Australia's energy transition initiatives are taking shape
Australia is going through the inevitable process of transitioning to a low-emissions economy.
In the past 5 years, Australia’s renewable energy generation has almost doubled increasing from approximately 14.6% of generation in 2015 to 27.7% of generation in 2020. Wind and solar projects have to date attracted the major share of investment in renewables.
While wind and solar have made up the vast majority of this investment, there has been investment in large scale batteries, energy from waste projects and pumped hydro projects with other potential renewable sources such as energy from bio-mass and wave-power being examined.
Whilst this investment is a positive from the point of view of energy transition and has contributed to a fall in wholesale power prices, the large number of wind and solar projects being developed and seeking connection to the grid has given rise to system stability issues in the National Electricity Market (“NEM ”). This instability can be exacerbated by the large transmission distances often faced by such projects.
Overlaying this investment in renewables, there is a major issue around what the NEM will look like once coal-fired power stations shut down and, in particular, a focus on ensuring that electricity supply remains secure and reliable.
In this transition to a renewables energy future, storage systems become critical. Two of the most discussed forms of storage are batteries and pumped hydro. The two technologies are very different - pumped hydro is a well-known and established technology in overseas markets, and viable grid-scale battery technology is new and developing rapidly. Both provide the ability to support the electricity network. Pumped hydro is based on well-established synchronous generation providing important ancillary services to the grid through the provisions of inertia, frequency and voltage support and sufficient fault level support. Battery technology is still catching up - the potential for batteries to provide “synthetic inertia” or fast frequency response is high but this is balanced by their reliance on system strength. Batteries offer minimal support with fault levels but can still provide some support to system frequency and voltage regulation.
In 2019, the World Bank set aside US$1 billion to invest in battery projects globally including one of the world’s largest solar, wind and storage plants in India and a battery project in South Africa. At the same time government owned utilities and companies (including Pacific Gas & Electric of the US and Scottish Power) were reported to be buying batteries and developments in technology were occurring rapidly through market leaders such as Tesla. China is already a major user of high-capacity batteries - China and South Korea deployed more than 40% of the new gigawatt hours put into service worldwide in 2018 for stationary energy storage systems.
This article looks at the current situation in Australia and considers where to from here?
Development of batteries in Australia - the state of play
The need for large scale batteries in Australia will increase as coal-fired power stations continue to close ahead of the end of their expected operating lives. AEMO forecasts that coal which currently contributes 70% of electricity will contribute less than a third of the supply by 2040 - this shift could occur even earlier as competition from renewables and carbon constraints render coal-fired plants uneconomic earlier than their schedule retirement dates or plant owners consider exiting coal earlier for strategic reasons. In that regard, AGL Energy’s coal fired Liddell Power Station in NSW is now scheduled to close in 2023 and EnergyAustralia has brought forward the closure of its Yallourn Power Station in Victoria by 4 years to 2028.
What is the status of batteries in the Australian energy market at the moment?
At the end of 2020, there were 16 utility-scale batteries under construction in Australia representing more than 595MW of new capacity. Completed and announced projects are described below on a state and territory basis with commentary as to other significant developments in the relevant state or territory.
Electricity grid issues
The significant number of renewable generation projects being developed has caused a number of issues for the Australian Energy Market Operator (“AEMO ”), the grid operator. These include:
the fact that all of these projects require connection to the grid;
once connected, these projects can give rise to grid stability issues because of the intermittent nature of their generation; and
the geographic spread of these projects has led to a growing need for investment in the development of transmission lines.
From a regulatory point of view, AEMO has introduced more stringent rules for renewables projects connecting to the grid in an attempt to boost reliability and stability in the NEM.
At the same time, the Energy Security Board is grappling with the post 2025 design of the NEM to ensure that there is reliable and secure power once coal-fired plants shut down and exit the NEM. The ESG’s review of the design of the NEM post 2025 has indicated a need for the construction of 26GW of renewable plants over the next 20 years noting that these plants would need to be backed by batteries and pumped hydro to ensure stability.
In its assessment of what an optimal future grid would look like , AEMO has found it would increasingly run on large and small-scale renewable energy - potentially by 2035 up to 90% of electricity from solar and wind at times - supported by “dispatchable” generation (or so called “flexible electricity”) that can be called on when needed. That dispatchable generation would come from a range of sources including pumped hydro, batteries and gas. In its 2020 Integrated System Plan released in July last year, AEMO suggested that the grid will need between 6GW and 19GW of new “flexible electricity” capacity to provide essential firming over the next 20 years as old coal fired plants are closed and are replaced by solar and wind. Interestingly, in 2016 AEMO forecast that Australia might only have 4MW of large-scale batteries by 2020. However, battery technology has taken off in Australia more rapidly than forecast. A report commissioned by AEMO in 2020 noted that Australia already has 287MW of battery storage in operation or committed to construction. Plans for more than 2GW have been announced since then.
However, in its most recent pronouncement in July this year, AEMO has publicly stated that Australia will target running the electricity grid entirely from solar and wind generation by 2025 under a 100% renewable target laid out by it. This goal, which would put the nation on track to lead the world transitioning to clean energy, is “uncharted territory” for Australia as it works out how to integrate more renewables into the power system as old coal plants face retirement. South Australia broke new ground in October with solar providing 100% of its energy needs for an hour. AEMO has said that this feat could be emulated across the entire electricity system at peak points during the day, despite it being a huge jump from solar and wind penetration levels of 52% in 2020.
In related developments relevant to Australia’s future electricity grid:
Tasmania is proposing to develop the Marinus Link, a 1500MW capacity undersea and underground electricity and telecommunications connection which will more closely link Victoria and Tasmania. The project is being progressed by Marinus Link Pty. Ltd., a wholly owned subsidiary of TasNetworks, which is the Tasmanian Government’s owned electricity network planner, owner and operator. Marinus Link will be able to support Victorian renewable energy developments - with Marinus Link in operation, excess energy generated by Victorian renewables could be transferred to Tasmania and stored in pumped hydro energy storage facilities. Cables will come ashore in South Gippsland and then go underground to the Latrobe Valley; and
Other developments
We are also seeing some interesting battery development to support individual businesses and in the transport sector.
Pernod Ricard, which owns the Jacob’s Creek wine brand, has taken steps to make its Barossa Valley winery reliant only on renewable energy - it has installed a new thermal energy storage battery that has an in-built weather forecasting system to maximise efficiency. The battery was built by Glaciem Cooling, an Australian manufacturer of storage batteries. The battery captures and stores energy from a large array of 10,000 solar panels installed at the winery in 2019. The Glaciem battery stores energy not electricity - it has an advantage over lithium-ion batteries as it can as it can be charged and discharged as often as required without degrading the battery.
In terms of the transport sector:
The ACT Government has released a tender to lease the territory’s first electric buses. This will see the highest emitting buses retired from the fleet. The leasing arrangement will cover 34 electric buses and procurement will be assessed based on providers’ ability to deliver buses with enhanced accessibility, lower emissions operations and associated charging infrastructure. The procurement will be released as three packages, depending on their interest and organisational capabilities. The new buses are expected to join the Transport Canberra fleet in late 2021, subject to the procurement process. In parallel with this procurement, the government is undertaking formal market sounding to deliver on its election commitment to purchase 90 electric buses and supporting infrastructure, training and skill development. It is intended that the formal procurement will commence in the third quarter of 2021, with the first of these vehicles to arrive in 2021-2022. The final vehicles will be supplied by 2024.
The NSW Government confirmed in December 2020 that it would convert all of its 8,000 buses to electric by 2030, starting with 50 in Sydney this year after trialling electric buses over the previous 18 months. The first locally manufactured electric bus began a two-week trial in Sydney’s east in March 2021. The bus was designed, manufactured and assembled by Custom Denning in St Marys in Sydney. The so-called ‘Element’ e-bus can run for approximately 16 hours on a full charge or 450 kilometres. The trial bus will run between Bondi Beach and Bronte. As part of the 2021 rollout, a further 70 electric buses are on order from Truegreen’s Nexport, which is setting up a manufacturing facility in the southern Highlands.
Australia’s pumped hydro initiatives
Pumped hydro technology has existed for more than 100 years with the first use in Switzerland in 1907. Reversible hydro-electric turbines have been in use since the 1930s.
Pumped hydro projects help to provide long duration storage and system services that can complement batteries and support higher levels of renewable energy generation. It can fill periods where there is not much sun or wind.
Pumped hydro storage accounts for over 90% of utility-scale energy storage in the US with most plants having been developed between 1960 and 1990.
In Australia, a number of these projects have failed to get up in recent years including two projects in South Australia, one sponsored by AGL (with copper miner Hillgrove Resources) and EnergyAustralia’s, Cultana project.
However, there are a number of significant projects underway at the moment which are noted below.
Snowy 2.0
Snowy 2.0 is being developed by Snowy Hydro at a currently estimated cost of $5.1 billion and will provide on-demand energy generation and large-scale energy storage, increasing the generation capacity of the Snowy Scheme by almost 50%. It will deliver an additional 2,000 megawatts (MW) of energy and make approximately 350,000 megawatt hours (MWh), or 175 hours of energy storage available to the NEM - this means that it will be able to generate for up to 175 hours at full capacity without refilling, enough to power 3,000,000 homes over the course of a week. The project is largely funded from Snowy Hydro’s balance sheet and $3.5 billion in corporate debt facilities provided by a range of banks. The Federal Government, as shareholder, has provided $1.38 billion in equity.
The project, which is currently under construction, is a major expansion of the Snowy Scheme, linking Tantangara and Talbingo reservoirs with tunnels and an underground pumped-hydro power station. The power station will house six reversible Francis pump-turbine and motor-generator units - three will be synchronous (fixed) speed and three will be asynchronous (variable) speed. A single inclined pressure tunnel that is concrete-lined will divert water into six steel-lined penstocks (the tunnels that feed water into the generating units). Hydropower will be generated by falling water spinning the reversible turbines, which can also pump the water in the opposite direction. Water will be recycled between the upper dam (Tantangara) and lower dam (Talbingo) so the same water can be used to generate power more than once (which is typical for pumped hydro projects). Snowy 2.0 will be able to pump water using the excess electricity in the system at times of low demand. Then, when energy is needed most, the stored water will be used to generate electricity within minutes.
Genex Power
Genex is currently developing its $777 million Kidston pumped hydro project in an old gold mine in North Queensland. The storage and generation facility will generate 250MW/2,000MWh of dispatchable (baseload) power into the North Queensland market - it will have an 8-hour storage capacity. Financial close was reached in May this year. The project has secured a 30-year off-take agreement with EnergyAustralia. The project has been funded by a $610 million loan from NAIF, a $56 million grant from ARENA, $54 million loan from CEFC (to fund the adjacent 50MW solar farm phase 1 rather than the pumped hydro facility) and $147 million from the Queensland government for a 186km transmission line linking the project to the NEM. This is the first pumped hydro project to be built in Australia in 40 years.
Financing energy transition projects
To date, both ARENA and CEFC have played an important role in funding energy storage and transmission projects and, in particular, in bridging the bankability gap to the traditional sources of finance available in the commercial bank market.
Of note:
ARENA has provided grant funding to projects including the Kidston pumped hydro project, to the AGL/ElectraNet battery at Dalrymple on the Yorke Peninsula in South Australia, to the world’s first solar-powered vanadium flow project sponsored by Yadlamalka Energy Trust in South Australia and to the AusNet Services/Energy Australia battery at Ballarat, in Victoria. It has also provided support for Neoen’s big battery to be built at Geelong (by way of a SIPS contract).
CEFC has provided financial support to two large battery projects, $50 million to Hornsdale in South Australia and $160 million to the Victorian “big-battery” in Geelong. In the case of both these projects, they have been under-pinned by off-take support from the respective state governments. CEFC is also providing finance for the proposed new high voltage transmission line connection between the New South Wales and South Australian power grids.
CEFC has the ability to develop and implement innovative funding models including long-tenored debt and flexible debt repayment terms which can be tailored to fit the actual revenue stream of the project over its life. For the funding of the proposed new high voltage transmission line connection between the New South Wales and South Australian power grids, CEFC has adopted a unique hybrid-financing structure to support TransGrid.
Financial support has also come from both state and Federal governments for energy storage and transmission projects which are considered to be of strategic importance - these include the Victorian Government’s commitment of $543 million to develop six renewable energy zones in the state, that government’s financial contribution to the AusNet Services/Energy Australia battery at Ballarat and to the proposed big battery to be built at Geelong and the Queensland government’s financial contribution to the development of a transmission line to connect the Kidston pumped hydro project, its commitment to install five large-scale, network-connected batteries as part of a community battery trial and its recently announced support for the Kaban Green Power Hub.
Finally, traditional project finance sourced from the commercial bank market has been the other source of financing for a number of battery developments. In this context, committed offtake arrangements with state government (or relevant state government agencies) or other credit-worthy offtakers is a key factor as is certainty of transmission connections to the grid, reliable technology and availability of funding from ARENA and CEFC to bridge any funding gap. Interestingly, Vena Energy’s Wandoan South Battery Energy Storage System (noted above) in Queensland reached financial close in December 2020 solely utilising debt sourced from the commercial bank market - of key importance was the fact that the project had secured a 15 years offtake agreement with AGL and adopted a traditional procurement and delivery model with a fully wrapped EPC contract.
The future for energy storage and transmission in Australia
Large-scale batteries have a key role to play in Australia’s energy future particularly in relation to smoothing energy flows form intermittent generators (such as solar and wind) and in the supply of grid stability services. At the moment, large-scale lithium-ion batteries are generally limited to 4 hours of generation-replacement supply, but improvements in technology may see that increase over time. There has been limited investment to date in vanadium flow batteries but there is at least one project in Australia set to utilise that technology. The financing and development of large-scale batteries will be further encouraged by the recent NEM rule changes that will create additional markets and, therefore, revenue streams for the various network services which batteries can increasingly provide (e.g. fast frequency response).
Smaller batteries will also have a role to play including as part of mini-grids in remote locations and as charging sources for electric vehicles and individual businesses looking to power themselves through sustainable renewable energy.
Overlayed on all of this is the need to develop coordinated “whole of system plans” for the NEM (and for the grid in WA) which will be a key challenge for the ESG and AEMO. We have already seen what can happen if connection of distributed renewable energy facilities to a grid designed for centralised coal-fired baseload generation occurs in a haphazard manner.
Other energy storage systems, such as pumped-hydro, will also have a role to play but in more limited circumstances depending on geography, chosen engineering solution, cost and availability of water resources. Pumped-hydro tends to be expensive and solutions need to be tailored to the particular geography and circumstances. On the other hand, both the cost and efficiency of batteries is likely to continue to improve, making them increasingly attractive over time.
The final piece in the puzzle is better high voltage transmission lines and underseas cables (where appropriate) to enable energy to be distributed across the Eastern seaboard to those locations where it is needed. Both the Marinus link and Project EnergyConnect represent important developments in this regard. Further investment to enable the NEM to function effectively and efficiently in an environment where renewables replace coal-fired generation on an ongoing basis will be critical.