The final report from Australia's chief scientist examined the market that covers southern Queensland, New South Wales, Victoria, Tasmania and South Australia recommends a new blueprint for a world coping with limits on emissions and an increase in renewables that offers world-class energy security, and Dr Alan Finkel sees a big role for gas in doing so.

 

The final report, released to Council of Australian Governments meeting on Friday, found business as usual operations on the NEM were no longer an option.

 

"We need to aim higher," Dr Finkel said.

 

"If we adopt a strategic approach, we will have fewer local and regional problems, and can ensure that consumers pay the lowest possible prices over the long term."

 

While federal, state and territory governments still need to accept and act on the recommendations, Dr Finkel believed his three pillars policy would deliver future reliability, increased security, rewarding consumers and lower emissions with a mix of orderly transition measures, system planning and stronger governance.

 

A clean energy target was recommended as possibly the best way to meet Australia's Paris Agreement targets over a renewed carbon tax or extended renewable energy target, while existing large electricity generators will be required to give a three years' notice of closure to allow new generators to enter the market and communities time to adjust.

 

As part of the three-year notice of closure requirement, Finkel recommended a lifetime limit for existing generators, based on their fuel type or emissions intensity, capped at 50 years.

 

The second pillar of the blueprint, planning, recommends a system-wide grid plan to inform network investment decisions and ensure security is preserved in each region, which would lead to the development of renewable energy zones.

 

The third pillar calls for a new energy security board to drive implementation of the blueprint and deliver an annual health check on the state of the electricity system.

 

 

In terms of where new power should come from, Finkel found that gas and renewables should be fuels of the future.

 

He concluded that gas offered half the level of emissions than even the most efficient coal-fired plant, and that cleaner coal technologies cannot even begin to compete without carbon capture and storage, an expensive and still-emerging technology that is yet to be completely derisked. 

 

Yet he also warned that work would be needed to ensure gas is available, given bans on exploration around the country.

 

He also warned that, as CSG developments have little ability to vary production and require long-term contracts, attention will need to be paid to the market, allowing them to become more dynamic to respond to changing conditions.

 

Gas generators need to avoid over-contracting gas on take-or-pay contracts, which would force them into higher spot contracts - a Gordian Knot, complicated by the desire of gas companies to seek high prices on the LNG export market.

 

The review found some 4900MW of new gas-fired generation capacity has been publicly announced, but those that are built are more likely to operate as peaking plants, because current gas prices make most existing gas-fired generators uneconomic in the wholesale electricity market

 

"Gas-fired generators will increasingly need to switch in and out of service, or ramp up and down while operating, depending on intermittent supply from wind and solar generation. This volatility means less predictability and more starts for gas-fired generators, resulting in higher costs," the report found.

 

"The result may be that gas-fired generators close down rather than compete. Across the NEM it is possible that a number of gas-fired generators will become uneconomic when their current gas supply or electricity off-take contracts end. 

 

"Rather than potential new gas-fired generation capacity being built, this could result in a reduction in gas-fired generation capacity, despite the inherent value of gas to security in a power system dominated by variable renewable electricity generation."

 

AEMO should be given better oversight of gas supply contracts for gas-fired generators to ensure they have sufficient supply available, but even with that, the review found the era of ultra-cheap gas was probably over. 

 

 

AEMO anticipates that unless new production is incentivised, total gas production for the domestic market will decline from 600PJ in 2017 to 478PJ in 2021, with most of this decline projected to occur in the offshore Victoria gas fields, leading to a shortage of gas for electricity generation between 2019 to 2024 unless new gas sources are identified and developed. 

 

The review suggested that Queensland CSG developers will need to be incentivised to develop new areas, while other states will need to diversify gas sources.

 

In terms of exploration acreage, he urged state governments to adopt evidence based regulatory regimes to manage the risk of individual gas projects on a case-by-case basis, including how landholders in areas affected by exploration and  development.

 

That should include an outline on how governments will adopt means to ensure that landholders receive fair compensation.

 

 

Not surprisingly, the big loser in the Finkel Review would probably be coal, although the report suggested it should be considered under the clean energy target if emissions could be lowered.

 

The power source that drove the industrial revolution, which still provides more than 76% of electricity in the NEM, is lumbered with a generating fleet that, by 2035, will be primarily comprised of plants that are 50 years old, and the review panel concluded they would not be replaced, as evidenced by major players such as Origin Energy, Engie and AGL declaring the coal era over. 

 

The panel said the future was in small generation assets, due to the rapidly declining costs of technologies like wind and large-scale solar generation and the lower capital costs of new gas-fired generators.

 

 

The report noted that even since its review started less than a year ago that utility scale batteries, wind and solar photovoltaic have declined in cost substantially more than expected. 

 

Finkel expects more investments in dispatchable generation and storage at grid-scale in response to high levels of VRE penetration, such as batteries and pumped hydro, which are expected to be able to support the NEM, but in the short to medium-term the NEM is likely to require higher levels of flexible and efficient gas-fired generation - assuming gas is available and cheap enough that the economics are not eroded.

 

He also tips more extensive ties across the NEM, particularly in areas that are rich in solar, wind, pumped hydro reserves and load centres. 

 

 

In terms of the clean energy target, all fuel types would be eligible for the scheme, provided they meet or are below the emissions intensity threshold, and would receive certificates for the electricity they produce in proportion to how far their emissions intensity is below the threshold. 

 

Electricity retailers would be obliged to purchase these certificates to demonstrate that a pre-determined share of their electricity came from low emissions generators. 

 

It would be calibrated to an emissions reduction target of 28% on 2005 levels by 2030 with a linear trajectory to zero emissions by 2070.