Macroeconomics Advisory submission on Australian Energy Market Operator (AEMO) Draft 2022 Integrated System Plan (ISP), 11 February 2022

This submission is made in response to the Australian Energy Market Operator (AEMO) invitation for submissions on the Draft 2022 Integrated Systems Plan (ISP).

In summary:

• Australia is almost unique amongst large industrial economies in attempting to undertake its zero carbon transition by relying on solar and wind as the primary energy source without the possibility of back up from an alternative large scale grid of the type available in say California or Germany.

• Australia is betting the economy and our future prosperity that we can get this right where others have failed. Our view is that this path is likely to be viable only if we accept that the risks be properly integrated into the assessment of the long term back up and security services needed.

• Certainly, the Draft Integrated System Plan raises questions about the uncertainties surrounding the predicted trajectories, the risks associated with depending heavily on a narrow range of technologies and the assumptions adopted in the areas of long range technological development and consumer behaviour. But the forecasted potential capacity and contribution of solar and wind technologies may significantly exceed actual capability. This level of risk imposes large scale potential costs.

• Our modelling suggests that the impacts of the economic costs of uncertainty should place much greater weight on medium and long term storage than the figures contained in the ISP.

• Existing low or zero emissions technologies are available to replace coal and utilize the existing thermal infrastructure in a flexible manner. These can significantly mitigate the overall network risks and long term storage requirements associated with our current Optimal Development Path trajectory.

• We suggest the ISP include comprehensive analysis of thermal energy storage and generation in its projections. This includes: (i) estimating the benefits to the grid of large scale dispatchable generation; (ii) the savings in costs avoided to replace transmission and generation infrastructure; and (iii) the options benefits provided through hedging against uncertainties and risks associated with the current Optimal Development Path.