Australia's Grid Hits Renewable Milestones Amidst Volatility and Geopolitical Headwinds

Australia's primary electricity grid experienced record demand in the final quarter of 2025, while renewable energy sources supplied over half of the power for the first time. This period coincided with a significant reduction in wholesale electricity prices.

However, the energy market continues to face challenges related to extreme price volatility and potential impacts from global gas market disruptions and conflicts in the Middle East, sparking debates over gas pricing and taxation.

Record Renewable Contribution and Demand Surge

During the three months ending December 2025, the Australian Energy Market Operator (AEMO) reported that underlying demand, including power from rooftop solar, reached an all-time high of 24,271 megawatts (MW). This marked a 2.2 percent increase from the previous high in 2024, driven by factors such as increased heating and cooling needs, electrification, the expansion of data centers, and population growth.

Concurrently, renewable energy sources provided 51 percent of the National Electricity Market's (NEM) total supply, a first for the grid, and an increase from 46 percent in the corresponding period of the previous year. Rooftop solar played a significant role, supplying an average of 4,407 MW during the quarter—also a record—and at one point contributed up to 61 percent of demand.

Combined with other renewable sources, including a 29 percent rise in wind output and a 15 percent increase in grid-scale solar, renewables demonstrated increased capacity.

During a heatwave, solar power supplied over 60 percent of the electricity consumed in the NEM at its peak on one day, with approximately two-thirds originating from rooftop installations. When combined with wind and hydropower, renewable sources met up to 76.6 percent of demand on that day, and 77 percent of peak demand during extreme heatwaves in January.

Over a seven-day period, solar contributed 30 percent of all electricity to the main grid, reaching a peak of 67 percent of consumption nationwide between 12 pm and 1 pm.

Conversely, coal-fired generation declined to a new average quarterly low of 11,544 MW, a 4.6 percent reduction from a year prior. Gas-fired power also reached its lowest level for the three months since 2000, decreasing by 27 percent compared to the same period in 2024.

Wholesale Prices Fall, Volatility Remains

Wholesale power prices across the national market averaged $50 per megawatt-hour (MWh) for the quarter, representing a 44 percent reduction compared to 2024 and a 43 percent reduction from the previous quarter. Price decreases were most substantial in Queensland, falling by 55 percent to $58/MWh, while South Australia and Victoria recorded the lowest average prices at $37/MWh.

Reduced price volatility was observed due to increased wind generation and battery discharge. In Western Australia's main market, renewables supplied 52.4 percent of demand, contributing to a 13 percent fall in wholesale energy prices to $69.55/MWh.

Despite these reductions, Australia's National Electricity Market (NEM) continues to exhibit high electricity market volatility globally. Spot power prices frequently drop to very low, sometimes negative, levels, yet can surge dramatically during periods of scarcity.

The NEM allows prices to fluctuate from as low as minus $1,000/MWh to as high as $20,300/MWh.

This volatility is attributed to factors such as the generation mix, where abundant solar power can suppress midday prices while more expensive sources like gas are needed for evening demand, and limitations in transmission line capacity between states.

Sustained lower wholesale prices are expected to potentially lead to decreases in retail electricity bills by mid-2026.

Battery Storage Sees Record Expansion

Battery storage capacity saw significant expansion, with discharge nearly tripling in Q4 2025. Approximately 1 gigawatt (GW) and 2.3 gigawatt-hours (GWh) of battery storage were added during this quarter, marking the highest volume of batteries commissioned in any single quarter on record.

In total, 1.9 GW and 4.9 GWh of battery capacity were installed throughout 2025, surpassing the combined total for the preceding eight years. Currently, about 17 GW of grid-scale battery capacity is either online or under construction across the NEM.

These batteries are anticipated to reduce the need for wind and solar farms to curtail output during high-production, low-demand periods and to supply significant power during evening peaks, thereby reducing prices and enabling greater dispatch of renewable energy.

Grid-scale batteries are increasingly competing with gas by storing surplus solar and wind power for release during evening peaks.

Gas Debate Intensifies Amidst Global Pressures

Natural gas continues to be a point of debate in Australia's energy transition. While some political parties assert its ongoing necessity for grid reliability and affordability, a report from the Climate Council indicated that increasingly expensive gas is a primary driver of rising electricity prices.

The report noted that despite supplying only about 5 percent of the total demand in the NEM, gas is reported to set the price of electricity up to 90 percent of the time, linking Australian household budgets to volatile global markets. Gas corporations reportedly generated close to $100 billion in additional revenue since the 2022 conflict in Ukraine.

Global events, including ongoing conflicts in the Middle East, are impacting international energy markets. Threats to the Strait of Hormuz, a critical shipping lane for oil and gas, and reports of Qatar halting liquefied natural gas (LNG) production, are expected to affect Australia's energy prices.

Global gas prices in Europe and Asia have reportedly risen by approximately 50 percent.

While Australia is a major gas exporter, it remains susceptible to these international price shocks, with potential increases in domestic costs. Rising gas prices affect electricity bills, heavy industry, manufacturing, and approximately 3 million Australian households connected to gas for various uses.

Concerns also extend to global oil prices, which have increased by approximately 10 percent due to Middle East disruptions. As Australia imports about 90 percent of its liquid fuel, local petrol prices could rise by about 40 cents per litre, and airfares are also projected to increase.

Policy Responses and Industry Divisions

In response to market dynamics, the federal government implemented a mandatory gas code in 2023 to ensure gas companies offer a "reasonable" price to the domestic market. A gas reservation scheme, requiring 15 to 25 percent of production for domestic use, was announced but will not be fully effective for new contracts until 2027.

There are increasing calls from crossbench Members of Parliament, trade unions, and energy experts for a new tax on the windfall profits of gas exporters, citing profits derived from geopolitical instability.

Independent MP Allegra Spender referred to these as 'windfall from war.'

Resources Minister Madeleine King acknowledged potential "ripple effects" from global shocks but also cautioned that new levies could hinder investment in gas projects and exploration, potentially affecting new supply necessary for the transition to net-zero emissions. Industry groups, such as Australian Energy Producers, have argued that new taxes could restrict production, leading to "gas shortfalls, higher energy prices, and the closure of Australian industries."

Future Outlook: Challenges and Transition Targets

Despite advancements, challenges persist in the energy transition. AEMO has had to intervene to maintain system strength in Victoria and New South Wales when synchronous generators (coal and gas plants) fell below minimum levels.

Constraints in high-voltage transmission lines led to the curtailment of available wind and solar capacity.

Delays in new transmission lines mean some coal plants, such as NSW's Eraring, will continue operation longer than planned. Investment in new renewable energy developments may not be sufficient to meet climate targets or ensure adequate replacement capacity as older coal plants close.

While batteries are anticipated to mitigate volatility, analysts caution they are not a complete solution, with long-duration storage technologies (like pumped hydro) and gas power remaining critical for supply security during periods of low renewable generation.

Victoria, Australia's most gas-dependent state, faces specific challenges, having opened new areas for gas exploration. Energy ministers are considering granting AEMO more authority to intervene in the gas market, potentially by contracting new infrastructure.

The government's target of 82 percent renewables in four years presents a significant challenge, despite the rapid progress in increasing the renewable energy share to 50 percent from less than 20 percent previously.