Stephen McMaugh, Science, Technology, Environment and Resources

Key issue

Australia’s electricity system is undergoing a modernising transition. The key challenge will be moving to a system dominated by low-emissions renewable energy while maintaining system security and reliability, amid growing demand.

A changing system

Australia’s electricity system is undergoing a period of modernising transition, consistent with global trends. Much of this modernisation is being driven by efforts to decarbonise the economy, the falling costs of renewable energy technology and the need to replace ageing generation infrastructure.

The global trend was recently exemplified when G7 Ministers of Climate, Energy and the Environment committed in May 2022 to ‘a goal of achieving predominantly decarbonised electricity sectors by 2035’ (p. 32) and by the International Energy Agency’s efforts to set out a pathway of transition from fossil fuels to a ‘clean, dynamic and resilient energy economy dominated by renewables like solar and wind’. In Australia, around one third of emissions come from the electricity sector. The Australian Government’s commitment, along with the states and territories, to net zero emissions targets, is expected to continue driving change in the sector.

Wind and solar have become the cheapest forms of new generation, even when integration costs are considered. These lower cost renewable generators are supplying an increasing share of Australia’s electricity and the pace of system change has been accelerating (Figure 1). For example, Australia recently reached 3 million small-scale rooftop solar photovoltaic (PV) systems (around 1 in 4 Australian houses) and larger utility-scale solar and wind farms continue to be built. Grid-scale batteries are being installed to store and discharge electricity when needed, as well as providing other services to the grid, and construction of major pumped hydro projects has commenced (p. 66). It is expected that Variable Renewable Energy (VRE) will supply the bulk of future electricity generation, with storage and peaking gas generation providing support (p. 41).

At the same time, many of Australia’s coal fired power plants are reaching the end of their service life and their generating capacity will need to be replaced. Modelling suggests that over half of Australia’s coal generation could withdraw from the market by 2032 (p. 9). They may also close due to commercial or policy decisions, such as recently announced in Western Australia.

This replacement of coal fired generators with VRE promises to deliver a low-emissions electricity system. However, this electrification of transport, heating and industry is expected to require an expansion of Australia’s electricity system to deliver almost double the annual electricity generation by 2050 as electricity becomes the principle energy source (p. 28). In addition, greater electrification also reinforces the need for electricity supplies to be reliable and secure against disruption, including from foreign actors and natural disasters.

To achieve this modernisation of the electricity system, Australia will need engineering and planning solutions to maintain reliable supply plus additional investment in transmission and energy storage. Developing the smart grid of the future will also require a gradual change, away from a highly centralised one-way flow of electricity, to a decentralised two-way system that allows consumers’ to participate in the sophisticated management of demand, generation and storage.

In the shorter term, the Australian electricity market is currently grappling with a major disruption. As detailed by the Australian competition and Consumer Commission, this has been caused by a combination of factors, including planned generator outages during a period of high demand, unexpected outages and restricted fuel supply to coal generators that forced greater reliance on expensive generation sources such as gas, and high international prices for gas and coal (p. 1).

The Parliament has unsurprisingly taken a strong interest in these energy policy issues, which is likely to continue. In March 2021, the House of Representatives Standing Committee on the Environment and Energy launched an inquiry into the current circumstances, and the future need and potential for dispatchable energy generation and storage capability in Australia. This inquiry lapsed at the dissolution of the 46th Parliament. This followed the committee’s 2017 inquiry into modernising Australia's electricity grid and its report, Powering our future.

Figure 1         Australia’s renewable and non-renewable electricity generation

Source: Australian Energy Statistics 2021 Table O: Australian electricity generation, by state and territory, by fuel type, physical units.

Australia’s electricity system

Australia has several separate electricity markets. The National Electricity Market (NEM) is by far the largest and covers eastern and southern Australia – Queensland, NSW, the ACT, Victoria, SA and Tasmania. Spanning around 5,000 km and with about 40,000 km of transmission lines and cables, the NEM is one of the world’s longest interconnected power systems. It currently generates around 200 terawatt hours (TWh) of electricity each year, supplying around 80% of Australia’s electricity consumption. WA and the NT have separate, smaller electricity systems, with different regulatory arrangements.

Electricity market governance

Governance of the NEM is complex. There are 3 main market bodies: a rule-maker, a regulator and a system operator, and mechanisms for ministerial oversight.

The rule maker for Australia’s electricity markets (except WA) is the Australian Energy Market Commission (AEMC). It also advises Australia’s energy ministers on improvements to regulatory design and energy market arrangements.

The Australian Energy Regulator (AER) regulates electricity networks in all jurisdictions except WA. It sets the amount of revenue that network businesses can recover from customers and enforces the laws for the NEM in southern and eastern Australia. It also enforces the Retail Law in NSW, SA, Tasmania, Queensland and the ACT.

The system operator is the Australian Energy Market Operator (AEMO), which is charged with ‘keeping the lights on’. AEMO operates Australia’s largest electricity markets and power systems, including the NEM and the Wholesale Electricity Market within the WA South-West Interconnected System.

The Energy National Cabinet Reform Committee (ENCRC) (previously the COAG Energy Council) oversees the energy market institutions. This ministerial forum includes the Commonwealth, states and territories, and New Zealand.

The Energy Security Board (ESB) reports to the ENCRC and provides whole-of-system oversight for energy security and reliability. The ESB has been developing a package of market reforms aimed at keeping the functions of the NEM fit-for-purpose as the electricity system undergoes modernisation.

National Electricity Rules and National Electricity Law

Constitutionally, energy is primarily a state matter. However, it was made a shared responsibility with the signing of the Australian Energy Market Agreement, between the Commonwealth, states and territories in 2004, which is coordinated through the ENCRC. The agreement provides for national legislation, implemented in each participating state and territory. South Australia is the lead legislator, with other states and territories participating in the NEM applying the National Electricity (South Australia) Act 1996 through their own legislation.

The NEL defines national electricity objectives based on central concepts such as price, quality, safety, reliability and security of supply of electricity. Reduction of greenhouse gas emissions is not among the stated objectives.

The NEM is governed by the National Electricity Rules (NER), made under the National Electricity Law. The NER set out the regulatory framework for functions including market operations, power system security, network connections and access, pricing of network services and national transmission planning. The NER are highly complex and are regularly updated, with 15 substantive chapters (running to upwards of 1,700 pages). The Northern Territory applies a modified form of the NER.

Planning for the future

The challenges of modernising the electricity system require sophisticated system planning. AEMO publishes the foremost planning document for the electricity system, the biennial Integrated System Plan (ISP), with the next edition expected to be published on 30 June 2022.

The ISP develops a range of plausible scenarios for the electricity system’s evolution. These scenarios necessarily make assumptions about different rates of change and consider variables including targets for emissions reduction and renewable energy, technology, fuel and transmission costs, and rates of PV adoption (pp. 28- 29). The draft 2022 plan set out 4 scenarios: slow change, progressive change, step change and hydrogen superpower. The ‘step change’ scenario is considered the most likely (p. 29), described as ‘a consistently fast-paced transition from fossil fuel to renewable energy in the NEM’ (p. 27).

The draft 2022 ISP also recognises that electrification will support emissions reduction in the broader economy (p. 35). Electrification means increasing uptake of battery electric vehicles, heat-pump hot water systems and other technologies not reliant on fossil fuels. Australia’s greenhouse gas inventory illustrates the opportunity for further emissions reduction through electrification, with stationary energy (excluding electricity) and transport the next highest emitting sectors after electricity (21.0% and 18.6%, respectively)). The stationary energy sector includes emissions from the combustion of fuels (such as natural gas), mostly in the manufacturing, mining, residential and commercial sub-sectors.

Transmission networks

The draft 2022 ISP foreshadows that 10,000 km of new high voltage transmission links will be required to support the future electricity system and minimise system costs (p. 8). This will require significant amounts of land and the draft ISP draws attention to the importance of gaining appropriate social licence for new transmission projects and the transition more broadly. During the recent election campaign, under its Powering Australia plan, the Australian Labor Party committed to establishing a Rewiring the Nation Corporation (RNC) to invest $20 billion toward the modernisation of the electricity grid. Some analysts have argued that investing in storage would be more effective in ensuring reliable supply. The ISP acknowledges that the ‘less transmission capacity there is, the more dispatchable capacity [e.g. storage] is needed, and vice versa’ (p. 44). The ISP also indicates that, in some cases, the need for social licence may ‘lead to alternative developments that reduce the need for new transmission, including batteries, gas-fired generation and offshore wind developments that connect to the existing network easements’ (p. 15).

The AER requires that network businesses meet a regulatory investment test (RIT) before constructing transmission. This focusses on a cost-benefit analysis, with the central objective of minimising consumer charges. The AEMC is undertaking a review into the transmission planning framework, which includes consideration of the mechanisms available to foster social licence for transmission development. Labor has also committed to improving the RIT-T process.

Renewable Energy Zones

Renewable Energy Zones (REZ) are areas with Australia’s best renewable energy resources. They are mostly located in regional Australia but also include 4 offshore wind zones (p. 40). Much of the expected utility scale VRE generation will be concentrated within REZs to efficiently use both the resource and the new transmission lines envisaged to connect the zones with the electricity network. NSW has moved to accelerate the development of its REZs. Victoria has moved similarly and the state government has amended the National Electricity (Victoria) Act 2005 to allow Victoria to depart from parts of the national framework on transmission approvals to speed up priority projects.

Storage

A VRE-dominated NEM will require large amounts of energy storage to provide most of its dispatchable capacity (p. 46). Many competing battery technologies offer different suitability for different uses (pp. 15-24). For example, fire-safe flow batteries are heavy and are unsuitable for powering transport, where lighter lithium batteries are preferred. Researchers are actively working on alternative storage technologies that use readily available minerals and may deliver lower costs in the longer term. Aside from batteries, the Snowy 2.0 project is a prominent example of pumped hydroelectric storage but other technologies for energy storage are being developed such as hydrogen or ammonia storage, gravity-based energy storage using large weights, compressed air and thermal storage. How quickly these technologies are developed will be determined by the market opportunity, costs, energy density, safety and availability of raw materials.

Electricity storage installed in the NEM will range from short duration, of less than 4 hours, to long duration of over 12 hours (p. 49). The bulk of the deep storage required in the NEM is expected to come from the Snowy 2.0 pumped hydroelectric storage project (pp. 49- 50).

While the main role of storage technologies will be to move low-value energy to a time when it is most needed, these technologies can also play an important role in providing critical system services (for example, frequency control) through power electronics. These system services have typically been provided by gas and coal fired generators but are increasingly being provided by grid-scale batteries. AEMO has a coordinated work program that will address the challenges of obtaining these system services solely through power electronics. AEMO and the CSIRO are also participating, with other leading nations, in cooperative global research efforts to overcome barriers to achieving electricity systems primarily powered by renewable energy.

Summary

Successfully modernising Australia’s electricity systems to be both low-emissions and able to generate twice as much electricity as today, is an extraordinary task that will require high levels of investment and profound change. The final composition of a future grid that provides all the system services and energy requirements that consumers expect, while meeting decarbonisation goals, cannot be precisely defined from current knowledge and will be reached by iterative actions. Indeed, each successive iteration of the ISP has shown that change has exceeded what was previously envisaged (p. 26). Policy makers, together with industry, the market bodies and increasingly, consumers, must continue to grapple with this complex problem.

Further reading

Alan Finkel, Getting to Zero: Australia's Energy Transition, Quarterly Essay-, 81.

Drew Clarke et al., Australian Energy Transition Research Plan, report for the Australian Council of Learned Academies, (Melbourne: ACOLA, 2021); and associated briefing papers.

Australian Energy Regulator (AER), State of the Energy Market 2021, (Melbourne: AER, 2021).

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