‘Accelerating and Irreversible’: Insights from AEMO’s 2022 Integrated System Plan
Fast Facts
On 30 June 2022, AEMO published the Final 2022 Integrated System Plan (ISP) following the close of submissions on 11 February 2022, noting that the overarching message from stakeholders and recent market events is that the energy system transformation is both ‘accelerating and irreversible’
AEMO reaffirmed ‘Step Change’ as the most likely scenario, which envisages a rapid consumer-led transformation of the energy sector and co-ordinated economy-wide action on emissions reduction
Projected market dynamics under Step Change:
Delivered electricity will double by 2050, reaching approximately 320 TWh per year to meet the growing electrification requirements of the transport, industry, and residential sectors
Coal-fired generation withdrawals will continue to be brought forward by up to 7 years, with 14 GW (60%) of the remaining 23 GW set to exit by 2030
A nine-fold increase in utility-scale VRE capacity is required by 2050, much of which will be built in renewable energy zones (REZ) to coordinate investment
A five-fold increase in distributed PV is forecast, reaching 69 GW of installed capacity by 2050 across 65% of detached homes, with most systems supported by small-scale batteries
Treble the firming capacity will be required by 2050 from a range of dispatchable utility-scale batteries, hydro, gas-fired generation, and smart behind-the-meter VPPs
By 2050, over 10,000 km of new transmission will be needed to efficiently deliver low-cost, firmed renewable capacity to consumers, adding $28 billion in net market benefits
Impacts on key players:
Coal-fired generators will find it increasingly difficult to reach the end of technical plant life as firmed renewable generation and DER increasingly penetrate the system, and the form of a possible capacity mechanism remains uncertain
Transmission Network Service Providers may benefit from significant investment in additional network capacity; however, they will also need to deal with existing and potential changes to delivery regimes under State legislation as States compete to attract generation investment and broader economic investments associated with the transition
Distribution Network Service Providers will need to invest significantly in the low voltage network over successive regulatory control periods to expand network hosting capacity and enable the intensification of two-way electricity flow in a secure and reliable manner
Regulators will face ongoing pressure to implement significant market and technical reforms to facilitate an orderly and cost-effective transition to a low emissions grid, such as a capacity mechanism, essential system services, DER integration, congestion management, and connections reform
Companies that have yet to consider the impacts of a rapid transformation of their operating environment on their business and implement a responsive transition strategy, will face increasing pressure from both internal and external stakeholders.
Our Insights
Baseload Generation and Firming
A key feature of the Final ISP, as it was in the Draft ISP, is AEMO’s predicted retirement of coal-fired generation at a rate that is much faster than previously forecast. AEMO’s Step Change scenario maintains that 14 GW (60%) of the current 23 GW of coal capacity will be retired by 2030, with all coal generation feasibly exiting by 2040. What is most interesting, of course, are the market developments that have occurred between AEMO publishing the Draft and Final ISP – most notably, the early retirement announcements from Origin’s Eraring Power Station, AGL’s Bayswater Power Station, and Engie’s Loy Yang A Power Station. AEMO’s position on accelerated coal retirements in the Draft ISP – the first iteration in which AEMO has taken a strong position on early coal retirements – drew criticism from some market stakeholders. The recent market announcements, however, particularly Origin’s intention to retire the Eraring Power Plant by 2025, has served to validate AEMO’s retirement assumptions. Countering AEMO’s position on early retirements would require significant shifts in current market trends. Energy market price signals would need to favour coal generation much more than they do at present, and coal prices would need to reach long-term moderation. With the current outage rates of coal assets in the NEM rising with each early retirement, sustained improvements to asset maintenance performance would also be needed for coal plants to be viewed economically as a viable contender. Emissions reductions policy at Federal and State levels reinforces this position.
AEMO’s Final ISP forecasts maintain that treble the current firming capacity – approximately 46 GW (640 GWh) of dispatchable storage capacity, 7 GW of existing dispatchable hydro, and 10 GW of gas-fired generation – is needed by 2050 to efficiently operate and firm variable renewable energy (VRE), emphasising the continued (but relatively small) role for peaking-gas fired generation. For a grid that is planning to be net zero by 2050, AEMO predicts 7 Mt CO2-e to remain in the system in 2050 that will need to be abated. While some have criticised AEMO’s continued inclusion of gas, it is important to remember that the ISP is a least-cost model. The inclusion of 10 GW of gas represents only a ~1 GW reduction in current capacity, which is much less costly than the total phasing out of gas-fired capacity. For the grid to further reduce or avoid continued investment in gas, the market would need to invest further in the relatively more expensive large-scale or coordinated storage as substitute firming capacity.
What remains unclear is the impact of the unprecedented soaring coal and gas prices of the current international energy crisis. While in the near-term they may provide mixed signals to contracted generators, they are not expected to provide a renewed signal for long-term profitability to those assets, given the looming decarbonisation commitments across organisations.
Despite the recent media spotlight on the now-public delays to the Snowy Hydro project (~19 months behind), the Final ISP modelling does not apply any change to the project’s schedule, stating only that “suggestions have emerged of a potential delay to the delivery schedule of Snowy 2.0”. The modelling also does not appear to include any consideration for a capacity mechanism beyond what was included in the Draft ISP, despite – or perhaps considering – the recent controversy and uncertainty surrounding the mechanism.
Key takeaways
Early retirement announcements from Origin, AGL, and Engie have confirmed AEMO’s position on accelerated coal-fired generation closures, with all remaining coal capacity feasibly exiting by 2040
Prevailing price signals, increasing outage rates, increasing O&M costs, and an ever-present threat of a carbon price have made renewed long-term profitability for coal-fired generators extremely challenging
AEMO has affirmed that the ‘least-cost’ pathway to net-zero can only be achieved with the support of ~10 GW of peaking-gas capacity through to 2050
The Final ISP modelling has not taken into account project delays for Snowy Hydro, nor made changes to its Draft capacity mechanism assumptions, both of which continue to face public scrutiny.
Renewables and Storage
To meet the Net Zero 2050 target, the 2022 Step Change scenario incorporates a record growth outlook for both utility-scale and distributed VRE. The current utility-scale VRE of 16GW is projected to grow nine-fold to 140GW in 2050.
The ISP notes that due to the complementary daily and seasonal profiles provided by wind and solar, by 2050, they will have almost equal shares of NEM generation (including distributed PV). The mix varies over the decades as storage and network investment catch up to utility-scale solar development requirements. While offshore wind is acknowledged as providing significant potential in the NEM, and notwithstanding the offshore wind investments and Government support (particularly in Victoria), the ISP notes that the technology is currently high-cost and is not currently part of the capacity mix assumed in the Step Change scenario.
By the mid-2040s, the ISP projects that supply electricity will almost exclusively be provided by renewables. By 2025, 100% of grid demand can be met by renewables infrequently through the year (< 5% of the time), with this reaching 36% by 2040 and 65% by 2050. Over this time, VRE capacity will reach 95% of the total capacity in the NEM. Increasing levels of VRE through the NEM can only dispatch securely, efficiently, and consistently with strong and fit-for-purpose transmission and distribution capability and firming capacity being built to support this growth.
Currently, over 128GW of renewables are projected across the NEM, over and above the existing, committed, or planned size of Renewable Energy Zones (REZs) across the regions over the next 10-20 years. A new REZ Design Report process has been introduced into the ISP process under the National Electricity Rules, and AEMO may trigger this report either in or between ISPs. The importance of transmission, including REZ development, to complement the planned growth of VRE simply cannot be overstated. The timing, process and visibility of the project approval processes and the issue of generator performance standards across the States must continue to keep pace in order for renewable generation to be able to be connected and commissioned in a timely manner over coming years. Securing social licence related to transmission development also will continue to be a crucial enabler for timely transmission development.
The ISP incorporates several types and depths of storage to firm the variable renewables, in addition to hydro and peaking gas, which will support variable renewables to 2050. Distributed storage, including ‘coordinated’ storage (virtual power plants) will comprise 75% of the dispatchable battery storage in the NEM. Deep storage, in turn, will be required to replace the firming provided by retiring coal capacity.
Notwithstanding the significant build-out of storage, by 2050, the ISP projects that approximately 20% of VRE generation will be curtailed or split. This occurs during period of high solar generation (spring and summer) and when solar and wind generation materially overlap each other at certain times. In these instances, the ISP notes that it is not economic to build storage to match every watt of renewable generation and that the overbuild of VRE will need to be seen as more efficient.
The scale of development of renewable and storage projects will be impacted by supply chain disruptions into the foreseeable future, including the shortage in the availability of critical minerals. With a longer-term outlook of a decline in renewable technology costs, the development of local industry and alternative technologies, along with global supply chains, will be key to the deliverability of the Step Change scenario.
The above factors also combine to drive the feasibility of renewable and transmission projects, which will impact their timing, and the overall progress the NEM can achieve towards net zero by 2050.
Current distributed PV of 15 GW, representing 30% of detached homes across the NEM, will grow five-fold to 69 GW by 2050. The ISP also projects that most new distributed PV systems will be accompanied by battery storage. Where investment in distribution systems is coordinated with the rate of DER expansion, optimising operation and export, the ISP projects that the 93TWh of electricity generated through distributed PV systems will meet almost 20% of the NEM’s underlying demand in 2050.
The substantial increase (since the 2020 ISP) in the level of DER including distributed PV, distributed storage and coordinated storage are primarily in response to the near doubling of underlying electricity demand by 2050 (to 320TWh), which in turn is a result of the extensive electrification of transport and heating expected within the coming decades. AEMO is seeking to strengthen the links between the ISP and distribution network planning processes. Nonetheless, the increased level of two-way electricity traffic, the level of visibility required between dispatchable devices (including EVs which can dispatch into the grid) and the adaptation of the distribution networks to handle the extensive electrification across the NEM, will be critical to the continued successful operation of grid, the majority of which will be distributed, by 2050.
Key takeaways
Timely, and cost-effective transmission and REZ development will be crucial to facilitate a nine-fold growth in VRE, requiring projects to secure social licence and the States to keep pace and provide visibility on project approvals processes and generator performance standards
Global supply-chain disruptions, particularly in the availability of critical minerals, has the potential to delay both the timing and scale of renewable generation and transmission infrastructure that is able to be built over the coming decade, and will need to be resolved via local and global efforts for Step Change to materialise
Offshore wind is not part of the Step Change capacity mix due to its high cost, despite the ISP noting its significant potential to complement the daily and seasonal profile of utility-scale solar
Extensive electrification of heating and transport is expected in the coming decades, requiring a material shift in visibility of dispatchable devices and strength of existing low-voltage networks across the NEM
Although distributed PV is expected to meet up to 20% of underlying demand by 2050 coupled with heavy investment in storage, the ISP notes that about 20% of VRE will need to be curtailed or split as surplus VRE capacity will be more efficient than building additional storage
Transmission
The Final 2022 ISP has a slightly smaller number of Actionable ISP Projects identified than in the 2020 ISP, with Project EnergyConnect, VNI Minor and the Central West Orana REZ projects having been moved to the ‘committed’ ledger in the interim. New entrants to the Actionable list are the Sydney Ring Project and New England REZ Transmission Link, both of which are given Actionable status by virtue of their delivery under the NSW Government’s Electricity Infrastructure Investment Act 2020.
There have been increases to project costs and the push back of delivery dates for interconnector projects – in some cases even since the Draft 2022 ISP was released in December this year. The delayed timing for HumeLink and the Victoria – New South Wales Interconnector (VNI) West, when compared with the 2020 ISP, is a combination of project cost increases, and a reduction to forecast project benefits.
Of note is the decision by AEMO to dispense with the decision rules that were applied to VNI West and MarinusLink in the 2020 ISP, and those included in the Draft 2022 ISP for VNI West and HumeLink. These decision rules acted as a condition precedent to projects moving ahead, and were based around the idea of protecting consumers from policy or market changes that may have put the need for, or benefits of, projects at risk. AEMO now appears satisfied that consumers will be protected from rising prices or lesser benefits of projects through the application of ISP Feedback Loop, and a staged approach to early works and full project implementation for Humelink and VNI West.
Perhaps the most striking change since the 2020 ISP has been the crystallisation of the NSW REZ regime that will now advance delivery of not only the Central-West Orana and New England REZ, but also the Sydney Ring project. It is worth remembering that the majority of Actionable Projects since the inception of the Actionable ISP process have had a significant footprint inside NSW. The costs of transmission projects built within a State are largely passed onto consumers within that State – this means that the costs of QNI Minor, and Project EnergyConnect (now committed) will be faced, in part, by NSW consumers. With HumeLink and VNI West likely to be next, it is not hard to understand why – for the delivery of the next suite of large projects, such as the Central West Orana REZ and NSW REZ, NSW has introduced a bespoke regime to handle delivery. Such arrangements enable the contestable delivery of transmission, and the ability to transfer some of these transmission costs onto to generators in the form of access fees. The introduction of a bespoke regime also allows NSW to ‘set the pace’ in terms of generation development in the State.
Looking forward, some of the challenges and opportunities faced by NSW relating to the management of transmission costs and prioritisation of generation, are likely to play out in Queensland. In the Final 2022 ISP, six of the 10 known future projects have a footprint in Queensland, with estimated total costs of $3.7 billion. These projects are in response to AEMO’s requirement to improve power system security services in central, southern, and broader Queensland regions, while also aligning with the expected generation potential of QLD. Significantly, the ISP forecasts that by 2050 under the Step Change Scenario, 47 GW of new utility-scale wind and solar VRE generation will be developed in Queensland, the highest of all jurisdictions.
The Queensland Government has a suite of broader renewables and emissions targets which include a 50% renewable target by 2030 and a 30% reduction in emissions by 2030, as well as a policy objective related to a sustainable hydrogen industry, and development of renewable energy zones. Under such circumstances, the Queensland Government may consider the regulatory settings under the national regime insufficient to face the challenges of the coming decades, and that the expected investment in the State might be undermined by other State actions. Given that AEMO must take into account Government policy that has been regulated or funded in the ISP planning process, State decisions on both transmission and generation development will have significant consequences for the future of the system.
Key takeaways
All Actionable ISP Projects identified in the 2020 ISP remain as required, but in most cases, delivery dates have been pushed back due, in part, to increases in project costs and a decline in potential benefits
Renewable energy zones have become a certain feature of the future energy and transmission outlook – NSW has accelerated the development of this transmission via State-based policy – and there may be incentives for other States to follow suit
QLD is likely to face significant transmission costs in the future, with the ISP forecasting future projects costs with a footprint in Queensland at $3.7 billion. Not only is this transmission required to address reliability and security issues, but also to facilitate a State-leading amount of renewable generation capacity to 2050
The introduction of ‘bespoke’ regimes within NEM States has the capacity to alter the planning of the ISP, and so influence deployment of transmission and associated investment opportunities in generation.
Conclusion
The Final 2022 ISP provides a blueprint for what AEMO has described as an ‘accelerating and irreversible’ energy system transformation. As a blueprint that is widely adopted by market participants, investors, and regulators alike, it has the capacity to act as a self-fulfilling prophecy.
Public policy and funding will be guided by the need to support local economies to adapt to the rapid exit of ageing thermal generation. Regulatory bodies will need to make material changes to ensure a safe and efficient transition to firmed renewable generation, and adequate market competition to keep costs low for consumers. Private investors will watch for pricing signals and market reform that support investment in net-zero infrastructure and technologies. Large energy consumers will intensify demand for affordable green energy sources as they face mounting ESG pressures from internal and external stakeholders, and small energy consumers will be more incentivised than ever to invest in behind-the-meter assets.
This momentum of energy and non-energy actors converging on an ‘accelerating and irreversible’ energy market transition, will in turn need to be considered by companies as they attempt to maintain profitability through such unprecedented change. Now is the time to update or undertake new scenario analysis to inform a long-term transition strategy, and importantly, to understand and plan for the potential opportunities and risks of Step Change for long-term profitability.