Shocked into Action: Change is Coming for the Australian Electricity Market Currently in Turmoil

The Australian electricity sector has been thrown into turmoil. Supply issues and price hikes have placed strain on businesses and households. The National Electricity Market (NEM), which represents all Australian states and territories other than Western Australia and the Northern Territory, has particularly suffered.

Wholesale electricity prices surged over the last financial year, more than doubling from the year before. These prices are set to remain elevated, averaging $100.4 per megawatt hours in 2022-23, which is a 92.3% increase on 2021 levels.

A long and cold winter contributed to higher electricity demand and prices, as consumers turned up the dials on their heaters. However, much of the turbulence has stemmed from challenging supply conditions. Multiple unplanned coal power outages and extreme weather events have limited supply from fossil fuels, which accounted for just over 73% of Australia’s electricity generation in the year through June 2021. Economic sanctions on Russia’s coal and gas supply have also raised demand for gas, coal and oil from nations that traditionally received these commodities from Russia. This increased demand, coupled with a restricted supply pool both domestically and globally, has contributed to higher electricity prices.

These factors have had a significant effect on businesses and households. In particular, rising electricity prices have exacerbated the high cost-of-living pressures gripping the nation. Inflation has risen by 6.1% over the past financial year, and the RBA projects it to reach 7.75% by the end of the year.

The Australian Energy Market Operator and their Integrated System Plan

The Australian Energy Market Operator (AEMO) has outlined a roadmap for the NEM in their 2022 Integrated System Plan (ISP) to optimise consumer benefits through a crucial but complex transitionary period for the electricity market. The biennial release estimates that approximately $320 billion in capital investment will be required to develop, operate and maintain the generation, storage, transmission and distribution requirements to the electricity system by 2050. These investments are set to enhance the capital capabilities for operators in the electricity transmission and distribution industries.

Australia is also set to reach its net zero emissions by 2050 target. Significant investment in renewable energy sources, such as wind, solar and hydrogen, will replace investment in non-renewable sources. The AEMO expects the electricity market to become coal free by 2040.

The ISP outlines four possible scenarios for Australia’s future electricity market:

• Step Change
• Progressive Change
• Hydrogen Superpower
• Slow Change

The most likely scenario is Step Change, which forecasts a consistently fast-paced transition from fossil fuel to renewable energy in the NEM. The Progressive Change scenario delivers a net zero economy by 2050, with emission reductions intensifying in the 2040s. The Hydrogen Superpower scenario projects that Australia will be become a significant hydrogen exporter. Slow Change is the least likely and would result in Australia not reaching their emissions reduction target.

Potential implications for the Australian electricity sector

The AEMO’s projections indicate that renewable electricity generators will benefit from the planned investments. This means that hydro, solar, wind and other renewable electricity generators are likely to benefit over the investment period. New industries are also projected to develop, such as hydrogen power generation.

The increasing share of renewables in Australia’s total electricity generation aligns with rising environmental awareness among Australian consumers and businesses. Households and businesses are likely to actively seek energy deals that have a higher portion of renewables. In particular, businesses are anticipated to reassess contracts to find cost effective plans that focus on renewables, and therefore improve their ESG ratings.

One of the biggest challenges identified by the AEMO in the transition away from non-renewables is delivering electricity from generators to households. Electricity transmission and distribution industries are therefore also set to expand.

These developments are set to come at the expense of fossil-fuel electricity generators. Coal-fired plants will inevitably be phased out under all ISP scenarios. For example, Origin Energy announced earlier this year that Australia’s largest coal-fired power plant would be closing seven years early, in 2025.

While these trends are expected to take shape over the next five years, substantial change is only forecast to begin later in the period. As a result, significant impacts are unlikely to be felt immediately.

Nevertheless, banks and other financial institutions are increasingly adapting climate-related risks into their decision making. Meanwhile, consumers and businesses are looking to invest in assets that are sustainable. These changes in financial decision making are projected to accelerate the shift to renewables.

Winners and losers

Other than renewable electricity generators and electricity transmission and distribution operators, several downstream sectors are also likely to benefit from proposed investments. The Heavy Industry and Other Non-Building Construction industry is set to be the main beneficiary. The AEMO has recommended projects such as the HumeLink, the Sydney Ring and New England REZ Transmission Link to be completed by July 2027. Other projects like the Marinus Link are expected to be delivered after the next five-year period.

Increased demand for heavy industry and other non-building construction operators is forecast to have flow-on effects to their upstream and downstream industries. For example, surveying consultants, site preparation services and scaffolding providers are all likely to benefit from increased infrastructure investment, as are industrial machinery manufacturers and repairers. Additionally, environmental consulting is likely to become a more important source of revenue for industries that offer these services. The Engineering Consulting and Management Consulting industries are therefore projected to leverage their expert advice on how to adapt to significant environmental changes.

While some industries will thrive, these growth opportunities are anticipated to cost the non-renewable energy generation sector. The forecast decline of the fossil-fuel energy generation industry will have detrimental effects for industries like Coal Mining and Oil and Gas Extraction. These negative effects will likely flow on to mineral exploration operators and mining support providers.

It won’t just be industries feeling the effects, consumers and businesses are also set to face high electricity costs over the coming years. The planned works outlined in the ISP are unlikely to occur in the short term, meaning wholesale electricity prices are projected to remain elevated above 2021 levels over the next five years. The immediate short-term pain is set to continue, with prices soaring in June 2022. These prices have potential consequences for consumer spending. The higher cost of living is anticipated to limit household discretionary spending, which will in turn negatively affect the retail and hospitality sectors.