Australia's renewable energy transition

Renewable Energy Revolution: Can Australia's Electricity Market Handle the Shift?

Jordan Keane in Climate & Environment August 2025 • 4 min read.

"Exploring the stability of Australia's National Electricity Market amidst intermittent renewable generation and the impact on consumers."

Australia, once a global model for electricity market reform, now faces unprecedented challenges as it transitions to renewable energy. The National Electricity Market (NEM), lauded for its success in the early 2000s, is under scrutiny as intermittent renewable sources like solar and wind gain prominence. Policymakers and consumers alike are concerned about rising prices and supply security, prompting a reevaluation of the NEM's design.

The core issue lies in the inherent instability of energy-only markets, where participants struggle to optimize Value of Lost Load (VoLL) events – instances of high demand and potential blackouts. The integration of Variable Renewable Energy (VRE) exacerbates this instability, raising questions about market equilibrium and resource adequacy. A critical concern is whether existing market designs can accommodate high levels of VRE without compromising reliability and affordability.

This article analyzes the stability of Australia's energy-only market design as Renewable Energy Target (RET) and Contracts for Difference (CfDs) policies drive VRE plant entry. By examining the interplay of market forces, policy interventions, and consumer welfare, we aim to shed light on the challenges and opportunities that lie ahead for Australia's renewable energy transition.

Navigating the Renewable Energy Transition: Key Challenges and Opportunities

Integrating renewable energy into the grid is not a simple task. Several factors must be carefully managed to ensure a smooth transition:

Thermal Plant Exit: As VRE sources become more prevalent, thermal power plants (coal and gas) may face financial distress, leading to potential closures. Managing the timing and pace of these closures is crucial to avoid supply shortages.

Optimal VRE Asset Allocation: The mix of renewable energy sources, such as solar and wind, significantly impacts market stability. Over-reliance on a single source, like solar, can lead to cannibalization and reduced economic viability.
Hedge Market Stability: As thermal plants exit, the availability of "firm" hedge capacity (financial instruments that protect against price volatility) may decrease, leading to instability in forward derivative markets. Government-initiated CfDs need careful design to avoid exacerbating this issue.
Government Policy Design: Policies like CfDs, intended to encourage VRE development, must be carefully designed to avoid unintended consequences, such as distorting market signals or extracting hedge contract capacity.

Addressing these challenges requires a multifaceted approach that considers market dynamics, policy interventions, and consumer welfare. It's essential to foster a market environment that encourages optimal VRE asset allocation, ensures hedge market stability, and promotes efficient resource allocation.

The Future of Australia's Electricity Market: A Path Forward

Australia's journey toward a renewable energy future is complex, with potential pitfalls and promising opportunities. By carefully considering the market dynamics, policy implications, and consumer interests, Australia can navigate the transition successfully. This requires a commitment to market stability, efficient resource allocation, and innovative policy design that supports a sustainable and affordable energy future for all Australians.

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Everything You Need To Know

What is the National Electricity Market (NEM) and why is it important in the context of renewable energy in Australia?

The National Electricity Market (NEM) is Australia's primary wholesale electricity market. It's crucial because it's the mechanism through which electricity is generated, traded, and supplied across the eastern and southern states. As Australia transitions to renewable energy sources like solar and wind (Variable Renewable Energy or VRE), the NEM's design faces significant challenges. Its ability to handle the intermittent nature of VRE and maintain stability, reliability, and affordability is under scrutiny. The NEM's structure, initially praised, must adapt to accommodate the changing energy landscape, especially considering the impact of policies such as Renewable Energy Target (RET) and Contracts for Difference (CfDs).

How does the integration of Variable Renewable Energy (VRE) like solar and wind impact the stability of the NEM?

The integration of Variable Renewable Energy (VRE) sources, specifically solar and wind, introduces significant challenges to the NEM's stability. VRE's inherent intermittency means that generation fluctuates, making it harder to match supply with demand. This can lead to periods of oversupply or, conversely, supply shortages. The issue is exacerbated by the energy-only market design, where participants focus on optimizing Value of Lost Load (VoLL) events. As more VRE enters the market, the risk of instability increases, potentially affecting market equilibrium and resource adequacy. Careful management and policy interventions are needed to mitigate these impacts, ensuring grid reliability.

What are the potential consequences of thermal plant exits as renewable energy sources become more prevalent in Australia?

As Variable Renewable Energy (VRE) sources, like solar and wind, gain prominence, thermal power plants (coal and gas) may become financially unviable. This can lead to their closure. The timing and pace of these thermal plant exits is crucial. If thermal plants close too quickly, it could result in supply shortages. Managing this transition effectively is a key challenge. It involves considering the mix of VRE sources, ensuring enough 'firm' hedge capacity is available, and designing government policies such as Contracts for Difference (CfDs) carefully to avoid market distortions. Ensuring a smooth transition is vital for maintaining grid stability and preventing potential blackouts.

Explain the role of Contracts for Difference (CfDs) and Renewable Energy Target (RET) policies in Australia's renewable energy transition, and any associated risks.

Contracts for Difference (CfDs) and Renewable Energy Target (RET) policies are government initiatives designed to encourage the development of Variable Renewable Energy (VRE) in Australia. The Renewable Energy Target (RET) sets targets for the amount of renewable energy that must be generated. Contracts for Difference (CfDs) provide financial support to renewable energy projects, helping to reduce investment risk. However, these policies must be carefully designed. Poorly designed CfDs could distort market signals or extract hedge contract capacity, leading to market instability. Policymakers must consider unintended consequences and ensure that these policies promote optimal VRE asset allocation and efficient resource allocation within the National Electricity Market (NEM).

What steps are necessary to ensure a successful renewable energy transition in Australia's electricity market?

A successful renewable energy transition in Australia requires a multifaceted approach. Key steps include: managing the exit of thermal power plants to prevent supply shortages; ensuring optimal Variable Renewable Energy (VRE) asset allocation to avoid over-reliance on single sources; maintaining hedge market stability to protect against price volatility, and carefully designing government policies, such as Contracts for Difference (CfDs). Additionally, a commitment to market stability, efficient resource allocation, and innovative policy design is essential. Addressing these issues will help create a sustainable and affordable energy future for all Australians within the National Electricity Market (NEM).