The new year will be all about grid firming as Australia rejoins race to renewables

This year has seen a seismic shift in the pace of the energy transition.

The accelerating momentum of 2022 now leaves Australia well capitalised to embrace the huge opportunities of decarbonisation, be that more energy efficient housing, the start of a reindustrialisation onshore of our manufacturing economy, and sustainably lower energy prices; a critical imperative given the fossil fuel hyperinflation that has been a defining feature of the year.

As AEMO CEO Daniel Westerman articulates, even after factoring the cost of new transmission lines, wind and solar remain by far the cheapest forms of new power generation.

Key policy commitments by the new federal Albanese Labor government have provided the foundation for progress. We now have a legislated target of net-zero emissions by 2050 and a 43% reduction in 2005-level emissions by 2030 – which federal energy minister Chris Bowen has repeatedly described as a floor, not a ceiling.

Central to achieving this is the Safeguard Mechanism, which targets a collective 28% emissions reduction for Australia’s 215 largest emitting facilities. This will combine with the restoration of credibility and integrity in our Australian carbon credit unit (ACCU) market to provide a domestic price on carbon.

The second key policy is to have a world leading 82% renewables in the National Electricity Market (NEM) by 2030, relative to the 34% share in 2022.

Moving to a science aligned national emissions reduction target of say 75% by 2035 – as articulated by Zali Steggall MP at the Smart Energy Council conference this month – would require the national electricity market to move from 82% to 95% or more by 2035.

This means a fundamental rethink of the NEM in terms of generation, firming, the hugely important role of pro-sumers and EVs, and the enabling regulatory framework.

Of the major states, Victoria is already aiming for 95% renewables by 2035, the most ambitious target in the country, with Queensland lifting its target to 80% renewables by 2035.

And while climate science deniers and many transmission engineers alike have long argued a reliable wind and solar powered grid was impossible, South Australia leads the world in proving the technology shift, with a 104% renewables penetration sustained for a week in December 2022, a staggering achievement given the absence of any hydro-electricity firming, and a demonstration of the value of interstate grid connectivity.

As in the AEMO Integrated System Plan (ISP) modelling, the electrification of everything including vehicles could see electricity demand nearly double from 2020-2050 to 230 terawatt-hours per annum, as we phase out reliance on high emissions, expensive methane gas and oil alike.

This will also see the exit of all coal fired power generation in our country by 2035-2040, down from the dominant 63% generation share in 2021, a radical overhaul at speed.

The global energy crisis has smashed Australia’s domestic economy in 2022, reminding us that our historic failure to address the climate crisis has left Australia exceptionally over-reliant on fossil fuels, in particular the multinational gas cartel.

The price caps of December 2022 buy us some time to ameliorate the hyperinflation in all things fossil fuel related, but the permanent solution is an accelerated buildout of new zero-emission firmed renewable energy and associated grid infrastructure.

AEMO reports it has 21GW of new projects undergoing connection assessment across the NEM, and that FY2023 will see 5GW of new capacity added, up from 4GW in FY2022.

Energy Minister Chris Bowen announced a step-change in Australia’s utility-scale battery deployments in December 2022, with ARENA granting $176m to fast-track 8 new battery projects of 2.0GW/4.2GWh combined capacity, a move to treble battery storage capacity in the NEM by 2025. This is a very good start on the Capacity Investment Scheme the Energy Ministers announced earlier in December 2022.

Pumped hydro energy storage (PHES) will play a key role in grid reliability and balancing as we move to 95% renewables and beyond, but we need to be cognisant of the cost and timetable blowouts at Snowy 2.0 and investor uncertainty over Genex Power’s 250MW/2,000MWh Kidston Pumped Storage Hydro Project.

A number of new PHES proposals are slowly progressing, from 810MW at Wellington NSW to the 5GW Pioneer-Burdekin project in North Queensland and the 2GW Borumba project near Mackay, key planks of the Queensland government’s $62 billion decarbonisation investment plan.

Whilst the $20bn Rewiring the Nation policy received a major boost in the October 2022 budget and with the announcement of the funding proposal for the VNI NSW-Victoria interconnect and $3.8bn 1.5GW Marinus Link,plus the new $7.8bn NSW critical transmission funding deal announced this week, this won’t be fully operational till early next decade.

Offshore wind is gaining serious momentum, and should play an important role in delivering 5-10% of the last 18% decarbonisation of the NEM. The December 2022 decision to fast-track the up to 2.2GW Star of the South project as a first priority for the federal and Victorian governments is demonstrating dramatically elevated ambition.

For a long time offshore wind looked problematic in terms of the likely $A100-150/MWh cost, more than double that of onshore wind. But with the NEM averaging a wholesale $A200/MWh in 2022, this provides all the context needed for an appreciation that remaining reliant on the hyper-inflationary fossil fuel sector is unviable.

The breakneck rise of EVs in 2022 globally is another key pivot. China leads the world, and will sell over 6 million new energy vehicles in 2022, more than double the previous year, with a three months to November 2022 market share of 30%. This makes the global pivot to EVs increasingly inevitable.

With all the focus on grid firming technologies for cheap, prolific but intermittent renewables, we would note that the latent capacity of EVs to play a key role here is huge. Let’s assume the vast majority of the 20 million Australian vehicles are electric by 2040.

The average EV battery size is 40kWh, meaning the entire fleet will have a collective battery capacity of 800GWh, or 200 times the combined size of the eight new utility scale batteries announced this week.

Assuming 10-20% of this can be harnessed to support the grid at any time of peak power prices, two-way electricity charging will combine with the 55GW of rooftop solar forecast by 2040 in AEMO’s ISP (2022 step-change), a more than tripling of current capacity. Behind-the-meter and community battery storage capacity will add further firming capacity at scale.

Further, the Safeguard Mechanism is set to combine with the 82% renewables by 2030 target to crowd in massive private investments of $100-200 billion and drive industrial sector decarbonisation, and the potential for embodied decarbonisation of the massively burgeoning value-added critical minerals industry here, that is, onshore mining and refining using renewable energy.

This should also allow industrial demand response management (e.g. at Tomago aluminium) to work together with smart two-way residential demand management to also enhance grid reliability in a cost effective way.

There is a lot of work to be done, and absolutely no time to lose after a wasted decade of LNP climate denialism, policy chaos and inaction.

More policy ambition on national decarbonisation targets would be welcome. Nevertheless, thankfully, after so many dark years, we leave 2022 with a new policy clarity and momentum, and with a federal government working cooperatively with business, investors and the states to supercharge the necessary and overdue transformation of our energy economy in the national interest and to the benefit of all.

Tim Buckley is director of Climate Energy Finance