The Future of Energy

Australia’s Energy Choice

In collaboration with
The Future of Energy | 2
Table of contents
04 Why this paper?

05 Our findings

08 Time is short

10 Australian context
– a policymaker’s view

13 Global context

16 Australia’s energy choices

from now to 2040

18 Key modelling principles

20 Analysis

24 Inclusion of emission costs

26 The rise of energy services

27 The energy transition

28 Where to from here

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Why this paper?
Energy, and what Australia’s future energy ecosystem might look
like, is a polarising topic for many.
Affordability and reliability are paramount when To provide impartial, fact-based input to the
considering what this future might be, but this debate, we have conducted detailed analyses
future also needs to consider the environment considering the financial, economic and
and economy if it is to carry weight and have environmental impacts of four different energy
impact with policy makers, customers, community scenarios for Australia through to 2040.
and industry.
1. Reference case - replaces retiring thermal
Unfortunately there is a roadblock hindering generators with mix of new gas and
agreement on this energy future and the renewables on a least cost basis
policy choices needed to get us there: our
public discourse. 2. Renewables case - as per reference case
but replacing most retiring thermal plants with
The debate is often partisan and mired in claims renewables
that green (renewable) is good and black (coal)
is bad, or vice versa. Numerous analyses show 3. Coal case - replacing retiring thermal plants
all types of power generation are the cheapest with a mix of coal, renewables and gas
sources of generation, and many could be
considered correct - in isolation. However, such 4. Accelerated renewables case1 - where we’ve
conclusions are irrelevant to the debate about assumed accelerated thermal plant closures
the best sources of generation if they don’t also with largely renewable replacement.
consider their impact on the entire energy system
and the economy.
Our analysis looks at outcomes to 2040. We’ve
gathered insights from opposing ‘sides’ of
As a result, there is confusion about the real the energy and climate debate to develop an
impact of different policy decisions on our energy objective view on the different elements of
system and on our economy. the energy trilemma – affordability, reliability
and sustainability.
Under this cloud of confusion, successive
Governments have been challenged to implement
a cohesive national energy policy that survives
beyond their short tenures. Meanwhile, operators
of coal-fired generation are caught between
Government pressure to keep ageing thermal
Our motive is to equip
generation plant online and a competing need policymakers and the
to evolve their businesses in line with an energy
sector transitioning to cleaner energy sources. At investment community with
the same time consumer preferences are changing facts and perspectives that
and their priorities are shifting dramatically.
help them move beyond
the polarised debate
towards a policy approach
that supports optimal
investment decisions and
secures the best energy
1 For this case we have made assumptions on possible early future for Australia.
voluntary closure dates. We have not assumed any kind of
government intervention to force closures.

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Our
findings
It is possible to solve
Australia’s energy trilemma
within a generation.
Our findings will surprise many. A power
generation mix dominated by renewables by
2040 can deliver reliable and affordable
electricity, as well as drive an increase in
Australia’s economic welfare. Conversely,
replacing retired coal-fuelled thermal plant
with new High-Efficiency Low-Emissions (HELE)
coal plants would result in a comparatively
poorer economic outcome.

This modelling runs counter to earlier modelling

which showed investment in renewables leads
to lower economic benefits. The story has
changed as:

• the cost of renewables has continued to

come down as technologies have matured
and scale has been achieved
• most coal-fired generators are nearing the
end of their economic and technical lives
and must be replaced - with the dominant
replacement technologies being renewable
• the changing power generation mix and
the need for different enabling power grid
infrastructure is changing the footprint of
Australia’s power grid and requires investment

We suggest pursuing an energy mix dominated

by intermittent renewables with reliability provided
by a mix of dispatchable power stations is a
no regrets policy direction for Australia. This
would result in the country being supplied by
80% renewable energy within 20 years and with
lower emissions from power generation (68%
lower than 2005). It would also add more than
$13b to GDP and enable an additional $6b in
consumption by Australians.

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If we accelerate this transition, Australia could see
even stronger economic and emissions benefits;
moving to a 90% renewable power system in
2040, adding $15b to GDP and enabling increased
spending by Australians of $11b.

Our national ‘moon shot’ is how do we transition

our energy system so it is the most positive
enabler of economic prosperity for our nation?
From our analysis and forecasts this will see
us rapidly move towards a renewable energy
dominated future - whether that’s 80% or more
remains to be seen.

This transition is not to be feared, but it must be

managed. Adopting a truly proactive mindset
would result in an energy system that is supplied
by 90%+ renewable power domestically, and
potentially developing a renewable export market,
enabling Australia to become an international
player in the export of power.

Our analysis highlights the importance of energy

network infrastructure - the connective tissue.
Globally we are seeing a networks investment
renaissance which must happen in Australia within
the next decade as our energy market transition
continues. This will be needed under all of
Australia’s energy choice scenarios.

Our work has assumed existing technologies and

published learning rates for these technologies,
so by its very nature is somewhat conservative.
We have seen many examples where forecasts
of technology take-up rates and cost curve
improvements are ‘under-cooked.2 This suggests
the speed of change and the estimated systems
costs within each of our scenarios is likely to be
improved upon in time, and provides exciting
electricity system innovation and customer cost
reduction opportunities if we tackle the energy
system transition as a ‘project’ of national
importance and unleash the best minds and
innovators across the economy.

2 For example Australian Energy Market Operator (AEMO)

and the International Energy Agency have regularly
underestimated the take up rates of new technologies in
their annual power sector forecast reports

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There is a direct link between Australia’s energy Continued inaction or
system and our economy. Historically low power
and gas prices have underpinned our economy. misguided choices will
We have had, and continue to have, a very propel us towards a
strong resources export sector which has grown
significantly in recent years (thermal coal exports disruptive energy future
increased by 50% between 2010 and 2018, while
LNG exports multiplied 3.5 times over the same
with increased grid
period).3 In June 2018 the ACCC reported that failures, less-reliable
Australian domestic residential electricity retail
prices had increased by 35% in real terms over supply, volatile prices and
the 10 years to 2017/18.4 Our domestic gas prices significant environmental
are now strongly influenced by international LNG
prices, and as a result, the retail price for gas consequences.
doubled between 2013 and 2018.5

All of these factors, combined with the global

supply chains we rely on for renewable generation
plant components, demonstrate our energy Agreeing and implementing the right policy
markets are genuinely subject to global forces. and regulatory mechanisms within the next two
These pressures are not going anywhere, especially years will support the vital energy infrastructure
when you consider the expected increase in global investment decisions needed, putting Australia
demand for electricity of 56% by 2040.6 on a path towards an affordable, reliable,
economically beneficial and sustainable energy
Add to this the reality that our energy market - and future that ensures consumers, community,
the way people consume and produce energy - is industry and taxpayers are positioned positively
changing. It is obvious we need to take action for decades to come.
nationally to ensure our energy market and the
economy are collectively strong. Unfortunately As we put this paper together, we consulted with
we are not seizing the opportunities this transition many across the energy industry and all agree,
is creating. We are not taking sufficient steps to there is little time to continue on as we are. Most
minimise the disruption it’s bringing. agree that we have up to two years to:

Without a structural, long-term plan or vision, • put an end to direct government interventions
future infrastructure investments are directly in energy markets
impacted. We have seen a ‘boom’ in renewable • obtain regulatory approvals and start work
energy construction over the last four years (i.e. on extending transmission networks
7,400 MW new capacity added and a further
• put in place changes in market settings
6,100 MW committed or highly probably,7 but over
to incentivise dispatchable generation
the same period only 700 MW of dispatchable
investments
capacity8 and 190 MW of transmission
interconnection capacity9 have been added. • determine an environmental policy that
Many of these investments were underpinned by creates the right ambition for Australia
subsidies of one form or another.

3 Australian Government, Department of Industry, Innovation and Science - Resources and Energy Quarterly, June 2019
4 ACCC, Retail Electricity Pricing Inquiry—Final Report June 2018
5 Energy Security Board, The Health of the National Electricity Market, 2018
6 IEA, World Energy Outlook 2019 (Stated Policies Scenario)
7 Clean Energy Regulator - website, as of 31 October 2019
8 AGL Barker Inlet GT, SA Government GT capacity, plus battery capacity in SA and VIC
9 Heywood interconnector upgrade

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Time is short
Policymakers and regulators have very little time to build
consensus on the energy future we should be aiming for and
implementing a robust framework that will lead us there.
If we can not achieve consensus, then at minimum in time, pushing Australia into a reactive situation,
we need the right market settings to give investors making dramatic interventions more likely. Being
confidence to start construction of the necessary reactive increases the risk of building assets that
near-term energy infrastructure investments aren’t the best for the nation long term.
required. The Energy Security Board’s Post 2025
process is a great initiative, this is due to report An example could be a new coal-fired plant being
in 2020 on all required market reforms to be in built, which our analysis shows, would increase
place by 2025. All market design work is due emissions, marginally increase system operating
for completion by 2022. Futhermore, there are costs and have a muted impact on economic
promising moves from regulatory agencies on the activity relative to alternative options.
ISP10 holding more weight and being actionable in
future. Numerous other reforms are in the making Globally, the energy transition is well underway,
but complex energy market governance structures resulting in major investments in both transmission
must be navigated. As COAG Energy Council and distribution grids. The AEMO ISP has done
looks to the future, and as these major reforms take good work in developing a plan for the future
shape, political point-scoring must be avoided. transmission ‘mesh’ we will need across the
NEM, but we still need a consensus view on what
Over the next five years, 2.4 GW11 of thermal investment is required at the distribution level.
generation capacity in Australia needs to be This must be an urgent next step for Australia
replaced. Beyond that, the retirement rate of as it is a crucial missing piece in our energy-
thermal generation ramps up significantly. choices puzzle.
However, investment decisions will need to be
made on replacing that generation capacity years Many but not all of the power quality and grid
before these plants are retired. In the immediate management issues we are expecting in future are
term we are already seeing issues from grid predictable. A single and comprehensive national
congestion and challenges around reliability plan isn’t only possible, it is imperative.
and power quality. These all require investment
capital quickly.

AEMO comment in the 2019 Electricity Statement

of Opportunities report “The forecast reaffirms
that targeted actions must be taken now to
provide additional dispatchable capacity to We must quickly provide the
reduce the risks of supply interruptions during
peak summer periods.12 market and investors with
certainty and direction.
Failure to create market certainty and clear
investment signals within the next two years risks
delaying new energy infrastructure coming online

10 ISP - AEMO Integrated System Plan

11 2.4 GW thermal generation capacity is equivalent of 2x Hazlewood coal plant closures
12 AEMO, Electricity Statement of Opportunities 2019, August 2019, p3

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The Future of Energy | 9
Australian context
– a policymaker’s view
We analysed AEMO’s forecast data and other published data
from the last 18 months to develop our Reference Case.13
This outlook shows that by 2040, Australia will have replaced
nearly 50% of its current large-scale, fossil-fuelled generators
resulting in 60% lower carbon emissions from power
generation than in 2005.
Australia’s energy system is undoubtedly on a As a result, Australia has a mix of renewable
highly transformative path. This path can only be energy targets and aspirations with different
successfully navigated through timely investment rates of change in generation mix expected over
in energy infrastructure – both generation and the next 20+ years. Some of these are legislated
grid. The current uncertain investment climate while others are not which adds to uncertainty.
and direct government interventions in Australia’s South Australia is already considered by some to
energy market creates the risk of a disorderly be a global renewable ‘superpower’ with >50%
transition towards this future scenario. This is of its generation coming from renewable sources
particularly true of investments in dispatchable in 2018.14
generation and major grid investments. As a
result the energy market transition will likely be The following table shows the different targets/
characterised by late reaction to market signals aspirations in place across the country. As we
by energy infrastructure developers, leading to can see there are multiple different timeframes
ongoing government interventions and periods being targeted. In time we expect these to come
of insufficient capacity and volatile prices. together. It would be helpful to have a consensus
Apart from the negative impact this will have on in the short term on targets to 2040 for both
consumer reliability and affordability, this may renewables and emissions.
have an adverse impact on our climate, as ad-hoc
interventions may not take a long term view. The challenge will be that pursuing these targets
will need to be underpinned by an ongoing
A key challenge for policymakers is confusion sizeable investment in dispatchable (on-demand)
around who should lead on specific issues. generation, such as pumped hydro, battery
In Australia, energy policy is a state-level storage, gas and possibly other thermal sources.
responsibility, with the Council of Australian We foresee challenges in the current market
Governments (COAG) ensuring broader design to incentivise such new investment.
coordination across the various governments
and market bodies.

We are increasingly seeing States and Territories

developing aspirational policy positions. In
addition market bodies (eg ESB and AEMC) are
conducting important policy development and
market design work.

13 Our forecasts have largely relied on data from AEMO Electricity Statement of Opportunities 2018, August 2018 and AEMO Draft
Integrated System Plan 2020 Assumptions, January 2019 to June 2019
14 Clean Energy Council - Clean Energy Australia report 2019

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State by state + federal energy policy & target/
aspiration analysis

Renewables target Emissions target

Government / aspiration / aspiration

33 TWh large scale

26-28% emissions
generation by 2020
Federal reduction by 2030
(approx 23.5%
(compared to 2005)
renewable)

100% renewable Net zero emissions

ACT
energy by 2020 by 2045

Net zero emissions

NSW
by 2050

50% renewable Net zero emissions

NT
energy by 2030 by 2050

50% renewable Net zero emissions

QLD
energy by 2030 by 2050

100% net
Net zero emissions
SA renewables by
by 2050
2030’s

Net zero emissions

TAS 100% by 2022
by 2050

50% renewable Net zero emissions

VIC
energy by 2030 by 2050

Net zero emissions

WA
by 2050

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Australia is expected to generate enough renewable energy to meet the 2020 Large-scale Renewable
Energy Target (33 TWh)15. Additionally, the electricity sector is expected to contribute at least its
proportional share of Australia’s commitment to the Paris Agreement.

Still, given Australia’s total domestic emissions are only expected to decrease 11% by 2030,16 there’s
a role for the electricity sector (which represents 34% of Australia’s carbon emissions) to explore further
options to reduce emissions and simultaneously reduce the cost of electricity generation.

We have the highest uptake per capita of small-scale solar PV anywhere in the world.17 A similarly
fast-paced uptake is now starting to occur with battery storage installations. These trends will
continue, with forecasts suggesting Australia will have the highest proportion of distributed energy
resources globally.18

Several factors amplify the challenges of integrating these developments into Australia’s energy
systems highlighted below:

Several major The large variability Emerging energy Australia’s east coast
fossil-fuel-burning in our weather market design has one of the world’s
generators and demand challenges longest transmission
will retire over the systems, comprising
next decade some very long ‘stringy’
sections with very low
customer densities

As a result of these challenges, our market is often cited by global players as being ideal for innovative
technologies to first come to market at scale.

15 Clean Energy Regulator, September, 2019

16 CSIRO, National Outlook Technical Report, 2019. CSIRO also quote ClimateWorks Australia 2018 in this assessment
17 Bloomberg New Energy Finance, New Energy Outlook 2018
18 40% estimated by 2030 - BNEF, New Energy Outlook 2018

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Global context
Power markets globally are already seeing change and the
trends are clear.
In most parts of the world, the quest for The following chart19 highlights the current
decarbonisation is a given. For most, it’s a question trajectory of the G20 nations in decarbonisation
of speed and the best policies and mechanisms to and what’s estimated to be required to reach the
drive the transition from fossil fuels.  temperature scenarios underpinning the Paris
Agreement. It is an understatement to say that
The UN Paris Climate Change Agreement shows there is a way to go to reach these targets.
the decarbonisation commitments of the globe.

In many countries, emission reduction targets

of net zero emissions by 2050 and renewable
energy targets of 50% by 2030 and 100% by
2050 are becoming increasingly common. The
2020 revisit of the Paris Agreement will likely see
increases in decarbonisation commitments made
by many nations.

Business as usual Fall in global carbon Average G20 NDC 2°C 1.5°C
decarbonisation rate intensity in 2018 decarbonisation rate decarbonisation rate* decarbonisation rate*
(2000-2018)
1.6% a year 1.6% 3% a year 7.5% a year 11.3% a year

350

300
Carbon intensity (tCO2/$mGDP)

250

200

150

100

50

0
2000 2000 2020 2030 2040 2050 2060 2070 2080 2090 2100

19 PwC, The Low Carbon Economy Index 2019, October 2019

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Increasingly, power generation investment globally is
focused on renewables
In 2018, the world invested approximately US$300b It also shows that the highest proportion of
in renewable power generation, more than 2.4 times retirements will be from coal and gas assets.
the amount spent on fossil-fuelled generation.20 The chart highlights the lessening relevance of
Around 12% of global power generation was coal-fired generation globally with coal plant
spent on nuclear. There will be ongoing minor additions just exceeding retirements on average.
growth in the nuclear fleet around the world based It also shows that gas is still viewed positively as
on projections (see following chart), with no signs a generation source, with gas plant additions
of major take-up any time soon. double the rate of retirements. Australia’s major
trading partners are predominantly investing
While often not discussed with the same passion in renewable generation and gas, including
as generation, close to US$300b was spent on the US, China and India. These figures have
network assets across the globe in 2017 and again changed dramatically over the last two years
in 2018. Increasingly, this investment is focused with lower global coal plant additions and higher
on enabling power systems, as well as expanding coal plant retirements predicted than previously
and replacing networks around the world. forecast (-15% and +30%, respectively) and with
Enabling power systems refers to investments on a major increase in the forecast annual solar PV
digitising and securing our power grids, and on investments across the globe (increasing by
managing the increasing amount of distributed around 65%).
and renewable energy sources.
This data gives a view that Australia’s two core
Two charts summarise the energy markets of the existing energy exports - coal and gas - have
world and their direction of travel. Both are from an ongoing place in the global economy, and
the International Energy Agency (IEA) reports/data. anticipate for the next 20 years there will be
The first looks at the forecasted annual global continuing solid demand for Australia’s traditional
generation capacity additions and retirements high quality energy resources. However, there
from 2019-2040. It shows that the vast majority of is a major shift underway towards renewables
additions will be from non-fossil fuel sources over and further distancing from fossil fuels by many
the next two decades. governments globally, putting pressure on our
current energy exports longer term.

Global annual average capacity additions and retirements by technology 2019-2040

Retirements Additions

Nuclear

Hydro

China
Coal
India
European Union
Gas
United States
Africa
Wind
Middle East
Other
Solar PV World
-30 0 30 60 90 120 150 2017 Data

Source: PwC analysis based on IEA, World Energy Outlook 2019 (Stated Policies Scenario)

20 International Energy Agency (IEA) ‘World Energy Investment 2019’ report

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The second IEA chart of note below, gives an
overview of a sample of major economies’ energy
Global trends indicate
policies.21 Most are challenging for coal. Nuclear strong momentum for
has its most significant support from major
developing economies, though the proposed
an energy transition to
investments in nuclear energy are still relatively occur and potentially
minor compared to renewables and gas.
at a faster pace than
previously thought.

Major global economies’ energy policy summary

Impact on outlook by source

Release
Region Policy Authority date Renewables Nuclear Gas Coal

13th Electricity Development December

China NEA
Five-Year Plan (to 2020) 2016

Draft National Electricity Plan December

India CEA
(to 2022) 2016

Proposed energy pillars New

Korea 2017
(to 2025) admin.

Announced energy policy New

France 2017
(to 2025) admin.

European No new coal power plants 26 of 28

2017
Union post-2020 countries

PLN electricity supply March

Indonesia PLN
business plan (2017-2026) 2017

Phase out traditional coal- New November

Canada
fired power plants by 2030 admin. 2016

United Removal of Clean Power New

2017
States22 Plan (to 2030) admin.

Note: NEA = National Energy Administration in China; CEA = Central Electricity Authority in India; admin. = administration;
PLN = Perusahaan Listrik Negara, the state electricity company in Indonesia.

Some nations have found a way to embrace an energy and climate future (e.g. the United Kingdom, France,
Germany and New Zealand), creating long-term confidence for investors, and enabling energy companies
and other market players to focus on how to get on with the job rather than second guess what the job
might be.

21 The International Energy Agency (IEA), World Energy Outlook 2017

22 We observe that the USA Clean Power Plan has in fact improved the outlook for gas and renewables and worsened the outlook for coal

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Australia’s energy choices
from now to 2040
Modelling of energy market scenarios serves an important
role in understanding the impact of potential futures on a
range of key criteria. In order to provide the energy debate
with a better foundation for discussion, we have focused on
four energy choices for Australia, modelling their financial,
economic and emissions impact.

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Three of these scenarios share the same assumptions regarding the timing of thermal capacity retirement
and vary only in the mix of new capacity added. They provide a good baseline comparison of the impact
of different technologies. The fourth option serves to understand the impact of accelerated thermal
capacity closure and increased renewables penetration. Because the amount of capacity replaced is
higher compared to the other three scenarios, the results are not strictly comparable, but provide
directional insight.

The models only take into account emissions from stationary energy generation and are not intended to
model emissions from other sources (e.g. transport and LNG production).

Energy scenarios for Australia

01 02 03 04
Reference Renewables Coal Accelerated
case case case renewables
case

Based on analysis In line with the Aligned with the Deviates from the
of various AEMO reference case on reference case reference case by
forecasts and most assumptions, and its thermal accelerating the
supporting data including the plant retirements thermal plant closure
and assumes major retirement rate of – assumes that schedule, particularly
thermal power thermal generation – for all coal-fired for plants currently
plant closures in replaces most retiring generation closed scheduled to close
line with company thermal capacity 50% of its capacity in the 2040’s and
announcements with renewables will be replaced by 2050’s – sees 60%
- sees 47% of High-Efficiency Low- of thermal capacity
Australia’s thermal Emissions (HELE) closed by 2040 and
generation capacity coal technology replaces it mostly
retiring by 2040 with renewables
replaced by a mix
of new gas and
renewable generation
on a least cost basis

In the absence of a long-term energy policy, the ‘reference case’ is an estimate of Australia’s current
pathway based on existing energy infrastructure plans, investment requirements and current policy settings
(both Federal and State/Territory). However, it assumes that any plant retirements are replaced in a timely
way with the lowest cost generation technology, or combination of technologies.

This scenario sees Australia in 2040 having 65% renewable generation, and emissions from the power
sector being 57% lower than they were in 2005. Our power system would be reliable and energy costs
will have declined compared to current levels. It is a case that some would argue as being ‘good enough’
for our future. But Australia can prosper much more by following the renewables case or the accelerated
renewables case. As seen in our modelling, there is economic opportunity from an increased investment
in renewables over the next two decades.

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Key modelling principles
To ensure the modelling can support an objective debate,
the analysis adhered to the following key principles:

Scenarios must be Focus on energy

01 comparable
04 system cost rather
Scenarios use the same set of than on energy prices
assumptions where possible, for example,
on demand growth,23 costs and learning Our analysis has focused on system
rates.24 The weighted average cost of costs included capex, opex and fuel
capital (WACC) is 7% for all technologies costs rather than attempting to predict
to ensure consistency between scenarios. wholesale prices.
No carbon taxes or emissions trading
schemes have been used in our modelling.
Remuneration for
05 energy asset owners
Scenarios only include
02 existing technologies We observe that as time progresses
there is almost certainly going to be new
Scenarios focus on known technologies models to remunerate asset owners. We
such as solar PV and wind to make them have focused on ensuring asset owners
realistic, rather than on prospective are provided with sufficient revenues to
technologies like High-Temperature Solar meet their return of capital and return on
Thermal (HTST) and fuel cells. Current capital needs, rather than the specific
nation-building energy infrastructure mechanisms to do so.
projects have been included in all
scenarios (e.g. the Snowy 2.0 pumped
Focus on creating a
hydro project, Marinus Link interconnector
to Tasmania, and the various transmission
06 reliable energy system
interconnection projects included in AEMO
ISP reports). in all cases
One of the key concerns of increasing
Focus on economic
03 impact vs. emissions
renewables generation is the reduction in
dispatchable capacity in the system and a
resulting reduction in reliability. One of the
key principles in developing our model has
The economic impact tends to be where
therefore been that the energy system in
opinions vary wildly. There is (generally)
all cases must satisfy reliability standards
less confusion about which scenarios are
to make them comparable. We have
better for the environment.
done this by ensuring timely investments
occur in dispatchable generation and
network assets.

23 AEMO, Electricity Statement of Opportunities 2018, August 2018 - we have used this forecast to identify economically optimal
energy choices in a rapidly changing and growing energy market.
24 Generation costs and learning rates have been taken from AEMO Draft ISP 2020 Assumptions.

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 Our approach to modelling has
been relatively conservative.
Our hypothesis is that this is the
best way to compare scenarios
and brings a strong sense of reality
to the ensuing debate of our work.

All scenarios modelled see Australia with a more

reliable energy system than we have currently.
In the renewables scenarios this resulted in
increasing amounts of pumped hydro and
battery capacity, as well as gas turbines to
provide dispatchable generation during extended
periods of low output from wind or solar.

Additionally, synchronous condensers were

added to the energy system to ensure system
security when high levels of non-synchronous
generation capacity (i.e. most renewables)
enter the market. The required interconnection
and transmission capacity have been included
in each of the scenarios. However, new
investments in distribution networks have been
excluded from the analysis.

One of the main drivers for investments in

the distribution system, including system
management tools, is the amount of
bi-directional flow and price-responsiveness
that occurs from distribution level resources
(both generation and demand management).

Substantial work is progressing through the

market bodies, ARENA, and multiple state-
based programs, to determine the ability of
the distribution networks to accommodate
increasing amounts of active distribution
level resources.

For our analysis, the amount of active

distribution resources has been kept the same
in each of the scenarios. This being the case,
excluding the distribution network investments
was an acceptable simplification that eliminated
a significant amount of complexity when
assessing investments required, as well as
the benefits offered by these distributed
resources. Definitive work is required to outline
the networks resilience and investment plan
for Australia’s energy transition.

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 Analysis:
changes in generation mix and emissions

The charts below highlight the changes in generation mix and resulting emissions that occur under the
different scenarios. The results show that Australia is likely to see between 61% and 90% of its electricity
sourced from renewable generation by 2040, depending on which path it decides to pursue.

Figure 1: Comparison of changes in thermal capacity

Thermal capacity retirement (GW) Thermal capacity in supply mix (GW)

25 35
30
20
25
15 20
10 15
10
5
5
- -
2019

2022

2025

2028

2031

2034

2037

2040

2019

2022

2025

2028

2031

2034

2037

2040
Reference, Accelerated Reference case Coal case
Renewables, Coal case renewables case
Renewables case Accelerated renewables case

Figure 2: Comparison of changes in renewable generation and emissions reduction

Renewable generation (%) Emissions reduction from power generation (% v 2005)

100% 90%
80%
80%
60%
60%

40% 40%

20% 20%

0% 0%
2019

2022

2025

2028

2031

2034

2037

2040

2019

2022

2025

2028

2031

2034

2037

2040

Reference case Coal case Reference case Coal case

Renewables case Accelerated renewables case Renewables case Accelerated renewables case

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 Analysis:
financial costs and economic impact

Table 1 summarises the financial costs and economic impact for each modelled scenario.

Table 1: Comparison of scenarios

Comparable scenarios Stretch

Reference Renewables Coal Accelerated

case case case renewables case

Cost 2019-2040 (NPV, $b, Dec-2018$)

Capital 40.3 44.8 42.7 53.3

Ops & maintenance 37.9 39.0 38.6 38.8

Fuel 42.5 38.0 41.6 33.1

Total system cost 120.7 121.8 122.9 125.2

Delta v. reference case - 1.1 2.2 4.5

Key ratios 2040

Thermal capacity replaced 47% 47% 47% 60%

(15 GW) (15 GW) (15 GW) (19.3 GW)

Renewable generation 65% 79% 61% 90%

Emissions reduction from 57% 68% 46% 84%

power generation (vs 2005)

Unserved Energy (USE25) <0.002% <0.002% <0.002% <0.002%

Cost of the energy system ($/MWh). 65.1 66.4 67.2 71.6

NB this not the wholesale price26

Economic impact, delta to reference case (NPV, $b, Dec-2018$)

GDP - +13.2 +6.2 +14.8

Consumption - +5.6 +0.5 +10.7

All costs are the discounted total spent over the 2019-2040 period for each scenario. Capital cost
represents the annualised cost of capital for investments in generation, storage and networks, and applies
a weighted average cost of capital of 7% for all technologies to ensure consistency between scenarios.
This assumption arguably favours coal over other technologies as independent research indicates that
new coal fired generation faces higher project risk and market risk.27

25 USE below 0.002% is the reliability standard in the NEM

26 This figure illustrates the cost of the energy system in each of the four Cases. It is not a wholesale electricity price which arises
through market forces. The cost of the energy system figure is calculated by dividing the total system cost by the total volume of
electricity produced.
27 Jacobs for Finkel Review (Emissions mitigation policies and security of electricity supply, June 2017) reports a WACC of 9.9-14.9%
for coal technology, 6.1-8.1% for gas CCGT and 6.1-7.1% for renewables; GHD for AEMO (AEMO costs and technical parameter
review, September 2018) reports a WACC of 10% for HELE technology, 6% for CCGTs and 6.2% for renewables

The Future of Energy | 21

 The compared scenarios
demonstrate:
All scenarios show positive economic
01 returns compared to the reference case
when focusing on GDP (from $14.8b for The total financial costs and
accelerated renewables, down to $6.2b for
the coal scenario). the associated impacts on
wholesale prices are key
Rather than focusing on changes to aspects to consider, but are
02 GDP, a more appropriate focus is on
changes to ‘consumption’. This measures not looked at in isolation.
household economic well-being through Arguably more important is
the acquisition of goods and services.
To the extent that consumption can be the likely economic effects
considered as a proxy for living standards,
an increase in consumption implies the
of the various scenarios,
Australian population is better off. This lens especially given that all cases
suggests that both renewable scenarios are
meaningfully positive (from $5.6 to $10.7b) deliver a power system that
while the coal scenario is only marginally should provide lower prices
positive ($0.5b).
for consumers than we
All of the cases vary in their total system
currently see.
03 cost (NPV) over the next 20 years by less
than 4%.
Our analysis highlights employment in fossil
fuel power generation and related industries are
reducing. Importantly this is being more than
offset by a larger gain in employment in the
The renewables case is only marginally more
04 expensive (<1%) than the reference case
and enables Australia to reach almost 80%
renewable generation and related sectors.

renewable generation by 2040 and sees The renewables scenario shows that States
emissions reductions of 68% from power with sizeable coal generation industries, that
generation compared to 2005 levels. require a higher degree of transition away from
coal, will see an increase in the construction and
renewable power generation sectors that offsets
the decline in employment in other sectors. As a
The accelerated renewables case, while more
05 costly, replaces a higher amount of thermal
generation before 2040, which in the other
result, depending on the timing of the transition
and the subsequent investments, employment in
New South Wales, Queensland and Victoria will
cases still needs to be replaced between
increase from the transition.
2040-2050. It also should be considered
within the broader context of its positive
effect on GDP, consumption and emissions. Predictably, the investment in new generation
stimulates construction activity and also expands
activity in downstream supplying sectors
Economically, there is a clear and obvious like cement manufacturing, civil engineering

06 offset between fuel and capital costs as we

move from thermal to renewable generation.
construction, and non-residential building. This
short term gain to employment from construction
applies to all forms of investment.

The impact on the cost of energy is also an

important consideration in relation to employment,
as it is an essential input into all sectors of the
economy. Relative to the renewable scenarios,
investing in new coal HELE plants as we have
modelled in the coal case has the smallest gain
to employment of the scenarios - a result of the
higher increase in energy system costs offsetting
the increase in construction related jobs.
The Future of Energy | 22
Social cost of carbon
Although the focus of our analysis has been on the economic
impacts from changes in the energy system’s costs, we have
also considered the flow-on impacts for the economy via an
assessment of the social cost of carbon.
This is not a new concept. It has been part of We include the economic impacts of the social
carbon policy analysis for almost 20 years. The cost of carbon in the analysis by calculating
following helps articulate and clarify its logic: the opportunity cost savings (or cost increases)
from abating (or increasing) CO2 emissions. The

“
The ‘social cost of carbon’ (SCC) is a opportunity cost reflects the difference between
commonly estimated measure of the the cost of emissions to society (the ‘social cost
economic benefits of greenhouse gas of carbon’) and the cost per tonne of CO2 abated
(GHG) emission reductions (e.g., Tol 2005, (a function of the change in emissions and the
2008; Nordhaus 2008; Hope 2006, 2008; change in the energy system’s total costs, relative
Anthoff et al. 2009a,b). The SCC represents to the reference case).
the present value of the marginal social
damages of increased GHG emissions in At a practical level, the consideration of this
a particular year—including the impacts of opportunity cost can be thought of as affecting
global warming on agricultural productivity the amount of taxpayer funding required to
and human health, loss of property and meet Australia’s commitments to reduce CO2
infrastructure to sea level rise and extreme emissions (e.g. through the Emissions Reductions
weather events, diminished biodiversity and Fund); if more emissions can be reduced through
ecosystem services, etc.—and therefore it the transition of the energy system towards
also represents the marginal social benefits of renewables then fewer emissions need to be
emissions reductions. Properly defined, the reduced elsewhere in the economy to meet
SCC is the correct “shadow price” to place current commitments (and vice versa where there
on GHG emissions in a benefit-cost or social is an increase in emissions from the energy sector,
welfare analysis of climate change policies.28 more needs to be done by other sectors).

When including the social cost of carbon in the comparison of the cases, the economic impact of the
accelerated renewables case improves while the coal case will negatively impact GDP and consumption
(i.e. when compared to the results in Table 1).

Table 2: Comparison of scenarios - Economic impacts including social cost of carbon

Comparable scenarios Stretch

Reference Renewables Coal Accelerated

case case case renewables case

Economic impact, delta to reference case (NPV, $billion, Dec-2018$)

GDP - +13.1 +4.7 +16.5

Consumption - +5.6 -0.4 +11.8

28 “The Social Cost of Carbon Made Simple Made Simple”, Stephen Newbold, Charles Griffiths, Chris Moore, Ann Wolverton, and
Elizabeth Kopits, 2010

The Future of Energy | 23

The rise of energy services
In line with this seismic shift in power generation sources
underway, there’s an unprecedented change in the way energy is
being provided to customers by utilities and other players.
There are two primary drivers behind this shift: The ‘local-power’ phenomenon adds to this. The
ability of customers to generate, and increasingly
• the shift in generation technologies - the store energy from their own assets is relatively
move away from centralised, large generation new. This is driving the development of new
to much more distributed generation and the services and new platform business models.
associated volatility in security, reliability and Our energy market design must evolve to
quality of power supply brings opportunities incorporate them as they develop. At present,
to monetise different types of energy the bulk of the service innovation underway is
provision. The Hornsdale Power Station, at the retail end of the value chain and to some
for example, with its combined renewable extent at the generation end. This is within the
generation and utility-scale battery (the unregulated parts of the value chain. While service
so-called Tesla ‘Big battery’) has created innovation is beginning to happen within the
a ‘value stack’ of traditional dispatchable networks segment, rigid investment regulations
power and energy services. are restricting this development.
• a more demanding customer - the energy
sector and utilities are increasingly under This again points to the need for a definitive
pressure to innovate and provide customers analysis of the future network (transmission
with more control while reducing costs, finally and distribution) investment needs for Australia.
catching up with other industries, such as
telcos and airlines. At an energy system level, we expect to see
energy services feature more prominently in the
future. We are aware that much work is underway
in Australia by the ESB and others on the future
of the NEM and within this, there is analysis being
undertaken on differing services models and how
they might be applied within an Australian context.

The Future of Energy | 24

 Australia’s energy
transition
For Australia to harness the potential economic benefits
of moving to a more reliable and a more renewable future,
Australia’s supply mix, networks and wholesale market need
to undergo a significant and well-planned transition.
Failure to reform our energy market to ensure Our analysis shows that moving to a more
key energy infrastructure investment decisions renewable energy generation model is positive
are made in the short term could push Australia for Australia’s economic growth and standard
into a disruptive energy future. Poor or of living. Replacing existing coal fired power
unbalanced energy policy choices undermine stations with new HELE coal stations is less
stability and create a poor investment climate. likely to have positive economic outcomes.29
Taking a forward view on energy system In its own right, this is an important input to
needs with a blend of dispatchable and non- Australia’s energy debate. As a reminder, this
dispatchable generation is not only possible but assumption does not include any carbon tax or
essential for our economy and our wellbeing. emissions trading system.

29 We observe this has been a topic of debate during our work, with polarised views on the cost of capital required to fund new coal
generation and even whether or not financing, insurances, etc could be sourced for new coal generation assets

The Future of Energy | 25

Where to from here
At the risk of being simplistic we see there are four key actions we must take as a nation:

1. Ensure that the current energy policy and 3. Developing transition plans for those
market reform work being undertaken by our industries, States and regions undergoing
various regulatory bodies and governments radical change - given our analysis points
comes together in a single coherent and to major regional shifts in employment and
comprehensive plan quickly and have the economic prosperity as the transition under
necessary legislation and regulation agreed all scenarios (including the reference case)
within the next 1-2 years. Governments of all unfold. Building coherent and action oriented
persuasions must not continue with political industry and regional economic transition
brinkmanship on the matter of energy policy. plans are fundamental to how Australia’s
energy communities continue to flourish as
2. A definitive body of work be undertaken our energy markets transition.
within the next 1-2 years to develop a view of
the critical role of the energy networks (both 4. Ongoing innovation is key to solving
transmission and distribution) sector and its Australia’s energy puzzle and creating
investment needs over the next 10+ years as world leading expertise. Much of what we
it continues its transformation to becoming will reshape over the next 20 years will
the physical energy platform we need for our occur across the globe which provides
energy future. an opportunity to develop world-leading
Australian expertise on how to build new
energy systems and the underpinning
technologies, both physical and digital.

The Future of Energy | 26

This report injects much needed economic
perspective into the energy debate. Further to
the four proposed actions, we don’t have all the
answers for what should happen next.
However, over the course of the coming months, we will be holding a number of
energy leadership discussions to identify opportunities and action-critical items that
need to be addressed immediately in order to shift the dial, with a focus on the next
two years.

If you believe you have ideas or thoughts that will positively impact this dialogue and
future planning, we would love to hear from you.

The Future of Energy | 27

Contacts
Energy, Utilities & Resources Leader, Chief Economist,
Australia Australia

Mark Coughlin Jeremy Thorpe

T: +61 (3) 8603 0009 T: +61 (2) 8266 4611
E: [email protected] E: [email protected]

Mining Leader, Co-lead Energy & Utilities

Australia Transformation Consulting

Chris Dodd Stijn Koppers

T: +61 (3) 8603 3130 T: +61 (2) 8266 3355
E: [email protected] E: [email protected]

Senior Economic Modeller, Marketing, Energy,

Economics & Policy Utilities & Resources

David Williams Deena Hooper

T: +61 (2) 8266 6376 T: +61 (3) 8603 3291
E: [email protected] E: [email protected]

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