Frontier Economics and the cost of the transition: How does it stack up?

Nearly two weeks ago headlines announced the price tag attached to Australia’s energy transition would be much higher than previously stated.

What created the media noise was modelling released by economic advisory and consultancy firm, Frontier Economics, highlighting what was already present in the Australian Energy Market Operator’s (AEMO’s) 2024 Integrated System Plan (ISP). Frontier’s work presents the real costs over time rather than the more often quoted net present value (NPV) capital cost of $122 billion to 2050 (which itself excludes some costs).

The headline price tag in the modelling including costs of emissions[i] was more than $600 billion, based on the sum of real costs to deliver the ISP (see table 2).

NPV is generally employed to compare the costs and benefits of alternative projects where they occur over time at varying times. Future cash flows are discounted such that for a constant value the further out they are in years, the less impact they have on the NPV. Frontier have used a seven per cent real weighted average cost of capital for discounting. Frontier argues consumers don’t pay the NPV, they pay the real costs. The report also comments that the concept of NPV is confusing and people would prefer to understand the total costs. Furthermore, when governments announce projects, they quote the costs not the NPV as it is the costs that appear in budgets. At the very least, it would be useful to have both quoted.

The Frontier modelling focuses on generation and emissions and not Consumer Energy Resources (CER), demand side participation (DSP) or network costs.

Frontier Economics indicated its report[ii] was independently funded by them with the objective of establishing a base case using the ISP to then assess (via a second report) the relative costs of integrating nuclear power into the National Electricity Market (NEM) and also compare it with the ISP’s scenarios based on renewables and firming capacity.  Frontier consulted with the Federal Opposition on their plans. It also notes that modelling and analysis should not be seen as the “last word on the matter”, anticipating and welcoming “robust debate on the work we present”.

Frontier modelled AEMO’s two main scenarios – Step Change and Progressive but did not model the market operator’s other scenario Green Energy Exports “because it is not considered credible as there are many other countries that are better suited to exporting green energy. Australia is a high-cost economy and while we have abundant renewable energy resources, so do many other lower cost economies”.

Frontiers modelling closely aligns with AEMO’s projections:

• In terms of NPV it is 97 per cent aligned in both scenarios

Table 1: Comparison of NPVs of ISP and Frontier modelled costs (including cost of emissions) to 2050

• In considering the sum of real costs including emissions, it is about 91 per cent in agreement.

Table 2: Sum of the real costs of ISP and Frontier modelling costs (including emissions) to 2050

• Excluding emissions, the comparison between AEMO’s ISP and Frontier’s assessment based on their modelling is shown below for NPV and sum of real costs respectively.

Table 3: Comparison of ISP and Frontier Modelled Costs (excluding cost of emissions)

Table 4: Comparison of sum of real costs ISP and Frontier modelled costs (excluding cost of emissions)

• Annualised costs show consistent trends over time between Frontiers modelled outcomes and AEMO’s ISP.

Frontier also attempted to estimate transmission costs for projects being built, and that have been committed and approved to be built and are part of the ISP.  The report notes most of these costs are treated by AEMO and governments as “sunk”, even though the majority of these projects are yet to be developed.  Frontier also found project cost estimates are highly unreliable but found “at the very least” currently approved and planned projects are expected to cost $62 billion.

Not including the cost of emissions in AEMO’s Step Change scenario produces $580 billion as the sum of the real costs of the electricity supply options. When you add the estimated $62 billion in transmission costs, this brings the total costs of the transition to $642 billion, excluding the cost of emissions and consumer energy resources.

If you include the value of emissions reductions (VER) it will obviously be higher. The VER, which came into effect in May, is an emissions price expressed as a dollar per tonne and came about from changes in the National Electricity Law.

A few more areas noted in the Frontier work is that the quoted $122 billion NPV costs are only capital costs, so do not include Fixed Operations and Maintenance (FOM), Variable Operations and Maintenance (VOM) expenses associated with running and maintaining plant, or fuel and emissions costs. 

When they are included in the NPV for the Step Change CDP14 – ODP scenario the cost doubles.

The Frontier Economics work comparing AEMO’s results with its own assessment while a model calibration exercise is still a useful contribution to public discussion over the energy transition and to the understanding of the potential costs involved in the ISP.  Consideration of the real total costs versus net present value does provide additional transparency. However, the report could have been enhanced if they took the next step and calculated the levelised cost of energy in $/MWh. Regardless, given the political atmosphere and state of the energy transformation, its findings – and those from the anticipated Report 2 – will be the subject of much debate.

i] Cost of emissions is based on the Variable Emission Reductions published by the Australian Energy Regulator

[ii] Report 1 – Developing a base case to assess the

relative costs of nuclear power in the NEM