A renewed future for Australia in renewables

Energy generation from renewable sources has more than doubled in less than a decade according to data from Australia’s Department of Industry, Science, Energy and Resources.

"One of the sector’s key challenges is the huge capital investment needed to upgrade capacity in the grid system.”

Renewable energy accounted for over 21 per cent of total generation in the 2019 financial year compared with less than 10 per cent in the 2011 financial year. The shift to large scale renewable projects and battery storage is expected to continue as more large coal-fired generators are retired in coming years.

Additionally, the Federal government is proposing to build a new gas-fired power station in the Hunter Valley, part of an overall gas-led initiative to add an additional 1000 megawatts (MW) of dispatchable power to the national grid.

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Grid constraints

One of the sector’s key challenges is the huge capital investment needed to upgrade capacity in the grid system. Congestion in the grid is the single biggest challenge facing new investment in large scale renewables, according to the Clean Energy Council.

Congestion occurs because the grid infrastructure in the locations of the best renewable-energy resources, which are often in rural areas with low electricity demand, are now being asked to absorb large electricity supply – something it was not originally built for.

These constraints in the grid have resulted in adverse changes to equity valuations in a number of renewable energy projects due to calculations of the marginal loss factor (MLF). MLF figures are a percentage of electricity the Australia Energy Market Operator (AEMO) predicts will be lost in transmission between the generator and end user.

AEMO and the Australian Energy Regulator are now planning for a significant build of new transmission infrastructure to support the energy transition. Based on AEMO’s estimates, the median value of the proposed projects that may be delivered over the next 10 to 15 years is close to the total asset value of the entire existing transmission network in the east coast.

Market reforms

Increasing amounts of renewable energy also introduce challenges to ensure security of supply to deal with the variability of the fuel source. This task is particularly complex because the rules that underpin the National Electricity Market impose one of the highest reliability standards in the world: an “unserved energy” target of 0.0006 per cent. That is, no matter the weather conditions or other circumstances, a tolerance level of around three minutes of unserved demand over the entire year.

The variability of renewable energy, not just in the short term but also longer seasonal trends such as El Niño and La Niña, requires the market to provide ‘firming’ energy services. These can take the form of long duration (eg. pumped hydro) and short duration (eg. chemical battery) storage as well as fast-start gas peaking. They can also take the form of self-generation and storage.

Indeed, ‘behind-the-meter’ generation, typically solar photovoltaic (PV) installations on domestic and commercial/industrial rooftops, has been booming – there are now over 2.5 million small scale solar installations across the country and by all accounts, despite COVID-19, 2020 will have been another record-breaking year.

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As the cost of storage continues to fall, each household or commercial premise has the potential to become more independent or even participate as part of a highly decentralised but coordinated energy system.

Market reform could help ensure these changes can be managed properly, so investment in a range of technologies that support the energy system are made in a timely, cost-effective manner that fairly compensates investors and participants. Additionally, balancing the trilemma of affordability, reliability and sustainability remains the focus of the various regulatory bodies involved.

David Roberts is Head of Project Advisory, Corporate Finance, Tsen Wong is Head of Energy, Institutional and Katherine O’Connor is Director, Project and Export Finance at ANZ

This article was originally published on ANZ’s Institutional website