by Michelle Bennett, Madeleine George, Will Gordon, Melissa Keane, Leighton O'Brien, Paige Pittorino, Jacqui Rowell
Make it. Store it: tackling the generation and storage challenge
Renewable energy is the key to a sustainable future, but it also poses two major challenges: how to produce it efficiently and how to store it reliably. The National Electricity Market (NEM) will likely need to triple its capacity by 2050, complemented by an additional 11-14 GW of storage by 2030. Meanwhile, it's anticipated the Wholesale Electricity Market (WEM) needs over 50 GW of new generation and storage to meet demand by 2041.
As corporations increasingly shift from carbon-intensive electricity generation towards renewable sources, a solid grasp of energy generation becomes crucial. This includes understanding grid-connected generators, remote or industrial site generation and distributed energy resources. Storage solutions form another critical part of this equation, with a spectrum of technologies on offer. Presently, battery energy storage systems and pumped hydro storage are leading the way in Australia.
For large electricity buyers, staying abreast with government policy developments and actively participating in industry organisations and forums can be very beneficial. Government incentives play a pivotal role in ensuring project success. Similarly, developers keen to progress new renewable generation projects must stay informed about reforms such as the Renewable Energy Zones in the NEM and renewable generation hubs identified for development in the SWIS to ensure transmission. As more companies adopt net zero targets, investors will notice competition for green products intensifying. Possessing an informed understanding of developing projects and standard market terms can help maintain competitiveness in both new and existing agreements.
What's the challenge?
While incentives like government funding, net zero goals, renewable energy targets and investor pressure stimulate new investments in renewable projects, a host of hurdles persist. These include securing necessary approvals and land tenure, adjusting to supply chain constraints, managing curtailment risks, obtaining project financing—especially for novel solutions, and maintaining community support. These challenges are amplified by the pressing timeline required to meet emission targets and replace retiring coal-fired stations.
What's happening now?
Across the generation and storage sector, a number of drivers and issues are influencing the development of grid-connected and remote generators, distributed energy resources and storage solutions.
Grid-connected generators
Grid-connected generators supply the majority of electricity to domestic, commercial and industrial users, and are often underwritten by long-term power purchase agreements (PPAs) with retailers or large energy users.
- The retirement of coal-fired power stations is increasing commercial incentives to develop replacement generation to meet energy demand.
- Legislated emissions reduction, net zero targets and policy developments create market confidence and make Australia more attractive for green investment, as favourable legislative regimes and support packages are considered necessary corollaries of these targets.
- Connection delay and risks of curtailment, which will increasingly occur as more renewable projects connect to the grid, increase commercial risks and may require higher rates of return to equity investors or financiers. In the NEM, the Australian Energy Market Commission is attempting to deal with these issues through its ongoing Transmission Access Reforms. In Western Australia, the Government has published the SWIS Demand Assessment report, which maps out a plan for the period to 2042 to support the connection of renewable projects to the SWIS.
- The development of new projects in locations that have not previously had major electricity infrastructure brings with it social licence challenges, both for the generators and associated transmission network upgrades—especially around environmental impacts, noise and visual amenity—and can result in lengthy negotiations with underlying tenure owners.
- Sourcing long-term PPAs to support the bankability of projects is becoming increasingly difficult, as large energy purchasers are exposed to greater numbers of green product options than ever before.
- Delays in securing environmental and planning approvals and increasingly stringent environmental assessment requirements and conditions increase the cost and complexity associated with delivering these projects.
Remote and industrial site generation
Remote and industrial site generation refers to the development of electricity generation infrastructure that provides large-scale electricity users with a detached, 'islanded' source of electricity outside the grid. These are traditionally found in remote mining operations and have predominately been operated using generators relying on diesel and gas. The energy transition has seen a shift in the types of remote generation being used, with diversified renewable energy generators and storage solutions being increasingly used in combination to facilitate decarbonisation of operations.
- Once constructed, renewable generation at remote or industrial sites has lower ongoing operating costs when compared with traditional energy generation sources such as diesel and gas.
- Corporate net zero targets and commitments to decrease scope 1 emissions—being direct emissions from operations—as well as the general trend towards remote site electrification, are driving an increased focus on decarbonising remote site generation.
- Managing the various environmental and stakeholder consents that are required is often a complex issue. This is especially relevant to Indigenous rights issues, including ensuring 'free, prior and informed consent' is obtained before developing expanded projects on the site.
- The development of remote generation, particularly as part of a hybrid solution for large-scale industrial sites, can be complex, time consuming and often prone to delays. Where remote generation is the sole power solution for a mine, meeting start-up time commitments is critical for commencement of, or continued, mining operations.
- There are additional risk allocation issues with alignment of construction programs and interfaces if the power facility and mine are developed together.
- Development of renewable projects may increase greenwashing risks associated with companies' aspirational net zero claims or the carbon-neutral status of project outputs.
Distributed energy
Distributed energy resources (DER) refers to technologies on the consumer side, which in Australia predominately means rooftop solar and co-located batteries. The use of DER, both residentially and commercially, is rapidly increasing and the Australian Energy Market Operator (AEMO) forecasts that by 2030 around 50% of consumers will use some form of DER.
DER, particularly rooftop solar, are the subject of ongoing reform in all jurisdictions, particularly in Western Australia, given the increased impact they have on system reliability and security.
- Increased energy prices, coupled with increasing electrification of the home, have meant that more people are investing in rooftop solar and batteries to reduce their energy costs.
- As technologies improve and the market for rooftop solar increases, DER are becoming increasingly affordable to install and maintain, which is further supported by government rebates and other initiatives.
- Energy retailers are looking to incentivise owners of DER to participate in initiatives like virtual power plants, which aggregate DER across various locations and dispatch them into the market as if they were renewable generation facilities. Western Australia is developing the 'Project Symphony' virtual power plant pilot to test how aggregated DER can be dispatched into the energy market.
- When power flows from DER into the grid, it can overflow the capacity of the grid and lead to congestion. This presents a significant challenge for AEMO in managing system reliability and security.
- AEMO and other regulatory bodies currently do not have adequate visibility and control over DER to effectively manage the associated system security risk. This is leading to a range of reforms that will principally affect the way data associated with DER will be obtained and shared.
Storage
As coal-fired power stations are retired, energy storage projects such as large-scale batteries and pumped hydro facilities will be integral to securing grid stability and security. As energy storage technologies improve, the pace and scale of investment in these projects continues to escalate.
- Given the versatility of services and revenue streams that batteries and pumped hydro facilities can offer, they are increasingly seen as a valuable investment.
- Government-led initiatives, policies and reforms will fast-track and incentivise further investment in storage projects. Examples are revenue underwriting schemes such as the Commonwealth Capacity Investment Scheme and the National Battery Strategy, the Australian Renewable Energy Agency's significant investment in battery projects, the Queensland Government's $14 billion commitment to two major pumped hydro projects, and the NSW Government's Pumped Hydro Roadmap.
- There is a growing maturity in the financing market resulting from the proven performance of batteries, a greater understanding of operational constraints and strong returns (to date, predominantly from secure cashflows afforded by traditional tolling arrangements, though alternative offtake structures are increasingly being accepted).
- Pumped hydro is increasingly being considered an option for the rehabilitation of mine sites with the appropriate geography (eg the Kidston gold mine in Queensland).
- Advancements in battery technology will continue to reduce costs associated with battery projects. In Western Australia, the ability of electricity storage resources to participate in the capacity market can also provide financial incentives for storage projects.
- Balancing the degradation profile of most large-scale batteries with the operating envelope continues to be a key focus, since degradation leads to reduced energy capacity and efficiency.
- Pumped hydro projects are complex to develop, and have significant capital costs and long construction timeframes. Combined, this increases development risk compared with more agile modular technologies such as batteries, as evidenced by the major cost overruns and time delays seen for Snowy 2.0 and the Kidston project.
- For now, the demand for batteries remains subject to both international supply chain constraints, and the availability and affordability of critical minerals required in the manufacturing process (noting the funding initiatives Australian governments are pursuing to support advanced critical minerals processing and value-adding in Australia).
- Pumped hydro projects have a major footprint. This means they can be subject to significant regulatory risks and environmental concerns, and are likely to face difficulties securing tenure, require extensive environmental impact assessments and involve complex approvals processes.
What's next?
- Large electricity buyers should consider engaging early with new renewable generation projects. With bankability central to successfully developing greenfield projects—in particular, from emerging renewable technologies in Australia such as offshore wind—partnering promptly can secure favourable terms.
- As net zero targets continue to be adopted by a range of companies, competition for green products may increase. Having a sound understanding of developing projects and standard market terms helps to ensure that both new and existing agreements remain competitive.
- As virtual power plants are developed, retailers will take on new roles as aggregators of DER.
- Emerging renewable energy technologies in Australia, such as offshore wind and large-scale storage projects, may present favourable investment opportunities for investors and financiers with specialist knowledge and experience—including joint venture investment opportunities. Where an investor does not have specialist knowledge in this area, they may initially seek to partner with experienced developers in order to gain that experience and manage the development risk associated with those projects. So, selecting the right dance partner is critical.
- Investment in distributed renewable energy platforms may allow investors to increase their exposure to the energy transition through aggregating smaller-scale projects that are not traditionally available to 'big capital'.
- Government incentives will be crucial to the success of many projects. Staying across government policy and announcements, and participating in industry organisations and forums, will greatly assist this.
- As renewable generators are consistently seeking to install co-located storage at renewable generation facilities, developers should consider investment in co-located or hybrid renewable generation facilities that include both generation and storage solutions.
- Developers seeking opportunities from new renewable generation projects should be aware of transmission and access issues, and reforms such as the Renewable Energy Zones in the NEM and the renewable generation hubs that have been identified for development in the SWIS.