Wind farm operator and aspiring solar PV developer Infigen Energy this week released its latest results. RenewEconomy caught up with CEO Miles George to talk about the major issues, including the ongoing difficulties in securing power purchase agreements from major utilities, and the lingering uncertainty about the Renewable Energy Target and its impact on investment.
George also discussed his company’s solar plans, BNEF’s cost estimates, problems with declining wind speeds at the Capital wind farm, and the ongoing battle against the anti-wind lobby.
RenewEconomy: Let’s start off with the overall market for renewables. Is it getting any better, or is it getting worse? It seems to be the never-ending question.
Miles George: Obviously the CCA (Climate Change Authority) review of the RET (Renewable Energy Target) is positive. The expected uptick in LGC (large generation certificate) prices in 2015/16 we think is still going to happen, because it coincides with the using up from the surplus from small scale scheme at the same time as the rate of increase in the target steps up, and although there is the occasional project that gets a run in the press for being built, in the context of the requirement it is tiny really.
RE: Well, that’s right. In your report today you say that the LGCs are priced lower and have actually fallen.
MG: The prices were lower than (last year). I guess we expected after the CCA pretty positive review that you would see the prices lifting, but it depends so much on what the three big utilities do – because they are 75 per cent of the obligated party market. So if they are not prepared to write PPAs (power purchase agreements) sufficient to get new build up then it just won’t happen.
We expected that by now that they would be in a position where their own requirement to maintain a reasonable forward hedge position would mean they would need to start committing. The only alternative to committing is to take a punt that they will be able to build things later, or take a punt that they might be able to influence government to reduce the target. You’ve seen both of those strategies being deployed.
RE: Do you think there is a bit of a capital strike going on?
MG: I don’t know if I’d call it a capital strike, but the evidence is that there aren’t many PPAs being written. There’s the occasional one or two, but it’s peanuts compared to what’s needed.
RE: Are you surprise that the government has not already ratified the CCA report?
MG: The legislation says they have until June 30 to respond and we think they will probably respond in next couple of months, and of course we would expect that they would respond favourably. I don’t think the market expects otherwise. I expect that the three utilities have the same view. The only other option that perhaps the obligated parties are thinking about is that we will have another crack at the RET review in 2014. That’s why we are keen that both major political parties commit to the current 41,000GWh target.
RE: And support a four year gap between the review?
MG: That would improve investor certainty. One of the problems of the two year review is that it could be up to June 30 before we get a response from the government, and then just one year later the next review starts. That creates too much uncertainty, and that’s expressed in the willingness of equity investors, lenders and other capital providers to fund projects in the sector.
RE: Are we still going to meet that target?
MG: Our view is that you have to start pretty quick. You need 1,000MW a year up to 2017, and the step up in the rate means you need 1500MW a year or more after that. The longer that doesn’t happen the more likely it is that price of LGCs will go up to the penalty. We think the prices will be going towards the penalty in 2015/16.
RE: Do you think that the utilities will then pay the penalty rather than build stuff?
MG: It’s hard to imagine that they would want to do that, absent them being able to lobby the government of 2014 to reduce the RET, I can’t see that happening. The finding of the CCA was that reducing the target does virtually nothing to reduce consumer prices. It stops investment. It could take 5,000MW out of new build and you would have increased coal fired emissions, and for what –no real savings. It’s hard to see why anyone, apart from having a strong vested interest, why you should reduce the target.
RE: The Bloomberg New Energy Finance assessment came out the other day and got a lot of tongues wagging about the cost of generation. I don’t suppose you’d disagree with them very much would you?
MG: The evidence is that you certainly won’t get new build coal, you might get gas which reflects peaking demand. But I think their pricing for wind economics in Australia was a bit low. They had a price in the $80s/MWh as being marginal cost. I can’t remember what cost of capital they used, but from our own perspective we wouldn’t be interested in contracting a new asset in the $80s, why would we when our current average received price in our portfolio in this last period was $94/MWh.
RE: If you are going to get $94/MWh, isn’t that enough to build wind farms anyway?
MG: That includes our contracted assets, whereas the market for new build is less than that. Others might do that, perhaps BNEF were influence by the Snowtown project, but that’s a project that has a very high capacity factor, a good connection, and apparently a ;ow cost of capital from Trust Power. From what we understand about that project is that most of the benefits of that are going to the offtaker, not to the investor. It’s not a good model in our view.
RE: Talking about capacity factors< you’ve had a bit of a shock at the Capital wind farm, where it’s blowing a lot less than you thought it might. What are the implications of that.
MG: There’s no evidence at any of our wind farm sites of a permanent reduction of wind resource. The wind is pretty constant over decades. We are confident that this is just a random distribution where we’ve got two very low years. Our expectation is that that will recover. What we’ve done is to lower expectation of that wind farm to a 30 per cent capacity factor.
RE: Does that change the economics of that wind farm?
MG: It is a significant reduction from what we expected in terms of production, but there is some offsetting good aspects – that is the diurnal profile, production during the day has been more favourable than we thought it would be, in terms of capturing high price events. Over last two years there have been about 12 events where prices have gone above $300/MWh, and we’ve captured 10 or 11 of those because the wind farm has been operating at those times.
RE: Wind farm operating at peak times? That’s a bit of a turn up for the books.
MG: Well, exactly. We have had a different experience in S.A. where you get very hot days and the price goes high but it is not windy, but in NSW it has been very different.
RE: What about your solar projects?
MG: We are still working on the Capital solar project. That is 35MW, we’re still negotiating with ARENA on a funding agreement. That could take some months. And subject to getting that sorted out, and getting an acceptable offtake arrangement, we hope to go ahead with that project as soon as we can.
RE: So are you trying to negotiate terms, or still trying to work out whether they will fund it at all.
MG: Very much the former, it’s a matter of negotiating the terms. After the Solar Flagships process – we were one of the under-bidders who were referred to ARENA with the recommendation that they consider it. It was recommended that we would do a reduced scale project and add some element about our project that would be novel. Our theme is to demonstrate the benefits of having wind and solar dispatched from same site, and what synergies can be achieved from that. We have already started construction on a small demonstration facility that will include those things and have battery storage, a 1MW site that will feed into the NEM.
RE: Wind still tends to be a divisive technology, and is the centre of attention for a lot of anti-wind lobbies. Do you think you are making progress on this?
MG: As you can imagine, we spend a lot of time trying to get our message out to relevant stakeholders, at a community level where our wind farms and prospective wind farms are, and to local, state and federal government. It’s a really difficult battle. Our approach is to use science, our view is that eventually the science will triumph. The recent EPA study on infrasound, the recent report recently released by Acoustics Australia – we are trying to get the science out there. The NHMC report that is due next month. That shows that no credible evidence that the antis claim. What we are trying to do is to get that information in front of people. Some people you will never convince, but we think that there is a majority of people open to considering the merits of the science, and since the science is so clearly in our favour, we are trying to target that group which is open to science. But it is tough, and in politics it is not always about the science. But we are working hard on it.
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