The 2019 federal election has been run and won, with the energy policy status quo set to remain in effect following the fulfilment of the Large-scale Renewable Energy Target (LRET). So where to for wholesale electricity prices and renewable energy investment?
Change in installed capacity
Assuming no change in federal policy, we project renewable energy generation could grow to 52 per cent of electricity in the National Electricity Market (NEM) by 2030, suggesting the electricity sector is already on track to reach a 50 per cent renewables target by 2030.
This is largely due to state renewable energy targets, with the QRET and VRET schemes forecast to drive approximately 20,500 GWh of new renewables energy generation in Queensland and around 3,500 MW of new renewable energy capacity in Victoria. Rooftop solar installations are currently breaking records, and although lower rates are forecast, we continue to see growth in rooftop solar remaining strong, representing around half of the capacity needed for the NEM to reach 50 per cent renewable energy by 2030.
In addition to existing capacity – roughly 27 Gigawatts (GW) of large and small scale renewables – around 3 GW of wind and 3 GW of solar capacity is currently committed for development in the NEM by the end of next year. As this capacity is added to the system, competitive pressure from new low-cost supply is modelled to significantly limit demand for coal-fired energy, even without a direct emission constraint.
As a result, while only AGL has announced that Liddell is to close in 2022, fossil fuel generation is modelled to be more broadly on the decline, displaced by a large volume of solar and wind energy and steady increase in rooftop solar.
Figure 1: No policy change – NEM electricity generation by technology type
Source: RepuTex Energy, 2019
This capacity will be supported by pumped hydro, with ‘Snowy 2.0’ assumed to be phased in between 2024 and 2025 (according to Snowy Hydro’s feasibility study). The addition of a large amount of energy storage is likely to benefit utility-scale solar and wind energy – the least-cost forms of energy – which become more appealing with firming to ensure predictability for buyers.
The deployment of Snowy 2.0 by 2024-25, concurrent transmission upgrades, and the QRET scheme being met, is projected to eliminate the need for a further 3 GW of coal-fired capacity by the end of the decade. This is likely to see renewables grow to 52 per cent of electricity in the NEM by 2030.
However, Current Policy does not necessarily represent the ‘most likely’ scenario. For example, if Queensland does not make enough investments to achieve its target; the construction of Snowy 2.0 blows out to eight years instead of five; and/or Tasmania’s ‘Battery of the Nation’ and MarinusLink projects are brought forward, this will result in an entirely different price projection at the regional and NEM-wide level.
Wholesale prices should continue to fall
Under Current Policy, wholesale electricity prices (refer to Figure 2 – all regions) are shown to decline from around $85 per megawatt-hour (/MWh) toward $70/MWh over the next three years. This is broadly in line with the federal government’s $70/MWh ‘target’ in 2021-22 – with the downward price trajectory underpinned by the continued uptake of large-scale renewables under the QRET and VRET schemes, and the installation of small-scale rooftop solar over the next 18 months (rather than federal policy).
State energy policy has therefore become the dominant signal for new investment in Australia, setting the NEM on track to achieve a 52 per cent renewable energy mix, and placing downward pressure on wholesale prices over the medium term.
Figure 2 – Annual average BAU wholesale electricity price – All regions (NEM).
Source: RepuTex Energy, 2019
But wait… the impact of no federal policy
While the current pace of project development has led to large scale deployment of renewable energy, under a Current Policy scenario, high rates of project development lead to a lower incentive for investment in new capacity after 2020 due to concerns over a sustained decline in wholesale prices, possible overdevelopment in some regions, and uncertainty over future infrastructure access.
As a result, without a robust policy framework to incentivise new investment prior to large coal-fired generation retirements, energy investment is again expected to slow. Our modelling suggests a return to elevated wholesale prices would therefore be needed to incentivise new capacity, triggering a higher price environment beyond 2030.
The long-term absence of a federal energy policy framework is therefore likely to be felt in the form of elevated wholesale prices and increased volatility in the future, with wholesale prices fluctuating around a boom-bust renewable energy investment cycle, determined by fossil fuel retirements rather than an orderly transition plan.
To access our full Australian Electricity Outlook (AEO), our quarterly outlook for Large-scale Generation Certificates (LGCs) and pool prices for each region of the NEM, contact our Client Services team.
The RepuTex Team
Australian Electricity Markets
Our Australian Electricity Outlook (AEO)
RepuTex’s Australian Electricity Outlook (AEO) is our flagship quarterly outlook for LGCs and pool prices across the National Electricity Market. RepuTex AEO provides a comprehensive view of both medium-term prices (over the next 16 quarters) and long-term prices through to 2040, providing decision makers with a deeper understanding of future price trends, scenarios and sensitivities, and the major factors driving the future shape of the market. Learn more about this service here.