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No carrot, no stick: Why Australian renewable projects are stalled

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Australia’s large-scale renewable energy industry is stuck between a rock and a hard place: Despite legislation and an apparently firm 2020 target, and soaring prices for renewable energy certificates, the market remains at a virtual standstill.

A whole slew of reports have been issued in recent weeks trying to analyse the situation. The latest, from UBS, suggests that the market remains stalled because the biggest electricity retailers (also known as gen-tailers because they have large generating plants) have little reason to invest – they suffer no penalties if they don’t invest, and risk cutting earnings from their existing fossil fuel plants if they do.

“Existing gen-tailers that have large generation assets and retail customer bases) are less than fully incentivised to introduce new supply,” a team led by UBS analyst David Leitch writes.

It notes that AGL, with a heavy bias towards coal-fired generation in the Latrobe Valley (Loy Yang), and NSW (Bayswater and Liddell) would lose $25 million for every $1 fall in the electricity pool price. (More renewable energy lowers wholesale electricity prices).

“But the liable entities (electricity retailers) suffer no particular financial disadvantage for not meeting the target,” UBS notes. “The higher prices can just be passed onto consumers. For consumers, even non exempt industrial consumers, the renewable cost typically makes up only a modest portion of the electricity bill.”

This lack of stick or carrot has left the market seemingly well short of its target, and prices of LGC (large-scale generation certificates) have soared to more than $80/MWh on the assumption that their will be a major shortfall as soon as 2018. Some retailers have already fallen short of their 2015 target, as detailed here.

UBS bloomberg REC price

This price surge should, in combination with a wholesale electricity price average more than $50/MWh is most states, provide sufficient price incentive for renewable energy developers. Yet this has not been enough to attract contracts or finance and kick off investment.

UBS estimates that more than 7,000MW of wind and solar is needed to meet the 2020 target, but there is only 1,000MW of capacity on the horizon – all of these from government tenders and none from the private sector.

What’s more, much of this capacity will be for voluntary schemes – such as the ACT reverse auction program – where the certificates are surrendered and are additional to the federal target. So, the 200MW of large-scale wind to be built for the ACT won’t count towards the national target.

There has been increased talk, but little activity from the major retailers about signing new contracts, apart from Origin Energy speaking about the plunging price of large-scale solar and AGL Energy announcing a new financing vehicle to build 1,000MW of capacity.

But while AGL’s renewables announcement has been hailed as a “shift to green” it does little more than seek to attract co-investors to spread the financing risk to achieve a target it was already obliged to meet. It still only intends to write contracts for a 5 to 10 year period.

And, as Morgan Stanley’s Rob Koh noted in a separate analysis last month, AGL may not choose to go ahead with its most obvious developments, such as the Silverton wind project near Broken Hill, which could be as big as 1.5GW, because of its potential impact on its NSW coal assets. Nor might it support a wind farm in Victoria because of its potential impact on its brown coal generators.

It might, though, support more wind in South Australia because “increased intermittency in South Australia would benefit AGL’s gas-fired Torrens Island Power Station. Koh suggests that AGL may bid a new gas peaking plant into the current tender being conducted by the South Australian government.

The lack of long-term contracts is a problem for developers, investors and financiers, and contrasts with the long-term price certainty offered by the ACT and by equivalent schemes oversees.

UBS says the combination of the LGC price and the wholesale market should make it attractive to build renewable energy. In NSW and Queensland, based on current futures prices, the “bundled price” is equivalent to $130-140/MWh.

UBS bundled priceThis should be more than enough to build a solar farm in Queensland or a wind farm in NSW. UBS estimates that the price needed to get a 6.3 per cent internal rate of return on a solar farm in Queensland is $105/MWh, while for a NSW wind farm it would be around $80/MWh.

But the lack of any long-term signal means it is difficult to attract finance. Assets such as wind or solar farms expect to have a life of 25 years, but the renewables target mechanism finishes in 2030, meaning these assets will only have access to this revenue for 13 years (given most will not be built until 2017/18).

After 2030, the renewable energy projects will have to rely on the “black” or wholesale price of electricity only. But there is also uncertainty over the previous decade – if not quite enough renewable supply is built, prices will remain elevated, but if a bit too much supply is built so prices (for LGCs) will go very low.

UBS suggests that one market that may emerge in Australia is corporate buyers. These companies, such as Apple, Facebook, Google and Dow Chemicals, now account for more than half the contracts issued in the US market.  

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  • Petra Liverani

    It’s so crazy for us to be so backward. We can supply much more than own energy requirements with 100% renewable energy; we can become a Renewable Energy Superpower! Reserve your free tickets to the launch of Renewable Energy Superpower in Sydney (4th April) or Canberra (21st April).

    https://www.eventbrite.com.au/e/renewable-energy-superpower-report-sydney-launch-beyond-zero-emissions-tickets-22433905415?

    https://www.eventbrite.com.au/e/renewable-energy-superpower-report-canberra-launch-beyond-zero-emissions-tickets-22390663076

    • Vernham

      Renewables Super Power please look beyond your navel and see what damage these things cause and how people are suffering.

      • solarguy

        WTF! Have you forgotten your meds son.

      • Catprog

        Such as the Morwell coal fire?

        • Chris Fraser

          haha … air violins for Vernham on three. one … two …

      • John McKeon

        Oh, noble wind turbine, stark, slender beauty standing tall, let me compare thee to an … open pit coal mine, on once good farming land???????

        Lovely little solar hot water tubes, and lovely little photovoltaic panel sets, distributed on roofs all around the nation, doing your thing, handling those air conditioning peaks … how should I compare thee … to an … open pit coal mine, on once good farming land??????

        Oh, Christ preserve us!!!!! From moon scaped earth, from black lung disease, from all manner of lung complaints in our children, from mercury, and God know’s what else out of coal fired satanic mills ….

      • John McKeon

        > “Renewables Super Power please look beyond your navel and see what damage these things cause and how people are suffering.”

        Collect your brown paper bag and choke on its contents ….

  • Ken Dyer

    This is all so unsurprising. Ever since the Abbott Government abolished the carbon “tax”, and actively discouraged renewable energy investment, there still is no incentive for the gentailors to move on. They can now do it at their leisure, maximising their use of fossil fuels. Now the Turnbull Government has continued this farcical situation.

    Tasmania is already one casualty of this policy as they advance back into the dark ages, being forced to use old diesel gensets to generate power. Meanwhile emissions continue to climb, and will be the defining statistic of the current government.

    • solarguy

      I think everyone knows who to vote for this coming election to rectify this untenable insane situation. Hint, it isn’t the right wing nit wits in power now.

      • Dispassionate

        I won’t be voting for Bill! Or the anyone in the Greens, so it doesn’t give me a lot of choices. I reckon Turnbull is the best bet for Australia, climate change included. Things take time to change and I think if given some time, and an election win of his own, Mr Turnbull will be able to bring about the changes needed.

        • solarguy

          That’s delusional.

          • Dispassionate

            Let’s hope there are lots of us delusional people out there next election then!

          • solarguy

            So you admit that you and your kind are delusional. Now all we have to do is find the right meds or stop you from breeding.

        • Brian Tehan

          That’s what my mother called cutting off your nose to spite your face, unless, of course you don’t believe the science.

        • wideEyedPupil

          Turnbull has done nothing except show that he’s not a conviction politician he’s a pragmatic careerist. Go with him at our peril. NBN is a complete basket case thanks to Turnbulls Multi-mode. And it could have been a huge social leveller (he’d probably wince at that) and carbon emissions mitigator (less air and car travel if we had super fast ubiquitous networks for example).

          • Dispassionate

            Don’t agree wEP, having failed at the his first tilt at leadership I think Turnbull is now playing the political game and once re-elected we will see more and more of his ideas and values come through. He has learnt you can’t just come in and tell people how it’s going to be, this is a prime ministership not a dictatorship…and Rudd and Abbott both went out on their rears because they thought they had last/the only say in it all.

          • wideEyedPupil

            you mean he doesn’t have control of his party and his policy resembles tony Abbott’s exactly. he’s keeping CEFC but ripping $1b out of it and destroying ARENA replacing it with something that wont make grants to develope technology development.

            it’s not about “picking winners” to use your slogan. it’s about getting PPAs signed and choosing an appropriate renewable technology mix to ensure demand is met at a cost and security optimum. it may interest you to know that Germany is now switching from FiTs to reverse auctions for PPAs (they revolutionised the energy industry using FiTs which for a long time drove the fast learnings curve for wind and to a lesser
            extent solarPV ). why you ask? because using national FiTs was deleiveing to much generation in one place of one type and the grid needed to “pick winners” in different places and encourage other technologies too.

            in the Australain context having state renewable targets is critically important. the only wind projects that have been commissioned since Abbott became leader of the Lineral party have been thanks to
            ACT’s RE target and a policy mechanism to get to 100% in a quick
            and orderly manner. strike price auctions make a lot of sense and both internationally and locally we see suprisingly low bid price almost very time they are held. they also critically would provide a double lock on RE deployment goals and encourage the states to compete for RET certificates. if all the states have had Renewables targets when Abbott became leader of opposition then the big three retailers could not have ground utility scale power deployment to a grinding halt.

            you can put your Fatih in a man who destroyed the nbn if you wish I prefer to have legislated mechanisms that the entire world is moving towards and bi-level or tri-level policy commitments from governments to get climate action now.

            you do realise 1m of sea level
            rise by 2050 is ALREADY locked into the climate according to Hansen, don’t you? I’m happy to have informed govt agencies pick winners instead of the destruction of one of the most important transitions to a zero emissions pathway.

          • Dispassionate

            It doesn’t he doesn’t have control over his party. No prime minister has control over his party like that, and neither they should, we elect local members not a prime minister, he doesn’t get to have more say than the any of the rest, he is a figurehead/leader with maybe more influence but no prime minister should be able to ride rough shot over his party, it isn’t supposed to work that way!

            choosing an appropriate renewable technology mix should not be the job of the government, that is the markets job…the government should be all about clearing bottlenecks and providing good policy and regulation that allows the market to achieve objectives with the minimum government intervention possible, the government is the judiciary and referee ensuring the rules of the game are followed, they should not be a player!
            Had they not picked solar as a winner and instead provided good policy and regulation the result could have been better. FiTs have come at a great cost to the community and the money could have been better utilised (not to say solar isn’t good but the way it was executed it was hardly least cost)
            As far as state based schemes and your point about the Abbot government. Probably correct, however again hardly least cost. What I am hoping is that Turnbull, who we know is personally supportive of things like the carbon tax etc, once elected in his own right will be able to better influence his party and lead them toward better policy. For me I think he is the best chance Australia has as far as coming up with a balanced intelligent way forward that won’t cost taxpayers a bomb while achieving emission reduction targets.
            In regard to the NBN, if we are going to judge each polly based on their past “failures”, well they are all buggered then aren’t they cause Bills record certainly isn’t unblemished.

            I really don’t care who gets in, but I’m NOT happy to have informed govt agencies pick winners, I’m happy to have good policy and regulations to allow for market based decisions!

  • Chris Fraser

    It doesn’t make sense considering many polluter-machines have reached the end of their economic life and new clean investment is such great value … not to mention other intangible things such as safe climate.Given that they are happy to keep their creaky old plant limping along, and considering the loss of a price on carbon can’t motivate generators at the moment I suggest it is up to some smart political party to require that 20% of each generators’ most polluting capacity be retired each year for five years … while at the same time they have to invest to construct the same clean capacity in MW in each year as is being retired.

  • John McKeon

    [A modern times Australian Dreaming ….]

    Ben Chifley shovelled coal into a train engine for a living in his younger days. Then he became Prime Minister of Australia for over four years.

    Tony “Climate Science is Crap” Abbott spruiked coal for his miserable short term as prime minister – in the COALition. That was two years.

    That simple, broadly based, entirely fair, sort of consumption tax, you know, that carbon tax … oh, for goodness sake, bring it back and be done with it!!

    • BazzaMcKenzie

      The wealthy are always in favour of consumption taxes, which inevitably fall most heavily on low income earners as a proportion of their incomes.

      Sounds “entirely fair” to some.

      • John McKeon

        The whole tax system needs adjusting, pseudo-Bazza. It’s not hard to compensate the poorest incomes for that kind of consumption tax. The ones who really don’t like it are the fossil fools. Are you one of them?

  • BazzaMcKenzie

    All this hand wringing and in November Trump will be elected US president and wipe away the green energy scam.

    Almost everything the US has done to participate in the scam, including its Paris position, has been by presidential exec order, use of EPA, etc, which Trump can unilaterally reverse without any congressional involvement (just as Obama has had none).

    Once the US pulls out of the scam it will fall apart globally, including here.

    • solarguy

      Another far right lunatic.

      • BazzaMcKenzie

        Ah, the erudition of the fascist green religion and its crony capitalist fellow travelers.

        • Fascist green religion and crony capitalist fellow travellers. Now, there’s a confusion of ideas. Bye now.

          • JeffJL

            Hey Giles. I took that as a parody account. So long as he/she/it was not slagging off other contributors (as solarguy did) I think the account should have been allowed to post.

        • Chris Fraser

          PS – Not the real BazzaMcKenzie

        • solarguy

          Tosser!

    • maxlyrical

      Hot tip: Given the inevitability of this outcome, now is the perfect time to invest in VCR’s, cathode ray TV’s, and tungsten filament light globes.

      • BazzaMcKenzie

        You’re absolutely right to not recommend investing in those parasite wind farm operators.

        All that will be left in 5 years will be their rusting turbine hulks and the farmers left with the bill for getting rid of them.

        • Brian Tehan

          Too much beer obviously. I’m pretty sure there’s a 30 year old turbine just down the road from me.

  • David Pethick

    There are a few options for renewable developers. None of them very good.

    Go merchant: If the economics are so great, the build it and sell the power and LGCs into the spot market. Of course, the reality is that no commercial lender wants to fund a merchant power plant of any type, particularly one exposed to two very volatile commodity markets and significant technical risk. No debt makes the ROI look a bit grim on any power station project.

    Become a gentailer: Build it and sell the green power to consumers. Maybe large corporates, but in my experience large businesses are amoral (as they should be) and don’t have much appetite to spend more on their energy than they need to. Perhaps there are enough green residential consumers left, but most of them seem to have purchased solar and don’t want to buy more energy from a wind farm or commercial-scale solar plant at the same time as their rooftop solar PV is pumping out energy into the grid at $0.06/kWh. Tough gig – ask Pac Hydro.

    Lobby for a higher penalty: If you can build your wind farm profitably assuming an offtake agreement of $80/MWh x 20 years, just lobby the government to raise the penalty price and reduce the scope of the banking provisions. Create a shortfall in the one commodity that only you can sell. Eventually someone will buy – just leave enough money on the table for them and economic incentives will take care of the rest. Of course, you might need a friendly government to explain to the electorate why their power bills are going up.

    Free markets are tough, unpredictable places. If the goal is more renewables in the generation mix then politicians should stop trying to manipulate markets and instead legislate the outcome they want.

    • wideEyedPupil

      “but in my experience large businesses are amoral (as they should be) ”

      Why should they be, never heard of triple bottom line accounting and why it’s good? Social enterprise is bad now? And the green investment funds out performed resource and property based funds in Australia in many super and other investment vehicles.

      thanks for an otherwise informative post though 😉

    • wideEyedPupil

      and see my remark above about communities needing to get behind state based RETs and reverse auction PPAs to break the market failure of capitalism in Australian energy sector.

  • wideEyedPupil

    This is why State based RETs are so important and why Yes2Renewables has campaigned so hard at the community level to get one reinstated for Victoria. Other states with aspirational targets and no targets should seriously get themselves RETs to break the deadlock and help themselves to RE investment and jobs rather than invest in other states by buying LGCs.

    • Dispassionate

      State based RETs are not the lowest cost emissions reduction option, they waste resources and cost taxpayers more than they should. The states should be pushing for a national solution and not trying to pick winners but allowing the lowest cost emissions reduction techs come to the fore.