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Investments in renewable energy projects will continue to decline in Eastern Australia through 2021, according to Wood Mackenzie.

Grid congestion is a key factor in the decline. Factors including grid limitations, such as system strength issues in Victoria, New South Wales, and Queensland, and low spot prices for large-scale generation certificates are expected to continue hindering the market growth.

Eastern Australia reduced its investments in renewables by more than half to $2.9 billion in 2019 from $6.9 billion in 2018.

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Australia’s renewables project pipeline in the National Electricity Market (NEM) remains massive at 67GW capacity (6GW under construction and 61GW in announced projects), but the current conversion rate to firm projects is low due to grid congestion.

Despite the anticipated decline in investments, new renewables capacity required by 2040 is expected to reach 30GW. However, existing transmission lines can only accommodate 13GW of new capacity hence the need to expand transportation infrastructure.

Revenue generated from renewables is also expected to decline due to a decrease in average marginal lost factors (MLF) for wind and solar energy.

The continued decline in MLFs will add uncertainty to investment planning resulting in declines in cash flow for renewable energy developers and limitations in investments.

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Wood Mackenzie principal analyst Robert Liew said: “With about 5GW of wind and solar installations added last year, Australia is a major market for renewable energy investments in the Asia Pacific region. However, looking beyond 2021, new investment is drying up.

“Australia needs a well-defined road map to address investments in grid infrastructure if renewables growth is to continue.”

Wood Mackenzie senior analyst Rishab Shrestha said: “In general, solar projects have seen greater declines in MLFs compared to wind power, but at the project level, MLF values can vary significantly even if they are in the same state.”

Under the current grid system, developers have been warned that even renewable energy projects that are under construction might not be able to connect to the grid on time, especially in western Victoria, with delays of upwards of nine months. As such, Wood Mackenzie expects renewables deployments are likely to be driven more by grid availability than resource potential.

Despite these barriers, the levelised cost of electricity for renewables is expected to remain competitive. Even hybrid battery storage systems that are charged by renewables could match gas-fired power within the next five years.

With its open electricity market and large-scale renewable projects reaching upwards of 1GW in capacity planned, the eastern Australia market continues to attract international investors. However, investors will need to remain cautious of the impacts of grid constraints and MLF. Australia’s renewable energy potential can only be achieved when there is greater clarity on transmission investments that can support the future sustainability of the sector.