The Energy Transition Down Under in a Nutshell - Part I

This article provides an overview of the electricity market and energy transition in Australia, highlighting the main features of this dynamic and evolving energy system. It does not intend to cover all subjects related to the energy sector or go into detail. Rather, the text presents some of the current hot topics and the references are shared for those wishing to go deeper in each subject.

The views and opinions expressed in this article are the author’s own.

1.????? Introduction

Australia has continental dimensions[1] but with a relatively small population[2] that is concentrated along the coast, mainly in Sydney, Melbourne, Brisbane, Perth, and Adelaide.

The country is not fully interconnected. The National Electricity Market (NEM) delivers electricity for six eastern and southern states and territories which represents around 80% of all electricity consumption in Australia (about 11 million consumers)[3].

On the west coast, the Wholesale Electricity Market (WEM) supplies electricity to the South-West Interconnected System (SWIS)[4], which is the main electricity network within the Western Australia State and isolated from other transmission systems.

There are small isolated systems that supply electricity for the Northern Territory[5] and Regional Western Australia[6]. Figure 1.1 brings an overview of the main transmission systems, highlighting the different energy sources in each State[7].

The NEM is formed by a wholesale market, allowing participants to buy and sell electricity, and a retail market, where consumers have the power to purchase their electricity from a list of authorised retailers.

The generators’ production in the NEM is aggregated and scheduled at five-minute intervals to meet demand, as illustrated in Figures 1.2 and 1.3, providing a market signal for investment in faster response technologies, such as batteries and gas peaking generators.

Figure 1.2 shows the load curve and energy prices for a holiday during summer in Victoria State where it can be clearly identified the effect of massive rooftop generation combined with lower demand during the day (known as “the duck curve”), resulting in negative energy prices in the market.

On the other hand, Figure 1.3 illustrates a winter day (Monday) in the same region with higher demand and energy prices due to lower rooftop solar generation and the intensive use of heating systems.? ??

The energy transition is fully under way and the ageing coal-fired power plants have already started to retire, as illustrated in Figure 1.4, and they will be replaced by a combination of large-scale renewables (solar, onshore, and offshore wind) and storage (batteries and pumped hydro), distributed energy resources (rooftop PV, batteries) and gas supply the electricity and capacity needed in the NEM.

Coal is still the main energy source (energy produced), but renewables are quickly moving forward, especially with rooftop solar PV (26.7% of the installed capacity in the NEM), as illustrated in Figure 1.5.?

Tasmania (98%) and South Australia (74%) are leading the energy transition in the country, while the other States have a long way to go, as highlighted in Figure 1.6.

Australia has also a huge offshore wind potential, up to 5 TW (according to the Global Wind Energy Council), yet to be explored. Figure 1.7 shows a map with the best wind resources around the coast.

Part II of this article will bring more insights about the energy transition and the associated challenges.

?2. Governance and Regulatory Structure

?The Australian electricity market has a complex governance and regulatory arrangement, with some actors playing similar roles on Federal and State levels, as summarised in Figure 2.1.

While the Commonwealth government sets the overall energy policy and greenhouse gas emission reduction targets for the country, each State and Territory also play an active role in the same space, creating a very dynamic and challenge environment for investors, developers, network operators and regulators.?

The Energy and Climate Change Ministerial Council (ECMC) gather the Commonwealth, States, Territories, and the New Zealand Energy Ministers, working on priority issues with national impacts and key reforms in the energy and climate change sectors.

The Energy Advisory Panel (EAP) provides advice to the Federal and State Governments (within the NEM) on topics related to security, reliability, and affordability of the energy system. The EAP is formed by the heads of AEMC (EAP’s chair), AER, AEMO and ACCC (as an observer).

The Australian Energy Market Commission (AEMC)[13] is the rule maker for the electricity and gas markets, in charge of the National Electricity Rules[14] (NER), National Energy Retail Rules[15] (NERR) and National Gas Rules[16] (NGR), as well as market developer and expert advisor to governments.

All stakeholders (individuals, consumer groups, industry, or governments) can submit a rule change request by following the well-established procedure[17], except AEMC that is only allowed to propose minor adjustments to the rules (without merit changes).?

Figure 2.2 outlines the merit criteria AEMC can apply to assess the any rule change request. A list of the current topics under consideration is available at: https://www.aemc.gov.au/our-work/changing-energy-rules/rule-changes

The Australian Energy Regulator (AER)[19] sets the economic regulation for electricity (transmission and distribution) and gas networks, monitor the performance of the wholesale and retail markets (electricity and gas), and apply sanctions within the NEM.

The Australian Energy Market Operator (AEMO)[20]? is in charge of keeping secure the electricity and gas systems, managing both markets and designing of Australia’s future energy system.

The Clean Energy Regulator (CER)[21] is responsible for administering legislation that reduces greenhouse gas emissions and increases the use of renewable energy.

The Australian Renewable Energy Agency (ARENA)[22] provides funding for research and development projects on renewable energy, energy efficiency and electrification, as well as knowledge share to accelerate innovation in those fields.?

Each State has the power to establish its own energy targets and set local policies to attract investments in the renewable energy space, such as defining preferred areas for projects to be developed, environmental standards and minimum financial compensation for communities that will host such infrastructures.??

Having a diverse number of entities working on the electricity sector demand high levels of interactions and collaboration between parties to allow new policies and market reforms to be implemented in time to deliver the expected outcomes for the country and leading the energy transition, as well as following the National Electricity Objective[23]:

?“to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to:

a.????? price, quality, safety, reliability and security of supply of electricity; and

b.????? the reliability, safety and security of the national electricity system; and

c.????? the achievement of targets set by a participating jurisdiction—

i.?????? for reducing Australia's greenhouse gas emissions; or

ii.????? that are likely to contribute to reducing Australia's greenhouse gas emissions.”

3. Energy Policy

As mentioned before, States and the Commonwealth have the authority to set energy policies and it’s not rare to have some level of competition among them and conflict of interests. This section focus on four subjects that are impacting the energy market and that lay ground for the medium and long term goals.

3.1 Capacity Investment Scheme (CIS)

The CIS was originally designed in 2022 to foster investment in dispatchable renewable energy and storage projects to increase the reliability of the grid and reduce the risk of price shocks in the country, as the ageing coal-fired power plants are scheduled to retire in the coming years.

In November 2023, the CIS was expanded from 6 GW to 9 GW of dispatchable renewable generation (storage), as well as adding 23 GW for variable renewable energy (wind and solar). This impactful new policy received support from the States and Territories Energy Ministers, representing a great effort from the Australian Government to achieve the 82% renewable energy target by 2030.

Within the total amount (23 GW generation + 9 GW storage), 15 GW of renewables and 3 GW of storage will be delivered through Renewable Energy Transformation Agreements (RETAs), negotiated between the Commonwealth and each State and Territory.??

Under the RETAs, the States and Territories should commit to

• Raising renewables ambition and energy planning to support national target of 82%.
• Matching Commonwealth commitments: streamlining environmental and planning approvals for renewables and transmission.

?The other part (8 GW of generation + 6 GW storage) will be allocated to state and territory governments through national tenders. Projects under RETAs and National tenders will be selected through competitive processes every 6 months until October 2027 and all projects must be operational by 2030. The first CIS tender started in May 2024[24] seeking 6 GW of renewable energy in the NEM.

?The selected projects will be offered a capacity investment scheme agreement (CISA), up to 15 years, under which the annual revenue will be subject to an agreed floor and ceiling values. The government pays the project owner if the annual average revenue is below the floor (buy not negative) and the owner pays the government if the revenue is above the ceiling, as illustrated inf Figure 3.1.

The CIS design aims to provide incentives for generators to sign contracts in the market between the floor and the ceiling prices, once there will be no payment from the government within those limits. Overall, the CIS is like an insurance offered to generators that can only be claimed if the project’s annual revenue is below the floor price and the goal is supporting developers to get better deals with banks and reaching the financial close sooner.??

Proponents of the first CIS tender must comply with a list of eligibility criteria. Projects will be assessed against the merit criteria and ranked based on the overall weighted score, as described in the tender guidelines[25]. Tender 1 has a three-stages process:

• Stage A – Project Bid Assessment
• Stage B – Financial Value Bid
• Stage C – Due Diligence & Recommendations

In Stage A, projects bids will be assessed against four merit criteria, each one accounting for 25%:

• Contribution to system reliability and system benefits-
• Project deliverability and timetable
• Organisational capability to deliver project
• First Nations engagement, community engagement and benefits sharing

In Stage B, the projects shortlisted in Stage A will be assessed against three financial value bid merit criteria and then ranked based on the weighted score:

• Financial value – 65%
• Contract departures – 10%
• First Nations and social licence commitments – 25%

Finally, the Stage C (Due Diligence) will be undertaken on bids shortlisted on Stage B to proponents may be required to provide additional information before the results are declared by the Australian Government.

The results for Tender 1 will be released only in December, but according to the Department of Climate Change, Energy, the Environment and Water[26] (DCCEEW), bids for Stage A reached about 25 GW, which indicates a strong interest from the market and high competition for the 6 GW underwriting agreement offered by the Commonwealth government.

On the other hand, Tender 2 was designed to supply additional storage capacity for the Wholesale Electricity Market (WEM) in Westen Australia (WA) and seeks 500MW/2GWh[27] out of the total indicative size of 1.1 GW/4.4GWh until June 2026.

The CIS-WEM generation tenders are expected for June 2025 and June 2026, with an indicative size up to 6.5 TWh (to be split within the tenders).? All projects must be operational by 2030, participating in the WA’s Reserve Capacity Mechanism[28] (RCM), administrated by AEMO, and be eligible to receive Capacity Credits (equivalent to 1 MW under the RCM).

3.2 Renewable Energy Zones (REZ)

High-quality resource areas with dedicated infrastructure where large-scale renewable energy projects can be developed with lower impacts for energy consumers and taxpayers. According to AEMO ISP 2024[29], there are 43 proposed renewable energy zones in the NEM, with the following estimated capacity per State by 2050:

• New South Wales (NSW): 34 GW
• Queensland (QLD): 43 GW
• Victoria (VIC): 22 GW
• South Australia (SA): 10 GW
• Tasmania (TAS): 3.1 GW

The Renewable Energy Zones development in New South Wales are more advanced than other States, followed by Queensland, as summarised below.

3.2.1 New South Wales REZ

New South Wales was the first State to set the REZ into a legislation through the Electricity Infrastructure Roadmap[30]. There are five REZ already declared by the NSW Energy Minister, as illustrated inf Figure 3.2.?

To deliver this roadmap, the Electricity Infrastructure Investment Act 2020[32] established the roles and governance to be applied only within the REZ, as summarised in Table 3.1.

In addition, each REZ will have its own access scheme[35] aiming to:

• Reduce uncertainty on curtailment risks for generators while maintaining an efficient level of utilisation of the infrastructure.
• Streamline connection process when compared to the open-access model applied in the NEM, under the National Electricity Rules.

The Central-West Orana REZ is in the most advanced stage, and it has already delivered long-term contracts (up to 20 years) for wind (815 MW), solar (1642 MW) and storage (7944 MWh)[36], followed by the South-West REZ.? Figure 3.3 shows the development progress of each REZ until December 2023.

3.2.2 Queensland REZ

?Queensland’s Parliament approved the Energy (Renewable Transformation and Jobs) Act 2024[38], aiming to:

• Increase the amount of electricity generated in Queensland from renewable energy sources.
• Facilitate and support the efficient and coordinated augmentation of the national transmission grid in Queensland to accommodate the increased generation of electricity from renewable energy sources in a safe, secure, reliable and cost-effective way.
• Provide support and advocacy for workers in the energy industry and communities affected by the increased generation of electricity from renewable energy sources.

?The new legislation established the framework needed to build the Renewable Energy Zones and updated the Renewable energy targets for the State, as follows:

• 50% by 2030
• 70% by 2032
• 80% by 2035

In March 2024, the Department of Energy and Climate released the REZ Roadmap[39] with 12 potential sites in Queensland that could allow investments to deploy up to 22 GW of wind, solar and storage by 2035, as illustrated in Figure 3.4.

The in-flight REZs are already progressing under the National Electricity Rules (NER) with a foundation project in development. Once it is converted to a declared REZ, that area will no longer subject to the connection process under the NER, and access and connection must be granted in accordance with the REZ management plan to be prepared by Powerlink.

According to the Energy Act, the REZ management plant should address with the following topics:

• Technical elements such as: REZ transmission network and network transfer capacity, geographic location of the REZ, indicative mix of renewable generation (the percentages of wind and solar proposed to comprise a REZ), REZ controlled assets
• Eligibility criteria
• Access principles
• Process to connect to REZ transmission network
• Dispute resolution process

The projects in the REZ area prior to a REZ being declared will transition from the existing NER connection process to the REZ connection process, following the Energy Act and summarised below:

• Existing connection agreements continue in effect as a connection agreement for the REZ.
• Existing applications to connect to the transmission network are taken to be an application to connect to the REZ transmission network under the REZ management plan.
• If the REZ transmission network includes a Designated Network Assets (DNA), any existing DNA service rights will continue and will not be affected.
• Existing connection and access rights holders may choose to enter into a new connection agreement within the opt-in period (4 weeks after a REZ is declared).

3.3 Offshore Wind

The?Offshore Electricity Infrastructure Act 2021 (OEI Act)[40] established the licensing and regulatory framework for offshore renewable energy and transmission infrastructure in Australia. Figure 3.5 summarises the steps that must be followed by projects proponents under the OEI Act.

The Australian Government has granted 12 feasibility licences for offshore wind projects off Gippsland’s coast in Victoria, summing up to 25 GW. The Victoria State is leading the development of this new market by setting ambitious targets (2GW by 2032, 4GW by 2035 and 9GW by 2040) and planning the first auction to open for the Expression of Interest phase by 2025 and award expected to occur later in 2026.

However, there is a long way to go before any project receives all licences and secure financial closure. The offshore industry is arriving in Australia with uncertainties related to the regulatory and policy frameworks from States and Commonwealth governments, as well as the acceptance from local communities. In addition, the infrastructure needed to build those projects, such as improvements on ports, roads and transmission systems are still in the planning phase and a lot of work must be done to achieve the 2 GW target in 2032.

3.4 Consumer Energy Resources

The consumer energy resources (CER)[42] have finally a national roadmap, after rooftop PV achieving almost 27% of installed capacity in the NEM (3.8 million systems), more than 100k home batteries combined with small-scale PVs[43] and a fast-growing electric vehicle fleet[44].??????

The National CER Roadmap[45] aims to unlock CER full potential across the country and provide benefits for all costumers (not only those with CER) and the overall energy system. For that, the roadmap lists of main reforms must be undertaken to overcome the well-known technical challenges, such as: system stability, voltage management, minimum load, peak demand, and cyber security. Figure 3.6 illustrates the CER roadmap.

Following the launch of the National CER Roadmap on July 2024, the AEMC released the Draft terms of reference for a major reform that aims to bring consumers to the core of the electricity market, named as Electricity pricing for a consumer-driven future[47], with focus on:

• Market arrangements to provide consumers access to better products, services, and prices.
• The roles of distribution networks, retailers, and energy service providers to enable consumers to fulfil their needs and preferences.

Therefore, the CER market will keep growing, probably at a faster pace, while policy and rule markers are improving the regulatory framework to get the most from such important resources.

To be continued in Part II , which focus on how the electricity system in Australia has been changing over the years and pointing out the current challenges to reach the national greenhouse gas emissions reduction and renewable energy targets, as well as consumers’ perspectives and preferences.

Footnotes and References

[1] The sixth largest country in the world, with 7.688 million km2.

[2] 27 million people.

[3] Queensland, New South Wales, Australian Capital Territory, Victoria, South Australia, and Tasmania.

[4] 1.1 million consumers.

[5] 82 thousand consumers.

[6] 45 thousand consumers.

[7] Rooftop solar PV not included.

[8] Source: : Australia 2023 Energy Policy Review ( iea.blob.core.windows.net )

[9] Source: AEMO | Aggregated price and demand data

[10] Source: AEMO | 2024 Integrated System Plan (ISP)

[11] Source: Race-to-the-top-Australias-clean-energy-momentum.pdf ( climatecouncil.org.au )

[12] Source: Offshore Wind Energy Brochure.pdf ( oir.gov.au )

[13] www.aemc.gov.au

[14] NER Version 211 Summary - AEMC Energy Rules

[15] NERR Version 41 Summary - AEMC Energy Rules

[16] NGR Version 80 Summary - AEMC Energy Rules

[17] Making a rule change request | AEMC

[18] Source?: Guide on the objectives - Sep 2023 ( aemc.gov.au )

[19] www.aer.gov.au

[20] www.aemo.com.au

[21] www.cer.gov.au ?

[22] www.arena.gov.au

[23] As stated in the National Electricity Law, available at: National Electricity (South Australia) Act?1996 | South Australian Legislation

[24] CIS Tender 1 - NEM Generation ( aemoservices.com.au )

[25] Source: CIS T1 Guidelines ( aemoservices.com.au )

[26] Source: https://www.dcceew.gov.au/about/news/australian-clean-energy-summit-2024-keynote-address

[27] Documents available at: https://aemoservices.com.au/tenders/cis-tender-2-wem-dispatchable

[28] The RCM aims to ensure sufficient capacity is available to meet system demand and maintain Essential System Services requirements during peak demand events. More information available at: wem-reform-market-design-summary.pdf ( aemo.com.au )

[29] a3-renewable-energy-zones.pdf ( aemo.com.au )

[30] The Electricity Infrastructure Roadmap | EnergyCo ( nsw.gov.au )

[31] Source: Renewable Energy Zone locations | EnergyCo ( nsw.gov.au )

[32] Electricity Infrastructure Investment Act 2020 No 44 - NSW Legislation

[33] Home | EnergyCo ( nsw.gov.au )

[34] AEMO Services

[35] Access schemes | EnergyCo ( nsw.gov.au )

[36] According to the results for NSW/CWO Tenders 1 to 4, available at: Tenders ( aemoservices.com.au )

[37] Source: EnergyCo Year End snapshot ( nsw.gov.au )

[38] Energy (Renewable Transformation and Jobs) Act 2024 - Queensland Legislation - Queensland Government

[39] Queensland Renewable Energy Zone Roadmap | Department of Energy and Climate

[40] Federal Register of Legislation - Offshore Electricity Infrastructure Act 2021

[41] Source: Legislative framework | OIR

[42] Also known as distributed energy resources (DER)

[43] Source: Small-scale installation postcode data | Clean Energy Regulator ( cer.gov.au )

[44] More than 70k battery electric vehicles (BEV) in Australia by March 2024. Source: EV Index - AAA - Data Dashboard

[45] national-consumer-energy-resources-roadmap.pdf

[46] Source: national-consumer-energy-resources-roadmap.pdf

[47] Electricity pricing for a consumer-driven future | AEMC