Significant investment and coordinated policy reform with a continued focus on cost management is needed to move Australia’s National Energy Market (NEM) smoothly to net zero.
The Energy Security Board (ESB) released its annual Health of the NEM report report after a tumultuous year, with a spike in wholesale energy prices and a temporary suspension of the entire market in June.
“The energy transition is a complex nationwide coordination exercise that will affect all parts of the supply chain,” said ESB President Anna Collyer. “Events earlier this year have highlighted the types of challenges we face and the bumps that can arise.”
The report highlighted the need for large-scale investment in new transmission, renewable generation and flexible capacity.
He said the best strategy was to build replacement assets quickly while managing costs to reduce the domestic market’s exposure to shocks from international gas and coal price movements.
“Due to the scale and pace of the investments required, we face major coordination challenges related to land use planning, the availability of skilled workers and supply chain requirements,” a- he declared.
Energy affordability has been identified as the top consumer concern, with some consumers likely to remain more exposed to cost risks associated with the energy transition.
“An orderly energy transition remains the best way to improve long-term energy affordability,” the report says. “However, this will take time and the necessary investments will increase cost pressures, even if they will be less than the costs of a disorderly transition.”
Transition in difficult economic conditions
He also noted that the close interdependence of the gas and electricity markets means that planning for the future of the two markets “cannot be done in isolation”.
Gas is expected to play an increasingly critical role in “filling the gaps” and complementing renewables.
This was also highlighted in the Australian Energy Regulator (AER) State of the Energy Market reportwhich was released simultaneously.
AER President Clare Savage said the year had seen many changes and “firsts” in the market after a “performance storm” of supply constraints that led to persistently high prices.
“In these difficult economic conditions, we are focused on using our regulatory levers to achieve the best possible outcomes for consumers to ensure the energy transition at the lowest cost,” she said.
Levers include enforcement of national energy laws, caps on the amount of revenue grid companies can collect from consumers, and the Default Market Bid which sets the maximum price for retail market bids. .
“Market transition and design must put consumers at the center,” Savage said.
Both reports warned that due to the increasing number of coal-fired power plant closures, massive investments in the NEM were needed to ensure reliable power.
The warning comes as Victoria’s largest coal-fired power station announced it would close 10 years ahead of schedule as its owner switches to renewables.
Energy giant AGL said the early closure of Loy Yang A by mid-2035 would save around “200 million tonnes of greenhouse gases”.