Australia enjoys renewable boom on wind, solar expansion; worries emerge over slowdown in coming years

Australia has seen a rapid expansion of its renewable power generation in recent years, but experts are expecting a slowdown in capacity additions amid policy uncertainty and grid connection issues.

Figures from the Clean Energy Council (CEC), a Melbourne-based trade body, shows the country's generation from renewable sources totaled 74.7 TWh in 2021, or 32.5% of the total output. In 2020, 62.9 TWh of electricity, or 27.7% of the total, was generated by renewables.

Last year's growth was driven by additions of solar and wind power capacity, according to the CEC. Total installed wind capacity grew 1.75 GW to 9.13 GW as of the end of 2021, registering its third record-breaking year in succession for capacity expansions.

Cumulative capacity of small-scale solar projects (up to 100 kW) expanded from 13.4 GW at the end of 2020 to 16.7 GW, medium-scale projects (between 100 kW and 5 MW) from some 520 MW to 667 MW, and large-scale projects (bigger than 5 MW) from 3.9 GW to 5.2 GW.

Government data suggests rooftop solar photovoltaic (PV) installations—generally small projects—amounted to 3.2 GW in 2021, five times the installed capacity in 2017.

"Australia now has more solar generation capacity per person than any country in the world, and more wind and solar than any country outside of Europe," Australia's Minister for Industry, Energy and Emissions Reduction Angus Taylor said last month.

Full data on 2021's capacity mix is not immediately available. According to S&P Global Commodity Insights figures, renewables already accounted for 43% of the total installed capacity of almost 90 GW in 2020.

Cloudy outlook

But the "extraordinary achievements" in renewable expansion are "clouded by a significant slowdown in the pipeline for new large-scale renewable energy projects," said CEC CEO Kane Thornton in a statement earlier this month.

In the Clean Energy Australia Report 2022, the trade body estimates financial commitments for new large-scale renewable projects fell from $4.5 billion in 2020 to $3.7 billion in 2021, citing "continued political and policy uncertainty" and the "challenges of connecting renewable energy projects to the grid" as the reasons for weaker appetite from investors.

"The slowdown in new investments in large-scale renewable projects is primarily because of the challenges with integrating additional variable generation capacity into the grid. Both wind and solar PV projects face connection and commissioning delays owing to recent growth in inverter-based resources, a more diverse generation mix, and a more decentralized system," said S&P Global's Logan Reese, an associate director at ENR.

"In addition, utility-scale solar PV projects are facing financial headwinds, with a sharp reduction in captured prices thanks to a high penetration of rooftop solar PV that reduces midday grid demand," Reese added.

Australia has been issuing large-scale generation certificates (LGCs) to the developers of hydroelectric stations, wind, and solar farms. It has a target for the LGC receipts' cumulative output to reach 33 TWh per year through 2030.

This policy has created an alternative revenue stream for power generators as more private businesses are buying those certificates for their climate and sustainability goals, Reese said.

But the LGC scheme is due to expire after 2030. "To continue Australia's renewable capacity expansion in the long-term, there needs to be an extension or replacement," Reese added.

Less coal

On the bright side for decarbonization, Australia's renewable expansion has come at the expense of coal power. The share of the most carbon-intensive fossil fuel in Australia's power mix fell from 62% in 2020 to 59.1% last year, according to the CEC.

In February, Origin Energy said it could shutter the 2,880-MW Eraring coal-fired power plant in Lake Macquarie—Australia's largest—in 2025, seven years earlier than originally planned.

The move came as renewables generators were able to outbid coal plants consistently in electricity markets due to zero fuel costs, said Institute for Energy Economics and Financial Analysis (IEEFA) Electricity Analyst Johanna Bowyer, adding that policymakers should focus on power storage and renewable generation when developing a future energy system.

Many experts see a robust storage system as key to rapid renewables expansion due to the power sources' intermittent nature, and Australian investors are showing strong interest in the sector lately.

According to the CEC, 30 large-scale batteries with a combined capacity of 921 MW and storage duration of 1,169 MWh were under construction as of the end of last year. A total of 34,731 household batteries with 347 MWh of capacity were installed last year, compared with 23,796 units with 237.9 MWh in 2020.

In December, the Australian Energy Market Commission made rule changes to exclude existing storage units from new network charges and require all charges to be consistent across new and existing storage providers, which could promote further capacity expansion.

But the federal statutory body didn't exempt pumped hydro and batteries from paying charges for withdrawing power in the National Electricity Market (NEM), composed of five regional systems on the east coast of Australia. Such exemptions were recommended by the Australian Energy Market Operator, which manages the market, as incentives for their operators to connect to the grid.

"Batteries and pumped hydro will now be placed at a commercial disadvantage to coal and gas generators, who do not face network charges. This undermines the efforts of state and territory governments to decarbonize the power system," CEC Director of Energy Transformation Christiaan Zuur said.

Federal policies

After all Australian states and territories pledged to reach net-zero emissions by 2050 or earlier, the federal government committed to the same target by midcentury last October.

But the Liberal-National coalition government believes Australia should continue producing fossil fuels in the long run while cutting emissions with new technologies, and critics argue its policies tend not to focus on renewable expansion.

In the federal 2022-23 budget presented last month, the government said it has allocated A$1.3 billion ($975 million) to maintain energy security and reduce emissions.

Of the budget, A$300 million will be used to support "low emissions LNG" and "clean hydrogen" production in Darwin in the Northern Territory, which will have an associated carbon capture and storage (CCS) facility. Some A$247.1 million in funds have been allocated to help facilitate private-sector investment in low emissions technologies including hydrogen, and the continued development of a hydrogen Guarantee of Origin scheme.

Also, A$200 million will be used to assist low-emission steel production in Indo-Pacific countries that import Australian iron ore, and a similar amount to build hydrogen production and carbon capture, utilization, and storage facilities in Western Australia's Pilbara region. The Pilbara region is an iron ore producing hub.

Thornton said the budget failed to make medium-to-long term investments in grid infrastructure that will be critical for rapid renewable expansion in Australia.

"The lack of transmission investment is now one of the most critical challenges facing Australia's energy industry. Instead, yet another Federal Budget has prioritized the fossil fuel industry when Australia's bottom line should be focused on providing a better future for communities through clean, low-cost renewable energy and storage," Thornton added.

The government could direct more investment toward grid interconnections, provide incentives for battery and pumped hydro developments, and designate more bespoke areas for renewable installations like Renewable Energy Zones, Reese said.

"The latest budget aligns with the government [policy] that prioritizes new investment into emerging low-emissions technologies such as hydrogen and CCS, without directly addressing the current challenges with increasing renewable capacity connected to the grid," he said.

In the budget, the government also indicated that climate spending, including payments to the Clean Energy Finance Corp., the Australian Renewable Energy Agency (ARENA), and the Clean Energy Regulator (CER), will fall from A$2 billion in 2022-23 to A$1.9 billion in 2023-24, A$1.5 billion in 2024-25, and $1.3 billion in 2025-26.

The figures were unveiled after the CER revised the country's trading scheme for Australian Carbon Credit Units (ACCU) in a way that could generate revenue for the government. In the past practice, Canberra simply paid private-sector developers of ACCU projects that avoid or reduce emissions.

Such a rule change could lead to less budget requirements at the CER, according to the IEEFA.

Looking forward, analysts believe a change of federal government could usher in different sets of renewable policies, with the next federal election expected to be held in less than two months' time.

The main opposition Labor Party has promised to reduce Australia's emissions by 43% from 2005 levels by 2030, compared with the current administration's goal of a 26-28% cut. It is targeting 26 GW in renewables capacity and 82% of power generation in the NEM by 2030, versus 31.4% in 2021.

"In the event of a Labor government, it is likely there will be additional federal support to modernize the electricity grid, and coal-fired generators could face additional financial headwinds with the reduction of emission caps that would accelerate coal retirements and the development of new generation capacity," Reese said.

"In the scenario of a victory by the current coalition, state governments will continue to take the lead in facilitating the expansion of renewables," he added.

Posted 05 April 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.