Economics of Firming Electricity Supply in the Age of Renewables

It is now clear that any new private sector investment in electricity generation in Australia will be in renewable energy. This is due to the dramatic cost reduction of renewables, driven by large reductions in capital investment costs. Our previous research, as well as empirical evidence, has shown that the rapid penetration of renewables is going to drive fossil fuel generators out of business much sooner than expected and planned. This opens serious questions about the system reliability given the intermittency of renewable sources of electricity generation.

This issue became dramatically evident in June 2022, when the electricity system barely managed to avoid systemic blackouts. It is therefore necessary that electricity supply from renewable sources be firmed-up, meaning that procedures, technologies and regulations should be put in place that will ensure uninterrupted supply of electricity even when renewable sources are unable to generate.

At present there is no clear evidence in the literature or in government or regulatory reports about what are the requirements for such firming (i.e. how much firming is needed); about the timeframes of the firming (i.e. how much firming is needed by when); and about the cost-effectiveness of alternative firming procedures, technologies and regulations. In this project we will address this research gap.

We will pursue these questions by

• quantifying requirements for firming based on a counterfactual scenarios build on observed data e.g. had there been 50 percent (or 100 or 200 percent) more renewable capacity in the NEM system over the period 2018-2022 and what would have been the firming requirement; 
• projecting based on observed data and existing projections the timeframes at which we are likely to see the increases in the renewable penetration that are in line with the scenarios investigated as per point above e.g. by when we might expect 50 percent increase in renewables penetration, or 100 percent; and 
• investigating the options for firming and determining their cost-effectiveness. In particular, we are interested in the following possible approaches to firming
  • requiring all renewable energy projects to invest in short and/or long-term storage (including batteries and pumped-hydro);
  • providing incentives through the electricity market for generators to invest in storage;
  • providing incentives and support for households with rooftop solar to invest in installing small-scale distributed battery storage;
  • compare the above options with the proposed capacity payments to existing generators.