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ACT could make windfall gains from bold 100% renewables target

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Who is the smartest energy minister in the country? At the moment, you would have to say it was the ACT’s Simon Corbell, the mastermind behind the territory’s bold 100 per cent renewable energy target, and who is poised to deliver massive savings to consumers in the nation’s capital.

Indeed, if current wholesale electricity prices continue as they are across Australia, the ACT will not just have zero emissions electricity by 2020, it may also be getting most of it for free.

corbell hornsdale

ACT energy minister Simon Corbell at opening of Hornsdale wind farm in South Australia.

This extraordinary situation arises out of the nature of the contracts that the ACT government has written with the project developers who have won its unique reverse auction tenders.

The ACT has locked in fixed prices at between $77/MWh and $92/MWh for a total of 400MW of wind energy capacity so far. If the wholesale price is below those contracts, the ACT government pays the difference. If it is above, the ACT electricity utility ActewAGL receives the excess.

In the past two months, wholesale prices across Australia have gone through the roof, mostly because of soaring gas prices (at record levels in most states), and supply constraints. Some of these rises have already been passed on to consumers.

The first of the ACT commissioned wind farms, the 19MW Coonooer Bridge project in Victoria, opened earlier this year and gets a guaranteed $81.50/MWh from the ACT. But prices in Victoria have regularly jumped above $100/MWh in the past two months.

In South Australia, the difference is even more marked. Last week, the 100MW first stage of the Hornsdale wind farm near Jamestown was switched on. It will receive a contract of $92/MWh from the ACT, but according to Pitt & Sherry analyst Hugh Saddler, the average wholesale price that it has received in that state since its opening has been $247/MWh.

hornsdale vertical

Hornsdale wind farm

In that instance, the ACT would receive the difference. It would not mean just free electricity, but the ACT would be paid $155/MWh for the output of that wind farm.

(As it is, the contract with the ACT does not start until April next year, so the Hornsdale developers, Neoen and Megawatt Capital, are pocketing the gains in the meantime).

“If prices ever reach $247 /MWh after that date, Hornsdale will pay the ACT $155/MWh generated over the relevant period,” Saddler notes.

“ACT consumers will never pay a wholesale price of more than $92/MWh. By contrast, electricity consumers elsewhere in the NEM will, sooner or later, directly or indirectly, have to pay for the $247 per MWh wholesale price.

“ACT consumers will thus be protected from having to pay for extremely high wholesale prices because of the hedging provided by the renewable electricity contracts for difference.

“By 2020, the ACT government’s policy will mean that electricity prices in the Territory are much more stable and predictable than anywhere else in Australia.”

It’s a strong validation for Corbell, who has been praised by the renewable energy industry for his vision – Victoria is now about to copy his reverse auction plan – but criticised widely by conservatives, who created the usual scare campaign about rising costs and businesses quitting the ACT to seek cheaper electricity elsewhere.

In a later statement, Corbell said the innovative electricity purchasing agreements with its eight wind and solar projects across Australia meant ACT residents would pay a set price for renewable electricity over a 20 year period, which are not affected by fluctuations in electricity prices.

He said final figures were not yet in, but it appeared that the Coonooer Bridge Wind Farm in Victoria, whose feed-in tariff entitlement with the ACT began in February, will be paying the ACT due to high market prices last month.

“If market prices for electricity remain high, we could see this becoming a more common occurrence for us in the ACT as more of our projects come online in the coming years.”

Indeed, it is now starting to dawn on governments and corporate buyers around the world that renewable energy makes sense – not just because it is cheaper than fossil fuel alternatives in many regions (even without including the environment and climate costs), but because it has no fuel price risk.

This is being borne out in Australia, where the ACT – the government with the most ambitious and daring renewable energy policy – is likely to be rewarded because it will have locked in relatively cheap – and zero emissions – source of electricity for 20 years.

It is also being discovered in other regions in Australia – particularly those in remote and off-grid areas, where the cost of solar, wind and storage is inevitably cheaper than fuels such as diesel and gas.

The ACT government has already signed contracts for around 400MW of wind energy capacity in two auctions, and 40MW of large scale solar, and is about to award contracts to another 200MW of large scale wind and solar projects.

Indeed, the South Australian contracts are looking like an exceptional deal for the ACT government. The second stage of the Hornsdale project, another 100MW, is contracted at just $77/MWh.

Those prices are set to fall further. Corbell has already said that the price offerings for the latest round of tenders are “impressive”, indicating that the ACT can lock in more capacity at even lower prices. And remember, these contracts are fixed and do not even rise for inflation.

Meanwhile, in the rest of Australia, the wholesale markets remain victim of the marginal cost of gas, which is rising because most of it is used to supply the big LNG plants, and the control that the major utilities have over the market.

In the past week, moves to change market rules that consumers and regulators say will make the market more efficient, lower prices and encourage battery storage, have been resisted by the major incumbent generators on the basis that the changes would be too costly and too difficult.

Wholesale prices may also rise as the major coal generators inevitably close, and if a carbon price – which most analysts say is inevitable – is introduced. As it is, the reliance on gas is causing jumps in the wholesale price that far outweigh the cost of the carbon tax.

(Editor’s note: This article has been updated to incorporate a later statement from Simon Corbelll).

 

 

   

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  • lin

    So the politicians in Canberra who have been holding back the development of renewables in the rest of the country will get cheap electricity in their negatively geared Canberra houses, while the rest of the country, who have been crying out for more renewables will get screwed? Hardly seems fair, does it? Still, 50.01% of us voted LibNat (2pp), so I guess we get what we deserve.

    • john

      The really funny aspect of this as you pointed out is that while the house as in the Federal House of Parliament is deriding any movement toward using Renewable Energy the very place is being powered by RE how ironic.
      Further more the cost is going to be below what the clowns play in their own states.
      Perhaps a realization is needed with in the walls of decision makers Australia wide do you not agree?
      Perhaps myopic vision is lacking is my thought.
      Or just perhaps an ideological view point has resulted in the outcomes that everyone else but the ACT will endure.

      • lin

        Our “representatives” are certainly very happy to push an economic ideology onto the rest of the country that results in the rich getting richer, and impoverishment of everyone else. Their attitude towards RE is consistent with their ignorance in many other fields of endeavour. Innovative and Nimble, lol.

        • john

          Actually I do not think many rich are getting any richer.
          Their view point is that any movement away from business as usual is not accepted.
          It is the mind numbing stupidity of our decision makers that is such a stumbling block to progress.
          I look on at the outcomes and just have to smile at the outcomes frankly.
          As to innovative yes i agree not exactly.

          • neroden

            Prior to the elimination of leaded gasoline, lead in the air was damaging the brains of every baby born in Australia (and the rest of the world).

            The current federal government is in the lead-damaged age bracket. So there is perhaps a reason for their mind-numbing stupidity.

            Corbell is still in the lead-damaged age bracket, and in fact was born during peak Australian lead, but I guess he got lucky! Lead exposure varied massively depending on exactly where you lived.

          • john

            Further to studies on people being effected by lead that they had in their system in the very important time of developing has come a study that shows that they exhibit antisocial aspects of personality as well as difficulty with cognitive reasoning, perhaps this does explain quiet a few of the atypical aspects of society’s acceptance of shall we say the more deluded ideas.

    • And it was the politicians that gave approval for the excessive amount of Aussie gas to be exported which has starved the local market and hence our excessive gas prices and all this at a time when world gas prices are rock bottom. It is a pity we didn’t follow the US example where gas for export only got federal approval after more than adequately meeting the domestic requirements.

      At least Simon Corbell has been smart enough to see what has worked elsewhere and implement it for the ACT.

    • Peter Campbell

      Hang on, there! Ninety nine point something percent of those of us who live in Canberra are not politicians, and I, for one, and very pleased with this from our local government.

      • lin

        I have no issue with Canberra locals getting the benefit of voting for a sane government. It just gripes me that politicians like eleventy joe and his climate change denying mates get to double dip into our pockets for their accommodation, plus get cheap electricity that they deny the rest of the country because wind farms are an eyesore or a health hazard or whatever other bile they spew from their deceitful lips.

  • Don McMillan

    The task they are embarking on can been as a prototype which learning can benefit whole the energy market. It would be most constructive if as much engineering data is placed on open file. This legitimizes claims as it prevents conformational bias entering published data. Wish them well.

  • Analitik

    “the average wholesale price in that state since its opening has been $247/MWh”
    But what is the wholesale price when Hornsdale is generating (which will be when all the other wind farms are generating) vs the wholesale price when there is no wind?
    The average is meaningless

    • That is the average price of Hornsdale’s generation from June 23 to July 7. i will make it clear in the story.

      • Analitik

        I see that you have updated the text that I copied to
        ” the average wholesale price that is has received in that state since its opening has been $247/MWh”

        Should this be ” the average wholesale price that it has received in that state since its opening has been $247/MWh”?

        • we mention state because that is where the wind farm is, and different states have different wholesale prices.

  • Andy Lemann

    Giles, thank you for another excellent article. However, in the first paragraph you tout “the territories bold 100% renewable energy target”. I would like to remind you that this is HIGHLY inaccurate. The ACT has a 100% renewable electricity target which is approximately equal to a 25% renewable energy target since electricity accounts for about a quarter of Australia’s energy consumption. I don’t know the exact figures ‘for the ACT but the point is you CANNOT use the two terms interchangeably. It is grossly misleading and I expect better from you.

  • Tim Buckley

    What a brilliant example of how we the consumers and taxpayers get gamed by our Oligarchs while Canberra is insulated from this by their commitment to industries of the coming century. A bit like India, paying a relatively high US$64/MWh for solar electricity, but where there price is locked in contactually for 25 years at the same fixed nominal price i.e. 5% cheaper in real terms annually. At some point the market and then eventually our politicians will realise renewables are a deflationary force that benefits consumers. No wonder the Oligarchs are fighting it will all their power – but it is a pyrrhic victory for them – just look at Origin’s share price – close to 10 year lows.

  • George Papadopoulos

    And what price will Canberrans pay for electricity when these wind farms aren’t working? Up to $2000 per megawatt backup from open cycle gas turbines?

    • No George, because the ACT will contract 100% of their electricity needs at prices of $92/MWh and less. So they won’t have any exposure to fluctuating fossil fuel prices.

      • George Papadopoulos

        That is a nonsense. Since when does the wind blow 24 hours a day?

        • George, the ACT does not operate a separate grid, but what they have done is contract to buy all their electricity from wind and solar. Just like a company might do, or a household might do. And they will have locked in a low price for all their electricity, and at a fixed price for 20 years.

          • George Papadopoulos

            So what you are saying is that the coal and gas plants produce electricity during times of renewable energy dearth, but the ACT doesn’t pay for this – someone else magically does. Sounds rather inexplicably bizarre doesn’t it?

          • Yep, that’s exactly what i am saying. You should read up more about how energy market contracts work.

          • Analitik

            I thought the $92/MWh was only for any electricity supplied by the Hornsdale wind farm and that other electricity was purchased as before (aside from other contracted power from
            the arrangements with the Coonooer Bridge and Ararat wind farms).

            Otherwise, how could the other wind farm reverse auction contracts work? Plus Neoen and Megawatt Capital would be on the hook for the massive power purchases for the balance of ACT’s electricity demand when the wind died, like it did at the beginning of this month.

            http://reneweconomy.com.au/2015/plunging-cost-of-renewables-act-wind-auction-goes-at-81-50mwh-98344

          • That’s not the way it works. The ACT will contract all its purchases through these agreements. $92 applies to Hornsdale stage 1, $77 for Hornsdale stage 2, another price for Sapphire in Qld and Ararat in Vict, with another 200MW to be announced shortly. Neoen and megawatt won’t be on the hook for anything. they get a guaranteed price for their output and simply hand over the excess if wholesale prices are high.

          • Analitik

            Right but were does the power come from when the wind isn’t blowing at any of them farms?
            Like George, I have not been able to find the details of their contracts anywhere online. Perhaps you could point us to some links so we can read up and be better informed.

          • David Pethick

            The PPA is just a swap or CFD on the output from the wind farm isn’t it? The ACT Government is purchasing enough volume to meet expected load over the course of a year.

            It’s the appropriate structure and the only way utility-scale renewables can be contracted. Seems to be working pretty well for all parties involved.

          • George Papadopoulos

            Giles, do you have any online references to these contracts?

          • The ACT contract details are on the government website. Most power purchase agreements (which is what these are, in effect) are private deals between a producer and a consumer and not commercial in confidence

          • George Papadopoulos

            Giles, not much luck finding the contracts. But even if I did find them, I can’t see the logic on how the ACT gets ‘wind energy’ when the wind isn’t blowing.

  • Johnny Green

    Lin It’s a different government you idiot!

  • Roland

    Very informative article. I am trying to figure out if the regressive and false conservative views on renewable energy and market based mechanisms are a product of dishonesty, ignorance or poor education (problems with basic arithmetic and general comprehension).

    I am coming to the conclusion that they are most likely affected by the Dunning–Kruger effect: “a cognitive bias in which relatively unskilled persons suffer illusory superiority, mistakenly assessing their ability to be much higher than it really is. Dunning and Kruger attributed this bias to a metacognitive inability of the unskilled to recognize their own ineptitude and evaluate their own ability accurately.” (Source: Wikipedia).

  • neroden

    Even if wholesale prices are slightly below the locked-in wind farm prices *most* years, a couple of years where wholesale prices are way way above the locked-in wind farm prices could mean that ACT makes a large profit on these deals.

    Corbell is a smart investor.