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How solar tower and storage won on costs

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As the South Australian government basks in the glow of procuring a second world-leading and game-changing renewable energy technology project for the state, attention is turning to the finer details of the deal; in particular, how a solar tower power plant with molten salt storage won the government tender on costs.

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SA Premier Jay Weatherill announced on Monday afternoon that solar thermal developer SolarReserve had won the tender to supply 100 per cent of the government’s long-term power needs via a 150MW, $650 million solar tower and storage facility to be built in the former coal town of Port Augusta.

The project, dubbed Aurora, won the 20-year contract to deliver power at just $78/MWh which, as we reported here, is amazingly cheap: around one-half of previous estimates for the technology, and significantly cheaper than the gas generation fleet that currently dominates the state’s generation profile.

So how did SolarReserve come to such a low cost of supply?

The answer lies in two key elements of the deal. The first is the length of the power off take contract SolarReserve has signed with the SA government, which at 20 years, allows the company to amortise debt over a longer period.

The second key factor is the $110 million of recoupable finance promised by the federal government in April, in a deal with SA Senator Nick Xenophon to help accelerate the development of a solar thermal plant or large-scale solar project at Port Augusta.

The deal, struck in exchange for Xenophon passing the federal Coalition’s tax cuts, was welcomed at the time by Weatherill, who confirmed the loan – over and above any funding from CEFC or ARENA – would put solar thermal “right in the running” to win the SA government’s tender.

And so it did. Speaking in an interview on Monday, SolarReserve CEO Kevin Smith remained hazy on the finer details of the contract (we assume the SA government gets to keep the LGCs generated by the power plant), but did concede that if the federal government withdrew its promise of equity funding, the company would have to go back to the drawing board on costs.

“We’ve built that into the structure that we’ve offered to the South Australia government,” he said, while stressing that the money was not a grant. “I think it’s interesting to point out that that’s an equity investment; so they get that money back, plus they get a return. So there will be actually profits that’ll go to the federal government for repayment and the equity investment on that funding.”

Asked whether the project was a “loss leader,” however, Smith’s response was a clear “no.”

“Investors and lenders do not let projects be loss leaders,” he said. “Lenders keep everyone honest. It is a modest return project… We hope to make some money on the back end of the deal.”

(ITK analyst David Leitch crunches the numbers on the project here, and concludes that it “is clearly not commercial.”)

On the length of the contract, Smith said 20-years was a pretty typical time-frame for the industry. “That allows us to bring in long-term financing… long-term debt … and that allows the capital cost to be amortised over a longer period, (and) drives down the cost of power.

“As soon as that debt is paid off, we are looking at significant price reductions after that,” he said.

For the SA government, the solar thermal and molten salt storage project has the obvious benefit of ticking the box for both its tenders – to provide 75 per cent of its long-term power supply and 25 per cent of its electricity load from dispatchable renewables – and the longer-term benefit of putting downward pressure on the state’s power prices.

“The government load peaks in the middle of the day, and the rest of the market’s load peaks at six or seven in the evening,” Weatherill said.

“So what that gives us the opportunity to do is to play this power into the point of the day when it’s most needed.

“That’s why it works, financially, for both parties. And that’s why it’s an incredibly powerful offering for the South Australian market.

“There will be benefits for the South Australian tax-payer, but broader benefits for the South Australian community as we put downward pressure on prices,” he said.

“As power companies are aware that this project is going to come on board, they’ll be starting to write forward contracts that factor it in – just as they factor in all market conditions at the moment.

“So we’ll see those benefits flow to us. And, of course, when the project is up, we’ll see the downward pressure on prices.

And then there is the unquantifiable – but undeniable – value, as one of the Twitterati put it yesterday, of the market confidence that comes from a government that is “actually doing stuff” to progress Australia’s energy market transition.

“This is our energy plan working,” Weatherill added. “We said we wanted to take control of our energy future. We are now doing this in an way which is incentivising private sector investment.

“That’s always been the ambition here; to make sensible investments, use our purchasing power to bring in other competitors to actually cause the changes in the market, but in a way which doesn’t sterilise existing market operators.

“So as new contracts are written in this market, which is now beginning to free up, you will see downward pressure on prices. The trajectory is all downwards, which is what the purpose of the energy plan has all been about.”

  

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  • Eb

    On what basis can you ‘assume the SA government gets to keep the LGCs generated by the power plant’?

    • Sophie Vorrath

      On the basis that a lot of renewable energy offtake deals are for both the RECs and the power generated by the project, and that we have heard nothing to the contrary. Certainly, if we do hear otherwise, we will amend the story.

      • Mike Westerman

        It would seem very unlikely that the $78 is anything other than the energy price, with all other rights retained by SolarReserve, even allowing for a $110M loan at a concessional rate. NREL’s analysis in 2012 indicated an operating cost of USD70/kW/a plus $3/MWh, which for this installation would come out at $30/MWh provided they met the output of 495GWh/a

        • Alastair Leith

          That’s assuming LGCs are worth anything much beyond 2020… if there’s oversupply in the market then the supply outsizes the demand.

      • Brunel

        Could you please glance at the comments written under your articles from now on? People point out typos.

  • Rob G

    I listened to the announcement and the number of jobs that will come from this project. So permanent jobs (50) and direct building jobs (600+) coupled with associated jobs totalling 4000+ was impressive. I recalled the Adani number as being 1300 according to their own numbers. Remembering that many of their jobs are short term jobs (much like some of these jobs) and are similar in breakdown (permanent, temp and associated). But here’s the thing – this one project will generate 3 times the jobs the Adani project would. Looks to me that QLD should consider this kind of solar project and get the NAIF funding rather than wasting it on bogus coal economics.

  • Ren Stimpy

    I hope this is additional to their PV planning rather than a replacement for some of it. I would have thought that CST would be best used to generate during the important 4pm-10pm period when the sun is low or down, and that 12pm-4pm would be better used by CST to keep heating salt rather than start generating, while PV services the midday demand.

    • I agree that it shouldn’t be at the replacement of PV and I expect that the real economics will prove that to be the case. However, I also suspect that the CST economics will work best when the plant can operate at full load 24/7.

    • Alastair Leith

      That’s what they’ll do. Jay Weatherill said as much in the presser. He said govt demand peaks at midday when there’s often excess generation spilling into the grid from PV BTM. So I’m suggesting (I’m not sure how the mechanics of the contracts with Govt work), Solar Reserve can buy on the wholesale market when energy is cheap to provide to Govt demand load centres (if they even need to go through that process) and keep storing generated heat at Aurora to sell into the evening shoulder, maximising profit taking (and from Govt POV minimise the peak demand price spikes by undercutting gas knowing Govt will make up any shortfall on their low bids). I don’t know how much Solar Reserve is relying on profit taking in these peak demand events to make this venture profitable at the price they bid which seemed to shock absolutely every pundit and observer I’ve read.

      The other thing is it’s larger than a capacity required to meet the two govt tenders they said, so there’s headroom for playing the short term market there also.

      The economics of storage suggest you cycle it as much as possible and into the highest pricing events possible. PV will continue to grow, though AEMO downwardly revised the projections for PV growth in SA and WA last year.

  • Michel Syna Rahme

    $110 million…. a little bit less than a non-binding postal survey that will mean nothing and generate no return!

    • Brunel

      The Brexit referendum was not binding either but it would be political suicide to ignore the feelings of the 52%.

      • Mike Westerman

        As opposed to the slow decomposition currently underway?

        • Brunel

          What?

      • Michel Syna Rahme

        It would be political suicide to ignore what became of Hitler!

        • Brunel

          Hitler died. Japan got nuked.

  • Alastair Leith

    Nick Xenophon jumped on the existing promise that ALP and Libs both made before federal election to provide $100m to get solar thermal up and running in Australia. (IIRC Libs announced first and ALP matched it). To what extent he was a passenger I don’t know, but he’s rather good at making himself look more useful than he is.

    • Brunel

      He is the only politician with a net positive approval rating!

      I love how he gave a $75 cheque to each pensioner in 2017. Something that I thought Gillard would do after she put in the carbon tax. But she did not even give me a $5 cheque! What is the carbon price now? $0.

      Perhaps if she gave every poor voter a $900 cheque, she might have won the 2013 election.

      • Joe

        Ah Brunie, here you are again with your $900.00 cheque fetish! What is wrong with you Brunie. Another post where you just can’t let it go. As I have repeatedly pointed out to you in a number of your posts, Julia did not contest the 2013 election and the $900.00 cheques were part of PM Kevin Rudd’s stimulus package in response to The GFC. As part of Labor’s Emissions Trading Scheme implemented by Julia Gillard as PM, compensation was given for price increases which the modelling for The ETS predicted.

        • Brunel

          Here you are again stalking me.

          • Joe

            Stalking…ha, ha, ha. Just assisting you with the facts and helping the other readers who read your posts so that they are not continually mislead by your ‘confusion’.

          • Brunel

            Do you really think Gillard would have won the 2013 election if Simon Crean and Bill Shorten did not knife her?

            Politics is a popularity contest.

          • Mike Westerman

            Is there actually any point to this type of speculation on a RE blog site?

          • Brunel

            Joe keep saying that Gillard did not lose the 2013 election. He also keeps ranting against electricity bill help cheques.

          • Mike Westerman

            A bit like pissing on a bushfire cheques at this stage. The network is being redesigned inside out while the operator is hamstrung and the regulator protects the incumbents, all while the hopeless incumbents of the government benches in Canberra do nothing except look after their own jobs.

            We can’t really afford too many solar towers or ivory towers!

          • Brunel

            Some people are getting the electricity disconnected because they are behind in the bills.

            Good on Nick Xenophon. I wish the Greens would have as much sense.

          • Mike Westerman

            You’ve heard about fish vs fish hooks? It’s in landlord’s self interest to put solar on the roof of rentals so their tenants don’t miss the rent or freeze to death. But the popular discourse is focusing on symptoms not cures. We have been massively misdirected into watching the magician, not the bird – short attention spans and self absorption.

          • Brunel

            Given the soaring levels of inequality – an annual cheque will help the poor.

          • Mike Westerman

            Not half as much as reform so they have cheap power in the future. For starters, put solar on the roof of every public housing tenancy and battery/HW controllers on all clusters of public housing or stratas. Then force landlords to do what they should understand is in their self interest: solar on every rental property. Inequality needs to be solved at a structural level, not with handouts – they don’t deserve to be poor, they were put into poverty by a broken system.

          • Brunel

            Wow.

            You can do the reforms.

            Who says the cheques and the reforms are mutually exclusive?

            The cheques will help pay for food or bus tickets.

            Some public housing = blocks of flats. Good luck with putting solar panels there.

      • Alastair Leith

        Slick Nick.

  • Jon

    “… We hope to make some money on the back end of the deal.”. This is the most telling quote of the day I think!