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Snowtown project shows wind costs below $80/MWh

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The ability of New Zealand company TrustPower to land a power purchase agreement for its proposed 270MW Snowtown 2 wind project in South Australia – the first significant PPA written in this country for a new-build wind farm for several years – basically comes down to the power of its wind resource.

While most Australian wind projects would need a PPA of $100-$110 to make a decent return for investors, it is thought that the PPA for Snowtown, signed by Origin Energy, is below $95/MWh, and may be below $90/MWh.

According to a report from Deutsche Bank analysts, Snowtown 2 has a long-run marginal cost (LRMC) of around $77/MWh, courtesy of the extremely rich wind resource, which is expected to deliver a capacity factor of around 43 per cent. The first stage of the Snowtown project, a 110MW facility constructed in 2009, delivered a capacity factor of 45 per cent and had a LRMC of around $74/MWh.

The average capacity factor in Australian wind farms is around 33 per cent – a factor which, if applied to Snowtown, would push its LRMC up to around $95/MWh. Indeed, it is thought that this is around the cost of Australia’s largest wind project, the 440MW Macarthur wind farm jointly owned by AGL Energy and another New Zealand company, Meridian Energy.

For that project – which was mandated by a contract to provide clean energy to a desalination plant – to go ahead would have required a PPA of $100-$110/MWh. AGL Energy would have been prepared to pay a higher PPA than Origin Energy because it remains a half-owner in the wind farm, so can benefit from the equity returns.

TrustPower itself describes Snowtown 2 as having “one of the best sites in Australia,” and although development is contingent on it finding a partner to share the investment burden (TrustPwer has a market cap of $1.5 billion and this is a near $600 million project), Deutsche says this should not be hard.

Based on its assumptions of a LRMC of $77/MW, a PPA of $95/MW, and a short-run marginal cost of $15/MWh, it assumes that Snowtown 2 will deliver earnings before interest, tax and depreciation of $43 million, and based on debt finance at 7 per cent, a net profit of $NZ11 million.

“While it is slightly premature, the metrics appear too attractive for TrustPower not to find a way to make it work.” the report said. “A key difference between the cost metrics of Snowtown and other Australian wind farms is its capacity factor.”

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  • Tim Buckley

    Giles
    Interesting that China can get commercially viable windfarms at capacity utilisation rates of 20-22% pa, and European onshore wind continues to be built at record levels with rates of only 20-26% pa, but Australia struggles with wind when we have capacity utilisation rates averaging 33%, with Snowtown at 43-45% and Colgar in WA at 45%. Only in parts of Brazil and Chile are onshore wind utilisation rates higher (at 45-50%).

  • D. John Hunwick

    Well I read the article (and undestood it) and I read the Comment (1)- now can some one please provide the answer?? Is it just a matter of the amount of wind at any location or is there more to it?

    • Giles Parkinson

      Two possible answers – the cost of financing is higher in Australia, and because the main mechanism for driving an investment in wind has been the renewable energy target, the excess in the number of certificates has meant that the RET has had no real bite until now – it has been cheaper for utilities to buy cheap certificates than pay for energy from a wind farm. In other countries, their alternatives are also more expensive – so wind, for instance, is cheaper in Germany and other European countries than gas imported from Russia, wind is cheaper than new coal in the US, and wind is cheaper than gas in Brazil,

  • http://hepburnwind.com.au Simon Holmes a Court

    The difference is basically the market price for energy. Prices this year in Victoria have averaged less than $70 / MWh “all in” (meaning energy price plus LGC price). European generators (and those in many other international markets) enjoy far higher tariffs. As such they can comfortably operate with capacity factors below 25%. (European generators also enjoy some benefits by being closer to manufacture, lower planning costs, most likely lower grid connection costs and with more mature RE markets, presumably more competitive construction costs. However none of these factors are as significant as the difference in income per MWh.)