A Comprehensive Roadmap for Australia's Complex Energy Transition

Part of the Jones Day Carbon Disruption series.

In Short

The Situation: On 30 July 2020, the Australian Energy Market Operator ("AEMO") published the 2020 Integrated System Plan ("ISP") for the Australian National Electricity Market.

The Context: The plan is a comprehensive, whole-of-system roadmap for Australia's energy future to 2040. It sets out detailed stakeholder engagement programs, potential investment requirements and planning timelines for Australia's proposed transition to a climate‑resilient network.

Looking Ahead: The 2020 ISP proposes that by 2035, nearly 90% of electricity demand on the Australian electricity network could be met by renewable generation. This would exceed Australia's current target of a 26% reduction in 2005-level greenhouse gas emissions by 2030.

The 2020 ISP Roadmap

Two years after publication of the inaugural ISP, the 2020 ISP draws on extensive stakeholder engagement and industry and power system expertise to update the ISP for the future of the Australian National Electricity Market. The 2020 ISP sets out recommendations on the nature, location and timing of investments required for the long‑term transition of the Australian electricity network to operate primarily on renewable power generation. In doing so, it seeks to synthesize the Australian Government's commitments to reduce emissions with market conditions, emerging technology and power system security and reliability. 

The 2020 ISP takes capital and fuel costs of generation into account as well as considering future network development. Importantly, it contemplates sector coupling with existing coal- and gas‑fired generation to integrate variable renewable energy into the Australian electricity network. The 2020 ISP contemplates necessary regulatory and market reforms to make this happen, allocated into three prioritized phases along an 'optimal development path': 

  • Phase 1 details development required to assist in meeting regional renewable energy targets and other policies, and/or where there is good access to existing network capacity with good system strength.
  • Phase 2 considers renewable generation development to replace energy provided by retiring coal‑fired generators.
  • Phase 3 considers generation development to accompany future projects identified by the 2020 ISP to specifically support renewable generation.

The 2020 ISP focuses on meeting future power needs efficiently and sustainably.

The next update to the ISP is due to be published in 2022, and AEMO has committed to work with industry, government and consumers to continue to develop the roadmap toward making the Australian electricity network sustainable.

Balancing the Timing of the Transition to Renewable Generation

Replacing large‑scale coal‑fired power stations involves substantial investments and deployment of new infrastructure, with long lead times and complex integration with the existing power system and planned subsequent developments.

The 2020 ISP considers this investment in new generation capacity in conjunction with expected timings of retirement of existing coal generation facilities and the need for gas‑fired generation to support the transition to an electricity network powered largely by variable renewable energy. 

All scenarios contemplated in the 2020 ISP expect to see residential, industrial and commercial electricity consumers continue to invest heavily in distributed photovoltaic solar-generated electricity.

The 2020 ISP forecasts that Australia should invest in a further 26-50 GW of new large‑scale variable renewable energy projects beyond existing, committed and anticipated projects.

To support these new projects, Regional Energy Zones have been established across the Eastern States of Australia. Regional Energy Zones are areas in the National Electricity Market which can most cost effectively support large amounts of variable generation through essential storage, gas‑fired generation and transmission investments, adopting a least‑cost and least‑regret approach to additional investment requirements. 

The 2020 ISP acknowledges that the market will need to be incentivized in relation to the timely investment in essential services and resources needed to replace retiring coal and some gas generators. While the focus is on transitioning to renewable energy generation, gas‑powered generation is expected to play a key ongoing balancing role in the network, including during periods of peak demand, overnight, low renewable conditions and generation outages.

The Potential of Hydrogen

The 2020 ISP recognizes the increasing interest in hydrogen as a potential energy disruptor. It acknowledges existing government and private sector plans and pilot projects, and the National Hydrogen Strategy highlighting Australia's potential to be a large exporter of hydrogen, stating that:

There are varied potential opportunities and future pathways for the domestic development of hydrogen; for example, as an energy carrier, allowing renewable energy to be used to supply low‑emissions energy to residences or reduce emissions from hard‑to‑abate industrial sectors such as steelmaking. New hydrogen transmission pipelines and existing distribution pipelines may be able to provide energy storage opportunities using hydrogen.

However, it also recognizes that the hydrogen industry is still nascent, and its potential to contribute to the future of the Australian National Electricity Market requires further consideration before it can be integrated into the ISP. Robust policy support will be required to reduce hydrogen's current high cost and build infrastructure to create opportunities and commercially attractive incentives in the market. 

The 2020 ISP foresees potential for hydrogen and for a green steel industry to develop if global policy shifts to support decarbonization of the industrial sector. Hydrogen prices will need to be much lower than they are currently projected if they are able to compete with gas in many other domestic applications. 

Consultation on the 2022 ISP will consider and investigate the role of hydrogen in more detail as it relates to Australia's electricity network.

Three Key Takeaways

  1. Electricity Market Operators and Regulators in Australia continue to plan for Australia's transition to carbon‑free domestic electricity generation.
  2. The 2020 ISP provides a useful guide to industry on the nature, location and timing of investments required as part of Australia's electricity future.
  3. The importance of green and blue hydrogen as a means to store energy for domestic use and for export is acknowledged as an important factor in the transition to a climate resilient network and will be considered in more detail in the 2022 ISP.
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