THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.
- 06 Sep 2022
Power Sector Outlook
Key View: Coal-fired power will remain Australia’s top power type over our forecast period. However, its share of the mix will decline increasingly as well, due to an increase in non-hydropower renewables. In the months following Australia’s federal election, the market experiences more clarity in the push for climate goals and renewables. This will bode well for the expansion of the non-hydropower renewables sector, presenting more growth opportunities and suppressing the growth of the conventional thermal power sector.
- In August 2022, the Australian House of Representatives passed a climate bill, ushering in two greenhouse gas emission targets into legislation. The two targets are reducing emissions by 43% by 2030 (compared to 2005 levels), and achieving net-zero emissions by 2050. While the bill does not include a scheme, mechanism and funding to guide Australia into a low carbon energy transition, we believe it sets the precedence for further supporting legislation and plans to build on. The next step for the bill is to be cleared by the Senate in September 2022.
- On May 23 2022, Anthony Albanese was sworn in as Prime Minister of Australia, marking a major political shift in the market. The Australian Labor Party (ALP) is the incumbent ruling party and we highlight its impact on the power market. ALP campaigned with ambitious renewable energy targets and a strong focus on increasing climate action in Australia through legislation. 2022’s election also saw an increase in support for the Green party and independent runners that promoted environmental action. We believe this will weigh on the outlook for the conventional thermal power sector, while brightening that for non-hydropower renewables.
- ALP campaigned with a climate plan called ‘Powering Australia’. Within it are targets for a stronger low carbon energy transition, such as power storage build-out, support for rooftop solar and funding allocation for clean energy metal production. While details of policies are yet to be written, this climate plan will slowly take shape over this term with ALP as the ruling party.
Australia’s power capacity will grow from 83.1GW in end-2021 to 100.6GW in 2031, at an annual average of 1.9%. This growth will be driven mainly by the expansion of the non-hydropower renewables sector following a strengthening of its project pipeline. From 2022 to 2026, we expect conventional thermal power capacity to dominate the capacity mix. Non-hydropower renewables will then overtake conventional thermal from 2027 to the end of our forecast period this quarter.
However, for power generation, conventional thermal will still dominate, contributing to 60% of 2031’s power mix. Of the conventional thermal power types, coal will contribute 40% of the power mix, 20% from natural gas, and 1% from oil. Non-hydropower renewables will contribute about 32% of 2031’s power mix. This is because the conversion efficiencies are greater for conventional thermal power plants, as they can generate electricity as long as there is fuel feedstock, unlike solar and wind power plants, which work on intermittent sources. Overall, Australia’s total power generation will grow from 249.5TWh in end-2021 to 279.0TWh in 2031, at an annual average increase of 1.1%.
The non-hydropower renewables sector will remain the bright spot as reflected in our Key Projects Database (KPD). The KPD currently tracks 397 major power projects across Australia, of which 334 are related to the construction of new power plants and the rest are energy storage and grid infrastructure projects. In terms of the project count, renewables overwhelmingly dominate the pipeline with 304 projects mostly in the solar and wind power sectors.
Australia's Power Mix To Become More Diversified
Australia – Total Power Generation By Type, TWh
e/f = Fitch Solutions estimate/forecast. Source: EIA, national sources, Fitch Solutions
Thermal Generation And Capacity Forecast
- AGL Energy closed the first unit of its Liddell Power Station in Hunter Valley, New South Wales in April 2022. The full closure is expected by April 2023. This is part of the firm's plans to transition the Liddell site into a 'Hunter Energy Hub' which will include green hydrogen, a 500MW grid-scale battery and the Bells Mountain hydropower station.
- Separately, AGL Energy has also announced that it will close its Bayswater black coal-fired station in New South Wales (NSW) in 2030-2033 instead of 2035, while the brown Loy Yang A plant in Victoria will close by 2045 instead of 2048. Previously, the firm said that it will likely accelerate the shutdown of its coal-fired plants but a phase-out is unlikely to happen before 2040. This is to ensure the affordability and reliability of electricity in the broader market. This is in line with our existing forecasts for coal to remain a key generation source up to 2031 despite increasing opposition.
- The Australian government's Department of Industry, Science, Energy and Resources has published a greenhouse gas emission report, which projected the closure of 11GW of coal power plants by 2030. This is close to double an earlier report by the Australian Energy Market Operator (AEMO) released earlier this year, which suggested the closure of 5,870MW of coal power plants by 2030. While this poses additional downside risks to our forecasts, we believe that the AEMO will likely have a larger say given the energy security and grid reliability issues in the market, and will likely remain conditional on more renewable resources coming online. The latest report also does not specify which plants are expected to close.
We expect overall thermal power capacity to contract by a net capacity of over 4.4GW from end-2021 to 2031, after taking into account several old plant closures. This includes the Torrens Island A power station, Liddell Station, Callide B Station and Eraring Plant over the coming decade. Additionally, we note that many coal-fired plants are reaching their retirement age after 2031, but could risk an early closure within the coming decade if they are unable to compete due to their age and less efficient nature.
Conventional thermal power generation will maintain its dominance in Australia's power mix over the next 10 years, accounting for 60% of total power generation in 2031. That said, this is a notable fall from 74% in end-2021, as thermal sources grow increasingly uncompetitive with renewables. Wholesale electricity prices are falling rapidly, driven by the influx of renewable energy generation onto the grid, making it difficult for baseload coal-fired power plants to compete. This trend was exacerbated by the Covid-19 pandemic, which led to a fall in power demand and prices by extension. Australia's largest coal-fired plant, the 2,800MW Eraring Plant by Origin Energy, has reportedly cut its output by more than 70% during the day in recent months as prices depressed by renewable energy made it economically unfeasible to generate power from coal. The firm now expects total coal-fired output for the financial year to drop by 20% y-o-y.
Our view is also supported by increasing environmental opposition, both domestically and internationally, placing increasing pressure on the conventional thermal power sector. The increase in frequency and intensity of natural disasters, such as bushfires and flash floods, have spurred greater environmental awareness and conversations on climate change issues in Australia. This has prompted many consumers to place pressure on the government and private sector to reduce greenhouse gas emissions.
Coal Power’s Dominance Is Eroding
We believe that the coal-fired power sector will come under the highest pressure due to its high emissions profile. Coal has long played a key role in Australia's power mix, supporting the market by providing a baseload of power supply. The market has an abundance of coal reserves, being the fourth-largest miner of coal in the world (with around 75% destined for exports and the remainder used in the domestic energy sector).
Growth of the coal-fired power sector will be limited to the upgrade and replacement of ageing facilities, though we expect opportunities to shrink in the long term given the planned closure of several old coal-fired power plants. Within the market, many coal-fired plants are reaching their retirement age after 2030, but could risk an early closure within this decade if they are unable to compete due to their age and less efficient operating nature. Concurrently, we believe that several projects in the pipeline are unlikely to come online, and remain our conservative forecast. We expect the share of coal-fired power generation in the power mix to erode from 52% in end-2021 to 40% in 2031.
Australia's Planned Thermal Plant Closures
|Power Plant ||State ||Company ||Planned Closure |
Torrens Island A Unit 3
|South Australia ||AGL Energy ||2021 |
Torrens Island A Unit 4
|South Australia ||AGL Energy ||2022 |
|Liddell Unit 1 ||New South Wales ||AGL Energy ||2022 |
|Liddell Unit 2-4 ||New South Wales ||AGL Energy ||2023 |
|New South Wales ||Origin ||2025 |
|Vales Point ||New South Wales ||Sunset Power ||2028-2029 |
|Callide B ||Queensland ||Queensland Government ||2028 |
|Gladstone ||Queensland ||Queensland Government ||2035 |
|Yallourn ||Victoria ||EnergyAust ||2029-2032 |
|Bayswater ||New South Wales ||AGL Energy ||2033 |
|Tarong ||Queensland ||Queensland Government ||2036-2037 |
|Loy Yang A ||Victoria ||AGL Energy ||2045 |
|Source: News sources, Fitch Solutions |
Gas-Fired Power Sector’s Growth Remains Limited
Natural gas is the second-largest source of conventional thermal power in Australia, accounting for around 20% of the power mix in end-2021. We expect gas-fired power generation to fall in the near term with the closure of the Torrens Island A power station and elevated gas prices compared to renewables. However, the sector will rebound to growth from 2023, with growth driven in large part by the development of technology for importing and processing liquefied natural gas (LNG). While the Federal government is looking toward gas-fired generation as a supportive baseload away from coal, we believe that the high domestic gas prices and gas supply bottlenecks will create challenges for a substantial ramp-up of the sector.
Onshore drilling bans implemented across Australia's eastern and southern states will hamper the development of new gas reserves and have consumption eat into existing reserves. A deficit in key gas-related infrastructure also contributes to supply bottlenecks and mark-ups in network fees, resulting in higher prices for end-users. Despite relatively abundant gas in the Northern Territory (NT) and central Australia, the lack of adequate pipelines and storage facilities prevents much of the domestically produced gas from being available to the eastern markets.
Australia's best chance of procuring additional gas to guard against a potential shortfall is to import LNG. This is gaining traction as a more cost-competitive option for large-scale cross-state pipelines or having to divert supplies away from export projects. To date, five floating LNG import terminals have been proposed.
Oil-Fired Power Generation’s Role To Be Marginal In The Power Mix
Oil will remain only a small part of Australia's power generation mix over the forecast period (about 1%) because of the absence of domestic oil deposits and the abundance of alternative sources of energy. To a large extent, the use of oil-fired generators will remain restricted to areas that lack national grid connections. However, most remote and rural power users are increasingly turning to off-grid renewables such as solar power to meet energy demands. For example, it was announced in early 2020 that Rio Tinto agreed to invest AUD98.0mn in building a new solar photovoltaic (PV) plant and a battery storage system at the Koodaideri mine in Pilbara.
Hydropower Generation And Capacity Forecast
- This quarter, we include pumped hydropower capacity into our forecast, separating it from hydropower capacity in our previous forecasts. This is especially relevant to Australia’s hydropower sector as almost all of its large-scale hydropower projects are pumped hydropower projects, this includes projects under the Snowy 2.0 scheme (total of 2.0GW capacity) and the 250MW Kidston II project. We expect the 250MW Kidston II project to come online in 2024 and have delayed the Snowy 2.0 project by a year, to have the six-unit gradually commissioned across 2025 and 2026. These are the only hydropower capacity growths we forecast at the moment as other hydropower projects have not gone through procurement processes or are in the early stages of planning.
From 2022 to 2031, we expect hydropower capacity to remain at 5.9GW. In fact, hydropower-related capacity growth will be experienced in the pumped hydropower sector. Hydropower generation will grow from 16.4TWh in end-2021 to 21.9TWh in 2031, at an annual average of 3.0%. In the short term, generation growth will be driven by a recovery of rainfall levels, after drops in the previous decade. Over the long term, the increase in hydropower generation will be from hybrid pumped hydropower projects.
As the driest continent globally (more than 80% of the country sees annual rainfall of less than 600mm, while half the country has rainfall of less than 300mm annually), Australia's hydropower potential is limited; viable sites are already developed. Most of the country's hydropower capacity is located in NSW (55%) and Tasmania (29%) and the biggest single site is the Snowy Mountains Hydroelectric Scheme, which has a capacity of 4.1GW.
Besides this project, the government plans to accelerate dam construction in Australia over the next decade with 16 proposed sites, primarily in the north of the country. While primarily focused on boosting agricultural production, small hydropower plants could be incorporated into the development.
Hydropower Projects Limited To Pumped Hydropower Storage
We expect all of Australia’s on-grid hydropower projects to be pumped hydropower projects. We also believe that any small hydropower projects will be off-grid and thus we do not factor them into our forecast for hydropower capacity at the moment. We highlight two pumped hydropower projects that we have included in our forecast.
- 250MW Kidston II Pumped Hydropower Project: Genex Power has reported that the McConnell Dowell and John Holland joint venture (JV) has started main construction on the 250MW/2,000MWh Kidston pumped-storage hydropower project in the Australian state of Queensland. The AUD777.0mn (USD559.3mn) scheme, backed by the Northern Australia Infrastructure Facility and the Australian Renewable Energy Agency, will feature two units of Andritz Hydro's 125MW hydro reversible pump turbines and include a 1.5km-long main access tunnel. The overall facility is expected to be completed in 2024, and begin operation in early 2025, and is included in our forecasts.
- 2.0GW Snowy 2.0 Pumped Hydropower Project: The project will add 2.0GW to the existing Snowy Mountains Scheme. The project is estimated to cost USD3.4bn and is the biggest hydropower project in Australia’s power project pipeline. The project was initiated by former prime minister Malcolm Turnbull and approved by Prime Minister Scott Morrison in February 2019. However, it continues to face strong resistance from environmental groups. We believe the project will proceed given strong support progress under the former administration, especially since it adds needed storage capacity for Australia’s booming non-hydropower renewables sector.
Pumped Hydropower Expansion Key To Growing Renewables
We believe Australia’s strongly growing pumped hydropower project pipeline is in support of a rapidly expanding non-hydropower renewables sector, allowing for storage capacity to store solar and wind power during periods of low demand. This will ensure that renewable electricity generated will be utilised during peak demand, reducing the market’s reliance on ramping up conventional thermal power. This is evident through a stepping up of funding by the Australian Renewable Agency (ARENA) under the ‘Advancing Renewables Program’. One example under this program is a 4.0MW solar-hydro demonstration project by RayGen Resources. ARENA announced an AUD3.0mn fund for the firm to conduct feasibility studies in Victoria. The firm has been working with AGL and GHD on the project since 2021.
Pumped hydropower will also play a part in expanding Australia’s green hydrogen production scene. In May 2022, Sunshine Hydro and Energy Estate unveiled plans for an AUD2.0bn (USD1.4bn) pumped hydropower and green hydrogen hybrid project in Queensland. The firms expect operations to start in 2028 and it will be part of the Central Queensland Renewable Energy Zone. Land for the project has already been secured near Miriam Vale and the conclusion for its final investment decision is scheduled for 2025.
Pumped Hydropower Capacity Will Support Non-Hydropower Renewables Growth
Australia - Net Installed Capacity By Type, MW & Growth, %
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