Network companies are on notice to justify huge spends on major grid upgrades, as their business cases get squeezed between another doubling in transmission costs and better, potentially much cheaper options underpinned by consumer energy resources.
Feeling the heat is the contentious VNI West project – a proposed 500 kV interconnector from near Bulgana in Victoria to a new substation named Dinawan in southwest New South Wales – whose estimated cost has soared by nearly 100 per cent in little more than a year, according to a major new report.
The Australian Energy Market Operator on Thursday reached the halfway point in the two-year cycle to develop the next Integrated System Plan (ISP) for the National Electricity Market, as it hurtles towards 82 per cent renewables by 2030 and net zero in 2050.
As part of the planning for 2026 ISP, essentially a roadmap for investment in electricity generation, storage and the grid, a 2025 Electricity Network Options Report summarises more than 100 potential electricity network augmentation projects across the NEM.
But the report warns that the inputs that will determine which network projects make it into the 2026 ISP are changing rapidly, in particular transmission cost estimates, which AEMO says in some cases range up to around 100% higher than costs estimated in 2024.
This is a near doubling of the 55 per cent cost increase for new transmission line projects AEMO foreshadowed in its Draft 2025 Electricity Network Options Report, published just over two months ago in May.
“After accounting for inflation, transmission cost estimates are markedly increased from equivalent estimates considered as inputs to the 2024 ISP, ranging up to around 100% higher in some cases,” the 2025 Electricity Network Options report says.
One such case, as noted above, is the Victorian to New South Wales Interconnector West, or VNI West, which is being developed by Transgrid and AEMO Victorian Planning.
According to 2025 Network Options report, AEMO currently estimates the cost of VNI West at $7 billion, while its developers put it closer to $7.6 billion (with scope to be 30 per cent lower or 50 per cent higher). As part of the 2024 ISP, published in December 2023, the cost was put at roughly $3.9 billion.
AEMO says the big jump in costs is being driven by a range of factors, including sustained supply chain pressures, project complexity, costs of social licence and additional community and landholder engagement along deeply unpopular transmission line routes.
There are also additional contracting costs to account for risk allocation in EPC contracts in response to pressures in the current market.
“This important finding indicates that transmission projects in the NEM are currently experiencing very strong competition for workforce and resources both within Australia and globally, as well as prioritising local engagement and adjustments to project scope and transmission line routes to accommodate community engagement and feedback,” the report says.
“We recognise that higher costs for network development would ultimately affect consumer bills,” adds AEMO executive general manager of system design, Merryn York.
“These revised cost inputs are material, and we will consider them carefully as we model an optimal development path that delivers the most efficient outcomes for consumers, while meeting government energy and emissions targets.”
Adding to the challenge of soaring capital costs is increased competition from alternative options, including the use of distribution networks to host large-scale renewables and to strengthen weak parts of the grid through the smart management of consumer energy resources (CER).
“AEMO has now begun engaging with distribution networks to incorporate important insights about their networks and the impact on CER into future ISPs,” the report says.
“This report provides, for the first time, proposed distribution network opportunities to facilitate the operation of CER and other distributed resources.
“These would add to the existing ability of the distribution networks to connect and operate CER across the NEM and may be required to operate the forecast uptake of CER (and other distributed resources) in the various ISP scenarios.
“AEMO has also included several distribution network augmentation options which would connect utility-scale generation and storage to high-voltage distribution networks, or sub-transmission networks,” the report adds.
“AEMO has included distribution options which are jointly planned between DNSPs, TNSPs and jurisdictional bodies, add more than 350 MW of additional network capacity, and are cost-competitive with REZ options.”
Essentially, the message is that, with the publication of this report, AEMO now has the best range of information currently available to start modelling the 2026 ISP, which – given the additional inputs – promises to be markedly different from any ISP before it.
And it’s not just transmission networks that are on notice. AEMO says distribution businesses will need to get their ducks in a row – pun intended – to play an effective role in a rooftop solar-soaked future grid.
The sudden ramp up in home battery storage uptake following the July launch of the Cheaper Home Batteries rebate is also expected to change the game, significantly, for behind-the-meter resources.
“The distribution network will play an increasingly important role, linking individual consumers, their consumer energy resources (CER) such as rooftop solar and household batteries, and other distributed resources into one integrated power system,” the report says.
“New investment in these electricity networks will be essential to efficiently provide consumers with access to secure and reliable energy, and enable a net zero economy.”
