Home Insights National Electricity Market update: the generation revolution continues

National Electricity Market update: the generation revolution continues

As the generation upheaval within the National Electricity Market (NEM) presses on, the early exit of thermal generation along the east coast is increasing demand for substantial and timely investment in clean energy and supporting transmission infrastructure.  

In this article we look at a number of recent developments impacting the NEM, including:

  • the release of the Australian Energy Market Operator (AEMO)’s 2022 Draft Integrated System Plan (Draft ISP);

  • the Energy Security Board’s (ESB) consultation in relation to a proposed capacity mechanism for the post-2025 NEM design;

  • the Victorian Government’s recent Offshore Wind Policy Directions Paper; and,

  • anticipated amendments to the Security of Critical Infrastructure Act 2018 (Cth) that may affect entities responsible for critical infrastructure assets. 

AEMO predictions: more renewables and transmission lines to support demand as the transformation of the generation fleet speeds up

AEMO observes in this year’s Draft ISP that the generation profile in the NEM is transforming ‘at a world-leading pace’.  

In line with various government and industry commitments to reach net-zero emissions by 2050, investment in low and no-emissions alternatives continues to escalate while ageing thermal generators are withdrawing from the NEM at a faster rate than previously anticipated. This is exemplified in Origin Energy’s recent announcement that it plans to retire the largest coal-fired power plant in Australia, the Eraring Power Station, in mid-2025 – seven years earlier than planned.

AEMO predicts that pressure from continued investment in low-cost renewable generation could see all brown coal and more than two-thirds of black coal generation sources retiring from the NEM as early as 2032. This is expected to coincide with a several-fold increase in demand on the electricity grid in the coming decades. AEMO anticipates that a number of potential changes to consumption behaviours could contribute to this escalation, including the replacement of gas and petrol as new household and industrial uses for electrification technology emerge and become commercially viable. Electricity use could also increase drastically to support the rise of a domestic hydrogen production industry.   

AEMO reports that keeping pace with increased demand without thermal generators will require a nine-fold increase in utility-scale variable renewable energy capacity and a five-fold increase in distributed photovoltaics by 2050. To cope with weather variability and help distribute output across peak loads and troughs, the NEM will also need a three-fold increase in firming capacity, which is expected to take the form of utility-scale batteries, hydro storage, gas generation, and smart behind-the-meter batteries or ‘virtual power plants’.

To enable the connection of expected generation capacity and ensure resilience against outages, AEMO’s Draft Optimal Development Path (Draft ODP) identifies more than 10,000 kilometres of potential investment in the transmission network – including projects that are confirmed or anticipated and those which are ‘actionable’ by the release of the next ISP (subject to completion of a market benefits assessment).   

Among those actionable projects nearing completion of the assessment process are the HumeLink transmission upgrade, connecting the Snowy Mountains Hydroelectric Scheme to Bannaby, and the Marinus Link connecting Victoria and Tasmania via two high voltage direct current cables.

AEMO will publish the final version of the 2022 ISP in late June this year.

Post-2025 market reforms underway: consultation on a potential capacity mechanism begins

On 28 July 2021, the ESB released its final advice on the post-2025 NEM redesign, identifying critical market reform pathways to support the generation transformation.

The ESB has published a table summarising its final recommendations and corresponding decisions by the National Cabinet. 

Resource adequacy is of particular concern with increasing variable renewable energy penetration tightening capacity margins, as the NEM will need to maintain sufficient flexible and firm resources to reliably respond to peak demand. This is especially pressing in light of AEMO’s observation that thermal generators are retiring earlier than previously expected.  

A key recommendation to support resource adequacy is the ESB’s proposal to introduce a capacity mechanism. Capacity mechanisms in various forms have been used overseas to create a ‘second marketplace’ alongside the primary wholesale energy market in which retailers are remunerated for making capacity available in case demand overtakes supply.  The chief objective of such a mechanism in the NEM would be to provide explicit price signals to encourage efficient investment in dispatchable capacity.

At this stage, the ESB is conducting a consultation process to determine the optimal design for a capacity mechanism best suited to the future NEM. In its Project Initiation Paper, the ESB calls for industry feedback on whether a centralised or decentralised mechanism is preferred. Under a decentralised model, retailers themselves would be incentivised to procure capacity, whereas a single body would forecast and procure capacity under a centralised model.  

Both options will be compared to a ‘base case’ in response to industry concerns that a capacity mechanism would not be more useful than adjusting the current energy-only market.

A detailed design consultation paper for the capacity mechanism is due to be published in the next month, and the ESB will accept submissions from stakeholders and interested parties until May.

The ESB is currently developing a program of work for the implementation of the remaining post-2025 NEM reforms.

Victorian Government plans to pioneer offshore wind in Australia

This month, the Victorian Government released its Offshore Wind Policy Directions Paper, announcing plans to launch Australia’s offshore wind industry with the potential to supply up to 13GW of power (approximately 20 per cent of Victoria’s energy needs) by 2050.

The Victorian Government expects that harnessing the offshore wind potential near Gippsland and Portland will diversify and strengthen the state generation profile, while supporting the achievement of its net-zero emissions target. Although offshore wind is currently more expensive, the Victorian Government predicts that up to 70 per cent of agricultural land would be needed to meet its emissions target using only onshore wind and solar technology. It is expected that onshore and offshore wind will reach price parity within the next two decades.

At this stage the Victorian Government will undertake a competitive process to complete planning and development activities, with the goal to have its first tranche of offshore wind capacity online by 2028. Victoria will then aim to supply 2GW of offshore wind capacity by 2032, 4GW by 2035 and 9GW by 2040.  

The state’s Energy Innovation Fund will initially invest up to A$18.7 billion in the development of three offshore wind projects led by Star of the South, Macquarie Group and Flotation Energy.

To support an emerging offshore wind industry, the Victorian Government notes that there will need to be significant complementary investment in developing transmission infrastructure and the state’s ports.  

An implementation statement containing a timeline and details for the first offshore wind tranche is set to be released by the Victorian Government later this year.

Upcoming amendments could increase compliance requirements for holders of critical infrastructure assets

On 10 February 2022, the Security Legislation Amendment (Critical Infrastructure Protection) Bill 2022 (2022 Bill) was introduced to the Federal Parliament. The 2022 Bill has passed through the House of Representatives and is currently before the Senate.

The 2022 Bill represents the second tranche of amendments to the Security of Critical Infrastructure Act 2018 (Cth) (the SOCI Act), following expedited changes made late last year to urgently introduce mandatory cyber incident reporting and government assistance, which Corrs discussed in detail in our previous article (A tale of two Bills: reform of Australia's critical infrastructure laws).

The 2022 Bill will amend the SOCI Act to impose amplified security compliance obligations on holders of critical infrastructure assets.

If the 2022 Bill progresses through the Senate, it can be expected that entities responsible for critical infrastructure – including electricity, energy market operators, gas and liquid fuels assets – will be obliged to develop and adopt a written ‘critical infrastructure risk management program’ (CIRMP). As a part of their CIRMP obligations, entities will need to:

  • identify any hazards, such as cyber security threats or weather events, representing a ‘material risk’ to the operation of the asset;

  • as far as reasonably practicable, minimise or eliminate the risk;

  • as far as reasonably practicable, mitigate the potential impact of the hazard or hazards on the asset; and,

  • submit an annual report outlining any hazards experienced during the year, the effectiveness of the CIRMP in response to the hazard, and any changes made to the CIRMP as a result.

Additionally, ‘enhanced’ obligations will apply to those entities that are declared by the Department of Home Affairs (the Department) to be responsible for ‘systems of national significance’ (SNS).  Where an entity receives written notice from the Department that it is an SNS, it will need to:  

  • establish, keep up-to-date and comply with an incident response plan for cyber security threats;

  • perform a ‘cyber security exercise’ and prepare a report evaluating its response to one or more cyber security incidents, or allow a designated officer of the Department to do so on its behalf, if requested by the Department;

  • conduct a ‘vulnerability assessment’ against one or more cyber security incidents and prepare a report, or allow a designated officer of the Department to do so on its behalf, if requested by the Department; and,

  • if the SNS is a computer or its operation relies on a computer, prepare periodic technical reports regarding that computer, if requested by the Department.

The amendments will implement the remaining recommendations made by the Parliamentary Joint Committee on Intelligence and Security in its Advisory Report published late last year.

Entities that are responsible for critical infrastructure assets should make preparations to ensure they are in a position to remain compliant with their security obligations under the SOCI Act in anticipation of the 2022 Bill progressing through the Senate in the coming weeks.



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This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.

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