Issues and Insights Article, 48th Parliament

Global change in the energy system

Major changes have been occurring in energy systems around the world. What are these shifts in electricity systems and what’s happening in Australia’s largest electricity grid? What key challenges and complexities need to be managed within Australia’s system?

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Key issues

The world’s energy mix is shifting as countries across the globe move towards greater investment in low-emissions sources of energy.
Australia is rebuilding its electricity system as coal-fired power plants approach retirement. Sufficient replacement generation needs to be built ahead of these closures.
Accommodating a high proportion of variable renewable generation presents engineering challenges that must be planned for and overcome.
Complex governance arrangements and a diverse policy landscape bring further challenges to the energy system in Australia.

Introduction

A major transition in the energy system is underway around the world. This has been heralded by the International Energy Agency (IEA) as a new ‘Age of Electricity’. The IEA has also forecast that worldwide electricity demand is set to increase over the coming years, with all additional global demand expected to be met by low-emissions sources.

In Australia, coal-fired power plants are retiring faster than announced with 90% of the current capacity anticipated to retire by 2034–35 (p. 10). The electricity system is, therefore, undergoing significant transformation to ensure that secure and reliable energy is available as these closures occur. Replacing this generation capacity requires substantial investment, regardless of the policy pathway chosen by governments. Currently, significant investment in renewables is boosting their share of electricity generation. Electrification is also providing a pathway to reduce emissions in line with climate targets, while renewed interest in nuclear energy is stimulating additional debate in this highly contested policy area.

This article discusses the global state of the energy transition, the state of play within Australia, and future directions and challenges that Australia is addressing as electricity grids transform to include more sources of intermittent and renewable generation.

Global shifts in the energy system

Currently, the world gets most of its energy needs from fossil fuels: coal, oil and gas. This is used to provide heating, to fuel transport, and to generate electricity. However, the global energy mix is shifting, driven by countries decarbonising their economies to meet emissions reduction commitments, the need to replace ageing infrastructure and cost declines in renewable energy. There are also developments in grid-scale energy storage and a renewed interest in nuclear energy.

While coal remains the dominant fuel for electricity generation, renewable sources of electricity (including wind, solar photovoltaics (PV) and hydropower) have generated more than 30% of annual global electricity since 2023 (p. 54), and the share of renewables is expected to continue rising significantly over the coming decades. Figure 1 shows how the mix of electricity generation has changed over time.

Figure 1 Share of electricity production by source, worldwide

Source: Ember (2024); Energy Institute, Statistical Review of World Energy (2024) – with major processing by Our World in Data.

The IEA expects total renewable electricity generation to overtake coal-fired output in 2025 (p. 26), with global coal-powered generation to decline by a third by 2035 (p. 130). Five developed economies have already phased out coal-powered generation, including the UK, which closed its last plant in 2024 (p. 127). A global picture of coal plant status can be seen on Bloomberg Global Coal Countdown.

The increases in renewable energy have required significant investment in both generation assets and other infrastructure, such as transmission lines. While it is estimated that the world invested almost twice as much in clean energy as it did in fossil fuels in 2024 (p. 4), this level of investment is not evenly distributed. As shown in Figure 2, China dominates global investment in clean energy, which is reflected in both its installed capacity and manufacturing capacity. China accounts for more than ‘40% of global installed capacity for wind and solar PV’ (p. 273) and has the capacity to manufacture at least double the global demand for solar PV and batteries (p. 273).

Figure 2 Annual energy investment by selected countries and regions, 2019 and 2024 (estimated)

Graph - Annual energy investment by selected countries and regions, 2019 and 2024 (estimated)

Source: IEA, World Energy Investment 2024, (IEA, June 2024), 5.

The energy sector is also responsible for three quarters of the world’s greenhouse gas emissions. Many countries, including Australia, have committed to net-zero emissions by 2050 and are implementing policies to decarbonise their energy sector. Electricity generation is a large component of the energy sector, and its decarbonisation would support other parts of the economy to reduce emissions through electrification – for example, by adopting electrically-powered vehicles or heat-pump hot water systems.

At the 2023 global climate summit, 130 countries committed to the Global Renewables and Energy Efficiency Pledge to triple the world’s installed renewable energy generation capacity by 2030 (p. 2). The IEA has said that this is ‘an ambitious but achievable goal’ (p. 6), but meeting it would require ‘a doubling of clean energy investment by 2030 worldwide, and a quadrupling in EMDE [emerging markets and developing economies] outside China’ (p. 20).

Australia’s energy transition

Consistent with global trends, Australia is rebuilding its electricity systems as coal-fired power stations are progressively retired by their owners, new renewable generators are added to the grid, and electrification of industry and households increases.

The generation mix in Australia’s electricity grids has undergone substantial change over the last 15 years. The National Electricity Market (NEM), which spans eastern and south-eastern Australia, is Australia’s largest electricity grid. Underlying consumption across the NEM is approximately 200 TWh (p. 25), which is around 73% of Australia’s total electricity generation. Renewable generation in the NEM is expected to approach 48% in 2024–25, according to data from the Australian Energy Market Operator (AEMO) (see source Figure 17).

Figure 3 shows the change in contributions of renewable and non-renewable electricity generation in the NEM since 2005–06. The rising proportion of renewable energy generation is accompanied by decreasing fossil-fuelled generation, and has seen the emissions intensity of the electricity system decline to a new quarterly low (p. 37).

Figure 3 Generation mix of the NEM, 2005–06 to 2023–24

Source: AEMO, 2024 ISP chart data. Calculations by the Parliamentary Library.

Complexity of the NEM

The NEM has complex governance and ownership arrangements which collectively influence the future of this vast and complex system. For example, Australia’s Constitution does not provide the Commonwealth with specific legislative powers for energy or electricity generation. Rather, the Commonwealth, state and territory energy ministers work collectively on matters of national significance under the 2004 Australian Energy Market Agreement. The agreement provides for consistent legislation, implemented in each participating state and territory (with South Australia as the lead legislator). This enables the National Electricity Law, under which the National Electricity Rules are made.

There is a mix of public and private ownership of assets, such as generators or transmission lines, which varies across NEM jurisdictions (p. 16). For example, some states such as Queensland and Tasmania retain transmission and distribution networks in public hands, as well as some generation assets. States and territories also have their own energy policies, emissions targets and other governance arrangements, which brings additional complexity.

Households have also invested in renewable energy generation, often with support from governments, and are increasingly installing battery storage. The widespread adoption of rooftop solar is a significant part of the increasing share of renewable energy in Australia’s electricity grids. Rooftop PV was the largest renewable generation source in the NEM in the first quarter of 2024 (p. 7). Australia stands out as a global leader in solar PV, having recently installed its 4 millionth rooftop PV system, with approximately 1 in 3 households now having solar. Close to 3 GW of distributed PV capacity is being installed each year, and the average size of new rooftop solar systems has steadily increased from 7.6 kilowatts (kW) in 2019 to 9.7 kW in 2024.

Contribution to emissions targets

Decarbonisation of the electricity system is foundational to Australia achieving its emissions reduction targets. The Climate Change Authority notes in its 2024 Annual progress report that emissions reductions in the electricity sector are ‘likely to contribute more than 80% of the emissions reductions needed’ to meet Australia’s legislated 2030 emissions target (p. 48). The emissions intensity of the electricity sector, and policy decisions that impact how this is likely to change over time, will therefore have a significant impact on Australia’s emissions trajectory.

Australian governments have implemented a range of policies to support the decarbonisation of the economy and electricity sector. The most recent policies have been collated in the Climate Change Authority’s Climate Policy Tracker.

Future directions and challenges

System planning

AEMO is required by the National Electricity Rules to develop an Integrated System Plan (ISP) every 2 years. The ISP provides a roadmap for the rollout of infrastructure required to meet expected energy needs in the NEM and must take into account relevant policy targets of governments. The primary objective of the ISP is ‘to optimise value to end consumers by designing the lowest cost, secure and reliable energy system capable of meeting any emissions trajectory determined by policy makers at an acceptable level of risk’.

The 2024 Integrated System Plan identifies challenges that will need to be managed to ensure a successful transition in the NEM. These include land use, planning, environmental and development approval processes, building social licence, supply chain risks and providing an adequate energy sector workforce (pp. 16–18). The iterative ISP cycle implicitly acknowledges the shifting landscape of the transition and the impossibility of perfect foresight.

High levels of renewable energy

As renewable generation capacity increases, records in the renewable penetration of the grid are being continually set and reset. Commentary is often focused on annual generation percentages, but records are also being set for short periods of time. For example, renewable energy accounted for 75.6% of total generation in the NEM on 6 November 2024 (p. 34), rooftop solar alone met 81.3% of demand in Western Australia’s South-West Interconnected System (SWIS) on 10 November 2024, and 112.9% of demand in South Australia was met by rooftop solar on 18 October 2024. Integrating those high levels of renewable energy will be challenging and require new and innovative ways of managing the grid.

South Australia

South Australia’s electricity system is a global leader in the uptake of renewable energy. Along with Denmark, South Australia has reached phase 5 (p. 29) in the IEA’s 6-phase framework of renewables integration, representing a high level of renewables integration that requires a fundamental transformation of the electricity system.

Notable features in South Australia’s electricity system include the arrival of wind generation in 2007, substantial imports and exports of electricity from 2009 via grid connection with Victoria, the arrival of substantial solar in 2015, the closure of South Australia’s last coal plant in 2016, and the introduction of grid scale battery storage in 2017. Each of these step-changes in the electricity system required engineering challenges to be overcome. Gas-powered generation, which is expected to continue playing a role as a firming technology, still accounted for nearly a quarter of generation over the past year. While the overall contribution of gas has declined since the exit of coal generators, gas is providing system services and contributing flexible and complementary generation as wind and solar generation increases (see Figure 4).

Figure 4 Energy mix of South Australia's electricity network, 1999–2025

Source: Generated by the Parliamentary Library based on data from OpenElectricity data for South Australia.

Supporting grid stability

The task of operating Australia’s electricity system is becoming more complex as the transition from ‘always on’ coal-fired generators to variable renewable electricity generation progresses. The variability of renewable generation means that the electricity system will need flexible ‘firming technology like pumped hydro, batteries, and gas-powered generation [to] smooth out the peaks and fill in the gaps from that variable renewable energy’ (p. 10). Substantial amounts of storage are currently being built, such as Snowy 2.0 and grid-scale batteries. AEMO is also exploring other sources of flexibility such as encouraging energy use during times of abundant supply (load shifting) and coordinating consumer energy resources (including household batteries and rooftop solar). AEMO believes that consumer energy resources could reduce the overall system costs of the grid (p. 51) if they are coordinated with grid operations, for example through virtual power plants. However, this would require that their owners are sufficiently incentivised to allow their assets to be controlled in such a way.

In addition to the ISP, AEMO undertakes a detailed engineering work program to ensure the secure operation of the electricity system into the future. This is mapped out in the Engineering Roadmap, an annual cycle of gap analysis and work program development that has been running since 2020.

AEMO is also a leader in global knowledge-building efforts as a founding member of the Global Power System Transformation Consortium (G-PST), which began in 2019 with 5 other leading system operators from Ireland, Great Britain, California, Texas and Denmark. The G-PST has since grown to over 30 partners and conducts work programs and knowledge sharing to ‘overcome these common barriers [a]cross all regions and advance the modernization of power systems’.

Timing of investments

In addition to ensuring the physical operation of the grid, market operation and design must be ready for the expected higher levels of renewable penetration as coal plants retire in the coming years. Coal plants, facing higher costs of operating and maintaining ageing generators and competition from renewable generators, have been retiring faster than previously announced. AEMO has forecast that 90% of the current capacity provided by coal is likely to retire by 2034–35 (p. 10).

It is critical to ensure that replacement capacity is built ahead of these closures to ensure the stability and reliability of the electricity sector. This is highlighted by AEMO, which notes:

Coal generators have been retiring earlier than initially announced, and a ‘just in time’ transition to replacement infrastructure risks reliable supply. The need for renewable energy, transmission, storage and backup gas generation is critical now and throughout the transition. Timing is critical, to make sure the new generation and firming capacity comes in ahead of coal retirements. (p. 33)

In November 2024, energy ministers instituted an independent review of NEM wholesale market settings ‘to recommend wholesale market settings to promote investment in firmed, renewable generation and storage capacity in the NEM’ after one of the major policies to encourage investment, the Capacity Investment Scheme, ends.

There is a long history of reviews into the NEM’s governance and market structures, which some analysts argue are ‘not keeping pace with developments across the world in new energy, business models, consumer preferences, and decarbonisation’.

Conclusion

While fossil fuels still play a substantial role in the global energy mix, a transition away from coal-fired electricity generation is underway in Australia and across the globe. State, territory and Commonwealth governments are planning for this transition, and their policy decisions will affect the pace of change and the future generation mix in Australia.

There are also significant complexities to the energy transition that cannot be predicted. Many are driven by commercial decisions outside the direct control of governments. These include private investment decisions, the timing of coal plant closures by their owners, and unknowns such as changes in the global trade environment, which may affect the price and supply of essential components for new system assets.

Ensuring that the electricity system delivers the affordability, services and reliability that consumers expect and need will be an ongoing challenge for all decision-makers involved in the system.