Intro

AEMO's Integrated System Plan, the ISP, is one of the most thorough documents in the Australian energy market. The ISP is a least-cost capacity expansion plan, covering the next 30 years. It works out the cheapest mix of generation and transmission required to both keep the lights on and hit emissions targets. It lays out when and where to build that transmission capacity and supply across three major scenarios and several sensitivities. It often is quoted as a source of truth - but we think this is risky and deserves a further commercial layer before sharing it as gospel.

Consider: a least-cost central plan is the truth if one coordinator builds the entire grid. The NEM isn't built that way - it's mostly privatised. So, every project has to find its own financing and clear its own hurdle rate. A plan that's optimal for the system as a whole isn't automatically one the market will agree upon. This report identifies some gaps in the ISP that the market may struggle to deliver upon.

It's important to flag - this is not an attack on the ISP. Rather, it is meant as an additional commercial layer to support the understanding of the challenges of the energy transition.

TLDR

• The ISP is a least-cost plan, built with certain objectives and constraints.
• We share some considerations around key ISP scenarios and assumptions.
• Demand, we think needs to be reshaped.
• Supply, we think is too optimistic, overbuilds, and leans too heavily on solar and short-duration storage, which will come with a higher longer-term cost.
• Network, we think has been sidelined.
• Fuel, we think has been set inversely across the scenarios.
• This is our commercial model applied to the ISP - what do you think?

Price outlook: nothin' to worry about

Smooth sailing ahead: the AEMO scenarios suggest we're in for sustained low prices. That's possibly the first warning sign.

Again, these are not Varial's view of future prices. They're what our market model spits out when you plug in AEMO's 2026 Final ISP scenarios and assumptions. But the results are what you'd expect to see from a long-term equilibrium model aimed at hitting both emissions targets and reliability requirements. In this world, new build arrives on time, clears its cost hurdles, and competes prices back to the cost of the marginal entrant. It sounds great, but we don't think it's realistic. If you're carrying real risk in this market - placing your faith on this is very optimistic.

Demand: that looks deep

Everything starts with the load the grid has to meet. At the quarterly level the ISP's demand looks fairly reasonable. Maybe a touch on the lower side if you're bullish data centre load growth.

But, let's zoom in. Look inside the daily profile and the assumed daytime load collapses. It's not non-scheduled PV, it's not over-forecasting rooftop PV. As far as we can tell, it's just that the shaping of native demand is too low during the daytime hours, possibly due to a min demand scaling adjustment. Worth noting, of course, that 2026 is a partial year, and as sunshine picks up again, it may even out. AEMO did reduce this trough in the final assumptions relative to the draft versions, but a big gap remains that we can't reconcile.

The issue with this is that it sets up daytime prices for collapse. With demand that low during the day, you can expect a lot of negative or $0/MWh prices during the day, with solar and coal min-gen setting prices.

Supply: glass half empty

Supply is the biggest delivery question in the ISP. And it's cursed by the inherently optimistic forecaster - projects always arrive on time and they always clear their cost hurdles. Reality isn't that simple.

Can we even build it this fast?

The sheer amount of capacity planned to come online is staggering. Line up what has commissioned per year through history against what the ISP says commissions per year from here and it looks... optimistic. It's a classic problem - of course my project is going to be delivered on time!

Perhaps most worrying, is the possibly rushed and subsidised build-out of primarily solar capacity that isn't actually lowest cost for the system in the medium- to longer-term, just to try to hit emissions targets.

Optimism - a forecaster's downfall

You can see the slippage already in AEMO's own inputs: compare the commissioning dates in the IASR against the more recent GenInfo, and 22 of the 30 committed and anticipated projects we can match have already moved back, most by six months or more. Optimistic dates feed straight into the supply build, and the supply build sets the price, so the optimism compounds downstream. Note: we use the latest GenInfo in our modelling.

And it may not pay

Say the build does arrive on time. The next question is whether it earns enough to get built in the first place. As more solar comes on, the middle of the day fills with cheap energy and the price each solar farm actually captures falls, so the more you build the less each one earns. The chart below tracks that captured price, wind and solar, across every scenario and weather year.

Now put that capture next to what a new plant needs to earn. Take the IASR's own build cost, spread it over the asset's life at the IASR's own cost of capital, and divide by the energy it generates, and you get the price each technology has to capture just to break even. Set the two against each other and very nearly all of the plan's new build fails to clear its cost of capital. On this run new solar never earns what it needs in any year, capturing roughly a third of its break-even price, and new wind only clears until 2028 before it too runs $10 to $25 a megawatt hour short for the rest of the decade. The red shaded gap is the subsidy per megawatt hour that someone has to provide for the plan's build to actually get financed - or otherwise, the losses that we predict investors will be exposed to. Again, worth remembering: this isn't what Varial expect VWAPs to be in commercial reality, just what we would expect if AEMO's assumptions hold.

ISP 2024 → ISP 2026: what changed

Compare the two latest ISP's like-for-like - Step Change, total installed capacity by 2049-50, from AEMO's own generation and storage outlook workbooks - and the pivot is clear. The 2026 plan builds less wind and less transmission, and leans harder on solar and batteries to make up the difference.

And one shift the 2050 snapshot hides entirely: coal. The 2024 plan had coal essentially gone by 2037. The 2026 plan keeps around 6 GW still running in 2035, nearly 4 GW in 2040 - where the 2024 plan had none - and doesn't fully retire it until about 2049, more than a decade later.

We think building out solar and storage is a shorter-term win for a longer-term loss - likely at a higher longer-term cost to reliably serve energy to consumers. The real question: is this capacity commercially viable?

New build: too smooth

For the data experts out there, there's another optimistic supply assumption worth considering too. Every new wind and solar project in a renewable energy zone (a REZ, an area earmarked for lots of new build) is effectively given the same smooth, zone-average generation trace. That's a reasonable approximation if you picture the fleet spread evenly across the whole viable area. Real build-out doesn't look like that though - it comes in a handful of very large projects clustered in the pockets of the zone. A lumpy, concentrated fleet swings harder than the average trace: sharper peaks, deeper troughs, more of the extreme intervals that actually set prices. The smooth trace assumes away exactly this volatility.

Network: the neglected child

The really hard part of capacity expansion is network expansion - not supply. Defining the project, abstracting it to a model, estimating the timeline - all horribly difficult tasks. Again, like supply, human nature is to optimistically assume a better timeline than reality might reflect. Line up some of the flow-path and REZ expansion projects in the 2024 ISP against where the 2026 ISP now puts them, and the dates have moved by years, mostly later.

The same handful of flagship interconnectors, and the in-service year each edition now expects them - later, or moved off the plan into the committed pipeline:

And the ISP editions only show you the survivors. AEMO keeps a separate register of every transmission project and logs each change to it, and that log is where the churn really shows. Across its last ten releases, a bit over two years, it records roughly sixty timing changes, twenty-five scope revisions and nearly twenty projects removed or downgraded out of the actionable list. Whole flagship items get reclassified: QNI Connect dropped back to a future-ISP project, the Central Queensland to Southern Queensland expansion replaced with a smaller option, Marinus Stage 2's scope cut back. These are the projects hitting the community opposition, landholder access and planning walls. When a line slips or disappears, the REZ behind it is stranded, the generation that depended on it slips with it, and the two compound rather than cancel.

Fuel: am I upside down?

Coal and gas still set the marginal price often enough that the fuel path does a lot of the work in any forecast, and it's the input where we most openly differ from the ISP. This is also where that flat price line from the top of the report comes from: the ISP's fuel trajectories (coal from a consultant in 2024, gas refreshed by the same consultant in 2025 for the 2026 ISP) glide down smoothly and never really move, so the prices they drive glide down smoothly and never really move either. Fuel doesn't behave like that. It spikes on a cold snap, a supply outage, or a pipeline constraint.

The scenario logic looks inverted to us as well. Take Accelerated Transition: it runs a faster, higher-growth, more electrified economy, and pairs it with softer commodity prices. In our view, those two things don't happen together. A world building and electrifying that hard is a world pulling harder on gas for firming and on coal through the overlap, which should carry firmer, spikier fuel, not cheaper. The faster the transition, the more the residual thermal fleet gets leaned on at the worst moments.

Standing on the shoulders of giants

None of this is a knock on the ISP. It is the right process for the job it's trying to achieve - capacity planning for a grid that has policy objectives, and it's an honest starting point for a market view, which is why our free sample runs on its scenarios. What VarialView adds is price outlooks, deliverability-adjusted timing, spikier and more realistic fuel price assumptions, demand shape sensitivities; custom scenarios that allow you to understand the commercial market rather than the planning one.

If you're carrying risk in this market, the ISP tells you where the system might be heading; VarialView tells you what it's worth to your book. Have a dig through the charts in the other tabs to see the forecast in full, and if you want us to walk you through what it means for a specific deal, get in touch.