State of the energy market 2021

state of the energy report 2021 report cover

The National Electricity Market (NEM) is undergoing a profound transformation from a centralised system of large fossil fuel (coal and gas) generation towards an array of smaller scale, widely dispersed wind and solar generators, grid scale batteries and demand response. This transition has required adaptation by all participants, from generators through to customers, and is driving a significant package of reforms to ensure the market framework remains fit for purpose.

The gas market is also undergoing a fundamental shift. In 2020 we saw a move to more flexible use of our gas resources to meet the competing demands of Australian industry and households, and liquefied natural gas (LNG) export businesses. Focus has turned to identifying and encouraging development of new sources of gas as the traditional sources decline. Gas network businesses are also balancing meeting short term operational needs against uncertainty about the future demand for gas.

In 2020 the COVID‑19 pandemic resulted in social and economic disruption across Australia, with many consumers facing increased financial stress. But the pandemic has had only a moderate impact on broader energy market outcomes. Energy demand reduced due to a drop in commercial load associated with businesses closing during lockdowns, but this was partly offset by a rise in household consumption. Falling international fuel prices flowed through to the domestic markets, contributing to lower energy prices.

National Electricity Market

In 2020 over 3,700 megawatts (MW) of large‑scale solar and wind generation capacity entered the NEM, mostly in New South Wales (NSW) and Victoria. There was also record investment in rooftop solar photovoltaic (PV), with almost 2,500 MW of new capacity installed across the NEM in 2020.

This new entry drove record levels of wind and solar generation in 2020, accounting for over 19% of total electricity generation. Wind output exceeded gas generation for the first time.

While wind and solar generation has increased, fossil fuel generation continues to produce over 70% of electricity in the NEM, but this is declining. Many older generators are nearing the end of their operational life and becoming less reliable. The growth in renewable energy is also contributing to financial stress on fossil fuel generators, risking earlier than scheduled plant exits from the market. Broadly, the profitability of black coal and gas plant has been challenged by low or negative prices in the middle of the day, when solar generation is at its maximum.

Over the next 2 decades, 16 gigawatts (GW) of thermal generation (61% of the current coal fleet in the NEM) is expected to retire. Over the same period, 26–50 GW of new large scale wind and solar capacity is forecast to come online, along with 13–24 GW of rooftop solar PV capacity. Energy storage is also expanding, through grid scale and household batteries, and pumped hydrogeneration plant. While still in their infancy, technologies including hydrogen and electric vehicles (EVs) will impact on both electricity supply and electricity demand.

This electricity market transition can deliver significant benefits. Renewable energy is a relatively cheap fuel source and, if integrated efficiently into the power system, can deliver low cost sustainable energy into the future. But the weather‑dependent nature of wind and solar generation poses risks. Firming capacity (such as fast‑start generation, demand response and battery storage) is needed to maintain a reliable electricity supply, filling supply gaps when a lack of wind or sunshine curtails renewable plant.

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