Understanding the cost of Australia's electricity transition

9 October 2023 8 min read

This explainer was updated on 09 December 2024 with the release of the draft 2024-25 GenCost report.

Electricity generation accounts for about a third of Australia’s greenhouse gas emissions.

It provides our nearest-term pathway to achieving the decarbonisation required to meet Australia’s 2050 emission goals.

Developments will take place in other sectors in the longer-term, however, the electricity sector is where we can manage Australia’s carbon budget early and other sectors may choose to leverage decarbonised electricity as they work toward 2050.

So, it follows that understanding the costs of different new-build electricity generation technologies – whether for renewables, nuclear or gas – is central to help guide planning and decisions to support Australia’s electricity sector transition.

The GenCost report is a key cost analysis document that contributes to this planning.

Its authors and contributors work to match the information it provides with the needs of industry and other stakeholders. As a result, it has become an anticipated and reputable information source – albeit one that can be selectively referenced to support different, and often polarising, assertions about our energy future.

GenCost is policy and technology neutral, and complex. Let's explain GenCost’s use of industry standard modelling on costs, which attracts public interest.

What is the GenCost report?

GenCost is a collaboration between CSIRO, Australia's national science agency, and the Australian Energy Market Operator (AEMO) to update the costs of electricity generation, energy storage and hydrogen production. GenCost reports are developed over an annual cycle and includes opportunities for government, industry, the private sector, and economic specialists to ask questions and provide input. Each year more than 100 different organisations do.

GenCost was first published in 2018 to create a common data set that could be used across the energy sector to enable standardised electricity system modelling. GenCost responds to the question: what will it cost to build different electricity generation technologies now and in the future?

New cost projections are released to government and industry via a draft consultation report in December each year. The capital costs of technologies are updated each year with input from an engineering firm. The final report, released mid-year, reflects the feedback and input received.

As well as referencing a range of relevant national and international energy reports, stakeholder consultation and input is a critical part of the process to analyse and update GenCost’s data and projections.

How GenCost calculates costs

GenCost responds to the question: what will it cost to build different electricity generation technologies now and in the future? To do this, GenCost provides two sets of data for current and projected costs:

• Capital cost data
• Levelised cost of electricity (LCOE)

GenCost’s current and projected capital costs for electricity generation and storage technology are a necessary and highly impactful input into electricity market modelling studies, such as those conducted by AEMO. Governments, regulators, and private industry use capital cost data for a range of planning and forecasting purposes, such as evaluating new investments and consideration of alternative policies.

LCOE, on the other hand, is a simple and widely used metric that provides a quick way of comparing the competitiveness of alternative sources of electricity generation. LCOE is useful for comparing generation costs across technologies but should not be confused with whole-of-system costs which consider the broader impacts of integrating different energy sources into the grid.

What can levelised cost of electricity (LCOE) tell us?

LCOE helps us understand how much it costs, on average, to generate electricity from a range of technologies that could be built now or at a future time.

It's like calculating the average cost of making any product from a combination of capital, labour, and material inputs. If you’re running a business and considering a new production line, you would need to add up all the costs of producing your product, then divide by how much of that product you can make.

LCOE does the same for electricity, helping us compare different ways of making it, like solar, wind, coal or gas. It shows us which method is cheaper for producing electricity.

On a technical level, LCOE tells us the average price of electricity an investor would need to receive over the life of their investment to recover both their capital and operating costs of building and running the technology. A low LCOE indicates the technology is likely to be competitive, however investors will conduct more in-depth studies for specific sites and market conditions that are not covered by LCOE analysis.

Because the LCOE is the price of electricity that new investors would need to break-even, LCOE data is also itself one indicator of future electricity prices required to ensure sufficient supply capacity is built to meet demand.

Are renewables the ‘cheapest’ form of energy?

Yes. Since 2018, GenCost has assessed that renewables have the lowest LCOE range of any new-build electricity generation technology. This conclusion can only be reached after considering the additional costs required to ensure renewables supply reliable electricity.

We know variable renewable energy (VRE), like wind and solar photovoltaic (PV), generates electricity intermittently. It requires significant extra costs to firm and integrate their supply into our electricity system.

So, to make a fair comparison of the competitiveness of VRE with other technologies that do not need firming or integration, we include these extra VRE costs in our analysis. These costs vary depending on what percentage VRE represents of the electricity system.

For example, these extra VRE costs are low when VRE represents less than 50 per cent. This is because irregular power generation can be smoothed out through the flexibility of the existing generators such as gas, coal, and hydro. Most new solar and wind farms at this level can also be placed on existing transmission routes.

However, extra VRE costs increase when VRE represents more than 50 per cent of the electricity system. This is because we need to construct purpose-built renewable firming technologies and new transmission infrastructure to access the significant additional renewable energy farms needed.

Our Renewable Energy Storage Roadmap is a helpful reference about the types of technologies that might be deployed with VRE.

We calculate the extra cost of VRE for electricity generation shares of up to 90 per cent and find that VRE remains the lowest cost generation source.

What about sunk costs? Or the cumulative costs to reach 2030?

When we are evaluating the cost of variable renewables from the perspective of an investor in 2030, the costs incurred before 2030 are not relevant to the decision an investor needs to make.

However, stakeholders requested integration costs be presented that account for storage and transmission projects that will be delivered before 2030. These have been sponsored by government or approved by the relevant regulator on the basis that they will be needed to support variable renewables.

To accommodate that request, GenCost also began presenting variable renewable integration costs for the current year of the report, which include committed and under construction pre-2030 storage and transmission projects.

Even with the higher cost of generation technologies in 2024, VRE remains the lowest cost generation source.

What is the Integrated System Plan? How can it help understand costs and benefits to 2050?

AEMO’s Integrated System Plan, developed over a two-year period with hundreds of stakeholders, uses technology capital cost data from GenCost and other data to produce a roadmap for the least cost way to supply reliable electricity to homes and businesses while supporting Australia’s net zero transition.

The Integrated System Plan uses capital and operating costs for generation, firming (batteries, hydro and gas) and transmission to determine the least cost pathway to meet an evolving consumer electricity load.

AEMO’s modelling explores the trade-offs between storage, transmission, spilled renewables, existing hydro and gas peaking generation as alternative ways of supporting variable renewable generation. It finds a combination of strategies to be the least cost approach. The least cost combination of strategies changes over time as we learn more about their relative costs.

All resource mixes explored by AEMO’s Integrated System Plan are required to meet the reliability standard for the electricity system.

What about nuclear energy?

The GenCost 2023-24 report (released 22 May 2024) was the first time detailed large-scale nuclear costs were presented for Australia, reflecting increased stakeholder interest.

While Australia has no experience with large-scale nuclear units, a review of the available evidence did not uncover any known technical barriers.

However, nuclear power was found to be more expensive than renewables and would take at least 15 years to develop, limiting its potential to reduce emissions and address climate change.

GenCost’s nuclear cost estimates can only be achieved if Australia commits to an ongoing nuclear building program, after constructing an initial higher-cost unit or units. The first unit of any new technology in Australia is likely to incur higher costs, with a potential first-of-a-kind cost premium of up to 100 per cent, which is not included in GenCost estimates.

The draft 2024-25 GenCost Report (released 09 December 2024) responds to subsequent requests from nuclear advocates. This included revising cost considerations to around a nuclear facility’s longer term operational life (suggesting a 60 year time frame), a higher operating capacity factor (of 93%) and a shorter development timeline.

The report responds to these in detail, finding:

• No comparative cost advantage for nuclear when longer operational time frames are applied across all technologies,
• Higher capacity factor claims are not supported by global evidence, and
• Shorter development timelines are only achievable in countries with different governance and community consultation requirements to western democracies like Australia.

Here's more on the question of nuclear in Australia’s electricity sector. From developing low-emissions technologies to supporting the energy transition and improving energy efficiency, our research is helping tackle the challenge of decarbonisation.