Australia’s energy superpower status at risk with grid congestion reforms

Australia could become a clean energy superpower over the next decade. We have all the sun and wind we need to power our economy and send clean energy exports to the world. But we must get the red tape out of the way. 

Institutional investors have a huge appetite to develop our renewable resources, from the big ocean winds of the Bass Straight to the sunny skies of western Queensland.

Last month the NSW government revealed that it had been swamped by tenders to build large scale solar and wind in the New England Renewable Energy Zone. The Liberal government called for proposals to supply around 8 GW of renewable energy, worth almost $11 billion. It received a proposal totalling 34GW from investors.

The challenge is turning those proposals into committed investments. Last month the Clean Energy Investor Group released research showing that billions of dollars worth of potential clean energy investments were stalled due to regulatory and policy risk.

The National Electricity Market was created when coal generated three quarters of our electricity. The market rules are still biased towards old technologies and stifle innovation and new investment. 

Renewable energy is cheaper than coal and gas. But if the rules create risk for investors, then new investment is delayed and the cost goes up.

Our survey of investors has found that the cost of capital could be reduced dramatically if grid congestion and connection delays were effectively tackled. This would deliver a saving up to $7 billion in capital costs over the next decade-and-a-half with the cost of equity reduced by 100-250 basis points.

There is already a huge gap in the project pipeline between what is theoretically profitable and what is bankable in the current regulatory environment.

Even before the 34GW of New England proposals there were 82GW of wind and solar projects proposed in the NEM. Unfortunately, only 3GW has been committed by investors. 

Investors were dismayed when the Energy Security Board recently proposed new rules that would make clean energy investment in the NEM even riskier.

The Board proposed a complicated policy to reduce investor risk but which will do the opposite. 

The ‘Congestion Management Model’ is meant to guide investors so they build projects where the grid needs them. Nobody wants the electricity version of gridlock, where there is too much generation in some locations. 

The flaw is that the Board’s model would create a patchwork of different prices paid to generators. These ‘locational marginal prices’ will be impossibly complex to predict.

The prices will be different across the NEM. Even worse, prices will change over time, in ways that are impossible to predict or mitigate against. An investor will build a renewable energy generator in a location, on the basis of historical prices paid, and then as additional projects are added to the grid, the prices received by the original project will change. 

This price risk is impossible to manage. It will drive up the cost of equity, which puts pressure on prices paid by consumers. If it goes ahead, it will make Australia a bad place for investment in clean energy.

Our survey of investors found they are ready to deploy up to $70 billion that Australia needs to meet the electricity sector’s share of our Paris climate commitments. But for this to happen they need fair rules of the road to be established and maintained over the long term.

When energy ministers meet at the end of September they should direct the Board not to pursue locational marginal prices and to revise the development of the congestion management model.

With the right policy guardrails in place, ministers can direct the Board to cut through the red tape holding back investment in Australia’s clean energy future.

Simon Corbell is Board Chair & CEO of the Clean Energy Investor Group @SimonCorbell