by Madeleine George and William Gordon
Developing generation and storage solutions
New renewable energy generation and storage are key to the energy transition. It is estimated that the NEM's capacity will need to triple by 2050, and 11 to 14 gigawatts of additional storage will be required by 2030.
Energy generation covers a range of facilities and technologies and can be broadly classified into three central categories:
- grid-connected generators
- remote or industrial site generation
- distributed energy resources.
Storage solutions similarly cover a range of technologies, although the two main types currently being used in Australia are battery energy storage systems and pumped hydro.
Stakeholders will need to be keenly aware of the developments, challenges and drivers in relation to generation and storage solutions if they're to keep pace as the grid transitions from predominately carbon-intensive electricity generators to a mix of renewables and storage technologies.
What's the challenge?
Despite the robust economic indicators propelled by government funding and strategies, net-zero goals, targets for renewable energy generation and storage, and pressure from shareholders (which collectively encourage fresh investments in generation and storage projects), a multitude of challenges persist.
For example, securing necessary approvals, grappling with supply chain constraints, increasing risks of curtailment, difficulties obtaining project financing (particularly for new and bespoke generation and storage solutions), undertaking social licence-related activities and maintaining community support, must all be managed to get renewable generation and storage connected and online. This is particularly difficult under an accelerated timeline, as new generation and storage is urgently needed to reach emissions reductions targets and to 'plug' the gaps left by retiring coal-fired power stations.
What's happening now?
Across the generation and storage sector, a number of drivers and issues are shaping the economic conditions and influencing the development of grid-connected and remote generators, distributed energy resources and storage solutions. These drivers and issues are affecting how business is being conducted in this space, and inform our understanding of the energy market as it navigates the transition.
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 and net-zero targets create market confidence and make Australia a more attractive place for green investment, as expectations of favourable legislative regimes and support packages are considered necessary corollaries of these targets.
- Connection delay and risks of curtailment, which are increasing as more renewable projects connect to the grid, increase commercial risks and may require higher rates of return to equity investors or financiers.
- 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.
Remote/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 source of electricity outside the grid. These are traditionally found in remote mining operations, and have predominantly 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.
- Renewable generation at remote or industrial sites has lower ongoing 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.
- Navigating the various required environmental and stakeholder consents is often a complex issue. This is especially so in regard to Indigenous rights issues, including ensuring 'Free, Prior, and Informed Consent' is obtained before developing expanded projects on the site.
- Remote or industrial generation, particularly as part of a hybrid solution for large-scale industrial sites, can be complex and time consuming, and can often experience delays.
- Development of renewable projects may increase the greenwashing risk 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 predominantly means rooftop solar and co-located batteries. The use of DER both residentially and commercially is rapidly increasing in Australia, and AEMO forecasts that by 2030, around 50% of consumers will use some form of distributed energy resource.
- Increased energy prices, coupled with increasing electrification of the home, has 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 DER owners to participate in initiatives like virtual power plants, which aggregate DER across various locations and dispatch into the market as if they were a renewable generation facility.
- When power flows from DER into the grid, it can overflow the capacity 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 go offline, energy storage projects such as large-scale batteries and pumped hydro facilities will be integral to securing grid stability and security. The pace and scale of investment in these projects is continuing to escalate as energy storage technologies improve.
- 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: eg revenue underwriting schemes, the proposed congestion relief market, 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 (predominantly from secure cashflows afforded by traditional tolling arrangements to date, though alternative offtake structures are increasingly being accepted).
- Pumped hydro is increasingly being considered as an option for rehabilitation of mine sites with appropriate geography (eg the Kidston gold mine in Queensland).
- Technological advancements in battery technology will continue to reduce costs associated with battery 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 at Snowy 2.0 and the Kidston project.
- For now, the demand for batteries remains subject to international supply chain constraints, and the availability and affordability of critical minerals required in the manufacturing process.
- Pumped hydro projects have a major footprint, which means they can face significant regulatory risks and environmental concerns and are likely to require extensive environmental impact assessment and complex approvals process.
What's next?
- Large electricity buyers should consider engaging early with new renewable generation projects. With bankability central to successfully developing greenfield projects—especially from emerging renewable technologies in Australia, such as offshore wind—partnering early 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 entered into remain competitive.
- Emerging renewable energy technologies in Australia such as offshore wind and large-scale storage projects may present favourable investment opportunities for investors and financiers that bring specialist knowledge and experience.
- Government incentives will be crucial to the success of many projects. Staying across government policy and announcements, and remaining close to government via 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 in new renewable generation projects should be aware of transmission and access issues, and reforms such as REZs.