South Australia may underwrite gas generators in new plan to back up 100 pct net renewables target

South Australia, the state with the world-leading target of reaching 100 per cent net renewables by 2027, has quietly released a proposal for a new “Firm Energy Reliability Mechanism” that includes its existing – and possibly future – gas generators.

The proposal from the state Labor government is sure to create controversy, not least because the federal government has refused entreaties from the gas industry to include the fossil fuel technology as part of its Capacity Investment Scheme.

South Australia, whose premier Peter Malinauskus is currently at the COP29 conference in Baku pushing his state’s hopes of hosting the annual UN climate talks in 2026, has been an enthusiastic partner of the CIS process, and has already landed underwriting agreements for four big battery projects.

However, a newly published consultation paper has flagged the government’s desire to secure firm capacity of at least eight hours storage (and a minimum 30 MW capacity) and makes clear that existing and future gas fired generators will be eligible to bid for underwriting agreements.

“The energy-only market does not currently provide the necessary investment signals for long duration capacity, to stay and/or enter the market,” the document says.

“To ensure reliability and resilience, the state needs to assess the amount of long duration capacity required and provide an efficient market signal to meet these long duration capacity needs that balances system resilience, cost to consumers and carbon emissions.”

South Australia is already much further along the renewables pathway than any other state in Australia, and arguably any other gigawatt-scale grid in the world.

In 2022/23, it sourced 72.3 per cent of its demand needs from wind and solar alone, and regularly reaches more than 100 per cent renewables. On some days, rooftop solar alone generates enough at times to meet all local demand.

However, South Australia – despite hosting the world’s first big battery at Hornsdale that was built in 2017 – has limited long duration storage options.

Its traditional dependence on gas has been whittled away by wind, solar and storage, despite the closure of the last coal generator in 2016, and most of its remaining fleet of gas generators is due to retire in the coming decade.

Some 780 MW of its 2.3 GW capacity is due to retire in 2026 alone, even as new industries enter the market with load demands of more than 1 GW.

It has been under pressure to provide support for the remainder, not just from the generator owners themselves, which include utility majors such as AGL and Origin Energy, but also from Adelaide-based gas industry giants such as Santos.

A handful of pumped hydro projects were proposed several years ago to solve the long duration storage needs, and were due to get both federal and state funding, but never saw the light of day.

Solar thermal was proposed at Port Augusta, but one supplier went bankrupt and its successor appears more focused on solar thermal for heat rather than power.

South Australian says it will define a rolling five year “Firm Energy Target” that will define its long duration firming power needs and hold annual tenders where generators, a definition that also includes batteries – can bid for a contract to underwrite a portion of their revenue. This will be called the Firm Energy Reliability Mechanism.

The need for some gas powered generation is not controversial, even if there is a big debate about whether they should be included in any government support schemes. The CIS explicitly excludes them.

The Australian Energy Market Operator, in its Integrated System Plan, identifies the need for 15 GW of fast response gas capacity in the grid in its “step change” scenario, up from around 11 GW now.

It makes clear that these generators will be used rarely, and overall gas generation will fall considerably, but will be essential to fill in gaps, particularly in periods of wind and solar droughts, called “Dunkelflaute” that often appear in late autumn or early winter.

Some of these generators may end up not being powered by fossil gas, but by renewable gas, green hydrogen, or another storage alternative. The question has been how to ensure the existing capacity is retained or replaced in the meantime.

The South Australian document acknowledges that long duration firm capacity will make up just four per cent of annual generation, but it says it is essential even as it reaches “net 100 per cent” of electricity generation from renewables by 2027.

“High levels of distributed renewables (including significant levels of household rooftop PV), prolonged periods of wind or solar “droughts” as well as transmission network outages drives the need for South Australia to have in place a long duration firm capacity fleet (capable of at least 8 hours of continuous rated output) that can quickly ramp-up and sustain high-output.”

It cites as an example May 13, this year, when low-wind conditions led to an increase in gas generation from 71 megawatts (MW) to 1174MW over three hours between 3pm to 6pm as solar output reduced.

“Long duration storage (> 8 hours) as well as gas and liquid fuelled generation (and other emerging forms of
technologies/storage) will smooth seasonal variability in wind and solar outputs – ensuring supply under a
range of conditions,” it says.

The document notes that gas generators often have to be “directed on” to the market by AEMO to fill in gaps, particularly in the provision of essential grid services.

And while lack of competition has been a feature of the state market, “short and infrequent periods of higher prices may lead to lower investment incentives for long duration firm capacity due to the high start-up costs and operational constraints commonly associated with these technologies,” the document says.

It appears that the mechanism will be used by the government to establish if any existing provider plans to exit the grid. The government is seeking feedback by December 20, and will release a draft plan in the new year.