by Danielle Jones, Luisa Colosimo, Tessie Chang and Jun Chong
Accelerating network changes
Ensuring our electricity grid can keep up with the continued uptake of renewable generation and other clean energy technologies is fundamental to the success of the energy transition in Australia. Unclear funding directives and lengthy regulatory processes—coupled with issues such as contractor insolvency, skilled labour shortages and supply chain constraints—have meant that investment in new transmission infrastructure has been insufficient.
What's the challenge?
The challenge is enormous, with tens of thousands of new transmission lines and billions of dollars of investment required to make our networks fit for purpose, and all before more coal-fired power stations are retired. There are also very significant social license issues that need to be grappled with, such as community opposition to large-scale overheard transmission networks leading to delays in the construction and approvals processes. Turning this around will require a coordinated effort from both government and the private sector. Dedicated funding and other incentives to fast-track the delivery of projects that will build, augment and upgrade our transmission network infrastructure are crucial, as well as clear regulatory reform to address the new challenges arising in response to the changing grid infrastructure and energy sources.
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– Kate Axup, Sector Leader, Energy |
Expanding our electricity transmission network is fundamental to Australia's energy transition. It is also an area where we see investor and developer clients really struggle as they try to get projects off the ground.What's happening now?
While more is required, we are seeing a push from both the federal and state governments to drive the expansion of transmission infrastructure in their jurisdictions. This includes the implementation of various funding initiatives and regulatory regimes to fast-track critical transmission infrastructure projects and incentivise involvement by the private sector.
We are also seeing increased coordination between federal and state governments in this space, which is a positive step. For example, the federal, state and territory energy ministers have come together to establish a new partnership, the National Energy Transition Partnership. The partnership is a framework for national alignment and cooperative activity as to priority actions between governments—including the acceleration of nationally significant transmission projects and national regulatory reforms—to support the energy transition.
Below is a snapshot of other recent developments.
Renewable Energy Zones
The NSW, Victoria and Queensland Governments have committed to developing Renewable Energy Zones (REZs) (ie clusters of large-scale renewable energy generation and storage projects and new transmission infrastructure); other governments, such as Tasmania's, are exploring REZ feasibility within their states. These governments are seeking to work with the private sector to develop new and/or upgraded transmission infrastructure with sufficient capacity and reach to service these REZs, and also contribute to the security, reliability and affordability of the broader electricity grid. NSW, especially, is taking the lead in this area, with its Electricity Infrastructure Roadmap and the projects currently underway under that new framework.
Victorian Transmission Investment Framework
In early 2024, the Victorian Government will introduce new legislation to establish a framework that will cover how major electricity transmission infrastructure and REZs will be planned and developed in the state to meet transmission needs; to account for feedback from Traditional Owners, local communities and landowners; and ensure timely delivery of, and value for money from, transmission and generation infrastructure. The Government has also announced additional payments for landowners to encourage the hosting of transmission easements on their land, in addition to payments under existing arrangements.
NSW's Electricity Infrastructure Roadmap
Under this roadmap, five REZs have been declared under the bespoke regulatory framework introduced to implement these initiatives. Of these, the Central-West Orana REZ is the most progressed, and is expected to unlock more than 3 gigawatts of new transmission network capacity in the region, creating up to four new energy hubs and approximately 217 kilometres of new transmission lines. Another key pillar of this roadmap is the NSW Government's fast-tracked procurement in 2022 of the Waratah Super Battery, which will provide system integrity protection services to the NSW electricity grid, to mitigate grid reliability issues.
Queensland Energy and Jobs Plan
The Exposure Draft of the Energy (Renewable Transformation and Jobs) Bill 2023 aims to implement the Queensland Energy and Jobs Plan, which sets out the state's commitments to, and frameworks and governance for, increasing generation of renewable energy in Queensland, including through the introduction of three REZs. One of the frameworks (the Priority Transmission Investment (PTI) framework) will allow the state to identify and assess PTI projects, and direct Powerlink, the transmission network service provider (the TNSP) in Queensland, to construct critical transmission infrastructure.
Rewiring the Nation
The Federal Government is investing $20 billion in low-cost finance to deliver, with states and territories, key priority transmission projects like the VNI West Link between Victoria and NSW, and the Marinus Link between Tasmania and Victoria.
Australian Energy Market Operator's Integrated System Plan
The Australian Energy Market Operator (AEMO)'s 2022 Integrated System Plan (ISP) provides a roadmap for the installation of more than 10,000 kilometres of new transmission, comprising 18 committed, actionable and future network investments, which are to be implemented by the TNSPs. The document attempts to provide a level of certainty as to what the future will look like, and will guide the direction of energy investment and regulation for the future transmission network. AEMO is currently consulting on the Draft 2023 Inputs, Assumptions and Scenarios Report, which will underpin the 2024 ISP modelling, with the draft 2024 ISP to be published for consultation on 15 December 2023.
Transmission access reform
The Energy Security Board (ESB), prior to being disbanded in June 2023, proposed a 'hybrid model' solution consisting of a voluntary congestion relief market (CRM) and priority access model to address increasing congestion in the electricity transmission system. The voluntary CRM will incentivise providers of congestion relief (such as batteries or controllables loads) to locate in congested parts of the network and the priority access model will address the issue of 'cannibalisation' in the energy market. Following the disbanding of the ESB, the Energy Ministers tasked the AEMC, in consultation with the Energy Advisory Panel and industry stakeholders, to prepare final policy recommendations on the transmission access reform for the Ministers' consideration at their next meeting in November 2023.
What's next?
Amid the energy transition, corporates, funders and developers must chart a unique course forward. Below is a summary of what's next for each.
- Electricity customers should expect continued wholesale electricity price volatility and possible threats to supply as the transition progresses.
- These buyers should also consider how to respond to stakeholder pressure to reduce emissions associated with electricity consumption.
- To mitigate these risks, large electricity buyers should consider how they can manage their own demand and costs, eg by:
- reducing their load (eg through energy efficiency measures and demand side participation);
- entering into offtakes with renewable generators to hedge against rising electricity prices and to acquire a supply of large-scale generation certificates (LGCs); or
- building on-site generation and/or storage facilities to reduce reliance on the National Electricity Market.
- Investors should consider available opportunities to deploy capital into key infrastructure assets.
- In particular, as more REZs are progressed, investors should look at whether they would like to bid for a role in financing, building, operating and/or managing those transmission projects. The tender submission process for the New England REZ is expected to commence in early 2024, so now is the time for businesses to reflect on any lessons learned from the previous bid process for the Central West Orana REZ and retain advisers in preparation for the next bid. New TNSP businesses focused on contestable connections are also an area of interest for some investors.
- Investors can take comfort in the fact that more certainty is expected from the Australian Energy Regulator (the AER) in relation to how transmission infrastructure costs will be recovered and the revenue determination for transmission projects. For example, the AER published a final Framework and Approach paper that sets out its approach to key elements of upcoming determinations relating to distribution and transmission services.
- Investors should consider opportunities in the pipeline of ISP transmission projects and upcoming REZs to diversify their asset portfolio. In doing so, they should consider the following key risks associated with such developments:
- supply chain constraints, such as the rising cost of critical materials and geopolitical tensions
- engineering, procurement and construction contractor solvency issues and skilled labour shortages
- regulatory clearance investment barriers, including FIRB and competition clearance
- ESG risks, including developing an approach to ensure meaningful community consultation occurs, and remediation mechanisms and processes are in place to address any potential disputes with the community.
- Developers should consider opportunities to diversify their asset portfolio in the pipeline of ISP transmission projects and upcoming REZs.