It's all about demand and supply

Hey Reader, welcome to The Energy's weekly data newsletter. This week we explore the potential for transmission cost tradeoffs as AEMO flags consumer energy resources.

Getting real about transmission costs

Australia’s energy sector drew a collective breath on Friday as the Australian Energy Market Operator landed some eye-watering numbers on rising transmission costs.

AEMO’s 202-page Draft Electricity Network Options Report with its 3-page glossary, 18 tables and 27 figures is no walk in the park for casual observers of the energy transition.

But it’s a pivotal document in terms of acknowledging the big gaps between what’s real, what’s likely and what’s still up for debate in the big infrastructure build out that to date has largely been happening on paper.

There are a few key charts worth calling out because they challenge assumptions or warrant work from the sector that goes well beyond transmission.

How much more?

AEMO’s Transmission Cost Database, prepared by engineering consultants including GHD, has had a big update to reflect the challenging supply-chain world we’re now living in.

But increases of between 10% to 55% in real costs for overhead transmission line and substation projects are not just about supply chains.

They also include additional community and landholder engagement (social license), additional contracting costs due to allowances for higher risks, costs due to added complexity of projects in remote areas, and market competition.

*This chart shows examples of changes in AEMO cost estimates and compares projects with identical scopes between the 2024 ISP values and the proposed 2026 ISP values. Source: AEMO*

The price of uncertainty

One basket of added cost is what AEMO calls “market activity”, which is meant to reflect "the impact on transmission costs of the concurrent delivery of large transmission projects that is attributable to competition for labour and materials".

Here’s the chart that shows the very real pain developers face as they compete on numerous fronts, including for labour. It fluctuates depending on how tight the market is, and one would assume right now, how Donald Trump is feeling about tariffs.

The much larger spread provided for 2025 is telling when it comes to uncertainty.

*Market activity impacts on project cost estimates in the updated Transmission Cost Database. Source:AEMO*

Beyond transformers

To demonstrate the point that the blowout in costs is not always going to be a supply-chain driven one, this chart shows what the forecasters think will happen to costs between now and 2049.

Many of the big increases are linked to the people side of development as opposed to materials - which begs the question: Can AI help stabilise some of these costs?

*Forecast change in transmission project resource costs in real terms between 2025-26 and 2049-50. Source: AEMO*

Where DER could help

AEMO’s report acknowledges the role of consumer energy resources.

It includes new costs related to distribution network opportunities including an estimated average cost of $0.4 million per megawatt (MW) of network capacity for voltage management optimisation to facilitate operation of aggregate CER, and an estimated average cost of $2.4 million per MW for subsequent larger network augmentations to facilitate export capacity upgrades in some cases. It’s seeking feedback on these numbers.

As DER expert Gabrielle Kuiper has pointed out, DER more broadly offers value in the reduced cost of network services, as illustrated in Baringa modelling from back in 2021.

Analysts have put the benefit of avoided distribution and transmission investment at $9.6 billion, and a DER economic boost of $19 billion by 2040, but only if reforms across network tariffs, direct procurement and other non-tariff DER integration measures are implemented.

*Network benefits from DER to 2040. Source: Baringa via IEEFA*

The challenge remains dealing with the capex bias, whereby regulatory frameworks inadvertently encourage or reward capital-intensive solutions over potentially more efficient operating expenditure solutions for integrating DER into the grid.

Speaking this week at the Energy Efficiency Council’s annual conference, NEM review chair Tim Nelson confirmed the demand-side challenges facing the market.

Expert view

“We are seeing new products come to market that reflect demand side, that reflect shaping, so taking energy at different times of the day, storing it and bringing it back later. But we've heard that that innovation is happening a bit slowly, and we've also heard that accessibility for smaller participants is an issue in terms of the findings in relation to long term investment markets.

We've heard very clearly that the market needs durable long-term investment now, very importantly, that's not just a supply side finding, it's also a demand side finding.

We have had lots of interaction with larger commercial and industrial users who told us very clearly: ‘We would love to make investments in our widget factory that would allow the widget factories to be far more flexible when it comes to energy consumption, but we don't know whether we can monetise that investment, because we can't get long-term certainty around what the benefits to us in offering that flexibility into the market might look like.’

So very interestingly, in the same way that a supply-side investor was saying, I would like more certainty so that I can get access to equity debt to build the energy generation facility, we were hearing the same thing on the demand side.”

Tim Nelson
NEM review Chair

Meanwhile, the UK has been busy building the largest flexibility market in the world, contracting 4GW of distribution network flexibility from DER last year.