Frank Calabria speaks at CEDA, on Monday 4th November 2024

This update from Frank Calabria (CEO of Origin) popped up in my feed yesterday with respect to Frank’s talk at the CEDA Lunch in Sydney on Monday 4th November 2024:

… and I’ve seen a few media articles covering some of the talk – so I thought I’d have a quick read.  Having read the talk, I thought it would be worth sharing here on WattClarity – in part because we might refer back to it later:

(A)  The full text of Frank’s Speech

Frank’s full speech was published on the Origin website under ‘Actions to return stability and security to Australia’s energy markets and support the transition to net zero’, and have been copied below for our ease of future reference:

To begin, I would like to acknowledge the traditional custodians of the land on which we are meeting today, the Gadigal people of the Eora Nation, and pay my respects to their Elders past and present.

It has been two years since I last addressed a CEDA luncheon in Sydney and it is an absolute pleasure to be with you again.

Today, I am eager to share some perspectives on Australia’s energy transition. Progress is being made and there is an incredible amount of work underway across the public and private sectors to deliver new renewables, storage, firming and transmission infrastructure.

Without minimising the challenges we face in executing this first phase of the transition to meet Australia’s 2030 emissions goals, today I am hoping to lift our gaze towards the longer-term horizon. I would like to talk about Australia’s ambitions to be net zero by 2050 and the transformation this will require of our energy system.

There is strong alignment towards this goal across all sides of politics, the energy industry and the business community. It is also my belief that this long-term ambition enjoys broad-based support from the Australian community.

To achieve this goal while continuing to deliver reliable, secure and affordable energy supply, will require us to look carefully at the design of the National Electricity Market (NEM) and opportunities to ensure it remains fit for purpose.

A more variable and complex energy system

First, I want to illustrate the reasons why reform of the NEM — which is both the physical power system and wholesale electricity market covering the eastern and south-eastern states of Australia —   is important, and to highlight the challenges and opportunities facing today’s market.

The NEM in 2024 is infinitely more complex than it was for the first two and half decades of its existence.

When the NEM commenced in 1998, Australia’s population was around 18.5 million and our economic output was approximately half a trillion dollars. The NEM was made up of a small number of large generation assets and these assets and transmission lines were largely government-owned.

The market was oversupplied with coal-fired generation, there was very limited interconnection between the energy market in each state and limited retail competition.

Fast forward to today, and our population is 27 million and the economy is almost four times larger than it was when the NEM was established. Today, the supply-demand balance in the NEM is tight as ageing coal plant retires. Demand has been steady for the last 15 years, largely due to the impact of rooftop solar which has been added to millions of houses. State energy markets are connected through significant transmission with more being built. Retail competition is strong and of course large-scale renewables have also grown materially.

If we look out to 2040, the Australian Energy Market Operator (AEMO) projects that electricity demand will have risen by 56 per cent and all coal plants will have retired.

The scale and mix of generation in the NEM is on a trajectory of tremendous change:

• • In 1998, total generation capacity was 35 GW. Coal comprised 25 GW, or more than two-thirds of the energy mix, with the remainder made up of gas and hydro. There was virtually no rooftop solar or variable renewable energy.
    
  • Today, the NEM’s generation capacity is 85 GW. Coal comprises one quarter of the mix, large scale wind and solar make up a quarter, another quarter is rooftop solar, while gas and hydro make up the final quarter.
    
  • By 2040, the NEM is projected to grow to 224 GW, according to AEMO’s Integrated Systems Plan Step Change scenario, and all coal will have retired. That’s more than six times the capacity for which the NEM was originally designed and some two-and-a-half times its capacity today. Large-scale wind and solar is projected to make up more than one third of the NEM at 83 GW, and this will be complemented by 60 GW of rooftop solar, 15 GW of gas peakers and 7 GW of hydro.
    
  • In addition, large-scale storage and Consumer Energy Resources (CER) are expected to increase by more than 10 times between now and 2040.
    
  • AEMO’s projections for the future energy mix are based on the technologies that are proven today. New technologies may emerge over time – small modular nuclear reactors (SMRs) and hydrogen are two examples – and it is appropriate that we continue to watch the technical and commercial progress of a range of technologies to assess whether they could be viable for this market in the future.

This evolution in the energy mix is affecting the way the market functions. Let me share some examples.

In June 2022, Australia found itself in the middle of an energy crisis. A very volatile period globally for all energy-related commodity prices combined with significant domestic coal plant outages and sustained wet weather that lowered wind and solar generation, and had an impact on coal supply and delivery. Gas peaking power plants ran very hard to cover the shortfall in supply, and for the first time in history, the market operator suspended the market to maintain stability and guard against blackouts.

In Autumn of this year, a cold snap on the east coast prompted a spike in electricity demand in what is usually a subdued shoulder period. At the same time, a sustained wind drought across the southern states coincided with coal plant outages, low solar generation and low hydro availability due to Tasmania’s drought, causing a spike in wholesale electricity prices. There was a significant draw on gas for power generation, and this created very real concerns about the drawdown of gas from storage heading into winter.

Then most recently, in early October, we saw two extremes in a matter of days. First, a new record set for minimum electricity demand in New South Wales due to mild weather and sunny skies. Rooftop solar met over half of the state’s total generation at the time, with black coal supplying just over 20 per cent, and grid-based renewable energy almost 20 per cent. Then, just two days later, temperatures were high and AEMO warned of a likely lack of energy reserves in Queensland, with demand forecast to outstrip supply. These warnings were successful as a signal for increased generation and demand was met.

These examples show the significant variability in conditions, and complexity we face, in meeting the energy needs of our nation – within each day, across each state, given variability in weather, with changing patterns of energy usage, and with continuing uncertainty around plant performance and reliability, particularly the ageing coal fleet.

And so, I think all market participants recognise that the system is not optimally structured to manage these challenges into the future.

This is even more evident when you consider system variability will become more pronounced with growth in large-scale renewables, and the march of rooftop solar at an annual rate that continues to outstrip even the most bullish estimates.

At the same time, demand for electricity will grow significantly with the electrification of homes, businesses and transport as the nation pursues further emissions reductions and with projected growth in data centres driven by artificial intelligence.

The NEM 2.0

The challenges before us are clear, as are the opportunities to make good policy decisions that will deliver on emissions reduction along with good outcomes for energy consumers.

Which brings me to the opportunity before us to redesign the NEM.

Origin welcomes the post-2030 review which is a timely and important piece of reform – noting that we are currently awaiting the terms of reference. It is important that we learn the lessons from previous attempts at reform such as the NEM 2025 program that was constrained in its effectiveness by unhelpful rhetoric and lack of consensus across governments and the sector, on both the challenges and potential solutions.

To reach the 82 per cent renewable target by 2030, AEMO estimates 32 GW of utility scale renewable energy will need to be built. If we use an average project size of 500 MW, that is 65 projects over 5.5 years or 5.8 GW per year. The maximum build-out achieved in a rolling 12-month period historically is around 4.3 GW.

The energy transition does not end in 2030, it is a multi-decade transformation of every aspect of the energy supply chain. Therefore, this review is important because it needs to facilitate significant infrastructure, investment and outcomes in the period beyond 2030.

To maintain consistency with net zero 2050 targets, and retiring capacity and demand growth, a further 72 GW of utility scale renewable energy is required. This is more than twice the already significant task to meet the 2030 target.

We will also need thousands more kilometres of transmission to connect renewables to the grid. As mentioned already, 15 GW of gas peaking power stations will be required to manage extended renewable shortfall periods, like the wind drought we had earlier this year, working alongside battery storage and pumped hydro, to maintain reliability.

I recognise that long-term planning of this nature can be hard given the immediate challenges in front of us. Political cycles are short-term, so too is the focus of some classes of investors. This short-termism is wholly incompatible with the world of energy and the challenges we need to address.

We need long-term vision and stability of policy settings so we can make long-term investment decisions, with certainty. This enables delivery of the energy supply our nation needs, at the time it’s needed, and underpins the choices that add the least cost to the system.

So, what are the priorities for a redesigned NEM that can help Australia meet its goal to be net zero by 2050? What key challenges need to be solved?

First, the NEM as it is currently designed is no longer driving the required investment in new generation.

A fundamental priority for the NEM design must be establishing settings that send a signal to market participants that drives investment in the right mix of technologies required to deliver reliable electricity supply at least cost – avoiding the need for government interventions.

This is always important but becomes critically so over the medium term, when electricity demand is projected to increase significantly.

Currently, much of the heavy lifting in delivering investment for the transition is being driven by government schemes, such as the Commonwealth’s Capacity Investment Scheme (CIS) and the New South Wales Roadmap, both with very ambitious targets out to 2030. These are short-term, tactical schemes to meet 2030 emissions targets, and they sit outside of the market.

The CIS also explicitly excludes gas, an important part of the technology mix, and for which investment is not encouraged by current market settings.

We therefore need enduring market settings that ensure sufficient investment over the coming decades in the right technologies, including flexible dispatchable plant such as gas fired peaking power generation, that may run infrequently but are required to support the market as coal progressively retires and variable renewable energy gets built out.

Options that facilitate market-led investment, while providing governments with sufficient confidence around reliability and carbon abatement goals, should be prioritised.

• • Reforms that build on the existing NEM framework but help de-risk a proportion of a project’s future revenue in an inherently variable market environment would be consistent with this approach.
    
  • A well-designed capacity mechanism could assist with this and should be one of the reform options for consideration.
    
  • A capacity mechanism that allows for the procurement of capacity through competitive auction processes could provide a direct, transparent, and certain means of meeting government reliability objectives, while also supporting the investment case.
    
  • Importantly, such a mechanism could be designed to supplement, rather than replace the existing NEM framework, with generators still principally reliant on spot and contract markets for revenue.

The NEM is now somewhat of a global outlier with its energy-only design and absence of a distinct, long-term mechanism incorporated into the broader market design to value and incentivise capacity. This will be crucial as the market becomes increasingly volatile and unpredictable. Capacity mechanisms are commonplace in U.S., European, and U.K. markets and provide revenue certainty to plant that are not called upon frequently but are required in an increasingly variable system to balance the market when renewables and storage cannot.

Secondly, the market design will need to consider how system security is best provided as coal plants retire.

I assure you that I will not get too technical here, but this is an important issue that needs to be addressed. The large spinning generators fuelled by coal and gas not only provide electricity to the market, they also provide the system strength and inertia that keeps the electricity system voltage and frequency stable. As I highlighted with those earlier examples, challenges in keeping the energy system secure are already becoming evident as variable renewable energy increases, and as coal plants retire.

South Australia provides a case study, with high variable renewable energy output and no coal plants. AEMO is forced to intervene regularly in this market to direct gas generators to provide system security to avoid the risk of blackouts. In fact, directions were in place for a staggering 65 per cent of the time in South Australia in the fourth quarter of 2023.

The phenomenon of minimum demand has also emerged as an issue. This is where, as more demand is being met by behind the meter resources such as rooftop solar, supply from grid-based resources is being reduced despite these being needed for system security.

Directions by AEMO, which were only ever intended to be used infrequently, are disruptive and can undermine the efficient operation and value of generation assets. To minimise the reliance on such interventions, it is crucial that markets and price signals are developed for the delivery of the required system services in the most efficient manner.

Thirdly, the market design needs to be equipped to support continued growth in Consumer Energy Resources, and importantly to manage these resources efficiently.

Consumer Energy Resources include rooftop solar and other behind the meter assets like household batteries and electric vehicles. Virtual power plants can play an important role in aggregating these distributed energy resources and orchestrating them in a way that efficiently balances supply and demand.

Harnessing aggregated energy assets to shift energy loads to different times of the day when energy is abundant is one way to avoid investment in additional grid scale infrastructure and reduce the overall cost of the transition for customers.

A further consideration is ensuring the orchestration of distributed assets is simple for customers to participate in, and that there are mechanisms or incentives to encourage and reward their participation.

Addressing the urgent gas supply challenge

To understand the significant consequences of extended periods of policy uncertainty or poorly designed market interventions, then look no further than the east coast gas market.

In my CEDA Address two years ago, one of the six priorities I focused on was the need for action on policy to support new supply in southern states to help offset dwindling supply from Victorian gas fields. These concerns have been repeatedly echoed by industry participants, regulators, analysts and other experts on gas, and the calls for action have become louder and increasingly urgent.

Let me reiterate today, urgent policy action is needed if we are to avoid the worst impacts of gas shortfalls on the Australian economy.

A gas shortage would have material impacts on our nation given millions of people rely on gas to cook, heat water and heat their homes, and to underpin the competitiveness of their businesses.

For some businesses, gas is a feedstock for their industrial processes for which there is no viable replacement today. Further, as I have pointed out, gas is important to the security of electricity supply. A lack of gas for power generation on any given day could have major consequences and undermine support for the energy transition.

While we recognise the continued role of gas in the energy mix is not something everyone supports, solving our nation’s energy challenges requires pragmatism. It has become increasingly evident globally, that more time is needed to plan for the transition away from gas, allowing time for households and businesses to electrify and for technology advancements to develop.

We also must recognise gas supply is needed to serve the 15 GW of gas generation critical to firm renewables and provide system security. Gas and coal are the only technologies today that can keep the lights on when we have extended periods – days, not hours – of cloud cover, low wind and drought.

Given the short time to address shortfalls, the solutions available are limited. But this should not prevent us from making good policy decisions that address the core problem – supply – with a combination of short- and medium-term solutions that can restore gas security.

Some have called for LNG export controls. However, this would be a retrograde action and incredibly damaging to Australia’s reputation as a safe and stable place to invest, and a reliable energy trade partner for our neighbours in Asia. The pace of the energy transition is at least as big an issue for our neighbours as it is here, and they will be reliant on our gas exports for decades to come.

We also cannot expect that Queensland gas alone can continue to meet the gap from declining southern production.

The options available to bring more gas into southern states quickly are:

• • Pipeline upgrades. Encouraging investment in pipelines could allow movement of greater volumes of gas from the point of production to the demand and storage centres.
    
  • Regasification terminals. LNG regasification terminals are an efficient way of moving gas around the country. Origin’s view is we are likely to need a regasification terminal, at the very least as an insurance mechanism. These are difficult investments to make with current market settings. Projects typically need to be underpinned by 10+ year offtake contracts, but these agreements are challenging given the considerable financial risk anduncertainty around domestic gas policy. Governments and industry may need to work together to partially underwrite these investments and share risk.
    
  • Accelerate approval of gas projects. Given the lead times from investment decision to first gas, new projects will not address any imminent shortfall. However, they are critical to delivering secure gas supply for customers and the electricity market over the medium term and approvals should be accelerated as a priority, supported by the appropriate checks and balances.

Each of these solutions require additional gas storage in the south.

With all of that said, I would like to acknowledge a recent shift in the dialogue on gas. The Commonwealth’s Future Gas Strategy is an important first step, but it must be backed up with tangible actions that drive outcomes.

We welcomed the Victorian Government’s decision to allow gas storage off its coast, and it is encouraging that the South Australian Government has introduced legislation that could support the development of gas peaking generation.

The forthcoming reviews of the gas Mandatory Gas Code of Conduct and Australian Domestic Gas Security Mechanism (ADGSM) are important opportunities to restore market signals and drive the investment urgently needed to avoid gas shortfalls.

Conclusion

To conclude, this is a time of great challenge, great change and enormous opportunity – not only for the energy sector, but indeed, for Australia as a whole.

I am optimistic, but also cautious, about the path ahead.

My optimism comes from the opportunity we have to underpin the future prosperity of our nation through delivering the transition and ensuring a well-functioning energy system for all. There are promising signs of progress over the past 18 months on renewables, storage and transmission infrastructure, as the industry has demonstrated its willingness to lean into the challenges and keep forging forward. There are recent green shoots on much needed gas market policy. And, we are galvanised around the shared ambition to be net zero by 2050.

But at the same time, I am a realist. A long career in energy indicates the path ahead is unlikely to be straightforward. For close to 20 years, progress on energy has been hamstrung by political division, policy delays and interventions which have delivered poor outcomes. This is not merely a frustration, there are very real and material costs to late and poor decisions, as we are now experiencing in gas markets. While I am disappointed to say we have at times become resigned to these shortcomings, it does not have to be this way.

We have a choice. As leaders, we can choose to align to shared goals for the greater good, and we can choose not to pander to fringe voices and vested interests. We can choose to elevate the public discourse on energy to a level that befits how critically important it is to our economic and social wellbeing. And, we can choose to make the hard decisions on energy policy – not place them back in the too hard basket.

We are not asking governments to step in and solve everything. But we do need governments to work with us to set up the frameworks that enable the industry to get on with it. Because I believe the industry has shown its commitment to the task, a willingness to continue to innovate, and we have the capital and expertise to get the job done.

If we can achieve this, I am confident we can return our energy markets to the place they occupied for many decades: stable and secure, and delivering good outcomes for all Australians.

ENDS

(B)  Media articles that follow

So far we’ve come across commentary in Media Publications, including the following:

1)  In the AFR we have seen…

(a)  Angela MacDonald-Smith wrote ‘Origin CEO calls for redesign of failing national power market’

(b)  The Chanticleer wrote ‘How to keep Australia pumping for another 25 years, and the lights on’

2)  In the Australian we have seen …

(a)  Colin Packham wrote ‘Design an energy market for post-2030 or risk chaos: Origin Energy CEO Frank Calabria’

3)  In the Guardian we have seen …

(a)  Nothing at this point?

4)  In SMH and the Age we have seen …

(a)  Nothing at this point?

5)  In RenewEconomy we have seen …

(a)  Nothing at this point?

6)  In PV Magazine we have seen …

(a) Nothing at this point?

7)  In the ABC we have seen …

(a)  Nothing at this point?

As a reader here, if you come across any other useful commentary, feel free to add as a comment below.