Hydropower is poised to play an integral role in supporting the integration of increased wind and solar generation in the National Electricity Market in Australia, a new report from the Clean Energy Council says.

The report – Hydropower: The backbone of a reliable energy system – outlines the enormous potential as well as the key challenges that will need to be overcome in order to deliver the 19GW of dispatchable energy that will be needed by 2040 to replace retiring coal-fired power stations.

"Hydropower is one of the most mature forms of renewable generation," said Clean Energy Council Chief Executive, Kane Thornton. "Its large energy storage capability and the essential system services it provides leave it ideally placed to thrive in a 21st-century energy system to complement the rollout of wind, solar and battery storage and drive the reliable and secure decarbonisation of the Australian energy sector.

"While these projects typically have a high upfront capital cost, investors are willing to spend the money to build new hydropower and to refurbish existing assets. However, to make this investment worthwhile, investors need to know that these projects will recover their investment and receive revenue for the value they provide customers and the energy system.

"Unlocking the full potential of hydropower, therefore, requires market reforms that incentivise these services as well as strategic investment that underpins new investment and critical network expansion and augmentation to ensure strong connection and access to the energy grid."

There is currently around 8.5 GW of hydropower capacity in operation across Australia, providing approximately 6.4 per cent of total energy demand in 2020. Earlier this month, the New South Wales Government revealed that its $50 million Pumped Hydro Recoverable Grants Program had received 11GW of proposals or over five times the 2GW it needs to support wind and solar projects within the state's renewable energy zones. Thornton said that this is further evidence of strong investor appetite under the right policy settings.