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The Australian Energy Market Operator (AEMO) recently published its seminal Integrated System Plan (ISP), which is intended as a roadmap for change for Australia’s electricity market to 2040, and to provide an investment signal to developers. The ISP modelling confirmed that the least-cost and least-regret transition of the National Electricity Market (NEM) is from a system dominated by centralised coal-fired generation to a diverse portfolio of behind-the-meter and grid-scale renewable energy resources supported by dispatchable firming resources and enhanced grid and service capabilities.
The report indicates that over 26 GW of new grid-scale renewables is needed by 2040 (in all but the Slow Change scenario), to replace 15 GW (63%) of Australia’s coal-fired generation due to retire by 2040 (a GW can power approximately 750,000 homes). This is both a massive and fast transformation from coal to renewables with support from other technologies.
The ISP indicates that 6 – 19 GW of dispatchable resources are needed to support this transition, to support the variability of solar and wind. This could include gas-powered electricity generation, utility scale pumped hydro, large scale battery storage systems, distributed batteries, virtual power plants and demand side participation. However, AEMO considers that new gas generators could only be required to provide that support if gas prices were $4 - $6 /GJ over the outlook period, which is very low: contract gas prices have hovered between $8 – $12 /GJ for the past three years on the East coast.
The below graph illustrates the relationship between renewable charging cost for batteries and the gas price as it relates to electricity generation. As the input gas price increases (and battery costs decrease), gas is less likely to compete against batteries to provide that dispatchable support in the NEM.
Figure 1 – Breakeven cost analysis – new gas-powered generation versus battery capacity for daily peaking support
(Source: AEMO ISP 2020 and Deloitte)
AEMO’s March Gas Statement of Opportunities report (GSOO), which is intended to provide the market signal to the gas market, flagged the risk of a gas ‘shortfall’ from 2024 as southern supply is forecast to reduce by more than 35% over the next five years.
The message on gas could be confusing – in the GSOO, AEMO is signalling to the market that more gas exploration and development is required, as well as augmentation of gas pipelines. Then, in this ISP, the view is that additional gas capacity may not need to be installed in the NEM, unless gas prices are close to $4 - $6.
However, if coal generator closures come earlier than currently forecast, the ISP shows there will be demand for approximately 390 MW of new gas capacity in the NEM. We consider it is possible that the closures modelled by AEMO may come earlier than set out in their ‘coal closure’ scenario – in which case it is reasonable to infer that the new gas capacity would also be required earlier.
The key takeaways are – the East Coast gas market still requires more gas supply from 2024. While the ISP does not signal clearly for more gas capacity, if coal closures occur earlier than expected, additional gas capacity will be required in the NEM as well.
Author – Liz Boylan
Kumar is a Partner in the Financial Advisory practice and is responsible for the Energy and Resources Sector. He specialises in portfolio management, policy advice, commercial and financial analysis, market modelling (electricity, gas and renewable energy), strategic positioning and assisting clients with growth strategies. Kumar helps his clients make future decisions with confidence.
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