The Victorian Government’s announcement on Thursday to resurrect the State Electricity Commission (SEC) may largely address supply gaps identified from recent Cornwall Insight Australia analysis.
According to the proposal, the SEC will receive $1b of initial investment to deliver 4.5GW of renewable power, this should help address the supply gap from the early closure of AGL’s Loy Yang A, happening in 2035. This aligns closely with modelling from Cornwall Insight Australia that showed Victoria would need approximately 3GW of variable renewable energy (VRE) and 1GW of storage during peak times to cover the loss of Loy Yang A1. If the Loy Yang A generation volume was considered in its entirety, the required VRE capacity would be approximately 5GW, mostly to cover the overnight period. This is just above the amount of generation the SEC is meant to deliver.
Figure 1: Historical time of day generation mix in VIC for 2018, 2020, 2021 and 2022
*The reason for the exclusion of 2019 is the outage of Loy Yang unit 2 for ~7 months due to damage to the generator.
The Victorian Government’s proposal is light on details, namely the generation mix of 4.5GW variable renewable energy announced. The Australian Energy Market Operator’s [AEMO] 2022 Integrated System Plan indicated around 12.5GW of wind and utility-scale solar would be required by 2035, around a 7GW increase on the current supply in Victoria. However, the establishment of the SEC, with its addition of 4.5GW’s of renewable energy, has the potential to crowd out the private investment needed in Victoria.This is particularly likely if the SEC’s portfolio invests in onshore wind and utility solar projects that could have otherwise been provided by the market.
More likely, it seems that the majority of the 4.5GW of renewable power will be sourced from offshore wind – particularly if the Victorian Government’s internal modelling indicates that the profitability of Victorian offshore wind is unlikely to attract the private investment required.
Mohsin Ali, Energy Market Intelligence Manager at Cornwall Insight Australia:
“State-ownership of controlled generation assets is not uncommon, with CleanCo in Queensland and many generators in New Zealand controlled by their respective government. Claims in the media that this amounts to renationalisation are overblown.
“However, there remains many questions on the Victorian Government’s proposal. It is still to be decided whether the SEC would act as a wholesale generator only or will sell to end users directly. Furthermore, investors may now be competing with a state government that could have access to cheaper financing. These unanswered questions could discourage potential investors, which is an important consideration when much investment is needed as existing coal-fired generation retires.
“Additionally, how the SEC operates its generation portfolio could have an impact on the market. The Victorian Government will have a ‘controlling stake’ in the SEC. If the SEC portfolio grows significantly beyond the initial 4.5GW target, the SEC could have a powerful role in setting the market price depending on the generation mix. This becomes even more impactful if the Victorian Government and other SEC investors do not require significant returns.
“The market will need to await further detail from the Victorian Government – as much investment is needed to meet the needs of the energy transition.”
- This is based on the historical average wind and solar conditions in the selected year (i.e. 2018 to 2022, excluding 2019). However, if low VRE seasons occur in the future, like the wind drought in 2016, more VRE capacity would be required.
Notes to Editors
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Cornwall Insight is the pre-eminent provider of research, modelling, analysis, consulting and training to businesses and stakeholders engaged in the Australian, Great British, and Irish energy markets. To support our customers, we leverage a powerful combination of analytical capability, a detailed appreciation of regulation codes and policy frameworks, and a practical understanding of how markets function.