Australia’s National Electricity Market (NEM) is navigating a shift to integrate more renewables. The transformation has largely been driven by the National Renewable Energy Target for 20% renewables by 2020, although the driver going forward is upcoming coal plant retirements throughout the market.
“Australia’s situation is quite interesting; although we currently do not have a strong federal policy to decarbonize, our states have renewable energy targets, and the bulk of our coal-fired generation fleet is reaching end of life in the next couple of decades,” says Clare Giacomantonio, Strategy and Transactions Partner, Power & Utilities – Ernst & Young Australia Operations Pty Limited. With the transition to renewables very much underway, Australia’s transmission network needs to be “significantly reconfigured,” she adds. This will be “an expensive challenge” because of the physical size of the grid relative to the load size, as well as the comparatively small number of customers who will pay for any upgrades.
With this in mind, TasNetworks, Tasmania’s state-owned electricity transmission and distribution company, has proposed the AU$3.5b (US$2.6b) Marinus Link. This high-voltage direct current (HVDC) undersea cable would connect the renewables-rich island of Tasmania with mainland Australia. Tasmania, which met its 100% renewable energy target in November 2020 and currently has access to an expected 10,741GWh of renewable energy, has recently raised its ambitions to double that renewable energy by 2040 to become a clean energy exporter. Current resources include wind and significant hydroelectric power, with plans to develop more wind, as well as hydrogen, resources.
“The Tasmanian system is currently almost entirely fueled by hydroelectric generation,” Giacomantonio explains. “The island gets a lot of rain and has some very large dams, and quite a sophisticated hydroelectric scheme with many cascades.” Wind production is also high yield and less correlated to that of the mainland, which adds value in terms of turning Tasmania into a net exporter of energy.
By strengthening the connection between these two parts of the same market, the proposed interconnector would essentially turn Tasmania into a giant battery providing capacity firming services to the NEM. The island would be able to store excess renewable energy generated on-island or transported from the mainland, using this energy itself or returning it to the mainland as needed. Development of long-duration pumped storage hydro on existing dams would further strengthen this role.
A stronger federal imperative to transition to renewables – for example, a carbon price – would reinforce the case to build Marinus Link, according to Giacomantonio. Grid development in Australia’s NEM faces similar challenges to those in other parts of the world, particularly as transmission is usually a regulated asset. This challenges include high standards and lengthy processes for gaining approvals, a regulatory test that was not designed for assessing multiple transmission projects simultaneously to achieve rapid transformation of the grid, issues around cost allocation, and the need to maintain grid stability throughout the transition.
In response to issues related to planning the NEM’s energy transition, a 2017 review of the whole of the NEM resulted in the Australian Energy Market Operator (AEMO) taking a larger planning role. “The regulatory investment test for large transmission projects has been more integrated with AEMO’s modeling in an attempt to streamline the process,” Giacomantonio says. “Whether that has improved efficiency is currently being tested by projects using the new rules for the first time.” Another, more targeted review started in August 2021, and will explore options to further reform or improve regulatory frameworks around transmission planning.
Marinus Link has passed the regulatory investment test for transmission and is progressing toward a 2023–24 investment decision. According to Bess Clark, TasNetwork’s General Manager for Project Marinus, cost allocation remains a key issue, however. “The main challenge to date is the resolution of the current NEM pricing framework for transmission infrastructure, whereby costs are allocated based upon the region (largely Australian state-based) where assets are located, rather than to the customers benefiting from the services.”
When it comes to attracting private investment, Clark believes this issue could cast doubt on the project’s ability to recover all required revenue. Unless there are seen to be fair pricing outcomes, private investors may also have concerns about the reputational and project risks around funding a project without strong community support.
“The investment test has demonstrated that the project provides net benefits to the NEM, but the current pricing/cost allocation frameworks need to be resolved before the project can proceed as a regulated service,” Clark says. “The methodology used to allocate transmission costs between NEM regions and between generators and load customers is, therefore, coming under greater scrutiny, with ongoing energy minister discussions on a way forward.”
If Marinus Link does go ahead, it will also provide an avenue for Australia’s hydrogen ambitions. Tasmania, in particular, provides a solid use case, given its 100% renewables status. “A number of green hydrogen proponents are active in Australia,” Clark says. “Marinus Link complements hydrogen opportunities by supporting continued development of variable and dispatchable clean energy resources and supporting transmission at lowest cost, as well as providing additional resilience in the national power system. This enables hydrogen investors to have greater confidence in the adequacy of their clean energy supply.”