2023 - The Year That Was

In recent years the pace and breadth of change and developments in the energy sector has been remarkable. Looking back over the past 12 months it is apparent that continues to be the case.

• Release of the Australian Energy Market Operator’s draft Integrated System Plan (ISP) in December illustrated the scale of the challenge we face in reaching government energy and emission targets. The ISP also sees the need for more dispatchable generation – a quadrupling – compared to the 2022 ISP with gas sitting alongside hydro, pumped hydro and battery storage. It identified an increased role for gas-fired generation to deal with renewable droughts and peak periods – with an additional 16GW of peaking gas generation now considered necessary.
• The year started with fallout from the introduction of the Federal Government’s $12/PJ price cap on gas as well as uncertainty surrounding the implications of the mandatory code of conduct. It saw a period where gas contracts proved difficult to access for retailers and, as a consequence, some Commercial & Industrial (C&I) customers who had not recontracted for 2023 in anticipation of the price cap, finding the only gas available was at spot prices. Prior to the start of the year there had also been an expectation from some businesses that the cap would mean $12/PJ gas at the consumer’s premises with media articles citing the fact that businesses could not get gas at that price. This ignored the additional costs, such as transport costs, in actually getting the gas to the customer. While supply availability improved with greater clarity around the new code and cap it did highlight that government interventions can often have unintended consequences.
  
  
• A major development was the replacement of proposals for a capacity mechanism with a Federal Capacity Investment Scheme (CIS), initially with a target of at least 6GW of “clean dispatchable” capacity by 2030. The form of the CIS stemmed from opposition amongst energy ministers to including gas-fired generation in the scheme, although the Federal Government accepts that gas will continue to play a role in our system. The first auction under the CIS was held in New South Wales (via a Commonwealth/NSW Government tender) which resulted in six bidders being selected to deliver a total of 1075MW of storage. Bids are now being sought for South Australia and Victoria to deliver 600MW of 4‑hour equivalent (or 2,400 MWh) of dispatchable renewable generation and storage.
  
  
• In November the CIS was expanded with the Federal Government targeting an additional 32 GW - 9GW of clean dispatchable capacity and 23 GW of variable renewables nationally. Under the scheme the Government will provide revenue support for selected projects, with an agreed revenue ‘floor’ and ‘ceiling’ through a contract for difference (CfD).  There is little doubt that the policy will bring forward investment, but as we pointed out at the time of the announcement it does not come without some risks including potential impacts on some private sector plans.
  
  
• The impetus for the expanded CIS came as it became clearer that the pace of the energy transition had slowed, challenging the Federal Government’s emissions and renewables targets. The release of the latest Climate Statement and Emission Forecasts showed that Australia could achieve a 42 per cent reduction in emissions by 2030 (just shy of the 43 per cent target) - predicated on the CIS and other measures being successfully implemented. Absent these additional policies the emission reductions have been forecast to be 37 per cent below 2005 levels in 2030.
  
  
• The emissions forecast again showed the electricity sector was doing the heavy lifting in decarbonising the economy. For that reason the strengthening of the Safeguard Mechanism which will encourage economy-wide emission reductions was welcome.
  
  
• The enhanced Safeguard Mechanism which was endorsed by Parliament covers facilities that account for around 28 per cent of Australia’s emissions in mining, oil and gas production, manufacturing, transport and waste.
  
  
• Equally developing sectoral pathways for emission reductions as announced during the year is a critical step. The AEC has long argued that the efforts to decarbonise Australia’s economy and reduce emissions won’t succeed if it is left to just the electricity sector. This measure, along with the revised Safeguard Mechanism, are important elements in making the decarbonisation effort whole-of-economy. This will require the exploitation of all decarbonising opportunities and technologies. We know that as emissions get closer to net zero, abatement will only become more challenging and more costly. There will also be sectors where it will be more challenging to decarbonise, but for others, such as transport, electrification can bring a greater contribution. The Federal Government’s electric vehicle strategy released during the year includes introduction of a Fuel Efficiency Standard.
  
  
• The establishment of a Net Zero Authority was a welcome initiative given the potential impacts from the energy transition, particularly for regional areas. There is an important role government and this new authority can play in helping investors and companies realise new net zero opportunities in regions where existing industries are transforming to lower carbon technologies. A national body can play an important coordinating role. Our members are on the frontline of the shift away from coal-fired generation and are acutely aware of the challenges at a local level and know that each community will be impacted differently. Energy companies plan years in advance to enable their plants to close in a way that supports both their workforces and the local community and the Net Zero Authority can help in this regard.
  
  
• The New South Wales Government commissioned Marsden Jacobs to undertake an Electricity Supply and Reliability Check Up. The final report flags the importance of getting the phase out of old plant and phase in of replacement generation right. It effectively provided the NSW Government with a risk management strategy. Overall, the report contains a broad range of recommendations (54 in all) that form a generally pragmatic response to the hurdles that have emerged through the energy market transition. If the NSW Electricity Supply and Reliability Check Up told us anything it was that there must be a careful balance between emissions reduction, affordability and reliability.
  
  
• Clearly there are consequences for reliability and affordability if that balance is not achieved. Amongst the reports 54 recommendations was one that the NSW Government should engage on the potential future of the 2880MW Eraring power station.
  
  
• Our national electricity grid is a delicate and complex piece of infrastructure that touches every home and business across the eastern states. Its decarbonisation requires time and the flexibility to be able to address issues as they arise. We supported the sensible recommendations made to the NSW Government and agree that government must continue to engage with plant operators to avoid the kinds of potential supply shortfalls flagged by recent market assessments.
  
  
• The Liddell Power Station closed after 52 years of operation in New South Wales. There are now plans to convert the site into industrial renewable energy hub and introduce a 500MW grid-scale battery. The closure went smoothly and was accommodated by the market but it also sparked renewed debate about the future reliability of grid as coal plants leave the system.  Reliability remains very front of mind for government, regulators, the market operator and plant owners. The success of the energy transition is inextricably linked to ensuring we can deliver secure supply.  Concern about reliability into the future prompted jurisdictions to consider plant-based agreements between government and existing coal plants to ensure the availability of dispatchable generation as new plant, transmission and technology is rolled out. During the year we saw Victoria enter a Structured Transition Agreement with Loy Yang A’s owner AGL to ensure plant will remain available until 2035.
  
  
• There is a view that the form of the current reliability standard should change, which has triggered a review conducted by the NEM’s Reliability Panel. The prior assumption is that reliability events will be rarer, but when they occur, they will be more severe. The Panel is contemplating new forms of standard that attempt to limit these extremes which implies a more conservative standard, costing customers more. The AEC commissioned Endgame Economics to consider the appropriateness of the existing standard in a transitioning power system. Its report found that the current approach to assessing reliability remains the best.|
  
  
• The reliability debate was heightened by delays in major projects as part of the energy transition and the Australian Energy Market Operator (AEMO) forecasting reliability gaps. The challenge of transition was evident with increased localised opposition to major transmission projects, along with delays to the Snowy 2.0 pumped hydro project, increased project costs, which saw the capacity of the Marinus Link proposal halved to one 750MW subsea cable. There was also slower than expected renewable investments. The hurdles that emerged included supply chain issues, inflationary pressures on projects leading to rapidly increasing costs, social licence, and availability of skilled workers.
  
  
• That is not unique to Australia – a commonality of experience emerged from the International Electricity Summit which brought together electricity industry leaders from around the world. Aside from the hurdles mentioned above changing government policy and regulatory settings were identified as a common experience, with concerns with the fluidity of the policy and regulatory environment often cited. In addition, the sheer volume of reform initiatives is presenting challenges to the electricity industry everywhere.
  
  
• 2023 saw nuclear re-emerge as an issue locally. Nuclear was also high on the agenda at the recent COP where 20 countries confirmed expansion of their nuclear fleet as a means to deal with climate change and meet their energy needs. Australia was not a part of that reflecting that there is no nuclear industry in Australia and there remains serious hurdles to the technology, not least of which would be social licence and bipartisan support. The technology being favoured is small nuclear reactors (SMRs) but we are yet to see these commercialised at any scale. Regardless with current timeframes to decarbonise it is hard to see SMRs being a viable technology for Australia in the medium term.
  
  
• Energy Ministers asked the Department of Climate Change, Energy, the Environment and Water (DCCEEW) and the Australian Energy Market Commission (AEMC) to further develop the transmission access reform (TAR) hybrid model (priority access and congestion relief mechanism). Industry is concerned that the implementation of TAR is likely to be both costly and challenging which has raised serious questions around the cost benefit ratio of the proposed reforms in their current form. Furthermore, with various National Electricity Market (NEM) reforms put in place since 2018, the initial justification for TAR as proposed needs to be re-examined to ensure there are net benefits for the NEM, investors and consumers.
  
  
• Queensland progressed its Energy and Jobs Plan to steer the energy transition. It is a comprehensive plan which involves the phasing out of what has been a dominant coal generation sector over a decade and replacing it with renewables and storage. It also includes plans for a 500kV “supergrid” to run the length of the state. The state will effectively over-rule the National Electricity Market’s transmission planning and revenue rules to bring this about. Its plan also envisages three renewable energy zones and two large pumped hydro projects. It is another of a series of state-based plans seeking to accelerate and support the shift to a lower emissions grid. As we also saw this year Victoria released a strategy for the revived State Electricity Commission. It has a budget of $1 billion with the aim of 4.5 gigawatts of new power through renewable energy and storage projects. The SEC will supply to commercial and industrial customers and government operations and facilities. Despite the release of the strategy, it remains to be seen how it will achieve its goals.
  
  
• While wholesale prices eased during the year from the highs seen in 2022, they remain above historical levels. And, as noted by the Australian Energy Regulator (AER), despite these improvements over 2023, many of the vulnerabilities observed in 2022 remain and supply-demand balances in both electricity and gas markets remain tight.
  
  
• With price pressures in the market we have seen energy debt levels generally increase. In response aside from delivering the government’s energy relief package electricity retailers undertook a number of initiatives to support those who were doing it tough – this ranged from increasing or expanding support under their own hardship programmes to providing substantial funding support to financial counselling services.
  
  
• Getting assistance directly to customers via their power bill is the most effective way for Government to make a difference in the current high-cost environment. The AEC and its retail members worked closely with the Government to deliver this price relief through customer bills. Payments appeared on customers' bills from July, paid automatically by retailers for customers already receiving energy concessions and rebates.
  
  
• In the current environment of heightened price pressures, the AER’s Final Determination for the 2023-2024 Default Market Offer (DMO 5) was closely monitored. The determination resulted in increases ranging from 13.4 to 24.9 per cent. The DMO is challenging with a fine balance between keeping consumer costs as low as possible while ensuring retailers can recover their costs.
  
  
• The final Victorian Default Offer (VDO) which was released at the same time was most notable because the Essential Services Commission changed two significant components between their Draft and Final Decision – wholesale electricity costs and the retail operating margin. While there is pressure to keep consumer prices as low as possible, it is also incumbent on the regulator to enable retailers, who are exposed to all market risks, to cover their costs. By changing the approach abruptly, rather than in a phased and transparent way, the ESC made that more challenging.
  
  
• In the 2023 WA State Budget, the then McGowan Government announced further funding of $2.8 billion to transition the energy system with funding going towards energy storage, wind generation and transmission network upgrades.
  
  
• WA’s Wholesale Electricity Market (WEM) began operating under new reforms from October. Introduced by the Australian Energy Market Operator (AEMO) as part of WA’s Energy Transformation Strategy they involve new capabilities, processes and systems reflecting changes in the grid and aiming to overcome some technical issues.
  
  
• The South West Interconnected System demand assessment (SWISDA) for WA’s main grid was released earlier in the year along with the State’s Reserve Capacity Mechanism Review information and consultation papers. All highlighted the scale of the transition. The SWISDA is an assessment of potential electricity demand over the next 20 years to meet industry and Government commitments of achieving net zero greenhouse gas emissions by 2050. In the future ready scenario, SWIS generation capacity will increase 5.9GW in 2022 to more than 50GW by 2042.
  
  
• Transmission is seen as critical and the WA Energy Minister (previously Bill Johnston who in November announced that he would retire from Parliament at the next election with an immediate move to the backbench) was granted powers to identify Priority Projects and avoid Economic Regulatory Authority review. The first Priority Project was announced in November by Bill Johnston – the North Region Energy Project Stage 1 - along with PoweringWA which will help coordinate transmission planning and investment. Energy Policy WA and Western Power also sought registrations of interest from large commercial and industrial users (generators and loads) to inform how and when future major transmission build will be undertaken, including potential renewable energy hubs locations, to connect more renewables to the grid.  
  
  
• The AEC has been advocating for a few years about the lack of revenue adequacy for generators in the WEM and during the year Energy Policy WA (EPWA) launched the WEM Investment Certainty Review Working Group to tackle some of these issues.
  
  
• AEC New Chair and Deputy we were pleased to have AGL Energy’s CEO Damien Nicks appointed as our new Chair. Damien brings great experience and in his role at AGL is at the forefront of the energy transition. He takes up the role from Mark Collette, Managing Director, EnergyAustralia, who equally is to the fore on the energy transition and was able to provide strong stewardship to the AEC. We’re pleased that Mark remains on the board. I would also like to thank Frank Calabria, who, while he remains a board member, stepped down as our deputy chair. EDL CEO James Harman has taken up the deputy chairmanship and we look forward to his contributions and being able to draw on his experience.
  
  
• During the course of the year the AEC made more than 50 submissions to market bodies, regulators and other government bodies, we also commissioned a number of reports ranging from battery energy storage systems and just transition through to consideration of the reliability standard and mandatory frequency control.