Executive summary

Key Findings

GPG in the NEM

Reducing levels of firm capacity (MW) and reducing energy reserves (MWh) are major changes occurring in the NEM associated with the renewable energy transition. The reducing level of energy reserves reflects the coal generator outlook, and that solar and wind generator and storage outputs are being developed to match NEM demand with limited spare energy. This is compounded by the highly seasonal nature of the NEM.

This has consequences for both supply reliability and the quantity of firm capacity available to support risk management products (such as cap contracts).

GPG is the current technology that can provide fast response capacity and energy (through continuous operation) to address the future challenges presented by unforeseen and extended coal generator outages, extensive wind generator lulls, and the seasonal nature of the NEM.
Without adequate GPG the reliability and price impacts of such events can be very substantial. This includes unserved energy and substantially increased energy prices of over $50/MWh per year.

Over 10,000 MW of new GPG will be needed by the mid 2040s, and this may be more under the higher AEMO 2025 demand projections. However, the current NEM settings do not provide the economics or support for the required future level of GPG.

East Coast Gas Market

Marsden Jacob Associates (MJA) modelling showed the demand for gas supply from GPG, both in terms of Maximum Daily Quantity (MDQ) and annual gas volumes (PJ), will more than double by the 2040’s (which is consistent with AEMO modelling).

To supply this gas (and non-GPG gas demand) will require substantial developments in the East Coast Gas Market. New supply is required by 2028.
These developments could entail most, if not all, of the development options that have been identified by AEMO, including at least one LNG import terminal, reversal and upgrading of identified pipelines, the East Coast Grid Expansion, Golden Beach, and gas supply from Narrabri.
Use of liquid fuels for GPG in place of reliable gas supply would result in substantially higher NEM electricity prices and potentially lower reliability of supply and is not considered a viable option.

Implications for policy

The report observed that the uncertainty of future developments may mean that GPG services are required quickly and unexpectedly. This underscores the criticality of GPG and gas market developments as we enter the energy transition.

This report presents analysis and modelling undertaken by MJA to quantify the future role of GPG, the price signals (spot and contract) the NEM is projected to provide for GPG investment, and the developments required in the East Coast Gas Market (ECGM) to support the required level of gas supply. The modelling involved detailed market modelling of the NEM and ECGM based on the most recent available information1.

Future Role of GP

A key issue in the transition occurring in the National Electricity Market (NEM) is the increasing role Gas Powered Generation (GPG) is projected to provide in the supply of firming services. All firming capacity is not equal, and supply from GPG, due to its ability to operate without energy limits, will be critical during periods of extended coal generator outages and extended wind lulls.

Without adequate GPG the reliability and price impacts of such events can be very substantial. This includes unserved energy and substantially increased energy prices (only moderated by the Cumulative Price Threshold). These could be in the order of $50/MWh per year.

In addition to physical supply reliability, GPG will provide firm derivative contracts, which are fundamental to the operation of the NEM. Firm contract supply requires support from firm physical supply capable of extended operation, which will reduce as the coal generators close.

Providing this role requires a sufficiency of GPG capacity and the capability of the gas market to provide reliable gas supply. In both these matters there is uncertainty. This is due to the exclusion of GPG from support schemes such as the Capacity Investment Scheme (CIS), and the substantial, yet uncommitted supply side developments required in the ECGM.

Level of GPG Investment

The amount of investment in new GPG required (to address need) will involve replacing all the retiring GPG and additional new GPG.
The amount of GPG development and resulting level of installed GPG capacity assessed as required (and compared to that in the AEMO 2024 ISP Step Change scenario which used higher demands and had earlier coal generator closures), is shown in Figure ES1 below. The amount required is substantial.

GPG Investment Economics

GPG economics was tested for GPG development by Vertically Integrated parties and GPG development by Independent Power Producers (IPP). This was done to reflect the different GPG operating incentives of these parties. Figure ES2 below presents the Internal Rate of Return (IRR) for the GPG developed (either as part of an VI entity or as an IPP).
The findings from this are summarised as follows:
• The level of GPG required to ensure supply reliability does not satisfy the 9% (pre-tax real) IRR specified by AEMO2
• GPG has lower spot energy revenue economics in a VI entity due to the portfolio utilising other generation, such as coal, in place of GPG.3 This means GPG in a VI portfolio will likely operate less.

The 9% IRR hurdle rate is in the opinion of MJA, low. The risk of GPG development, that includes carbon risk and gas supply risk, means that a higher IRR is most likely to be required.

This demonstrates that without changes to market signals insufficient GPG will be developed. This would have consequences to the level of reliability achieved, electricity prices, and by association the reform process.

ECGM Developments

Modelling by AEMO and supported by MJA has the level of gas demand by GPG (both the annual average and maximum daily levels) substantially increasing, reflecting the increasing role of GPG.

Modelling also supported the outlook that without substantial developments in the ECGM, gas supply would be highly limited in the Southern Gas Market (SGM)4. This would prevent GPG from performing its required role in the future.

The modelling that supported this conclusion consisted of modelling nine ECGM development paths, each of which was categorised into cases. The developments and required timings of developments, obtained from modelling, are presented in Table ES1 below.

With the exception of Case 5, each of the cases consists of a sequence of developments in addition to the Port Kembla Energy Terminal (PKET), which has completed construction and landside commissioning – noting there are still works to be done and a ship to secure. For example, Case 3b includes the developments in Case 3a, and Case 3c includes the development in Case 3a and Case 3b).
As shown, most of the development paths provided sufficient supply to the mid-2030s.

The balance of capacity (total supply TJ/day in excess of the demand POE55 TJ/day) provides a useful guide on the sufficiency of gas supply. For a robust gas supply system, supply capacity needs to exceed the POE5 demand TJ/day. Figure ES3 presents the capacity balance (TJ/day) in the SGM for the eight development paths modelled (as described in Table ES1) and for no new developments.

The small amount of reserve (TJ/day) in 2026 becomes almost zero in 2028. This indicates that new supply is needed by 2028 and most likely before this.
• The proposed development paths address gas supply to the mid-2030s, but not beyond. A key reason for this is that the demand profile for gas by the GPG increases significantly post 2035. This is shown in Figure ES4 below.
• If domestic gas supply is to be preferred over imported gas, at least one of the East Coast Gas Expansion (ECGE) or Narrabri is required.

GPG Reliance on Diesel

The consequences of a substantial reliance on liquid fuels would include an increase in average annual spot electricity prices of $20 to $40/MWh, if not higher, and associated issues with potential plant reliability and delivery.

Outlook Risk

It is noted that the modelling was confined to a coal closure and demand outlook based on the information available. There are credible scenarios that have higher demands (such as increased data centre development) and faster coal closure (that could occur due to plant failure). Under such outlooks the role and GPG would be increased and the gas supply requirements from the ECGM would be correspondingly higher.
This underscores the criticality of GPG and gas market developments as we enter the energy transition.

For more information and detailed graphs attached to this summary please download the full report.