REZs the Pig in the Renewable Snake

2025Q3

Public reporting of sentiment in the renewables sector and the progress of the energy transition often seems schizophrenic, swinging from unbridled optimism to dire pessimism from one week to the next. Investors in the sector are best minded to think long-term and to recognise that in a sector with 20-50-year asset lives change happens slowly.   Thus, while the headlines surrounding the CER reporting in August that no wind farms and only 615MW of solar farms reached financial close in the June quarter of this year, are factually correct, they probably miss the bigger picture.   

For the National Electricity Market (NEM), which covers the eastern states of Australia plus South Australia, the action is in the Renewable Energy Zones (REZ).  

What is a REZ?  A REZ is an area that has been designated by governments as an attractive area – from both a resource availability and grid perspective – for the development of renewable energy projects.  Within REZs there is an effort to coordinate environmental and development approvals, grid connection and transmission upgrade arrangements to provide for a coordinated development of large amounts of additional renewable energy. There are plenty of criticisms about how coordinated this really is – but let’s cut policy makers some slack and say that they are learning as they go and, hopefully, future REZs will be better.

There are two first REZs that are an important template for how this is likely to operate – the Central West Orana (CWO) REZ (located around Dubbo) and the South West REZ (located on the Hay plain in NSW along the NSW/Vic border). In Q2 the NSW government announced the access right winners for both of these REZs. For CWO there are 10 projects with 3.0GW of wind, 2.5GW of solar and 1.7GW of storage.  For the South West REZ, there are four projects with a further 3.2 GW of wind and 0.3GW of solar.

The vast majority of these projects are likely to start construction in the next year (and, if they don’t, this will be a huge warning sign that the energy transition is running seriously off track) and start commercial operations in 2028 – 2030. Across these two REZs this is a huge amount of capacity – 6GW of wind and 3GW of solar. Once fully operational, these projects are likely to deliver approximately 25 terawatt hours (TWh) of generation (that is millions of MWh). To put this in context, the Eraring coal fired power station generated 15.5 TWh in calendar 2024. Thus, the projects for these two REZs would comfortably replace – with a lot left over – the generation lost from the closure of Eraring (which is slated to occur in 2028). In fact, the CWO and SW REZ projects are probably enough to cover Eraring and Vales Point.

There are risks that not all of these projects will reach financial close quickly (the Yanco Delta project in particular seems to be quite slow). However, in the grand scheme of things, once these projects reach financial close, a huge chunk of wind and solar is going to drop into the market in three or so years later. 

This is the pig passing through the snake.

This is the good news. 

The bad news is that no-one really controls the timeline of delivering the REZs. There are lots of people who can screw it up but there isn’t anyone who, on their own, can make it happen.

For example:

• Individual project developers need to reach NTP for their projects and start construction.  But to achieve this they need approvals, offtakes, construction contractors and equity and debt investors. The biggest question mark here is whether there are enough equity investors with enough long-term confidence in the Australian energy market to fund these projects (or put another way, can the projects get sufficient offtakes to provide that confidence)?

  
  

• Local, State and Federal government have separate approval rights over each of the projects and the network upgrade works for each of the projects. While many of these are in place, not all are, and this is a further source of delays. While Chris Bowen can agitate within the Federal Government to fast track EPBC approvals, he has no direct influence over state or local governments.

  
  

• Particularly for CWO, there are substantial network upgrades that will connect the projects on a combined basis, to the broader transmission grid. It is quite possible for the underlying projects to be complete, but for a delay in the network upgrades to delay operation. Within this, there is further complexity. The CWO projects will be connected to the grid by the ACEREZ consortium (Acciona, Cobra and Endeavor Energy) which in turn connects to the Transgrid transmission network. Thus, a delay by either of them (or their underlying contractors) or a delay in getting approvals from EnergyCo and/or the AER (given that they are effectively approving the costs that will be passed on to all NSW electricity users for the cost of the REZ upgrades) could delay the project.

  
  

• Commissioning will be particularly tricky. AEMO is trying to coordinate this so that each REZ effectively joins the network as a single large project. However, how this actually works is untested.   Given the potential costs of delays and how these delays can cascade from one project to another, this has the potential to bevexatious.  Infradebt has witnessed the unique challenges of two projects trying to connect to the network nearby each other. For CWO, 10 projects are going to be connected at once.  Given the liquidated damages sums involved with construction contractors and PPA offtakers, this is a recipe for a lawyers picnic.

Thus, while Chris Bowen will be sweating on getting the CWO and SW REZs operational prior to 2030 (as his chances of hitting his 2030 targets in the absence of these projects being operational are zero), he doesn’t actually have much direct control.  

What are the implications of this:

• First, there aren’t going to be big additions of new wind supply to the NEM for the next two or so years.  There are a small number of large wind projects currently under construction (Golden Plains 2, Macintyre and Clarke Creek.) but after that, not much supply is going to hit the market until these REZs come through. Our prediction would be the SW REZ projects will actually beat CWO to operation.

  
  

• The secondary implication of this is that base load electricity prices, in the absence of a surprise major outage, are likely to be reasonably steady. There will be a gap between wind dispatch weighted prices and solar dispatch weighted prices, with the latter expected to continue to be weak. As a generalisation, solar construction is front-running wind (in both time and capex cost terms) and this is reflected in prices.

  
  

• Thirdly, our expectation is that Eraring will remain open until these two REZs are operational and this is likely to require an extension beyond the current proposed 2028 closure date. While this is disappointing for emissions and the planet, there are two good reasons for this. Politically, neither the NSW nor Federal government will want risks of supply shortages until they are sure the generation from the REZs is there to replace Eraring.

Economically, Origin is making reasonable profits from operating Eraring and, hence, has a strong incentive to keep it open. The main thing that would change this is lower night-time electricity prices, which isn’t going to happen until a lot more wind enters the market. That is, once the SW and CWO wind projects come online.