TOPIC #2
Australia’s Energy Transition: Ghost of the U.S. Future?
Australia’s grid operators learn to surf big waves of change.
Fact-Finding Mission Reveals Major Changes Underway, but Will the Lights Stay On?
- In November 2022, ScottMadden sponsored the Smart Electric Power Alliance's fact-finding mission to Australia to better understand the country’s electricity markets and ongoing energy transition.
- Australia’s energy transition is being driven by both top-down and bottom-up pressures:
- In September 2022, Australia passed federal legislation requiring net greenhouse gas (GHG) emission reductions of 43% below 2005 levels by 2030 and net-zero by 2050.
- Conversely, lucrative feed-in tariffs and high solar irradiance have driven significant adoption of rooftop solar, totaling 40% of dwellings in some states.
- With many similarities to the United States, including current grid developments and GHG reduction ambitions, the energy transition in Australia provides interesting insights into operational challenges and lessons for developing a long-term vision for the electric sector’s future.
KEY TAKEAWAYS
Similar to the United States, the energy transition in Australia includes a variety of state and federal policy requirements, growing public demand for clean energy, increasing operational concerns, and a critical need for new capacity resources and transmission.
Despite the increasingly complex operating environment, utilities are expected to maintain reliability while meeting clean energy mandates and facilitating third-party deployment of distributed energy resources.
Australia demonstrates that the energy transition will require major new investments and new operating methods. In addition, the transition will require an honest discussion about the pace of change and trade-offs involved.
Similar to the United States, the energy transition in Australia includes a variety of state and federal policy requirements, growing public demand for clean energy, increasing operational concerns, and a critical need for new capacity resources and transmission.
Despite the increasingly complex operating environment, utilities are expected to maintain reliability while meeting clean energy mandates and facilitating third-party deployment of distributed energy resources.
Australia demonstrates that the energy transition will require major new investments and new operating methods. In addition, the transition will require an honest discussion about the pace of change and trade-offs involved.
Australia’s National Electricity Market (NEM): One of the World’s Longest Interconnected Power Systems
- Spanning Australia’s eastern and southeastern coasts, the NEM provides electricity to 10.7 million customers (see Figure 2.1). In addition, the system:
- Consists of five interconnected states that also act as price regions.
- Stretches roughly 3,000 miles from Port Douglas in Queensland to Port Lincoln in South Australia and across the Bass Strait to Tasmania.
- Incorporates roughly 25,000 miles of transmission lines and cables.
- The NEM consists of a wholesale spot market and transmission grid for electricity (see Figure 2.2 below).
- Roughly 325 generating units produce electricity for sale into the NEM.
- The Australian Energy Market Operator (AEMO) schedules the lowest-priced generation available to meet demand in five-minute dispatch intervals.
- The transmission grid carries this electricity along high-voltage power lines to industrial energy users and local distribution networks.
- Energy retailers complete the supply chain by purchasing electricity from the NEM and packaging it with transmission and distribution network services for sale to residential, commercial, and industrial energy users.
- Electricity generated by rooftop solar is not traded through the NEM, but it does lower the demand that generators must meet.
Figure 2.1: Australia's National Electricity Market (NEM)
Source: Australian Energy Market Operator
Figure 2.2: Overview of NEM Market Participants
Source: Australian Energy Regulator
Australia’s NEM (Cont.)
- The NEM generation portfolio, which totaled 70.5 GW as of January 2022, is undergoing a rapid transformation as coal capacity is replaced primarily with wind, solar, and storage capacity (see Figure 2.3).
- Australia is learning that coupling rapid energy transition with external shocks results in new challenges for the system.
- In June 2022, sustained high prices triggered protective price caps, multiple market interventions, and unprecedented market suspension of the entire NEM (see Figure 2.4 for a view of regional power prices).
- Contributing factors included:
- High fuel prices: Elevated global coal and gas prices
- Increased demand: Increased demand due to an early and very cold winter
- Coal plant issues: Ongoing coal plant outages, significant coal supply challenges, and higher marginal coal prices
- Greater reliance on gas, hydro: Reduced coal-fired generation, causing the market to rely on more expensive sources of generation, such as gas and hydro to meet demand. This high demand for gas-powered generation coincides with gas supply limits and soaring gas spot prices.
Figure 2.3: New Generation Additions and Retirements by Fuel Type (2013–2025 Projected) (MW)
Notes: Positive values are additions. Negative values are actual (before 2022) or expected (2022-2025) retirements.
Source: Australian Energy Regulator
Figure 2.4: Australia NEM Wholesale Power Prices by State and Quarter (Jan. 2017–Jun. 2022) (in AU$)
Notes: Prices are volume-weighted quarterly averages. As of March 16, 2023, AU$1.00 = ~US$0.67 (see https://www.xe.com/currencyconverter/).
Source: Australian Energy Regulator
Rooftop Solar Outshines Natural Gas but Creates Operational Challenges
- With nearly 3 million installations (compared with approximately 9.6 million dwellings in NEM states), the adoption of rooftop solar (i.e., small-scale solar PV) in the NEM exceeds anything experienced in the United States (see Figure 2.5). For context,
- Sustained growth is driven by a simple interconnection process, declining technology costs, and ongoing incentives from the federal government and some state governments.
- In 2021, rooftop solar accounted for one-fifth of NEM’s generating capacity, second only to black coal (see Figure 2.6).
- In the same year, rooftop solar provided 8% of NEM’s generation, which beat out the energy provided by natural gas (see Figure 2.7).
Figure 2.5: Annual and Cumulative Small-Scale Solar PV Installations in Australia’s NEM (2005–2022)
Source: Australia Clean Energy Regulator
Figure 2.6: NEM Generation Capacity by Fuel Source (2021) (MW)
Source: Australian Energy Regulator
Figure 2.7: NEM Generation Output by Fuel Source (2006-2021) (GWh)
Source: Australian Energy Regulator
Rooftop Solar Outshines Natural Gas but Creates Operational Challenges (Cont.)
- Despite the higher penetration, many of the operational challenges seen in Australia are similar to experiences in the Unites States.
- Excess electricity produced by rooftop solar in the NEM is typically sold by the consumer to their retailer for a flat feed-in tariff (FiT).
- Victoria offers the lowest FiT at ~3.5 cents/kWh.
- South Australia offers the highest FiT at ~5.6 cents/kWh.
- Since the FiT is not linked to the actual value of the excess electricity, consumers are not incentivized to time exports for when additional energy is needed.
- The result has been constraints requiring some networks to limit excess electricity exports from rooftop solar to the electric grid.
- Recent rule changes are designed to integrate consumer energy resources more efficiently onto the electric grid.
- Network businesses may now charge consumers to export excess electricity during times of network congestion.
- This new price signal is expected to encourage consumers to export electricity at times of need.
Grid Operator Blueprint for “Once-in-a-Century” Transformation
- As the electricity grid operator, the responsibilities of the AEMO include securing electricity systems, managing electricity markets, and leading the design of Australia’s future energy system.
- Released in June 2022, the Integrated System Plan (ISP) is a whole-of-system plan that provides a comprehensive roadmap for the efficient development of the NEM through 2050.
- In the analysis, the most likely future is called the “step change” scenario, which considers aging generation plants, technical innovation, economics, government policies, energy security, and consumer choice.
- Based on this scenario (see Figure 2.8), the energy transition will include:
- An economy-wide electrification coupled with a transition to firmed renewables. More specifically, the ISP forecasts:
- Nearly doubling electricity delivery by 2050
- Sixty percent of coal capacity retiring by 2030
- Nine times increase in utility-scale variable renewables by 2050
- Nearly five times increase in distributed PV and substantial growth in distributed storage by 2050
- Increasing firming capacity provided by dispatchable low-emission alternatives (e.g., dispatchable storage, hydro, gas-fired generation, and hydrogen)
- Wholesale demand response and other flexible loads to help manage peak loads and troughs
- Market and technical reforms to improve system services and allow for two-way electricity flow. Current work streams are focusing on:
- Capacity mechanism
- Essential system services (i.e., frequency, inertia, etc.)
- Distributed energy resource integration
- Transmission reform
- Congestion management
- Significant investment in the transmission network: $12.8 billion of actionable projects are modeled through 2026
- Geographical and technological diversity is expected to allow the future system to operate under increased uncertainty and a changing climate.
- A winter week forecasted in July 2040 (see Figure 2.9), shows generation sources interacting in New South Wales, Victoria, South Australia, and Tasmania.
- During low renewable periods, a combination of storage, hydro, and gas-fired generation plays a strong firming role, while transmission investments allow imports from other parts of the NEM.
Figure 2.8: NEM “Step Change” Scenario Capacity Forecast to 2050 (MW)
Source: Australian Energy Market Operator
Figure 2.9: Hypothetical June 2040 Week NEM* Winter Dispatch Outcomes Under “Step Change” Capacity Forecast (GW)
Note: *Excludes Queensland
Source: Australian Energy Market Operator
Looming Reliability Gaps Prompt Urgent Calls for Additional Investment
- The AEMO also publishes an annual Electricity Statement of Opportunities (ESOO), which provides a reliability outlook for the NEM over the coming decade.
- The ESOO identifies the following factors that may impact reliability:
- Unavailability of generation or transmission
- Generation retirements
- Delays in commissioning of new generation, storage, and transmission
- Increasing demand (i.e., electrification)
- Ultimately, the ESOO recognizes periods where electricity demand exceeds expected supply, thereby highlighting the need for capacity development.
- Published in August 2022, the most recent ESOO warned of near-term reliability gaps.
- Reliability issues were forecast for South Australia during fiscal year 2024 and Victoria during fiscal year 2025.
- However, an update published in February 2023 suggests a reprieve, as near-term reliability gaps are no longer forecast, considering the following actions:
- Recent capacity developments that included new gas, wind, and battery storage
- Delayed retirement of an existing 180 MW combined-cycle natural gas generator in South Australia
- Despite the near-term relief, forecasted reliability gaps remain a long-term concern.
- All mainland regions are forecast to experience reliability gaps by fiscal year 2032 with present capacity commitments.
- As a result, the AEMO continues to stress an urgent need to invest in generation, long-duration storage, and transmission to meet long-term reliability requirements.
- Even with major capacity investments, the AEMO notes reliability risks remain due to weather uncertainty and simultaneous generator or transmission outages.
Figure 2.10: NEM Forecast (2022–2027) and Indicative Forecast (2027–2032) of Reliability by Region (in % of Expected Unserved Energy)
Note: ESOO is AEMO’s annual Electricity Statement of Opportunities. Reliability in the ESOO is measured as the expected unserved energy (USE) as a percentage of energy demand. The forecasts are assessed against an Interim Reliability Measure of 0.0006% USE which is effective through June 30, 2025. After this date, forecasts are assessed against a reliability standard of 0.002% USE.
Source: AEMO
Australia’s Energy Transition Provides Many Useful Insights for U.S. Utilities
The fact-finding trip raised the following key considerations for the U.S.'s energy transition:
Role of natural gas during an energy transition: With a strong reliance on coal, Australia has not built out natural gas generation capacity in the same manner as the United States. It remains unclear how much natural gas capacity and related gas infrastructure will be needed to ensure system reliability.
Public policy outpaces operational capabilities: Aggressive policy mandates and incentives are accelerating the adoption of utility-scale and distributed variable generation resources. The proliferation of variable resources concurrent with the retirement of baseload generation requires new operating paradigms to ensure reliability. As a result, grid operators are developing new approaches as new resources come online.
Pace and cost of the energy transition: Aggressive investment in lower or zero-carbon technologies can produce rapid reductions in greenhouse gas emissions but comes with a steep cost. Australia continues to monitor the investment needed to address emission reductions and ensure reliability.
Transmission provides critical linkages: Similar to the United States, Australia must build new transmission to connect renewable resources at the scale required to meet emission-reduction goals. Local opposition is a growing challenge both in Australia and the United States.
IMPLICATIONS
The energy transition in Australia includes rapidly growing distributed energy resources, significant and rapid retirements of baseload generation, and major investments in clean energy and grid technologies. Similarities with the United States include the need to meet varying state and federal policy requirements, growing public demand for clean energy, public policy demands resulting in operational concerns, and a critical need for new transmission.
The rapid change occurring in Australia should send a clear message to U.S. utilities: the energy transition will be both top-down and bottom-up. To avoid getting squeezed in the middle, utilities must be active participants by offering balanced solutions. In practice, this may require a cultural shift from “yes, but” to “yes, and” solutions that account for reliability and affordability.
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On Australia's Energy Transition
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