Below, we summarise our latest forecast for wholesale electricity and Large-scale Generation Certificate (LGC) prices in the National Electricity Market (NEM) 2020-40, contained in our quarterly Australian Electricity Outlook (AEO).
The AEO presents RepuTex’s forecasts for wholesale price development over both medium- (16 quarters) and long-term horizons (20 years), providing an outlook for wholesale electricity prices for each region of the NEM in line with RepuTex’s view of the most likely market drivers and the current transition of the energy industry.
The AEO also provides an outlook for LGC prices, along with forecasts for market outcomes (such as change in capacity and generation mix) and analysis of the major factors that will impact on the electricity market in the forecast period.
The below summary describes our forecast changes in capacity and wholesale electricity prices in annual average (all regions) terms. For our price forecasts and analysis of individual regions please refer to the full AEO.
Australia on track to exceed 50% renewables by 2030
As noted in our earlier updates, we continue to forecast renewable energy generation will grow to 51 per cent of electricity in the NEM by 2030, indicating that the sector is on track to reach 50 per cent renewables penetration by 2030, despite the absence of a federal policy framework beyond the large-scale renewable energy target (LRET).
New capacity additions are expected to be driven by state renewable energy targets, with the Queensland Renewable Energy Target (QRET) forecast to drive approximately 20,500 GWh of new renewable energy generation, and the Victorian Renewable Energy Target (VRET) forecast to drive approximately 3,500 MW of new capacity in Victoria.
Rooftop solar installation is occurring at record levels, and although lower rates are forecast, we continue to anticipate growth in small-scale solar, representing around half of all new capacity needed for the NEM to reach 50 per cent renewable energy by 2030.
Figure 1: Forecast fuel mix of NEM electricity generation (Central Case).
Source: RepuTex Energy, 2019
Slowdown in renewable energy investment
In addition to existing capacity, around 2.7 GW of wind and 2.1 GW of utility-scale PV capacity is committed for development in the NEM.
Following record levels of investment in 2017 and 2018, earlier expectations for a slowdown in investment over 2019 have been met, with utility-scale wind and solar investments falling around 50 per cent from 2018 levels.
This is expected to result in a slowdown in renewable energy additions from 2021-22, potentially threatening to stall declining wholesale electricity prices. Under current policy, lower levels of renewable energy investment is therefore expected to become the new normal until the retirement of coal-fired generators later in the decade, with renewables investment forecast to become reactive to coal-fired closures (and higher prices), rather than proactive (policy driven) to prepare for expected retirements.
Figure 2: Forecast change in annual capacity 2017-40 (Central Case).
Source: RepuTex Energy, 2019
As large volumes of renewable energy capacity is added to the system in the near-term, at low marginal cost, competitive pressure from new supply is modelled to depress 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 2022-23, 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.
Wholesale electricity prices to fall, but renewable energy investment slump may hit
Short term commissioning of renewable energy capacity, along with investment under the VRET and QRET and the installation of small-scale rooftop solar, is forecast to maintain downward pressure on wholesale electricity prices though the 2020s.
Wholesale prices (average all regions) are shown to decline from around $80 per megawatt-hour (/MWh) toward $70/MWh over the next three years. However, as renewable energy investment slows, the closure of major coal-fired facilities may exacerbate the steady growth energy consumption after 2030. This is forecast to lead to higher wholesale electricity prices in the 2030s assuming the continued absence of a policy framework to incentivise investment in new generation and utility storage ahead of expected retirements.
Figure 3: Annual average wholesale electricity price – Avg all regions (Central Case).
Source: RepuTex Energy, 2019
With no policy framework to guide new investment prior to large coal-fired generation retirements, renewable energy investment is again expected to slow, with modelling suggesting a return to elevated wholesale prices would be needed to incentivise new capacity additions, triggering a higher price environment beyond 2030.
Regional price dynamics will vary in line with state renewable energy policy frameworks and coal-fired unit retirements. Despite competitive headwinds from new generators, the announced retirement of large assets in QLD and NSW is expected to improve profitability for remaining coal plants in the system. However, short-term benefits are expected to be offset by more significant operating challenges, such as aging assets with decreasing reliability, increasing ramping costs, commodity price volatility and high emissions intensity.
As a result, the early retirement of coal-fired assets remains a live issue for market participants, planners and policymakers, with implications for regional wholesale prices under alternative forecast settings.
The RepuTex Team
Australian Electricity Markets