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Huge penalty charges loom as renewable investment remains at standstill

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Australian consumers face paying nearly $2 billion in so-called “penalty prices” in a few years time if the two-year standstill on renewable energy investments continues much longer, according to a leading industry analyst.

Green Energy Markets says that unless 4,400MW of new renewable energy capacity is committed in 2016, then the federal renewable energy target will likely miss its revised goal of 33,000GWh by 2020.

That means that a penalty price for any shortfall will be passed on to consumers. Instead of paying renewable energy developers for the output from wind farms and solar farms, the money will go straight into government coffers.

The need to commit to 4,400MW of new large scale renewable capacity contrasts to what was achieved in the last three months of 2015 – when minor projects totalling just 8.5MW were accredited. In the first month of 2016, still nothing of significance has been committed.

In all of 2015, just 448MW of large scale projects were committed. But half of that capacity came from the ACT government scheme which is not included in the RET.

GEM capacity thingGreen Energy Markets’ Ric Brazzale says the problem is that not a lack of projects. There is some $15 billion of “shovel-ready” wind farms waiting for contracts, and possibly up to 100 different large scale solar projects, as revealed in the recent funding programs proposed by ARENA and an auction from Ergon Energy.

But because of the Federal Coalition government’s tinkering with the RET – firstly its attempts to remove the target and then to reduce it – project finance is proving impossible to achieve.

The constant changes and the lack of certainty means that off-takers such as big utilities are not entering long term contracts, and that means that lenders will not come to the party.

The only projects that are going ahead are those with long term agreements such as the ACT government’s successful tendering program. But those projects, which may total nearly 500MW of wind and solar, will not count towards the RET. Most renewable energy companies are not big enough to take “merchant risk.”

This graph below from GEM suggests what may happen in various scenarios. Under the most pessimistic scenario, where only 1,000MW of new capacity is committed each year, the 33,000GWh target will not be totally met with actual capacity until about 2023.

In the meantime, a penalty price will be paid for any shortfall. In the worst case scenario, that could total more than $550 million in 2019 alone, and more than $500 million in 2020.

penaltyLarge scale generation certificates are already selling at more than $77/MWh. Brazzale says this means that the market is already pricing in failure, and has been doing so for several months, ever since it went above the penalty price is set at $65/MWh.

While for most utilities with tax obligations, it still makes sense to build rather than pay penalty (or get their consumer to pay) up to $92.86/MWh, for some obligated parties with no tax bill, $65/MWh is the cut off point for their interest.

The issue is who is to blame, and who cops the fallout?

Opponents of renewable energy will be quick to lay the blame at the feet of the renewable energy itself. Others suggest that utilities are at fault, but they will argue that they are dealing with changing government policy, albeit influenced by the utilities’  own objections and attempts to have it repealed.

If one utility passes on a penalty price, that may involve reputational risk. If they all do, then it will simply reflect the failure of the market.

The government may not be too upset because it will pocket the penalty price as revenue. But it will look foolish, because many will argue that it is its own intervention in the market that has brought the stop to investment.

In the rhetoric favoured by environment minister Greg Hunt, it will be the Coalition that is imposing an “electricity tax” and asking the public to pay for “phantom credits.”

Brazzale argues that the shortfall may not be such a big deal, because the market is a self correcting mechanism that should avoid his worst case scenario. The required capacity will  be built, it just may take two two three, or possibly up to five extra years to do it.

“That revenue will be lost to the (renewable energy) industry,” Brazzale says. That, he suggests, should provide extra incentive to find ways to get the capacity built.

Right now, renewable energy companies are enjoying the rewards of the high LGC prices. Some new developments are expected to be announced in coming months, such as the 25MW solar project flagged in Perth’s outskirts, but most likely not enough to avoid a shortfall. Then the blame game will begin.

“Not meeting the target in any year is not that dramatic as it is not due to a shortage of potential projects,” Brazzale says.

“When we consider the capacity of projects that were submitted to the ACT, Ergon and ARENA tenders we can conclude that the resources are in place to deliver on the target provided that financiers can get comfortable with the policy and regulatory risk.

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  • Jon

    My understanding is that the ACT Govt Auction is dependent on the RET and the LGC’s that flow from the projects it supports…has something changed here?

    There is also the issue that the RET only runs to 2030, so unless you can make your returns in that time it will be very difficult to get support for projects. Unfortunately, it looks like the RET will be a failure without further policy tweaking, or organisation willing to take merchant risk.

    • http://www.energydr.com.au david H

      I cannot understand why the RET isn’t revised to a 10 year rolling cut-off. This at least give the market / investors a continuous 10 year horizon for financial returns on new renewable projects. Obviously, the RET could be revised (upwards) at regular intervals, say 2 yearly.

  • humanitarian solar

    When the government and grids are not highly cooperative then this slows renewable energy uptake at a macro or society level. To me this signals the mainstream financial community is still not ready to embrace renewables, hence why not focus on that minority of the community who are? It’s smaller economic cycles within larger economic cycles, till the time renewable energy is whole heartedly accepted, and surely we need to accept and appraise current opportunities to move ahead. Eg. Many generous FITs are ending this year, so there needs to be clarity on what system architecture these people need employ, for the coming decade of their lives. We need here and now approaches.

  • bedlam bay

    We should email this article to Abbott and Macfarlane and Hunt. We should also send an account for the full cost to the Liberal Party.

  • JohnRD

    We need to accept that Abbott demonstrated very successfuly that the RET could not provide investor confidence due to the sovereign risk that we may get another prime minister like Abbott. We need to move to contract based schemes based on some form of competitive tendering. The ACT renewable auction scheme provides an example of how well contract based schemes can work.

  • RobS

    What I’m unclear about is who gets the the $2 Billion and is there any regulation around what they may do with it

  • Andrew Thaler

    Happy days. I like high LGC prices.
    It means I can buy lots more solar panels.

  • George Papadopoulos

    I would prefer if fines were paid to the government and reduced public debt rather than wasted on inefficient wind projects that won’t ever remove the need for carbon-based baseload power…

    • Ronald Brakels

      I know you don’t care, George, but South Australia’s last operating coal Power Station will be shut down for good in march and the state will have no generating capacity operating in baseload mode. Nor will electricity be imported in a continuous way and so play a baseload role. South Austalia has operated without any baseload generating capacity in the past for months at a time without difficulty. Now it is the combination of wind and rooftop solar which has allowed South Australia’s coal generating capacity to be eliminated but as the state’s wind generates 4 times as much electricity as the state’s solar, it has played the larger part.

      • George Papadopoulos

        So SA will rely on open cycle plants? Or will it rely on diesel generators like they do in Britain?

        • Ronald Brakels

          For baseload power? None. I mentioned that already. I’ll quote myself, “South Australia’s last operating coal Power Station will be shut down
          for good in march and the state will have no generating capacity
          operating in baseload mode.”

          Baseload demand will be met by a variety of generating capacity, wind and solar when its available and dispatchable gas when its not, along with diesel during critical peaks.

          I suspect you may be confused about baseload demand and baseload generating capacity. Baseload demand is the minimum amount of grid electricity demand. It’s about 800 megawatts in South Australia. Maybe 700 nowadays. Baseload generating capacity is capacity that is built to run most of the time, such as the coal Northern Power Station which will soon be shut down. Once that closes down South Australia will have no more generating capacity operating in a baseload mode.

          • George Papadopoulos

            Ronald, the sources I quote above are not base load power sources. They are the most expensive and still rather polluting carbon sources that are used to back up intermittent energy sources.

          • Ronald Brakels

            Well it is 2:35 in the morning and electricity demand is almost as low as it’s going to get today and South Australia is generating about one gigawatt of electricity. Coal is supplying about 51% of generation, natural gas 27%, and wind 22%. The natural gas electricity would be produced by Osborne Power Station and presumably by the half of Pelican Point Power Station that isn’t in mothballs. Both of these power stations are combined cycle natural gas, so currently no open cycle or diesel generators are likely to be in use and meeting the current baseload demand. And I will mention that last financial year diesel generators only supplied about 0.014% of South Australia’s total electricity consumption.

          • George Papadopoulos

            Yes, one precise time point. Fortunately the wind is blowing…

          • Ronald Brakels

            A thank you for staying up all night to report on baseload demand would be appreciated. It certainly wasn’t the case that I had just returned home completely drunk from an Invasion Day party where many rounds of pin the collective guilt on the previous generation were played.

            Anyway, I’ll just repeat the point I made in my first comment: I know you don’t care, but South Australia’s last operating coal
            Power Station will be shut down for good in march and the state will
            have no generating capacity operating in baseload mode. Nor will
            electricity be imported in a continuous way and so function like a baseload generator.

          • George Papadopoulos

            I don’t care if SA coal plant is going to be closing down and replaced with gas fired facilities…

            My point is that wind energy is a flop on many levels and that is why the major energy companies seems to be interested in investing in solar and not wind

            As far as thanking you for staying up all night just to get baseload data I dare say that only someone who lacks common sense would do that.

        • Coley

          Just where do we “rely” on diesel generation here in the UK?

  • john

    I can not see RE being built.
    There will be a shortfall.
    No doubt the policies were very effective in causing a climate of risk to potential projects.
    This of course plays into the story that RE is a failure, because the target was not completed.
    This will work as a political slogan along with the usual disingenuous policies.

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