Last week, several members of our team were in Melbourne for back-to-back conferences that, in many ways, reflected the two sides of the NEM.

On Tuesday we attended the Clean Energy Council’s Australian Wind Industry Forum (AWIF), an event that largely revolves around the supply side talking to itself: developers, OEMs, financiers and advisers discussing current issues in the NEM’s development pipeline. The following day I presented at the Energy Users Association of Australia’s (EUAA) National Conference, which draws a very different crowd: large industrial and commercial energy users, retailers and policymakers, with discussion centred on pricing, risk and policy.

Moving between the two conferences in under 48 hours highlighted how differently each side of the NEM now sees the challenges ahead. Below are some reflections on the key themes that emerged across both conferences, including several points I raised in my presentation at the EUAA event.

Supply-side struggles: Getting to financial close

More than anything, the CEC’s conference was occupied in discussing why projects keep stalling on the way to financial close.

Source: Clean Energy Council

Increasing development risks

Being a developer-focused conference, construction cost and risk dominated much of the on-stage discussion, with many speakers pointing out the sharp rises in wind turbine prices and broader input costs over the past 12 to 24 months.

With rising costs making financier confidence harder to secure, bankability emerged as one of the central themes of the conference. Adeline Pang (White & Case) described three pillars for bankability: quality counterparties, clear understanding and allocation of risks, and confidence in the project’s technical robustness. Liam Cusack (CleanCo) made the related point that earlier engagement around PPA set-points and offtake arrangements can materially improve a project’s chances of success. In particular, early alignment between developers, OEMs, contractors, connection authorities and financiers can help avoid difficult renegotiations later in the process.

This environment is also reshaping contracting approaches. Stan Kaluwin (Aurecon) argued that while the shift away from large EPC wraps toward split-contracting gives developers more flexibility, it also leaves them carrying more integration and interface risk themselves.

Mismatch of cost and market value

Even projects that can still make the cost case increasingly face a difficult revenue case. Alan Rai (Core Markets) said there is a stubborn gap in the bid-ask spread, with offtakers offering prices well below the LCOE of proposed wind projects in most NEM regions. Oliver Nunn (Endgame Economics) made the related point that “market value” is becoming far more important than levelised cost alone, arguing that generation profiles increasingly matter as renewable penetration rises. As one example, he described the vast majority of solar output as becoming “junk in the middle of the day” — a blunt summary of how rapidly the value of poorly-timed generation can erode.

Underlying many of these discussions was the broader sense that the market is becoming increasingly saturated with energy during certain periods, while transmission constraints and curtailment are making it harder for projects to reliably capture the revenues developers originally modelled — a theme that has continued to build across CEC conferences for a number of years now.

Questions hanging over the CIS

Industry unease around the federal government’s Capacity Investment Scheme has been building over the past year, but this time the concern was noticeably more explicit. Regular WattClarity readers would know that I set out my own views on the CIS’s design and execution issues in this article series last year. At AWIF, the dominant view — expressed during the Industry outlook panel and later by Mark Leersnyder (KPMG) — was that the main issue surrounding the CIS is that many auction outcomes, for wind in particular, were struck against a materially different cost environment to the one developers now face, and that revenue floors which made sense at auction no longer appear sufficient for some projects.

One speaker noted it is no secret that some CIS winners are now in discussions to renegotiate their contracts. While that appeared to be welcomed by parts of the development community, some of my hallway discussions during the conference centred on the slippery slope such a move could create.

Demand-side struggles: The rising complexity of interacting with the market

Although declining wholesale electricity prices might appear, at first glance, to signal improving conditions for consumers, a recurring theme throughout the EUAA conference was that managing energy exposure is becoming increasingly complex for large users.

The difficulty in taking a long-term view

Interacting with the electricity market has become materially more difficult, even for large users whose energy needs remain largely contracted — a theme that has run through recent EUAA gatherings and sits at the heart of the Nelson Review.

It featured heavily in one of the final panel sessions, where Mark Collette (EnergyAustralia), Steve Quilter (Stanwell), Phil Hirschhorn (Nelson Review Panel) and Byron den Hertog (Macquarie) discussed how the challenges facing large users now look structural rather than merely cyclical. Large users, they argued, are increasingly forced to weigh factors that once sat further in the background: weather and seasonality, the timing and shape of load, locational/jurisdictional value, evolving contract structures, and the widening gap between periods of very low and very high price volatility.

AEMO advocate for flexible demand as a means to overcome uncertainty

One response to growing complexity and uncertainty came from the head of AEMO itself. In his keynote, AEMO CEO Daniel Westerman made the case that flexible demand could help large energy users navigate rising market uncertainty and complexity — while delivering system-wide benefits:

Many of you are making significant, long-lived investment decisions in electrification, on-site generation, storage and digital controls, based on expectations about how the energy system will evolve. Those investments are shaping demand profiles and system outcomes, and they rely on a planning and market framework that is stable, transparent and predictable.

In that context, flexible energy use is no longer just something the system reacts to, it’s a genuine system asset with increasing market benefit.

Source: EUAA

My presentation about the growing divide between intra-day and inter-day market dynamics

While the value of flexible demand may be increasing, at last year’s EUAA conference our own Paul McArdle spoke about how the traditional form of demand response in the NEM is becoming more difficult to utilise in practice.

In the article accompanying that presentation, he showed that while the “theoretical benefit” of demand response has remained relatively stable across 25 years — and is largely non-correlated with average prices — the practical reality is that changing market dynamics and operational conditions are making it harder for C&I users to actually capture the benefit of demand response.

My presentation at the EUAA conference last Wednesday built on this broader theme by arguing that the characteristics of price risk are changing, with intra-day and inter-day dynamics diverging.

In particular, intra-day price volatility appears to be compressing in some periods, while inter-day and weather-event-driven volatility is becoming more important. The presentation also built on a recent WattClarity article I wrote about the rapid growth of the NEM’s utility-scale battery fleet — and the even faster growth in behind-the-meter battery capacity — and some of the unanswered questions around how this may reshape broader market dynamics.

Source: EUAA

While batteries are certainly playing a role in compressing intra-day spreads, and in turn contributing to the lower wholesale prices experienced recently, the shift may also involve price risk becoming:

• More difficult to forecast, as the volume of ‘invisible’ price-responsive load is growing at an accelerating rate (see my slide below); and
• Increasingly concentrated in tail-risk weather events (such as what occurred in South Australia on the evening of Australia Day) and transmission-constraint related events (such as what we saw in New South Wales in late November).

The AEMO are reporting that there is now 2.8 GW of UPRR behind-the-meter batteries (i.e. that respond to prices but are not centrally dispatched) — the equivalent power capacity of Eraring Power Station.

My main caution for the audience was that subdued prices do not necessarily mean subdued risk.

Although spot prices are currently declining, many of the system’s biggest operational risks are increasingly emerging during the lowest-priced periods — including minimum system load conditions, recent observations around frequency drifts caused by semi-scheduled units, and ongoing system strength concerns.

Concerns surrounding data centres

As at every recent gathering, data centres surfaced repeatedly as a concern among incumbent industries. On stage Daniel Westerman noted that the AEMO may need to revise its data centre load forecasts upward, while also cautioning that significant uncertainty remains around the pace and scale of growth.

That uncertainty aside, the concern among my discussions with attendees centred on two main structural differences hyperscale data centres operators possess over incumbent traditional industries: much deeper capital pools, and an extremely high value of lost load that allows them to tolerate short-term price spikes at levels that most other users cannot.

Together, these differences raise concerns that incumbent industrial users may gradually be outcompeted for firm supply, hedging products and even network access — particularly if large new loads continue emerging faster than dispatchable supply can be built.

Key takeaways

Attending both conferences in quick succession underlined a striking irony at the heart of the NEM: the supply side is struggling to make projects financially viable at a time when average wholesale prices are falling, while the demand side is finding those same falling prices offer less comfort than they appear — masked by growing complexity, new risks and emerging competitive pressures sitting beneath the averages.

Both sides, in different ways, are grappling with a market that is becoming harder to read and harder to plan around. The challenge for the rules makers and policy makers over the next few years is whether reform frameworks, such as the ESEM, can give both sides the confidence they need to make long-lived investment decisions.