Clean electrification: how Australia can unleash its renewable energy potential

"Australia is rapidly transitioning away from fossil fuels, and expectedly, this is throwing up all kinds of challenges," says Danish Aleemullah, Division Director, Infrastructure and Energy at Macquarie Capital. 

"Even though Australia has abundant renewable energy resources, at the micro level² we still need to act fast – and in multiple ways – if we’re to meet our goal of net zero emissions by 2050."

Moving to greener energy sources

Jessica Edwards, Associate Director in Macquarie Capital’s Infrastructure and Energy team, says that as fossil fuels are phased out, electrification is becoming an integral part of Australia’s decarbonisation equation. 

Over the past couple of years, Australia’s energy companies have closed – or announced the accelerated closure of – some of the country’s largest coal-fired power plants.⁴ While some of these decisions have become the subject of political discussion, none were too surprising to those in the sector.

Installed power generation capacity in Australia, 2005 – 2021

Source: BloombergNEF

The challenges Australia needs to (urgently) address

The early shutdown of coal-fired power plants may mean fewer coal-based emissions, but it presents some serious challenges in relation to energy supply. While investors may be reluctant to support coal, the reality is that it’s still used to generate much of Australia’s energy needs. 

"We need to roughly triple Australia’s renewable energy generation over the next decade to account for these closures," Edwards says. 

Although large-scale hydro, wind, and solar projects – as well as large batteries – must be part of the solution, they can’t be the only ones, especially not in the short term.

"Developing and building a reasonable-sized wind or solar project – something, for example, that could produce 400 MW – generally requires a three-to-five-year timeframe. Planning and permission alone usually take around 18 months to complete," Edwards says.

"There are a lot of projects in this phase of development at the moment, but not many under construction," she continues. “These assets also need to be supported by adequate transmission infrastructure and an appropriate portfolio of dispatchable energy assets – for example, grid scale batteries and pumped hydro – both of which are lagging in development."

The micro matters 

The good news is that at least part of Australia's goals can be achieved without large-scale grid-connected projects. Instead, the grid can be supported by shifting energy production from large scale to small scale, with behind the meter assets in homes and businesses doing much of the heavy lifting.

"Australians have shown an enormous appetite for renewable energy at the individual level," Aleemullah says, pointing to the fact that almost a third of households now have a solar energy system.⁵ "We can take this even further and transition to the home of the future already," he adds.

The next step is to encourage more households to adopt solar, Aleemullah says, as well as household batteries, and an electric vehicle – even with recent spectacular growth, electric vehicles still only account for around 7 per cent of all new car sales, meaning there's plenty of room for growth.⁶  This would allow Australians to generate their own electricity and feed it back into the grid, either individually or as part of a virtual power plant (VPP). This setup could help alleviate the network strain and technical issues the grid is currently facing (and likely continue to face) as more renewables come onstream. 

"It's already happening right now. More than two thirds of the solar panels installed in Australia as of last year, were installed on the roofs of homes and commercial buildings,"⁷  Aleemullah says.

"The technology exists, and Australian consumers want to be part of the solution. We just need the software and policy settings to encourage greater adoption."

The longer timeframe

The impetus for change is highlighted by Clean Energy Council estimates that the pace of deployment for new large-scale projects must double if Australia is to meet the government target of 82 per cent renewable generation by 2030.⁸ 

Though speeding up development timelines will encourage greater development of large-scale storage projects, there are other hurdles that need to be overcome, Edwards points out, including some unique to Australia. 

"The well-publicised supply chain issues that have affected world trade hit us harder than many countries. We’re a small part of the global market, and we currently lack the local manufacturing to build our own parts," Edwards says. "Construction costs are also at an all-time high which challenges the economics of projects."

The distances involved in Australia’s network, and the interconnected nature of the network itself, also make it complicated and expensive to 'plug in' a new asset once built. "Connection of new assets is becoming more complicated and costly and is more frequently becoming dependent on completion of government-led upgrades to the transmission systems." adds Edwards.

Grid-scale dispatchable energy resources, such as medium-duration batteries and pumped hydro, are also lagging in development but will be critical in meeting Australia's decarbonisation goals. 

These assets provide energy for extended hydroperiods (four hours plus) when the wind isn’t blowing or the sun isn't shining. Post 2030, when a significant amount of coal generation capacity will have come offline, this infrastructure will be critical to the security of energy supply and needs to be planned for now.⁹

A need for government support

Overcoming these challenges will help Australia scale electrification and fill the void left by the decommissioning of coal power plants. It requires, however, governments to step in and play a direct role in facilitating and encouraging take-up at both the macro and micro levels, Aleemullah says. The latter, for example, has seen success from financial incentives.

"Australians have generally done a good job of installing rooftop solar, encouraged by government rebates, with which there's a direct correlation," he says.

In 2019, when Queensland’s government offered generous grants and interest-free loans for switching to solar, installation almost trebled. In 2020, when these measures were removed, installation fell below 2018 levels.¹⁰

Similar patterns emerged with battery installation. In South Australia, the state government offered a $A6,000 subsidy for such installations in 2020 before progressively reducing this to $A2,000 by early 2022. As this happened, battery installations in the state fell by 55 per cent.¹¹

"If this transition is to succeed, we need support from governments and government agencies through incentives, the formation of new markets, and clearer revenue streams for the services that energy assets can provide," Aleemullah says. "We also need to address some of the real underlying issues, like workforce skills and barriers to entry.¹² 

"More than anything, however, we need a coordinated approach between the state governments and the Commonwealth with energy market participants and investors. Otherwise, innovation may be slowed at the micro-level and infrastructure projects will face complexity as they deal with the challenges of development."

Aleemullah says there is a real opportunity across Australia to focus on developing initiatives that support the build-out of grid-scale medium and long duration storage assets. However, unlike wind and solar farms, these assets can be more challenging for private capital as they require long lead times and come with development risks and higher costs. 

For this reason, encouraging private investment requires providing some level of certainty around revenue. By providing supporting mechanisms, such as capacity payments or downside revenue protections, governments can help firm a project’s development now rather than in five to ten years’ time.

Opportunities on the horizon

Edwards points to Australia’s renewable energy zones (REZs) as an example of the type of government initiative that should help encourage the investment needed to meet its targets.

Up to 41 sites in eastern Australia were identified as potential REZs, with state governments then committing to developing them (the New South Wales government has pledged to develop five and Victoria six).¹³ 

The Australian Energy Market Operator (AEMO) describes these as ‘high resource areas where clusters of large-scale renewable energy projects can be developed using economies of scale'.¹⁴

This means that they are places close to existing transmission lines, where the sun regularly shines, or the wind regularly blows. In these areas, state governments and the Commonwealth have pledged to create certainty for investors, project developers and communities through strategic land usage, collaboration and consultation. 

"Macquarie has been actively advising on projects in these renewable zones," Edwards says. "The way they're set up means we can understand the risks, develop a business plan and expedite development so that a project comes online quicker."