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The good, the bad, and the ugly of solar policies

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“People must look at Australia and wonder what we are doing.” This quote yesterday from a solar industry executive who wanted no attribution possibly best summed up the bottlenecks brought to light under the Solar Flagships program. Australia, with the best solar resources, the most advanced R&D, and one of the strongest economies in the world, is failing to produce large scale solar plants where other countries in Europe, Africa, the Middle East, north America, China, India and the rest of Asia are succeeding. Never has so much money been promised on so many different occasions for so few megawatts delivered!

The announcement yesterday by the Federal Energy Minister Martin Ferguson leaves the large scale solar industry in this country more or less in limbo for another six months, and the government with egg on its face. Not that the decisions taken on Tuesday – to extend the financing deadline for the Solar Dawn consortium until June, and to throw open the PV section to another tender among the shortlisted candidates – were necessarily the wrong ones – the fact that the government rushed it out just as the mainstream media picked up on the story smacked more of knee-jerk politics than sound policy making.

And that has been the sorry position of both the Labor and the Coalition parties on clean energy in the last decade. So much has been promised and so little delivered. It is a blight on both their economic and energy policy pretensions that it has only  the Greens who have recognized the market-based mechanisms that could encourage and support the rollout of new technologies in this country. And it is to the Greens’ credit that the Clean Energy Finance Corp has been proposed, and may just be created. The Flagships debacle suggests it can’t come soon enough. (Senator Milne’s grilling of RET staffers at a Senate committee meeting next week could be enlightening).

But this is not just a political problem, it is also a cultural issue for the energy industry itself. One of the key reasons the flagships program have been delayed is because neither project could obtain power purchase agreements. That’s not just a product of a surplus of renewable energy certificates (courtesy of another botched policy decision), it’s also a failure to recognize the value of energy rather than the mere cost, as Andrew Want argues in this article.

But what does this decision mean for the Flagships contenders? No one is quite sure. One thing we can be certain is that the cost of the PV projects will be at a considerable discount to last year’s proposals by the time the tenders are resubmitted in the second quarter, thanks to the tumbling prices of PV modules around the world. It is suggested that the cost estimates will be one third lower, with just the construction costs of the $930 million Moree Solar Farm, for instance, falling by $180 million from the original estimate of $700 million, according to one third party estimate.

The question for the Moree consortium is who benefits from that cost reduction. If it can retain the $306 million federal grant, the lower costs could help it target a power purchase agreement at around $100-$120/MWh, a slight premium to wind, but one that could be justified by the time of day of production. If the government seeks to trim the grant to reflect the reduced costs, then that advantage may be removed.

It is also not clear what status that any revised bids from AGL/First Solar; TruEnergy/First Solar, and Suntech/Infigen will have. Do they get the nod if they are the cheapest? Were they the cheapest the first time round? The AGL and TruEnergy projects should have less difficulty with financing because they are in a position to deliver a PPA, even if such a deal would give little transparency to the market. The fact that Moree had to deal only with the one remaining large utility, Origin Energy, and a handful of smaller players highlights the structural problems of the Australian energy market.

While the AGL and TruEnergy projects are considered by some to have an inside running, it is suggested by others that the Infigen/Suntech consortium could deliver a surprise, given that it has the advantage of multiple sites (and possibly more manageable and price-competitive PPAs), and the backing of the world’s largest producer of PV modules, and who would be keen to make a statement in Australia given its bullish predictions about the solar PV industry made last year.

Given the amount of work that the Moree consortium has invested in the project, including a dedicated 14-person team in the Sydney office, it is little wonder that it expressed its disappointment at the decision on Tuesday, which seemed to be justified by the government on “substantial” changes to the project. It seems that need to find a new supplier, after BP Solar’s decision to quit the global solar industry, gave the government the opportunity to recast the tender.

If that was the criteria, then the Solar Dawn consortium, which was chosen to build the 250MW solar thermal facility near Chinchilla in south-west Queensland, can consider itself fortunate. It too, had substantial changes to its plan – including the decision to drop the idea of having a gas booster because of design complications, and the withdrawal of one its three founding members, the state-owned generating company CS Energy, which snubbed both the O&M contract and the opportunity to invest equity.

But it is likely that the $1.2 billion Solar Dawn, project, which is led by French nuclear giant Areva with the support of Wind Prospect CWP, won the extension because it has no obvious rival, unlike in PV. This was implicit from the comments of Minister Ferguson, who said that it still represented the best value solar thermal offer. Those that could and should compete, such as the solar tower technologies – with or without storage – did not even make the shortlist. To invite them to tender now would be to admit the government got its choice terribly wrong the first time round. But they may well get their chance, come the first of July.

The government decision was welcomed by most industry groups, possibly relieved that at least the government is still engaged in the flagships process. But this has dragged on for nearly three years, and faces another five months of uncertainty. It makes one wonder what would have happened had the government adopted a more market friendly approach, such as the reverse auction now being implemented by the ACT government on a much smaller scale, and which have proven very successful overseas, or even the loan guarantees employed in the US.

It is suggested that Australia, and its grid, would be best suited by a handful of 50-100MW solar plants and a host in the 5MW-20MW range. This would have been much more useful way to satisfy the dream of 1000MW of solar thermal by 2015, and may have actually achieved it with a series of auctions ensuring that pricing remained competitive. As Andrew Dyer, the local representative of the US-based solar tower developer BrightSource, which has more than 2610MW of solar thermal capacity under PPAs, and 392MW under construction, said: “There are tangible examples in other jurisdictions that that these sort of projects are being built. Australia can learn from this.”

 

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  • Jake

    When new coal or hydro-power plants are build in this country, do they also need to acquire a PPA? Given the NEM, what is the normal way for a generating plant to enter the market?

    • Giles Parkinson

      Mostly the generators make a call on the market. Given that the utilities are vertically integrated, that is a call they can make with greater confidence. Some developments, such as the gas plant at Mt Isa, are built after reaching specific agreements with users.

      • Jake

        Thanks Giles,
        I find this stuff fascinating, but perhaps I should have studied economics.

        If I’m understanding this correctly, a plant is built with some kind of understanding that it will be able to profitably sell attractive call options in the NEM. However, most of the time this is only a formality because it was likely commissioned and built by the very distributors that it’s selling to.

        The number of calls purchased corresponds to the expected electricity requirements of a given period, with leeway to buy cheaper electricity on the spot-market when demand is low, or emergency extra electricity when demand is abnormally high.

        Any energy produced by an entity with a FiT agreement must be purchased by the distributor, and given that solar PV generates best during peak demand, the merit order effect means that it can theoretically negate some of the necessity for distributors to buy $10,000 per mW/h electricity from conventional generators.

        Hah! You don’t have to answer, but keep writing articles, I enjoy them thoroughly.