Australia’s energy transition is accelerating, with a huge investment towards renewable generation as the country moves away from an ageing fossil fuel infrastructure.
The Australian Government has committed to several climate change targets such as reducing greenhouse gas emissions by 43% by 2030, increasing renewable electricity generation to 82% by 2030, and reaching net zero emissions by 2050.
Renewable energy will play a major role in achieving those targets. But as we progress, what will it cost to build the energy grid needed to get there, and what could that mean for electricity bills?
The cost of renewable energy is more than you think.
Wind and solar are widely considered among the lowest cost forms of new electricity generation. Once operational, they also avoid many of the ongoing fuel costs associated with coal and gas generation.
However, the price businesses ultimately pay for electricity is influenced by much more than the cost of producing energy.
Australia needs significant investment in new generation, transmission infrastructure, distribution networks, storage and firming capacity as ageing coal fired power stations progressively leave the electricity system.
And the cost of delivering that infrastructure is increasing.
Origin Energy CEO Frank Calabria warned that the cost of constructing wind farms has increased by around 50% since 2020, with financing, labour, steel, concrete and logistics all contributing to higher development costs.
According to Calabria, projects that may have been financially viable are becoming increasingly difficult to deliver economically. One example is Origin Energy’s proposed Yanco Delta wind project in New South Wales.
The 1.5 gigawatt project is expected to require more than $4 billion in investment and has received underwriting support through the Australian Government’s Capacity Investment Scheme.
Despite that support, Origin has described the project economics as challenging, with a final investment decision targeted for early 2027 still uncertain.
It highlights one of the major challenges facing the energy transition.
“Australia has ambitious renewable and emissions targets, but achieving them requires investment on an enormous scale. If the cost of financing and constructing projects continues to rise, delivering new generation at the pace required could become increasingly costly.”
Network charges and infrastructure contribute to cost pressures
New electricity generation needs to be connected to the grid and transported across Australia, which requires substantial investment in new and upgraded transmission and distribution infrastructure.
The same cost pressures affecting renewable projects are also being seen across transmission developments, with projects becoming more expensive and, in some cases, taking longer to complete than originally anticipated.
Energy bills reflect more than wholesale electricity prices. Network and metering charges, infrastructure investment and the cost of maintaining a reliable electricity grid also contribute to what businesses ultimately pay.
Renewable electricity may be relatively inexpensive to generate once the infrastructure is operating, but Australia first needs to build the foundations capable of supporting significantly more renewable energy.
Renewables may not mean lower electricity prices
Electricity prices will continue to move as market conditions change.
Weather, electricity demand, available generation, planned and unplanned outages and fuel costs can all influence wholesale pricing.
There may be periods where businesses benefit from lower wholesale electricity prices. In fact, lower benchmark electricity prices are expected for some customers in 2026 and 2027.
However, industry leaders are warning against assuming that the transition will lead to sustained reductions in electricity bills.
The Australian Energy Council has modelled wholesale electricity prices stabilising at around $100 to $120 per megawatt hour in the medium term, compared with averages of around $80 to $100 per megawatt hour in recent years.
Those estimates do not include the additional transmission and distribution investment required to support the transition.
Government and industry challenges
The issue is not whether Australia should continue its transition towards renewable energy. There are clear targets for reducing emissions and increasing renewable generation, while ageing fossil fuel generation will continue to be phased out.
The bigger challenge is how we deliver that transition efficiently, reliably and affordably.
The government is already playing a significant role through initiatives that are designed to encourage investment in renewable generation, storage and the transmission infrastructure required to support the changing grid.
Can renewable projects remain commercially viable as construction and financing costs increase? And how much of that cost will flow through to households and businesses?
Calabria has described Australia’s cost of building major infrastructure as a broader structural issue that cannot be solved by the energy industry alone. As Australia works towards 82% renewable electricity by 2030 and net zero emissions by 2050, maintaining transparency around the cost of that transition will become increasingly important.
What does this mean for your business?
The energy transition does not mean market volatility is going away. There will continue to be periods where wholesale electricity prices present opportunities, as well as periods where market conditions place upward pressure on costs.
At the same time, increasing infrastructure and network investment means businesses need to consider more than the headline direction of wholesale electricity prices.
Understanding when an energy contract expires, what is happening in the wholesale market and how network and other charges are affecting the overall bill can help businesses make more informed energy decisions.
Reviewing your business energy contract?
Choice Energy can review your current energy rates and help you understand the options available in the market.
