NSW’s electricity Check Up confirms challenges of transition

NSW’s Electricity Supply and Reliability Check Up report released last week confirms the massive challenge represented by the energy transition and the need for flexibility to get it right. It has effectively provided the NSW Government with a risk management strategy. Key to this strategy is the option to keep the 2880MW Eraring power station open beyond its proposed closure date of 2025, which is supported by one of the report’s recommendations proposing that the NSW Government engage in negotiations with Origin Energy about the plant’s future.  

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 to date. 

The NSW Government has now been informed by both this Marsden Jacob report and the Electricity Statement of Opportunities (ESOO) released by the Australian Energy Market Operator (AEMO), which independently of each other advise of potential supply risks with the retirement of Eraring and delays in new plant and energy infrastructure. There is also a concern about the loss of supply and its consequent impacts on wholesale prices.  

The case for extension 

In the Check Up’s findings, Marsden Jacob noted that with more electricity customers entering hardship programs in the first quarter this year “…the case for an extension of Eraring on affordability grounds appears strong. Combining it with the proposed reliability gaps identified by AEMO, it is clear cut under an energy trilemma frameworkⁱ”. 

The review also notes, “Under any circumstances, replacing a plant like Eraring that provides around 20 per cent of NSW’s delivered electricity would have been extremely challenging. With just three-and-a-half years’ notice, it is almost impossible without reliability and affordability impacts.” 

Marsden Jacob has highlighted that unnecessary risks with energy supply are to be avoided, and optionality preserved, until the path ahead becomes clearer. There have been arguments that any funds that might be needed to keep Eraring in the system would be better spent on accelerating the rollout of renewables and new transmission.  But this would be an unwise course to take, given the delays that we are already observing for major projects and the likely ongoing challenges created by skilled workforce, supply chain and social licence problems. There is just no guarantee that projects can be brought online within reasonable timeframes. 

The NSW Government is wisely trying to cover off on both options. It has announced an additional $1.8 billion in funding to “help rescue” the energy transition, connect new projects to the grid and accelerate Renewable Energy Zones, while also indicating that it intends to consider options to keep Eraring available for a short time to address teething problems with newly established entities (discussed further below).  

We can be sure that if Eraring’s August 2025 closure date is postponed, it will not be for a long period.  NSW Minister for Energy and Climate Change, the Hon Penny Sharpe MLC was explicit on this point when releasing the report: “I don’t want taxpayers to pay 1 cent more than they need to and I don’t want Eraring open 1 minute more than it needs to be.” 

What the NSW Government will be weighing up as it goes through this process is the cost of keeping a plant open and creating a buffer versus the whole-of-economy costs of not having supply available with resulting increased costs and reduced reliability. It is a stark equation. 

Consideration of what any agreement should look like can be expected to include the physical cost of running the plant in a specific way and then assessing those costs against the broader economic costs if that plant is not there. 

Given it will be short-lived, any extension seems unlikely to have a long-term or lasting impact on investment decisions, particularly if exit plans are clear and visible, and if it is understood how the plant is expected to operate in the market.  

Managed exits 

The Marsden Jacob work has recommended that any extension be accompanied by a managed exit framework to avoid a reoccurrence of the current situation in the future.  

Marsden Jacob also recommended the development of a NSW-specific ‘Responsible Generator Exit Policy’. Under that proposal, any plant owner would have to provide all details to the Energy Security Target Monitor (ETSM) at least three years before closure. It notes that given the ESTM already has significant information-gathering powers, this will allow it to fully assess the reliability and affordability impacts of any closure and make any recommendations to address potential breaches of the State’s reliability measure – the Energy Security Target. It also wants an Orderly Exit Mechanism (OEM) for future plant closures progressed by NSW through National Electricity Market (NEM) forums. 

NSW is not alone in confronting the reality of the challenges in the transition. Consequently, we have seen bilateral deals between government and existing coal plants emerging. This is to ensure they remain available during the transition period as new plant, transmission and technology is rolled out – this has occurred with Yallourn and Loy Yang A in Victoria (despite the State’s Premier Daniel Andrews disparaging coal plants as “clunkers”) and now consideration of the potential to keep Eraring in the system beyond its current expected closure.  

Further afield, in WA the State Government announced that it has pushed back the closure of Muja C unit 6 by 6 months to navigate through the 2024-25 summer period, which AEMO’s WA ESOO identified as a potential risk period. 

Flexibility will be an important part of achieving a smooth transition nationally, particularly given the present hurdles thrown up by supply chain issues, skilled labour shortages and some community resistance to some of the necessary new infrastructure builds. 

Backup power 

The responses we are seeing are also somewhat of a reflection on the fact that the Capacity Investment Scheme (‘CIS’) agreed to by Energy Ministers specifically excludes existing dispatchable plant, such as gas generators. The CIS is a significant Commonwealth initiative and will become the only explicit National Electricity Market (NEM)-wide capacity support mechanism. As the CIS will support market entry but not existing capacity it will unavoidably undermine the profitability of existing plant, so as we noted in our submission on the scheme, it opens the prospect of driving closure of that plant before new capacity is ready to adequately replace it. That would have consequences for prices and reliability. 

The CIS is expected to largely support energy storage. A particular need will be for long duration energy storage so the grid can manage any extended periods of low wind or solar output.   

The NSW Check Up identifies that the 2GW long duration storage targeted to be in place by 2030 is unlikely if it is based on pumped hydro. That capacity target was in addition to Snowy 2.0. 

Marsden Jacob has recommended a more flexible approach to achieving the state’s storage needs, coupled with a recognition of the firming role played by gas generation which is welcomed.  

In addition to the problems identified for NSW with the delay of projects such as the Snowy 2.0, the development of the first renewable energy zone (REZ), known as the Central West-Orana zone is also running behind its original online target of 2025. The zone is now expected to be online in 2027 or 2028ⁱⁱ, and is an early indicator of the difficulty of translating an ambitious plan into on-the-ground infrastructure. 

Institutions 

Of the 54 recommendations, many relate to how the recently created Electricity Infrastructure Roadmap institutions should operate and interact with each other.  Having to clarify roles and responsibilities of newly created institutions is no great surprise, and a reminder that there can be a significant lag when the preferred path to accelerate infrastructure rollout is via the creation of new institutions.   

As the Check Up notes, when the Roadmap was legislated, NSW did not have the capability to implement its objectives. A range of new and existing entities have been appointed since 2020: 

• An Infrastructure Planner – EnergyCo – to plan and recommend infrastructure projects such as renewable energy zones (REZ) and Priority Transmission Infrastructure Projects (PTIPs).  A Consumer Trustee – AEMO Services – runs competitive auctions for generation, storage and transmission access rights in the REZs.  
• Regulators – IPART, AER. IPART undertakes performance audits of EnergyCo and AEMO Services.  The AER applies Transmission Efficiency Test (TET) to authorised infrastructure projects, approves AEMO Services risk management and reviews the LTESA tender rules. 

Other agencies include the Office of Energy and Climate Change (OECC), Transgrid, AEMO, Infrastructure NSW and the Australian Energy Infrastructure Commissioner (AEIC). 

Check up on EnergyCo 

The Check Up notes that EnergyCo’s Network Infrastructure Strategy, released in May 2023 would see it as the network planner and procurer of $9.7 billion of REZ infrastructure. However, it casts doubt on EnergyCo’s ability to translate a network strategy into a cost-effective delivery of that infrastructure.   

The Check Up says: 

“To continue with the current model with such a large infrastructure program presents a significant risk” and it recommends that EnergyCo should be directed to focus on progressing the CWO REZ to financial closure with the preferred bidder, ACE Energy.   

Beyond that, the Check Up recommended that EnergyCo should limit itself to planning and consultation, and progressing critical PTIPs and conduct no further procurement until it has been independently reviewed by Infrastructure NSW.   The NSW Government has accepted this, and will conduct an assurance review, reporting in November 2023 before further procurement proceeds.   

Conclusion 

If the NSW Electricity Supply and Reliability Check Up tells us anything it is that there must be a careful balance between emissions reduction, affordability and reliability. If that fine balance cannot be achieved there is a risk that the social support for the transition could evaporate, making the task of achieving targets even more difficult. What is being encouraged by Marsden Jacob in this report is a more multi-faceted approach to managing supply and reliability in the current decade. That requires a shift and a nimbler approach to decision making. This independent report, and the NSW Government’s response to it, represent a welcome and fresh approach to the debate and to the critical decisions that need to be made as we move towards Net Zero by 2050.    

ⁱ Electricity Supply and Reliability Check Up, Finding 8.3.4

ⁱⁱ See NSW Network Infrastructure Strategy, May 2023, page 25.