Power Struggle in Australia: The Problem and the Opportunity

Despite an apparent lack of federal support, there is enormous opportunity for private capital investment in renewables in Australia, driven by the need to replace the continent’s aging coal fleet

Could there have been a more unfortunate representation of Australia’s climate ambitions than our Prime Minister wielding a lump of coal in parliament, beseeching the public to have no fear? Thankfully, that parliamentary pantomime doesn’t represent reality in the Australian energy market. Advancements in energy efficiency technology and engineering, supportive state-led policy frameworks, and sound project economics are driving the shift away from fossil fuels.  

The opportunity for private capital to invest in renewable energy is more attractive now than ever before. Many new solar and wind projects are already undercutting the cheapest of existing coal-fired power plants, and Australia stands out as a world-leading renewables market with a bright future. Today, India and Australia are the only markets in Asia-Pacific where the levelized cost of electricity for renewables is cheaper than new-build coal, according to Wood Mackenzie, which predicts that renewables power in Australia will be 47% cheaper than new-build coal by 2030.

This unique cost advantage will further support Australia's energy transition which has been underway for some time. Despite Australia’s abundant coal reserves, the repeal of a carbon price mechanism that would have put a price on Australia’s carbon pollution, and the lack of a nationalized electricity feed-in-tariff program to accelerate renewable energy investments, there has not been a coal-fired power station commissioned in the National Electricity Market (NEM) in 14 years. I doubt there will be another, absent direct government intervention. In March, Australia’s third-largest power retailer announced that it would shut its aging 1,450 MW Yallourn power station four years early. Other early coal closures such as Liddell (2,000 MW) in 2023 are positive proof that thermal generation can no longer compete with renewables.  

Staying Ahead of Coal Retirements
The stated core objective of the federal government’s energy policy is to lower energy prices in Australia. The only feasible way of achieving this is to increase renewable penetration. Yet, the NEM remains reliant upon coal-fired power stations. The coal fleet is old, unreliable, and expensive. Therein lies the problem and the opportunity: 15 GW of coal fleet is approaching the end of its life and must be replaced by 2040. In reality, this will happen much sooner, as the coal fleet is losing money due to low-cost renewable energy entering the market.  

The Australian Energy Market Operator (AEMO) estimates that 60 GW of renewable energy capacity will need to be built in the next 19 years to replace the coal fleet. That will require more than A$150bn in capital expenditure on generation alone. Major upgrades to grid and distribution infrastructure will increase this requirement substantially, and we have learned that we need to be in front of retirements. Australia’s first major coal plant closure – that of the Hazelwood power station in 2017 – has already alerted us to the disruptive consequences of sudden and unplanned coal exits, namely, spikes in electricity prices and higher risks of blackouts during periods of extreme demand.  

While the task is challenging, our course is clear. A great deal has been learned from the teething problems in integrating solar, wind, and other Variable Renewable Energy (VRE) into legacy grid assets. AEMO’s Integrated System Plan is a recognition of the need to carefully orchestrate grid augmentation alongside renewable generation installation.  

Integrating Clean Energy into the Electricity Market
Climate leadership at the state government level is promising; it has resulted in the enactment of favorable policies in support of the energy transition. For example, the establishment of Renewable Energy Zones with clear planning of grid augmentation to support generation is well developed, in New South Wales and Queensland in particular. However, to take VRE penetration from the current 25% to 50% and beyond, more storage capacity is required, and at scale. The federal government has sponsored the Snowy 2.0 pumped hydroelectric storage and generation project, which will add 2 GW of long-duration energy storage, but this will come online in 2027, at best. We don’t have that long to wait.  

This presents a major opportunity for Battery Energy Storage Systems (BESS). Australia is a leader in large-scale BESS – the Hornsdale Power Reserve project in South Australia is the largest lithium-ion battery in the world. State governments and major energy retailers alike are showing leadership in BESS. Each of the three largest thermal generators have committed to large-scale BESS investment ahead of coal decommissioning.  

Windlab, an Australian wind farm developer, conducted a study on the amount of storage that would be required to support very high renewable penetration in the NEM. The study drew upon actual data from the 14-day periods in 2017 and in 2018 with the lowest VRE generation. Windlab concluded that the NEM could support 94% renewable penetration, with additional storage comprising Snowy 2.0 (2 GW / 350 GWh) plus an additional 8.6GW / 13.8 GWh in BESS or other storage technologies.

The opportunity for wind generation in Australia is particularly attractive. Solar generation in the NEM is highly correlated; while the grid is 5,000km long, it’s not wide east to west, meaning that practically all of the solar generation comes onto the system at the same time. Furthermore, household rooftop solar installation is expected to continue at pace, rising from the 5 GW installed today to 20 GW forecast by 2036. This will exacerbate our so-called ‘duck curve,’ which reflects the timing imbalance between energy production and peak demand. Under these circumstances, wind has several advantages over solar. Wind resources across the NEM exhibit a lower generation correlation than solar, and a low – sometimes negative – diurnal correlation with solar. Wind farms also have higher net capacity factors (now approaching 50% onshore vs. maximum 28% for solar). Wind farm operators therefore command higher generation-weighted prices than solar power operators in the NEM.

Australia has long been recognized as a leader in private infrastructure investment, both within our borders and around the globe. Let’s build on this legacy in the A$150bn energy transition that lies ahead.  

About Stephen Panizza
Stephen Panizza is a founding member of Federation Asset Management, a Sydney-based private equity firm that invests in sustainable infrastructure. Previously, Stephen was the Chief Investment Risk officer at the Clean Energy Finance Corporation of Australia. Prior to that, Stephen was a senior member of Macquarie Capital’s Principal Investment division, and led that division in Asia. He has over 25 years of experience in the financial services industry.