AGL has flagged increasing concerns over the commercial viability of new wind farm projects as rising construction costs begin to outpace expected returns, casting doubt on the effectiveness of government underwriting schemes intended to support renewable energy development. The company’s chief executive, Damien Nicks, highlighted these challenges in remarks delivered to the Committee for Economic Development of Australia, underscoring the growing financial hurdles facing large-scale wind projects.
Australia is under mounting pressure to replace ageing coal-fired power stations with renewable generation to meet its climate targets, including Labor’s goal of securing 82 percent of electricity from renewable sources by 2030. The federal government’s Capacity Investment Scheme (CIS) plays a central role in this effort, offering long-term revenue guarantees to renewable energy developers to reduce financing risks. Under the CIS, if wholesale electricity prices fall below a set benchmark, the government tops up revenues to agreed levels; if prices exceed the benchmark, developers reimburse the government.
Despite initial optimism, AGL’s assessment reveals a widening "value gap" between the escalating costs of constructing wind farms and the revenue these projects are likely to generate in the electricity market. This gap has been driven by inflation, supply chain disruptions, labour shortages, and rising borrowing costs. Nicks cautioned that the true test of government policies like the CIS will not be the number of contracts awarded but whether the projects ultimately reach completion and deliver usable capacity.
Currently, the government has awarded underwriting agreements for 94 renewable projects, including 31 wind farms totalling approximately 13.7 gigawatts of capacity. AGL itself holds a CIS contract for its proposed 600-megawatt Hexham Wind Farm in Victoria. Nonetheless, industry participants report difficulties in securing final development approvals amid escalating costs and regulatory hurdles, raising questions about the pace at which new wind generation can come online.
Nicks emphasized the ongoing importance of wind power, noting its complementary role to solar energy, especially during periods of low solar output. With the planned retirement of coal-fired stations, wind energy is viewed as essential for maintaining grid reliability and supporting the transition to a low-carbon electricity system.
Beyond supply-side challenges, Australia’s electricity demand is expected to grow substantially over coming decades, driven by increased electrification, electric vehicle adoption, and expanding data centre operations. The Australian Energy Market Operator forecasts operational electricity consumption could nearly double by 2050. Nicks pointed to data centres not only as a challenge but also as a potential opportunity to stimulate investment in renewable generation through sustained, large-scale electricity demand.
AGL plans to invest around $2 billion in renewable and firming projects currently under construction, with a development pipeline totaling 11.3 gigawatts. The company aims to add 12 gigawatts of new renewable and firmed capacity by 2035, seeking to balance the technical and financial complexities of energy transition while navigating an evolving policy and market landscape.