Study: Fossil Fuel Generation Has No Business Case in Australia

Experts have said the results of a comparative study show there is no longer a business case for new non-renewable generation in Australia.

The study, published last year by the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Australian Energy Market Operator (AEMO), found solar and wind are the cheapest forms of power even after balancing costs were taken into account.

And since both are still falling in price, with solar continuing to see annual cost reductions of up to 10 percent, “we have no expectations of people investing in anything else,” said lead author Paul Graham, the chief economist at CSIRO’s energy division.

Although the researchers had expected wind and solar to outgun fossil fuels price-wise on a standalone basis, the finding that renewables are competitive with coal even after factoring in the cost of two to six hours of battery or pumped hydro storage “was a surprise,” he said.

Wind and solar trounce coal

The research found the levelized cost of energy (LCOE) of standalone wind and PV coming it at a range roughly between AUD $65 and $50 (USD $46 to $36) per megawatt-hour in 2020.

This compares to a lower limit of around AUD $85 (USD $61) per megawatt-hour for black coal and AUD $70 (USD $50) for gas, with no carbon price or risk premium factored in. Brown coal is more expensive.

When the renewable energy costs were recalculated to allow for two hours of firming with battery storage, wind and solar still emerged as at least as competitive as black coal. At the lower end of the LCOE range, meanwhile, the renewables were able to beat gas comfortably

Wind and solar could even trounce coal on price when six hours of pumped hydro storage were added in for renewables firming, the analysis found. But this extra balancing cost isn’t needed across most of Australia today.

The research indicated that little or no storage would be required to accommodate up to a 50 percent share of variable renewable energy on the grid. By the time balancing costs do become important, the decreasing costs of solar and batteries will have tilted the economics further in favor of renewables.

Meanwhile, although there is no explicit greenhouse gas emissions cap on the Australian electricity sector, the chances of new fossil-fuel plants being built in Australia without some form of risk premium or future impact from carbon pricing is increasingly remote, Graham noted.

Applying either a carbon price or a 5 percent risk premium to the fossil-fuel generation costs did not have much of an impact on the LCOE for gas, the researchers found. But the risk premium had a big effect on black coal, pushing LCOE up to more than AUD $120 (USD $86) per megawatt-hour. The impact on brown coal was even more severe.

Informing electricity market decision-makers

Rounding off the analysis, the study found that adding carbon capture and storage would push 2020 LCOEs for coal beyond AUD $150 (USD $107) per megawatt-hour.

Solar thermal technology with eight hours of energy storage emerged as being less competitive than brown coal with carbon pricing factored in.

And small-scale biomass or small modular nuclear reactor power both came out as being prohibitively expensive, at more than AUD $250 (USD $179) per megawatt-hour. The researchers also looked at pricing scenarios for 2030, 2040 and 2050.

These showed that solar, in particular, would continue to become more competitive, both on a standalone basis and when paired with storage, while costs for fossil fuels remained largely unchanged.

“Solar PV is projected to represent one of the largest contributors to electricity generation by 2050,” said the report, entitled GenCost 2018.

Graham said CSIRO and AEMO intend to repeat the analysis on a regular basis, with a view to informing electricity market decision-makers. Already, he said, based on the research, “There’s a question about, ‘Do we need a capacity market?’”

In a press note issued by the Australian Renewable Energy Agency this month, Nicola Falcon, AEMO’s group manager of forecasting, confirmed the research would form part of the plans for Australia’s energy system.

It “will act as the foundation for initial discussions with stakeholders when we commence our modeling inputs and scenario consultations for the next Integrated System Plan,” she said.