Transition to Renewable Electricity

What the system-wide financials are telling us

By Matthew Rogozinski

 
 

In 2023, nearly 40% of electricity in Australia was generated from renewable energy sources. This is a significant milestone on the way towards green electricity. But are we on track to deliver on the government net zero commitments? What components of the system do we need to invest in? And what is the future cost of this transformation? To answer these questions, we examine the National Electricity Market through the financial lens.

Consider the AEMO Step Change scenario, which aligns with the government net zero commitments, and the CSIRO GenCost  Global NZE post-2050 capital expenditure projections for various generation and storage technologies.

We estimate the capital expenditure until 2049/50 to total $467b. Our estimate, expressed in 2023 dollars, represents the total investment over this period (rather than an incremental investment above that for projects already commissioned, committed, or anticipated). This investment task should be doable over the next 27 years—after all, around $265b was invested in mining infrastructure over the past seven years. 

The deployment of this capital expenditure into the components of the electricity system is shown in the exhibit below.

 
Breakdown of investments required to transition to renewable electricity
 

We note some parameters of the envisaged capital expenditure:

  • Households/businesses ('behind the meter') contribute 27% of the total capital and a third of the renewable generation and storage capital;

  • Transmission, connection and strengthening of the grid represent 14% of the total capital;

  • Solar and wind generation represents 56% of the total capital;

  • Storage represents 25% of the total capital and 31% of the renewable generation and storage capital;

  • Hydro and utility batteries represent 7% and 6% of the renewable generation and storage capital;

  • Wind and solar represent 61% and 39% of the wind and solar generation capital;

  • Onshore and offshore wind represents 75% and 25% of the wind generation capital.

Looking at the near term, we see some significant challenges: a substantial and urgent step-up in investment and infrastructure delivery is required to keep the transformation on track to achieve the goal of 82% renewable electricity by 2030.

We estimate the required investment until 2029/30 to be $194b (in 2023 dollars). Households and businesses are expected to contribute $36b (before government incentives) for the 'behind-the-meter' infrastructure. Private and government investors must provide the remaining $158b for the 'utility' infrastructure.

The average annual 'utility' investment in the electricity system (NEM plus WA but excluding NT) was $13b from 2017/18 to 2021/22. Using this run rate over the next seven years implies an investment of ~$90b, well short of what's needed. Using the past run rate for renewable generation and storage investment would deliver only $35b for the next seven years, whereas $123b is needed.

The government has stepped in and committed $20b under the Rewiring the Nation program and underwritten $10b through the Capacity Investment Scheme. However, the apparent investment shortfall is likely compounded by infrastructure delivery issues beyond capital availability, such as social licence, regulatory approvals, global supply chain and local labour constraints.

Matthew RogozinskiInhance PartnersRenewables