Infigen Energy – Australia’s largest pure-play renewable company – yesterday announced a net loss of $55.9 million for the last financial year, a $5.1 million improvement on 2010/11. Miles George, Infigen’s managing director, spoke to RenewEconomy after the company’s results announcement, discussing – among other things – the important role of new wind farms in meeting the Renewable Energy Target, the role of solar PV, and the opportunities of battery storage and combining this with wind and solar.
Giles Parkinson: What is the state of the market at the moment?
Miles George: Since July 1, the price for electricity has risen substantially. Part of it is due to the carbon price, but there is more to it than that. There seems to be a change of bidding strategies since July 1, with the result that power prices in the first month averaged $80/MWh in South Australia and $$66/MWh in NSW, which compares to sub $40/MWh prices typically in the months prior to that. The forward was estimating that the increase from the carbon price would be $16-$18/MWh but the increase has been more like $30/MWh, so there is another component coming through, which is the way the other generators are bidding.
The forward prices are also showing significant increase – $60, $55 and $60, a lot higher than $30-$40 that we been seeing over last few months. And RECs are also showing prices of around $44/MWh. There’s not a lot of liquidity, but it gives an indication of where that going. Because 45 per cent of our wind farms are on merchant schemes, we benefit from the increase in those prices for those assets.
GP: What about the market for building new wind farms?
MG: I guess there have been some encouraging signs, which is that at least there is a market now. Over the last 18 months or so there hasn’t been a market, people haven’t been interested in talking about long-term off-take contracts, whereas in last six months there has been a willingness on behalf of the obligated parties to enter into PPAs. So that, itself, is an improvement. But the prices that they are prepared to pay is not enough for us to want to contract.
GP: How big a difference?
MG: We’ve said for some time that contract prices need to be in $100/MWh region to justify contracting, relative to being exposed to future merchant prices. Our view is that future merchant prices are going to be higher, and our view is that there will be a significant LGC shortfall from 2015-ish, and in order to meet that shortfall, to reduce the chance of obligated parties going to the penalty, they will need to start contracting in order for others to invest, in 2013, because it is a two-year project to build those wind farms.
So our view is that the price of LGCs will start to reflect that – towards the end of this year and early next year, we expect them to be on the rise in anticipation of that requirement.
GP: Does change in carbon price mean anything?
MG: I wouldn’t be saying that the price will drop in the near term. Because there is a bit of action in Europe to bolster that price, because at $10 it’s not enough to achieve the fundamentals of the scheme, which is to make coal-fired generation more expensive than gas generation.
GP: What do you expect the retailers to do, will they hop in to the market?
MG: for the last two years it has made sense for the retailers to buy RECs from the surplus of the small-scale scheme – and their accounts show they have spent more than $1 billion doing that in the last few years – and if we were them, that’s what we would do too. Going forward, they don’t have that option, they have already bought that surplus. The surplus exists, but they have banked them. They will need from 2015 to build themselves or contract with others and write PPAs, or buy projects.
GP: Are all three utilities involved with this? You get impression from Origin that they are not in the market.
MG: Origin doesn’t seem to be as much in the market as TRU or AGL, but they have other big capital expenditure items on their mind.
GP: Are we going to meet the Renewable Energy Target?
MG: We think it is still achievable, but it will require a very substantial build rate, depending on how late we start. The later we start, the harder the task. If we accept that we will have to build something like 6,000-8,000MW to meet the target by 2020, doing that over a five-year time frame is going to be challenging with respect to previous build rates. I think it can be done, but if we don’t start building until 2015, then it will be very challenging and the price could go to the penalty.
GP: Will it be all wind, or will there be solar?
MG: We think solar will take a material part of the target, because the cost of panels have come down markedly, and that’s due to reduced production costs and improved efficiency. So the delivered cost of MWh per solar has been rapidly decreasing. It’s still higher than wind, but there’s a number of initiatives – the ARENA funding, the CEFC – that will enable solar to get a bit of a start in Australia with utility-scale applications.
GP: So not much solar without extra assistance?
MG: We think there will be some. Our project and others have been referred to ARENA.
GP: Is that a scaled-down project? 30MW?
MG: Yes, it’s just one of the three sites we had for the flagships project, and I think the others are the same. So there is a prospect that some of those projects will be proceeding, and there are other initiatives such as the ACT government’s (auction). We expect that the combination of those and further ARENA initiatives will get more utility-scale solar.
GP: When do you think utility-scale solar will be able to be built without added funding?
MG: That’s a very difficult question to answer. It’s certainly in a five-10 year period. It depends where solar industry goes, and whether rate of decline continues or levels off.
GP: What about rooftop solar – what’s your take on how that is impacting on energy retailers and generators?
MG: It has a very big effect. In the market, generally, it is considered as negative demand, so it is somewhere around 1.5GW of domestic solar. The SRES target anticipates around 4 gigawatt hours, although there is no cap on it. I think industry participants think that the 4GW will be achieved within 18 months, depending on how cheap those panels will be. That will have a material effect on anticipated demand. Of course, it costs way more than to build utility-scale solar, but there are other benefits of rooftop solar.
GP: For the householder, it is cheaper than buying electricity from elsewhere.
MG: Sure, and they are saving on distribution costs. So there is a trade-off there. But the thing that is interesting about Australia is that we have got the best solar resource in the world, but many other countries with good solar resources have got utility-scale solar, like Spain and the US, but we don’t have anything.
GP: You’re building a 1MW plant with a battery. What are you hoping to prove there? Battery storage could be a big change factor in the NEM.
MG: There are a couple of things we are trying to demonstrate with that project. One is the construction techniques we hope to apply with utility-scale plants. The other thing is the integration of solar into the NEM. We are going to operate it as a registered plant and bid it into the NEM, I think it will be the smallest registered plant in the NEM, but importantly it is seeing how the profile of solar will operate in the market, which will be a first.
We also want to see how we integrate wind with solar, because the plant we are likely to build will be integrated with wind, and battery storage has the potential to be an integral part of the network generally, but renewable networks in particular, partly because the cost of battery storage, like PV panels, is also dropping dramatically, so it is coming to the point where it is becoming economic to consider it as an augmentation and to facilitate the dispatch of some combination of solar and wind and battery storage.
GP: Is that where we are headed? Because at scale we are moving away from baseload and peak to dispatchable and non dispatchable energy.
MG: That’s right. As we get bigger, if we want to supply customers who have a firm load requirement. At the moment we can do it through the futures market, plus our own variable generation. Or we could combine a number of sources together with battery storage. And battery storage might have a benefit with a voided network costs as well. That will be an important part of the whole solution, if you like, and they are a more appealing alternative than diesel peakers.
GP: And how is Infigen placed to move ahead with its developments?
MG: We acknowledge that we have got limited capital to grow the business, and we don’t have an immediate solution for that. In the meantime, the approach we are taking is to bring forward those projects we think have the best prospect in the short to medium term, and then for the rest of the development pipeline, we are keeping them alive, because we don’t think the market is attractive enough yet.
In the short term we can do smaller projects. We have focused on solar projects in the US, where capital requirements are smaller. Here we have also focused on solar PV, because we think it’s a new technology that we can get up. With wind, the market is not yet attractive enough to do that. If we were to get a substantial wind project up, then we would need additional capital. What we have thought about is bringing in some partners at the project level.
GP: Tell us about the US solar projects?
MG: In the US we have partnership with Pioneer Green Energy, where we are developing with them a number of projects, 10MW-20MW projects, across various states, because in the US the state legislation encourages utilities to buy solar PV, and they run tenders a bit like the ACT tender. We haven’t got one to a stage where we have invested in a project yet.