Every Tuesday afternoon we publish a collection of topics and give our expert opinion about the Equity Markets.

Last week Opposition Leader Peter Dutton released long overdue financial modelling of its nuclear power plan. The Coalition’s pitch to voters ahead of an election in 2025 is that intermittent renewables need to be firmed by nuclear baseload generation. They also claim that this option will be the cheapest solution as it forgoes the need to build extensive transmission and storage solutions. However, the primary problem with this pitch, amongst a swath of modelling assumption issues, is that rooftop solar in Australia has made baseload power generation uneconomical. For the final ABSI of 2024, we will analyse the fatal flaw in an important energy policy for the opposition government. 

With an election due by May 2025, energy is quickly heating up as a key policy difference between the two major parties. The Coalition's pitch to voters is that renewable energy is unreliable and, when you account for the extra transmission and the need for storage, more expensive compared to alternative solutions. That alternative solution is nuclear energy.

Earlier in the year, Opposition Leader Dutton released a revised vision for nuclear energy in Australia. His pitch is that the government should own and operate the baseload nuclear power in Australia, proposing to build 13.2 GW across 7 nuclear plants in 5 states by 2037. They say that this will provide the reliable foundation that alternative forms of renewable energy can sit atop to power Australia in a net-zero future. 

There is some validity to this plan. Globally, nuclear power is undergoing a renaissance driven by the push to decarbonise energy production and advancements in the safety of the technology. The development of small modular reactors, while still in an early phase of development, has the potential to bring down the cost and increase the speed of deployment. However, nuclear remains one of the most expensive energy technologies with Lazard’s 2024 Levelised Cost of Energy (LCOE) report providing a range of between US$142 to US$222 per MWh. In comparison, utility-scale solar comes in at US$29 to US$92/MWh and onshore wind between US$27 and US$73/MWh, albeit these numbers don’t account for the extra transmission infrastructure and the need for storage.

Source: Lazard

Putting aside the many holes in Dutton’s forecasts, such as total electricity consumption in 2050 being 303 TWh against AEMO forecasts of 525 TWh, the biggest flaw in the nuclear plan is the economic fact that the composition of the grid has changed which has destroyed the business model for large-scale baseload power.

Australia has the highest penetration of rooftop solar in the world. This isn’t surprising given the high solar radiance of the country. In 2023, rooftop solar capacity reached 20 GW and accounts for 11.2% of Australia’s electricity supply. The effect is a bottoming of minimum demand in the grid. Minimum demand refers to the lowest level of electricity demand on the grid within a specific period, typically occurring during the middle of the day or overnight when energy use is at its lowest. Minimum demand matters because it affects grid stability and the integration of electricity supply. In simple terms, minimum demand is like having too many taps pouring water into a small glass — the grid must carefully manage this to avoid spilling over or breaking the system.

Source: Synergy

According to the AEMO’s Q3 2024 Energy Dynamics report, minimum demand in the NEM was ~11.5 GW with all-time record lows recorded in NSW and QLD. Importantly, minimum demand is forecasted to continually decline. In SA, the minimum demand record is negative 58 MW and there are forecasts for the entire NEM minimum demand to be as low as 4.3 GW by 2027. This is the cause of the duck curve in the energy grid - extremely low or negative prices during the day and extremely high prices during the evening peak. 

While the coal power infrastructure in Australia is very old, many still have decades left on their useful life but are choosing to shut down prematurely due to these market dynamics. Coal is a baseload power option that is always generating and while they’re immensely profitable during the evening peak, this isn’t enough to offset the losses during the day. Nuclear will be subject to the same dynamic as a baseload power option, only that it will be operating in the future when minimum demand is even lower and the price per MW will be materially higher than their coal counterparts.

Australia is extremely fortunate with the energy resources it possesses. Previously it was coal and natural gas, and today is sunshine, wind, and water. The influence of these renewables is changing the dynamics of the grid. Nuclear is a great solution for some countries but it isn’t for Australia. Dutton’s plan to build 13.2 GW of new baseload power in an energy market with a rapidly shrinking minimum demand is an outdated solution and a recipe for failure.

Introducing BPC Wealth Management

BPC Wealth Management is dedicated to shaping resilient investment portfolios, empowering you to achieve and sustain your financial aspirations. While the foundation of your portfolio focuses on long-term investments, through BPC, clients will be offered opportunities in equities trading and equity capital markets. This aspect is highly customised, allowing asset flexibility. Discover how our proactive and client-focused approach can help you achieve your financial aspirations by booking your discovery call with James Whelan. 

We offer value-rich content to our BPC community of subscribers. If you're interested in the stock market, you will enjoy our exclusive mailing lists focused on all aspects of the market.

To receive our exclusive E-Newsletter, subscribe to 'As Barclay Sees It' now.