ACCELERATING THE BUILDOUT OF TRANSMISSION TO ENABLE THE CLEAN ENERGY TRANSITION

By Christiaan Zuur, Director Energy Transformation, Clean Energy Council

Transmission is central to the rapid and low-cost decarbonisation of the National Electricity Market (NEM). We need more renewables and storage, and building more transmission means we can use them to supply energy to consumers at the lowest cost. But what’s the best way to accelerate the buildout of that transmission to make sure it gets built before it’s too late?

Working with Energy Networks Australia, the Clean Energy Council commissioned KPMG to interview a number of senior executives and CEOs in industry and the market bodies to find out the best way to bring forward transmission investment. The?Market Sounding Report on Transmission?sets out these leaders’ thinking on some of the impediments, and the biggest opportunities, to speed up transmission.

In short, we need to:

• reform the transmission regulatory frameworks to make them fit for purpose
• make better use of government funding to bring forward transmission investment
• reform transmission planning processes to bring communities along
• coordinate transmission build across state boundaries
• reduce transmission connection and congestion risk.

But why are these transmission issues important in the first place?

Transitioning the power system to renewables means we need to build generation in new locations – where the wind and solar energy resources are best. Transmission allows you to access these premium energy resources. It also means you can share power more efficiently, helping to manage the variability of these energy sources while keeping the lights on using the lowest cost resources.

The problem is that a decade of energy wars has stopped critical transmission investment. This has delayed the buildout of renewables, meaning that wind, solar and hydro generators have simply been unable to get their power to consumers. And all of this has occurred as the old coal generators are withdrawn because they aren’t profitable anymore or fail because they are beyond their operating life.

We’ve already seen the cost impacts of delayed transmission investment. The recent energy crisis was partly caused by ageing, expensive and unreliable coal generators. It was made worse by the fact there hasn’t been enough investment in the storage, renewables and transmission needed to replace them. We need to accelerate the transition to stop energy crises becoming the norm.

Recent work commissioned by Clean Energy Council member NEXA Consulting and undertaken by EndGame economics clearly shows the extent of these cost impacts. Figure 1 shows that by delaying investment in transmission by two years, there is a massive reduction in availability of low-cost wind and solar generation, which means high-cost gas generation is used instead.

Figure 1: Impact of transmission delays on generation mix

Figure 2 demonstrates just how material those cost increases can be. Delaying investment in transmission causes major increases in final residential consumer bills, particularly in fossil fuel-dependent Victoria.

Figure 2: Total impact on residential consumer bills due to transmission delay of one, two, three and four years (real 2022 AUD, incl GST)

There is a major cost associated with delaying transmission investment. Leave it too late and costs are excessive, while bringing it forward provides insurance against risks like unexpected coal exit. Recognising this asymmetrical risk needs to be central to how we view clean energy investment as the system transitions – a “just in time” approach doesn’t cut it anymore.

So what do we need to do to bring forward this crucial transmission investment and buy ourselves some insurance against these massive price spikes?

The Clean Energy Council and Energy Networks Australia engaged KPMG to interview a number of experienced executives across network and generation businesses and various regulatory organisations. These leaders were asked to identify the key issues with the current processes for transmission build and then what the best solutions were to address these issues.

Some of the problems identified were related to the current processes around regulatory project approval. These frameworks are overly onerous and don’t effectively capture all the benefits of transmission, particularly the major wholesale cost savings they could bring to consumers as well as the fact that carbon abatement costs are artificially externalised and cannot be considered.

Another issue is the misalignment of customer cost and benefit. Customers fund the cost of transmission ‘up front’, however the benefits – such as more reliable, lower-cost supply – may not flow immediately. Social license and gaining buy-in from local communities was also identified as a critical issue, with many communities not perceiving a real benefit from hosting transmission lines.

It was also identified that transmission, despite being critical national infrastructure, was not funded similarly to assets like road or rail. Government funding to de-risk these projects is lacking, while the regulatory frameworks often inhibit the ability of the private sector to invest in these projects.

A number of solutions have been identified to these issues, as described in Figure 3.

Figure 3: Proposed solutions to improve transmission buildout

A key focus area was how government funding could be used to reduce the risks and accelerate transmission buildout. Multiple approaches were proposed, including:

• Governments could take equity stakes in transmission investment or provide grant funding, which would help to smooth cost recovery from different classes of customers. Of these, equity funding models appear to be more appropriate as this reduces the risk of simply increasing profitability for network service providers.
• Governments could take on responsibility for development of a transmission asset, then sell the long-term operation and revenue from the asset.
• Bridging loans could be provided at early stages of development, which are then paid off as the project is built and revenues are earned.
• Funding could be used to provide direct support for affected communities.

A number of changes were also recommended to the regulatory frameworks, including:

• bypassing the regulatory investment test for transmission (RIT-T) for projects that have been approved through the Australian Energy Market Operator’s Integrated System Plan
• better recognition of the full suite of community benefits that flow from investment
• better coordination of transmission investment, including improved information signalling processes to ensure that transmission and generation investment is coordinated.

Finally, it was noted that funding could be used to support investment both in traditional transmission investment and ‘virtual transmission’, where non-network assets such as batteries are used to enhance network capability.

Transmission is central to the NEM transition. Bringing forward transmission investment in turn supports the best mix of storage and renewables, driving the lowest cost outcomes for consumers. To achieve this, we need reform to the NEM regulatory frameworks to reflect the changing physics of the system. Governments also have a central role to play in reducing the risks of investing in this critical nation building infrastructure.

Read the report: https://assets.cleanenergycouncil.org.au/documents/resources/reports/Market-Sounding-Report-on-Transmission.pdf