Huge Investment Needed for Smooth Transition to Net-Zero: Energy Regulators

A power plug is placed into a power socket in Melbourne, Australia, on Oct. 22, 2012. (Quinn Rooney/Getty Images)

Significant investment and coordinated policy reform with a persistent focus on cost management is needed for Australia’s National Energy Market (NEM) to smoothly transition to net-zero.

The Energy Security Board (ESB) released its annual Health of the NEM report after a tumultuous year, with surging wholesale energy prices and a temporary suspension of the entire market in June.

“The energy transition is a complex coordination exercise on a national scale that will affect all parts of the supply chain,” ESB Chair Anna Collyer said. “Events earlier this year highlighted the types of challenges we face and the bumps that can emerge.”

The report highlighted the need for large-scale investment in a new transmission, renewable generation, and flexible capacity.

It said the best strategy was to quickly build replacement assets while still managing costs to reduce the domestic market’s exposure to shocks of international gas and coal price movements.

“Due to the scale and pace of investment required, we face major coordination challenges relating to land use planning, the availability of skilled workers and supply chain requirements,” it said.

Energy affordability was identified as the biggest concern for consumers, with some consumers likely to remain more exposed to cost risks related to the energy transition.

“An orderly energy transition remains the best way to improve energy affordability in the long-term,” the report said. “However, this will take time, and the required investments will add to cost pressures, although they will be lower than the costs of a disorderly transition.”

Transition In Tough Economic Conditions

It also noted that the close interconnectedness of the gas and electricity markets means planning the two markets’ future “cannot occur in isolation.”

Gas is expected to play an increasingly critical role in “gap filling” and complementing renewable energy.

This was also highlighted in the Australian Energy Regulator’s (AER) State of the Energy Market report, which was released simultaneously.

AER Chair Clare Savage said the year marked many changes and market “firsts” after a “perform storm” of supply constraints resulted in persistently record high prices.

“In these tough economic conditions, we are focused on using our regulatory levers to get the best possible outcomes for consumers to ensure the energy transition is delivered at least-cost,” she said.

The levers include enforcement of national energy laws, caps for the amount of revenue network businesses can collect from consumers, and the default market offer that sets the maximum price of retail market offers.

“Market transition and design needs to have consumers at the centre of it,” Savage said.

Both reports warned that due to the increasing number of coal-fired power plant closures, widespread investment across the NEM was needed to ensure reliable energy.

The warning comes as Victoria’s biggest coal-fired power plant announced it would shut down 10 years earlier than planned as its owner transitions to renewable energy.

Energy giant AGL said the early closure of Loy Yang A by mid-2035 would avoid around “200 million tonnes of greenhouse gases.”