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

Last week the worst kept secret in the energy industry was announced with NSW announcing an agreement with Origin Energy (ASX: ORG) to extend the operation of Australia’s largest coal-fired power station by at least two more years. The announcement follows a reliability update from the Australian Energy Market Operator (AEMO) that warned of blackouts in NSW and Victoria due to delays in transmission infrastructure and renewable projects. ABSI this week will update readers on the status of the Australian energy market. 

Australia is still a nation that runs on coal, evidenced by the “State of the Energy Market 2023” report that shows coal accounting for almost 60% of total generation in the National Energy Market (NEM). While coal’s use is declining, the decline comes in waves as individual generators shut down. For example, the chart below shows South Australia’s coal generation quickly falling from 21% to zero between 2015 and 2017 as the state closed its last two coal stations - Northern and Playford B.

Source:  Australian Energy Regulator

Eraring Power Station is Australia’s largest coal power plant with a nameplate capacity of 2,922 MW. In Feb 2022, the owner, Origin Energy, announced that the ageing and underperforming asset would be closing 7 years early in August 2025. This caught the NSW government by surprise and highlighted how ill-prepared the NEM grid is for a post-coal world. Fast forward 27 months later to May 2024 and the NSW government has announced a deal with Origin to keep the plant open for a minimum of 2 extra years to ensure the lights stay on.

The impact of this extension is significant. It allows extra time for new renewable energy, storage, and network infrastructure projects to come online to replace Eraring and the ~16 GWh it annually produces. To put it in perspective, Eraring represents roughly 50 million PV solar 320W panels. Moreover, the timing of the announcement came just before an AEMO report that highlighted an urgent investment need for electricity reliability in the NEM. In the report, it highlights the high level of failure in new projects meeting their timelines and the delay in a new transmission line from SA to NSW has heightened the risk of power shortages in Victoria and NSW until summer 2027.

Source:  AEMO

Unfortunately for energy users and taxpayers, these energy woes come with a price tag. The AEMO is asking industrial energy users, such as aluminium smelters, to tender for Interm Reliability Reserves which provide compensation for turning off operations during peak summer demand. Likewise, the NSW government’s Eraring extension agreement comes at a cost of up to A$225m per year. However, the deal is structured as a compensation fund that can only be tapped if the plant runs at a loss but also shares 20% of operating profits, up to A$40m per year. Given that power price forecasts are rising to almost A$150/MWh until 2028, it is likely that the NSW government won’t need to pay a cent but this will come at the expense of the taxpayer paying higher energy bills due to lack of supply. 

Critics of the Eraring extension argue that the NSW government is sending mixed messages regarding its commitment to reducing emissions and fear it may slow down investments into renewables. Personally, I don’t disagree with this but the reliability of the energy grid needs to come above everything else. What I would like to see done in tandem with the extension is for Australian governments, of all levels, to eliminate needless, expensive, and time-consuming bureaucracy that is causing delays in the advent of new energy projects.

A quick detour to announce the BPC NRL Tipping Competition! 

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