Australia’s energy system is at a critical junction. Continuation of current trends will mean missing our 2030 emissions reduction targets, risking electricity system reliability, and failing to deliver the federal government’s election promise of cheaper electricity. Change is urgently required on all three fronts.
Emissions reduction in the electricity sector is central to Australia’s climate change agenda. There’s been strong progress over the past 10 years, but it’s not enough.
A year ago, existing policies were projected to deliver a 32 per cent reduction in emissions by 2030. Two measures were projected to get near the 43 per cent target: reforms to the Safeguard Mechanism and increasing renewables’ share of generation to 82 per cent.
The government has landed the mechanism reforms, but we have yet to see if they will deliver the promised emissions reductions. The bigger problem is that renewables’ share in the National Electricity Market had grown to only 35 per cent as of the end of June.
The growth in renewables has been steady and, most recently, at the expense of gas. Federal and state targets and policies for renewables had driven rooftop solar and grid-scale wind and solar farms, the latter where there was capacity in the transmission grid. But that capacity has been largely exhausted.
The federal government had proposed a fund to deliver more transmission through low-cost finance. This is not happening, primarily because finance was never the barrier – the barrier was and remains the planning and regulatory processes that surround transmission investment.
Curse of politics
The second front is maintaining power system reliability as the share of intermittent renewables grows and the last of the coal-fired power stations close. Both big attempts to address this challenge over the past six years failed.
First, the internal politics of the former Coalition government killed the National Energy Guarantee, an initiative championed by the Turnbull/Frydenberg duet. Second, the recalcitrance of state governments and some vested commercial interests led the Energy Ministerial Council to reject the Energy Security Board’s attempt to introduce a capacity market to deliver dispatchable capacity.
Bringing forward the closure of coal, delays to Snowy Hydro 2.0 and renewable energy zones, and big cost blow-outs for the Marinus Link create more challenges. It is unclear whether the yet-to-be-revealed Capacity Investment Scheme will be enough to address these challenges. The role of gas-fired generation in providing firming capacity to a renewables-dominated system has become unnecessarily contentious.
Third, Australia is not on track to deliver the power bill reductions that Labor somewhat bravely promised before last year’s election. From then to May this year, annualised average wholesale prices rose from $97 per megawatt hour to $146 per megawatt hour. The newly elected Labor government faced an almost immediate energy system crisis, due to factors beyond its control.
But despite caps on gas and coal prices and recent moderation in power prices, the government faces a big task to “cut power bills by $275 a year for homes by 2025, compared to today”, as it promised little more than a year ago.
Time for tough calls
There are things that governments can and should do. First, they should implement an electricity-sector policy to reduce emissions consistent with net zero.
This will be made harder by the need for the federal government to set a 2035 national target, probably before the next election. Best candidates would be a revision of the electricity sector’s share of the Safeguard Mechanism to become a binding constraint, or an extension of the Renewable Electricity Target.
Second, governments should make some tough calls on building the priority transmission links for the NEM grid. A different governance structure with stronger authority and financing support, and supported by all the governments, may be the only way forward. The Integrated System Plan was a good idea, but modelling a set of scenarios was never going to be enough.
Third, the Energy and Climate Change Ministerial Council should agree on mechanisms to maintain reliability. Whether that is a NEM-wide capacity mechanism, state-based capacity auctions, or simpler arrangements such as strategic capacity reserves is less important than reaching agreement and getting on with it.
As things stand with global supply chains and interest rates, maintaining current prices would be a pretty good outcome and the emissions reductions would be free.
The federal minister, Chris Bowen, has demonstrated capacity to set the vision and secure nominal jurisdictional agreement via the Energy Transformation Partnership. Delivery will require co-ordination and co-operation with the states that we have not seen to date. Yet failure cannot be contemplated.
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