The policies may not yet be in place, and the resistance from the incumbents will be fierce, but according to global analysts Bloomberg New Energy Finance, the future is clear: wind and solar will replace coal and gas fired generation, and a lot quicker than many think.

By 2040, BNEF predicts, one third of all capacity which will be located “behind the meter” – which means via rooftop solar on households and businesses (38GW), and mostly tied to battery storage (15GW).

Over the same period, some 27GW of large scale solar plants and 19GW of large scale wind farms will be added to the system. Combined with small scale solar PV and hydro, this will provide two thirds of Australia’s power capacity and 59 per cent of generation by 2040.

These new solar and wind farms will replace 16GW of coal fired generation that has been retired either because of old age, or because they are not flexible enough to compete in a high renewables market. Only 12GW will remain in the market by 2040, with nearly of that with “life extensions”.

“This is a fundamental change,” says BNEF’s chief analyst in Australia, Kobad Bhavnagri. “Australia’s power sector is expected to fundamentally change over the next 25 years as an influx of end-user PV and energy storage is driven into the system.” He estimates that $A116 billion will be invested to achieve this near 60 per cent renewable energy capacity, and 89 per cent of that money will be spent on renewables themselves. The biggest change though is through the customer, who will invest in rooftop solar and batter storage because of the “superior economics” of these technologies, which he says will be able to supply consumers with electricity at a lower cost than the grid.

On large scale generation, Bhavnagri says it is clear that renewables lead on cost – as coal retires, its generation will predominantly be replaced by lower cost renewables. Thats because wind and solar, while possibly more expensive than existing coal fired generators (if you ignore the environmental costs) will be much cheaper than new coal or gas plants).

The economics of even existing coal fired generator will be challenged because they are not flexible enough. In effect, many will fall the way of the Northern power station, the last coal generator in South Australia which was closed because of falling wholesale power prices and the impact of wind energy. Indeed, this graph above shows the changing nature of the grid, with solar carving out large amount of supply during the day. This accords with predictions for market operators that rooftop solar alone will account for all daytime demand on some days, as soon as 2025 in states such as South Australia and West Australia. Bhavnagri says gas-fired generation, because of its better flexibility, will play an important role at times of low renewable output, but its overall generation share will remain small. Instead, demand response technologies (6GW) and other flexible technologies (7GW) such as large-scale storage could also contribute, potentially limiting the need for more gas. Despite all of this, greenhouse gas emissions fall, but not enough – a similar conclusion brought by BNEF in its global report released earlier this month. “The exit of coal and replacement by renewables will see emissions fall after 2017, but not enough to meet Australia’s targets. By 2020, power sector emissions are still 7 per cent above 2000 levels, and by 2030 they are some 23% below 2005 levels.”

The BNEF scenarios are based on no changes to policies: i.e. that the renewable energy target is not extended, and the various elements of “Direct Action” – the emissions reduction fund and the safeguards mechanism – have no impact on the power sector.

In other words, it is a forecast based on economics and market forces. But, it warns: “The lack of sound policy in Australia is a risk to the outlook.”

In particular, Bhavnagri says, it is large contingent on the Large-scale Renewable Energy Target being met – because it will key to deciding whether the future is shaped by variable renewable energy sources such as wind and solar, or the incumbents coal and gas.

That is because if the target is met, there will be enough new variable wind and solar capacity in the system to change the market to the point that it will trigger the retirement of coal fired power (see that graph above).

That will be followed by another key event – in 2035 – when more renewable energy capacity means that the retirement of coal becomes unstoppable – driven by volatile wholesale markets and coal generators’ inability to cope with the need to flexibility.

“Baseload generation will become a liability,” Bhavnagri says. “Flexible generation will be the key attribute.” And this may explain the fierce resistance from the coal generators, not just to the federal target, but to the increased state-based targets unveiled by the likes of South Australia, Victoria and Queensland.

And the news is not good for the Australian coal mining industry either. BNEF, like others, believes that the seaborne thermal coal market is in structural decline, mostly because the presumed biggest customer, India, will meet most of its demand from domestic supplies.