Significant changes in NEM capacity and demand over the last 10 years

Prior to AGL’s acquisition of Macquarie Generation in 2014, Macquarie Generation (then owned by the NSW Government) put forward a plan in 2009 to expand generation facilities in NSW by developing Bayswater B power station.

Since the time of that proposal in 2009, the National Electricity Market (NEM) has changed significantly. At that time, AEMO was forecasting significant year-on-year increases in NEM peak demand and overall NEM consumption, following the trend of demand and consumption increases since the inception of the NEM in 1998.

In 2009, the NEM was also experiencing a period of tight supply. In fact, in the summer of 2008-09, actual NEM demand exceeded AEMO’s forecasts due to some periods of particularly hot weather. As a result parts of the NEM subsequently experienced load-shedding events (interruptions to electricity supply).

NEM demand and consumption 1998-2017 (actual and forecast)

Source: AER, AEMO


As a result of these interruptions to supply and forecasts of even greater demand, AEMO signalled that significant new capacity was likely to be required to be built to keep the system reliable.

In the 2009 Electricity Statement of Opportunities (ESOO), the market operator AEMO also proposed that more than 10,000MW of capacity would need to be built in the five years from 2009-2014 to cope with these forecasts (see chart below).

Demand and generation capacity outlook from 2009 – 2015 

Source: AER State of the Energy Market 2009; AEMO Electricity Statement of Opportunities 2009


“However, these forecasts proved to be incorrect by a significant margin as a result of a number of unexpected factors including a significant fall in industrial electricity use following the Global Financial Crisis and a greater-than-expected uptake in rooftop solar generation.”

Despite projections, demand actually decreased and the NEM was over-supplied

In direct contrast to the forecasts, actual NEM demand decreased instead of increased, and for a period of time, instead of requiring new supply, the NEM was over-supplied. This oversupply lead to the under-utilisation and closure of several thermal generators including Northern in South Australia and Hazelwood in Victoria.

Actual NEM capacity and demand 1998-2017

Source: AER, AEMO


Moving forwards to today, the forecast NEM consumption is fairly flat, with demand not expected to dramatically increase over the coming years. At the same time, coal power stations are reaching the end of their design life and will shortly need replacing with new projects.

In contrast to 2008, however, the cost of generation projects has changed significantly. In 2005, the levelised cost of energy (i.e. cost of energy from a generator taking into account the cost of development) was cheaper for gas and coal than wind and solar.

“However, technical advancements and changes in fuel costs now mean that the cheapest new generation sources are wind and solar.”

Levelised cost of energy (2005-2025)

Source: AiGroup, 2017


Supply and demand characteristics in the NEM have also changed. Increasingly, because of the uptake of rooftop solar, less capacity is required during the day, meaning that the traditional notion of large amounts of ‘baseload’ capacity has changed.

“Increasingly, demand in the NEM is becoming ‘peakier’, and generation assets need to have the ability to ramp up quickly and be flexible and responsive to changes in demand.”


Renewable generation mix is cheaper in this context

As a result, the optimal mix of generation plant for the NEM that ensures the best utilisation and return on investment has changed. Increasingly, the needs of the system will be met by cheap wind and solar, with flexible gas, hydro, storage, and demand response providing the balance of supply. This was discussed in more details in AGL’s previous blog post ‘Does NSW need more baseload?

As a result, instead of the significant investments in new capacity that were forecast in 2008, AGL is looking at replacing its aging thermal plants with a mix of renewables, peaking plant, storage, and demand response.

“We have shown that this mix of generation will meet NSW’s generation needs at a lower cost to customers.”