NSW faces generation shortfall when Eraring retires as pressure on government grows

A report coming out on Thursday shows NSW will not have sufficient supplies to ensure reliable supplies of power.

A stockpile of coal at Eraring Power Station in NSW last year. At the station's cavernous turbine hall as much as 6 million tonnes of coal a year is crushed and loaded into furnaces. Picture: Brendon Thorne/Bloomberg via Getty Images

NSW will be short of sufficient energy generation capacity to guarantee reliable electricity supplies when Origin Energy’s Eraring coal power station retires in 2025, a much anticipated report from Australian Energy Market Operator has concluded.

The NSW government has been waiting for the findings of the AEMO 10-year outlook before deciding whether to endorse its own independent report, which The Australian revealed had urged the state to strike a deal with Origin.

In a report that will heighten pressure on the state Labor government, AEMO on Thursday confirmed Australia’s most populous state will have insufficient energy generation capacity to ensure reliable supplies in 2025.

AEMO chief executive Daniel Westerman said he could not comment on the prospect of Eraring staying open but said additional energy would ease concerns around security of supply.

“If Eraring stays open or not is a matter for the investor, Origin, and I guess they will be discussing that with governments,” Mr Westerman told The Australian,

“No doubt, having more energy in the system will further improve the reliability.”

The assessment is expected to cement the requirement that Labor moves to extend the lifespan of Eraring, which generates about 20 per cent of NSW’s energy needs.

Australia’s energy market has already priced in the expectation of a deal, though industry sources said formal talks between the government and Origin have yet to begin.

While Labor appears to have little choice but to underwrite or move to acquire Eraring, newly installed Premier Chris Minns is unlikely to want to bear the political consequences.

A buyout is widely seen as unlikely as Origin earmarks the site of Eraring for a $600m battery that capitalises on existing infrastructure. The NSW government rejected the chance to acquire Eraring in 2021, indicating a deal would be difficult to reach.

Without a deal, NSW would face the heightened threat of blackouts. Even if blackouts are avoided, prices would likely rise across Australia’s east coast - unpalatable for a new government.

Australia has endured significant price increases in recent years - primarily driven by a global energy crunch - and industry executives worry that public support for the transition to renewable energy will wane.

Australia has earmarked a rapid transition of its electricity generation to renewables as the cornerstone of plans to be net zero by 2050.

The NSW state Labor government cannot afford to undercutting efforts to cut emissions. Labor was elected into power on a platform of moving to curb emissions and prolonging Eraring would likely require significant taxpayer underwriting, unpopular with environmental voters even during a cost of living crisis.

Underwriting would likely see NSW have to cover any financial losses incurred by Origin to operate Eraring. But Eraring is on course to be losing money as soon as next year when the emergency coal price cap finishes.

The federal government in conjunction with state counterparts introduced a $120 a tonne cap on the price of coal, a scheme designed to put downward pressure on household and business bills.

The scheme will end in 2024 and Origin’s supply costs will spike, likely plunging the facility back to a loss-making operation.