Stephen McMaugh, Science,
Technology, Environment and Resources
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
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
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
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
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.
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
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.
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 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.
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.
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
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.
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
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).
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.
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
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.
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
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.
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.
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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