is yet to appear in AEMO’s projections.