May 18 2023

Energy transition: Can WA unlock enough investment?

The past few weeks have been packed with new announcements and reforms for the Western Australian energy sector. First came the release of the Reserve Capacity Mechanism (RCM) Review information paper and consultation paper and then just days later the State Government dropped some major announcements around the publication of the SWIS Demand Assessment 2023 to 2042 (SWISDA).

These give useful insights into the scale of the energy transition in Western Australia and how the State Government plans to tackle the challenge. While there are some big numbers and major commitments, there are also a lot of gaps in the detail.     

Here we take a look at the events of the last few weeks, consider what it means for the energy sector, and point out some of the issues that still need to be addressed.

Where’s the money?

The WA Government launched a review of the WEM’s capacity mechanism in late 2021. It is being undertaken in stages and the document released a few weeks ago summarises the changes following the stage 1 review and asks for feedback on the proposed amendments as part of stage 2.

The RCM Review papers included financial modelling that forecast the financial viability of new storage and renewable generation projects with the changes proposed under the RCM Review. To meet the Planning Criterion, the modelling assumes there is no new wind or solar generation until 2030, and only two new open cycle gas turbine plants are added over the next 30 years with a total capacity of 350 MW.

Planned new build generation to meet the Planning Criterion

Source: p96 of RCM Review

The financial modelling has good news for battery storage. It forecasts that there is enough revenue to support the entry of new battery storage projects, particularly in the late 2020s when the retirement of several gas facilities pushes up the Reserve Capacity Price for flexible capacity.

The modelling is far less positive for wind and solar projects. While energy prices are expected to rise slightly in the short-run, they collapse after 2028 and become negative by the late 2040s. It means that new wind and solar projects are NPV negative over their lifetime.

Forecast revenue for new build projects in the SWIS

Source: p101 of RCM Review

Stakeholders are already aware of this grim reality. Previous financial modelling commissioned by the Australian Energy Council and the Economic Regulation Authority (ERA) showed that most generation types will not earn sufficient revenue in the WEM, and investors are not incentivised to enter the market.

Mapping the future: the SWISDA

Fast forward a week and the State Government published the long awaited SWISDA. The SWISDA is an assessment of potential electricity demand over the next 20 years to meet industry and Government commitments of achieving net zero greenhouse gas emissions by 2050. The aim of the SWISDA is to model the optimal mix of renewable generation and storage required to meet the anticipated demand, and to identify the network augmentations necessary to get the electricity to end users.

Through interviews with the resources industry and renewable developers, the Treasury-led taskforce developed four demand scenarios each reflecting different outlooks for major loads connecting to Western Power’s transmission network over the next 20 years. They chose to use the ‘future ready’ scenario for the modelling; a middle path scenario that includes growth but a more conservative estimate of hydrogen loads connecting during the 2030s.

The outcome was interesting. In the future ready scenario, SWIS generation capacity will increase 5.9GW in 2022 to more than 50GW by 2042.  The majority of this new generation capacity is large-scale wind and solar, increasing from 1.2GW in 2022 to reach 41.8GW in 2042.

This projected growth in generation capacity is truly transformative. It’s also at odds with the amount and type of forecast new build in Energy Policy WA’s RCM Review paper released only a week earlier.

While the modelling in the RCM Review paper included modest increases in renewable generation and only 350MW of new gas generation, the SWISDA says that an additional 3.9GW of new gas generation capacity will come online after 2030 to support renewable generation. It’s likely that most of this new gas generation will have to be delivered by private investors because the State Government announced last year that Synergy would not build any new gas projects after 2030. But this creates a big disconnect – new gas generation is forecast and would need to be delivered by private investors, but at the same time Energy Policy WA is assessing options to implement penalties for high emissions technologies that will have the practical impact of reducing the capacity factor and financial viability of those gas generation projects.

Source: SWIS Demand Assessment

Transmission planning is one area where the SWISDA goes beyond expectations. Stakeholders had been calling out for more investment for years and now the SWISDA proposes a raft of upgrades and more than 4,000 km of new high-capacity transmission lines to unlock three renewable generation hubs that are flagged for the north, east and south.

The first stage of network augmentation involves upgrading the northern corridor, building a new line from the metropolitan area to Neerabup, converting the existing line between Neerabup and Mid West from 132 kV to 330 kV, and building two new lines from the South East to South West to enable the initial connection of around 1.3GW of new renewables (map below shows the proposed network augmentations).

Source: SWIS Demand Assessment

The SWISDA has set an ambitious target for completing this first stage of work by 2027. After years without any new transmission projects, Western Power will need to shift gears and shed its conservative approach to meet a tight three-and-a-half-year delivery timeframe. In fact, probably the only way the stage 1 works can be completed on time is by aggressively procuring items upfront, expediting the planning, approvals and design phase, and then fast-tracking the engagement of contractors. But in this tight labour market, there’s no certainty that skilled professionals will be found in time to allow all of this to happen.

New WEM reform initiatives

The SWISDA lays out a roadmap for a future SWIS with new transmission projects, three renewable energy hubs and a huge amount of new renewable generation. But how will investors be encouraged to add the forecast 41.8GW of large-scale wind and solar when the financial modelling in the RCM Review says that these projects will never make a profit?

The answer perhaps lies in one of the WEM reform initiatives announced by the Minister for Energy at the same time that he launched the SWISDA. To improve investor certainty, the WA Government is considering a policy that would “top up the energy revenues for renewable generators so they equal the revenues of renewable generators before WEM prices started to decline ... These top-up revenues will be available to renewable generators which can demonstrate in the RCM certification that they have firmed up their capacity by, for example, contracting with a storage facility.”[1]

There are few other details about this policy and it remains to be seen when this top up will commence, how it will be calculated and whether it will be sufficient to get over 40GW of new wind and solar projects onto the grid in the next 20 years.

Another initiative announced as part of the reform package is the introduction of a 10-year reserve capacity price guarantee for new technologies. This would allow some generation, such as long-duration storage, to get a fixed Reserve Capacity Price that would help to finance the projects and get them onto the grid. However, other projects – like shorter duration battery storage and renewables – will still only be able to capture a 5-year fixed capacity price, which is likely to fail to underwrite investment in new long-life generation.

The Minister for Energy also used his announcement to briefly mention a grid connection review. The grid connection process has long been a challenge for investors and it came into sharp focus during Western Power’s fifth access arrangement (AA5). While many stakeholders advocated for binding timeframes and more transparency in the grid connection process, Western Power argued against ‘hard coding’ timeframes and instead sought to continue with non-binding approximate timeframes.

In a positive step, Western Power has undertaken an internal review of the grid connection process to improve communication and reduce the grid connection timeframe. The outcomes of this review will start to trickle through over the coming year but the ERA already cautions that “even with these changes, the applications and queuing policy framework under the Access Code will not be able to deal with the scale of change required for decarbonisation”.

The AEC and its members used the AA5 process to propose some options that might reduce the bottlenecks and help to bring new projects online quicker. These included:

  • Re-considering the current rigid, linear process where new projects need to obtain a grid connection agreement before they can apply for capacity credits that commence two years later;
  • Shortening the capacity credit application cycle;
  • Closer integration between Western Power and the Australian Energy Market Operator (AEMO); and
  • Prioritising projects and removing the “first in, first serve” principle.

With a typical connection process already taking up to four years, there needs to be substantial reform to allow more than 50GW of new renewable and firming capacity to come online in the next two decades.

Removing bottlenecks to support new investment

The WA Government should be commended for delivering the SWISDA. It’s a valuable report that highlights the scale of work required to address potential future demand. The 4,000 km of new transmission lines is an ambitious project with tight timeframes. Even so, the upgrade to the network is welcomed after years without any transmission planning or investment. It makes for a remarkable turnaround from a few short years ago when:

  • The RCM was being weakened as it was seen to be over-rewarding capacity resulting in an inefficient over-supply;
  • The lack of revenue for generators was not even acknowledged; and
  • The Whole of System Plan envisaged a transition without any new transmission.

The energy sector is constantly evolving and the amount of new generation proposed under the SWISDA will be a step-change for Western Australia. Now the focus needs to switch to unlocking investment in new generation. The existing grid connection process is lengthy and opaque, creating unnecessary delays and making it difficult for the required generation to enter the grid. And when the generation can connect, investors face the reality that there simply isn’t enough revenue in the market to make a profit.

It won’t be easy to get an additional 50GW of generation capacity onto the grid in the next 20 years. It requires a coordinated effort between the WA Government, Energy Policy WA, Western Power and investors to remove the bottlenecks preventing new generation from connecting to the grid in a timely manner.

 

[1] See SWIS Demand Assessment website

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