Renewable Energy: A Key Market Update

Australians have watched with growing trepidation the roasting of the Northern Hemisphere this summer. Many are wondering what the extremes of heat, drought and fire in places such as Germany, the UK and Canada might mean for Australia’s looming summer.

According to the Climate Change Authority, a strong majority of Australians (consistently around 70–80%) express concern about climate change and strong support for renewable energy (typically around 75–85%). While cost-of-living pressures understandably dominate day-to-day concerns, many businesses remain supportive of the transition to low-carbon energy and the pursuit of ‘Net Zero’.

So, what is happening with renewable energy?

The Federal Government’s target remains 82% renewable electricity generation by 2030. New South Wales and other states maintain ambitious renewable energy targets of their own, although Queensland has taken a step back under the Crisafulli Government.

At the same time, there is increasing urgency in New South Wales and Victoria as the closure of ageing coal-fired generators draws closer. These generators have served the economy well for more than 50 years, but they are increasingly unreliable and no longer fit for purpose.

So why has the development of utility scale solar and wind projects slowed and, in the case of wind, come close to stalling over the past two to three years?

Four factors stand out.

Success Creates Its Own Challenge: Cheap Power Is Making New Projects Harder to Finance

Renewable generation has been so effective at lowering wholesale electricity prices that many projects now struggle to demonstrate sufficient revenue to satisfy financiers. Lenders and investors need confidence that projects will generate enough income to service debt, deliver returns and compensate for risk.

Put simply, renewable energy has helped drive down power prices so successfully that financing the next wave of projects has become more difficult.

The Revenue Certainty Problem: Financing 30-Year Assets with 3-Year Contracts

Since the creation of the National Electricity Market in the 1990s, contracts for the sale of electricity have typically been relatively short, often two to three years in duration. Contracts of three to five years are becoming more common, and the market has seen some extending as far as ten years. Even so, they remain well short of the 25-to-30-year financing horizon typically required for renewable energy projects.

The result is a significant tenor gap between the long-term capital needed to build projects and the shorter-term revenue contracts available to support them.

Community Opposition and Planning Delays

Planning delays continue to slow project development, particularly for wind projects. Wind projects are increasingly facing organised objection campaigns, many involving individuals and groups lodging objections despite having little or no connection to the communities in which projects are proposed. Alongside legitimate concerns raised by local communities, these campaigns have become a powerful brake on wind energy development.

Queensland has raised sovereign risk concerns by cancelling approvals for major wind projects and signalling opposition to new developments.

The Grid Challenge: Infrastructure Struggling to Keep Pace

The build out of the electricity grid from a centralised hub-spoke model based around a few large coal-fired generators, to a more distributed model with a large number of smaller wind and solar generators, geographically dispersed — has taken longer than hoped. This has left the existing grid constrained, often unable to accommodate the energy being produced during the day by solar farms.

To these four structural challenges we can add Australia’s ongoing debate about climate policy. For international investors in particular, this raises a nagging question: if a future government were to change course, what would that mean for investment risk? Queensland has already demonstrated that policy reversals in renewable energy are not merely theoretical.

Government Programs to Address Market Challenges

Commonwealth and State governments have introduced increasingly sophisticated revenue-support mechanisms designed to help projects reach financial close.

Long-Term Energy Service Agreements (LTESAs) under the New South Wales Electricity Infrastructure Roadmap, and Capacity Investment Scheme Agreements (CISAs) at the Commonwealth level, are awarded through competitive tender processes targeting renewable generation, energy storage and hybrid projects.

Looking beyond 2030, the Commonwealth government is developing the Electricity Services Entry Mechanism (ESEM), intended to replace the CIS framework. The proposed scheme would create a market-based, tradeable revenue support mechanism operating through a central clearing house, supporting three classes of projects:

• Bulk energy generation (renewable generation)
• Energy shaping (storage and time-shifting)
• Firming (dispatchable energy and storage)

Decarbonisation Beyond Electricity

The Albanese Government’s amendments to the Safeguard Mechanism established a pathway for Australia’s largest emitters to progressively reduce emissions intensity. The policy is specifically designed to have economy-wide ripple effects across value chains.

Australia’s Diesel Dependence

Alongside this summer’s extreme weather events, conflict in the Middle East has once again highlighted the risks associated with Australia’s dependence on imported fuel. Australia is one of the world’s largest importers of diesel and refines very little of its own fuel. Accessible stockpiles remain limited (around 34 days) should global supply become constrained.

The rapid growth in electric vehicle sales, including commercial vehicles, suggests many businesses believe there is a better way. For some, continued dependence on diesel is increasingly becoming a material business risk.

Yet diesel consumption continues to grow. The Fuel Tax Credits Scheme remains one of the largest expenditures in the Federal Budget, costing approximately $10 billion in the year to June 2026. Australian taxpayers continue to subsidise diesel consumption on a very large scale, rather than directing those funds towards electrification and decarbonisation initiatives in agriculture, industry and transport.

Opportunities for Business

The decarbonisation of the electricity sector is well underway, although the pace of new renewable generation is being constrained by financing challenges, planning delays, grid limitations and ongoing policy uncertainty. Increasingly, attention is shifting beyond electricity to transport, agriculture and industry.

For many businesses, the ongoing transformation presents opportunities as well as challenges:

• Rural and agricultural businesses may be able to secure long-term lease income by hosting renewable energy or energy storage projects on part of their landholdings, providing vital revenue security as agriculture is impacted by increasing climatic extremes.
• Recent changes to the Renewable Energy Target now enable owners and long-term occupiers of industrial and manufacturing facilities to use rooftop solar installations to generate tradeable Small-scale Renewable scheme certificates.
• Small and medium-sized businesses, together with commercial and industrial energy users, can now access rebate incentives for battery storage systems 20kWh to 30MWh through the New South Wales Peak Demand Reduction Scheme (PDRS). Announced on 18 August, the rebooted PDRS opens on 1 September 2026 and is estimated to improve payback periods for batteries from 7 to around 4 years.

Navigating the Opportunity

Energy markets are complex and the energy transition is one of the most significant economic transformations Australia has undertaken. Despite the friction, delays and political headwinds, the transition continues. The changes underway will create risks, opportunities and strategic decisions for businesses across almost every sector of the economy.