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Origin stuns industry with record low price for 530MW wind farm

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Origin Energy has set a stunning new benchmark for renewable energy off-take deals in Australia – and sounded the alarm for energy incumbents – after committing to a long-term power purchase agreement of below $60/MWh for the 530MW Stockyard Hill Wind Farm in Victoria.

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Under the terms of the deal, Origin will sell Stockyard Hill Wind Farm – Australia’s largest wind development – to Chinese company and wind turbine manufacturer Goldwind for $110 million.

At the same time it has agreed to buy all of the power generated by it, and the associated Renewable Energy Certificates, for less than $60/MWh, from the commencement of operations in 2019 to 2030.

RenewEconomy understands that the strike price for the wind farm output is “well below” $60/MWh and closer to $50/MWh than $60/MWh.

As such, it sets a new benchmark for renewable energy prices in Australia, and its impact should not be underestimated. It is, after all, around half of the wholesale price and comparable to what could be bought directly from a brown and coal fired generator.

It compares with the AGL deal to pay just $65/MWh for the output of the Silverton wind farm in the first five years, which beat the previous low price of  $73/MWh price struck in the ACT wind auction for the Hornsdale wind farm, although that price was fixed for 20 years, with no inflation uplift.

Origin Energy CEO Frank Calabria says it indicates just how fast Australia’s renewable energy transition is unfolding.

“Through our deal with Goldwind, Origin has been able to add a substantial amount of new renewable energy to our portfolio at a market leading PPA price.

“And, as Stockyard Hill is in Victoria, this will help to cover a large portion of the load of the recently retired Hazelwood Power Station,” Calabria said.

“As Origin looks to a future where renewables will dominate Australia’s energy supply, we are in a very strong position to build one of the nation’s lowest cost renewables portfolios.”

Origin has signed a slew of PPAs with wind and solar farms in recent months, including the 110MW Darling Downs solar farm – located adjacent to its large gas generator – which it sold to APA last week. It has also signed contracts for three other solar farms – including the 220MW Bungala solar farm in South Australia and has two more large contracts in the pipeline.

Origin, like the other retailers, are expected to shoulder the bulk of the efforts to meet Australia’s renewable energy target of 33,000GWh by 2020, which roughly equates to around 23.5 per cent of total demand. Origin is indicating that it can go further, courtesy of the plunging cost of wind and solar.

“By 2020, we expect that renewables will be more than 25 per cent of the energy in our generation mix, allowing us to deliver the cleaner energy our customers want,” Calabria said in a statement.

“Last year, we announced our ambition to add up to 1,500MW of new renewables by 2020, and we are now just 300MW short of that target.”

Last week, the Clean Energy Regulator said that despite fears to the contrary, the RET was likely to be met, given the huge rush of contracted projects in the last six months, particularly in solar. It says there may be enough commitments made by the end of the year to meet that target.

Some doubt that, worrying about the retailers’ appetite beyond the current rush of projects, but Origin’s comments appear to allay those fears.

While recent investment has been centred around large scale solar farms, whose costs have fallen dramatically in the last year, the Stockyard Hill deal shows there are still great deals to be found in wind energy, and wind energy costs are still falling.

Screen Shot 2017-05-08 at 11.42.06 AMIt also suggests that Origin will have to update this graph to the right that it released last week, which highlighted the plunging cost of wind and solar PPAs in Australia over the last few years.

Note how Origin make it clear that renewables are the lowest cost new build generation today -it’s not coal, it’s not gas, and it’s certainly not nuclear.

Indeed Origin, like AGL Energy, has now dismissed the idea that gas fired generation can play any significant role in the energy transition, with Calabria telling investors last week that only gas peaking plants will play a role, and that they will be “even peakier” than they have been, suggesting they will be used less and less as more wind and solar and more storage is installed.

The Stockyard Hill deal, announced on Monday, remains subject to regulatory approvals and still hinges on Goldwind achieving financial close of the project.

That financing shouldn’t be an issue, given that Goldwind is one of the biggest  wind turbine manufacturers in the world and is currently building the 175MW White Rock wind project in Barnaby Joyce’s electorate, and is building it without a contract and on a merchant basis.

Environment Victoria’s Mark Wakeham said it was clear that the finance industry had decided that renewable energy was the future, but warned that deployment would grind to a halt unless the Turnbull government extended the national renewable energy target and the Victorian government legislated the state renewable energy target.

“To meet our national 2020 renewable energy target, all projects will need to be underway this year or next. After that, investment in renewable energy projects could fall off a cliff without longer-term targets.”

Note: To catch up on last week’s events and RenewEconomy’s analysis you can listen to our Energy Insiders Podcast, click here or below.

  

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  • trackdaze

    It ought to take the proceeds of sale and buy energy storage. Win(d)win.

    One suspects its to prop up gas exports.

  • TheTransition

    As has been pointed out by many articles here, generating the renewable energy is only part of the cost. We also have to pay for the transmission and storage of the energy so it can be delivered to paying customers as the power they need, when they need it.

    • MrMauricio

      Despite all the money spent by networks to “goldplate” the grid(i,e receive guaranteed income simply imposed on hapless consumers by the wonderfully generous “regulator”regardless of need or appropriateness of investment) WE DONT HAVE A SEMBLANCE of the SMART GRID needed for the future.Wow!!!

    • Vox

      Not sure what exactly what you mean with “we”. If a wind farm at a certain location is assessed by the grid operator to exceed available capacity, the wind farm is charged with paying for the required upgrades.
      If a wind farm is 30km from the grid, it is the wind farm that has to build (and permit) the transmission line.
      So the public does not shoulder any direct costs of wind farms, either for transmission storage.

      Where did you hear otherwise?

      • I think what The Transition is saying is that there are costs in addition to the CAPEX for the renewable energy generation asset. Some level of storage will be required to balance the over/under supply of RE from wind and solar.

  • Chris Fraser

    Thank goodness they got rid of Grant King (doubtless a one-time energy adviser for Tony Abbott …)

  • Robin_Harrison

    We’ll need targets less and less as the economics take over.

    • Alastair Leith

      Not so fast, Eugene. WA hasn’t seen a serious wind farm approved for a decade.

      • Robin_Harrison

        I was talking generally rather than specifically but, no matter who owns the politicians in WA or what they’ve done so far, future generation capacity will increasingly be renewables+storage which is reaching price parity with FFs and still getting cheaper.

        • Alastair Leith

          Agree the technology is making it harder for corrupt politicians to block RE deployment. I think we need targets less and less when these targets are actually achieved 🙂 There’s almost zero merchant RE projects up that don’t rely on a 15-20 year PPA with a gentailer or a government (ACT and in the future Vic govt). So until the numbers are so compelling we need mechanisms to get RE onto the grid ASAP.

          • Robin_Harrison

            I couldn’t agree more, I just think the tipping point is closer than most people think. It’s already happening in SA and there are rumblings in Vic. Exponential growth always speeds up in the last few doublings of its growth.

          • Alastair Leith

            Yes in furious agreement about that. 1% of global energy from PV and wind today, only seven doublings and it’s 100%! (say 14-20 years). Storage growth is pretty exciting too as it value adds to PV behind the meter, thus increasing the deployed capacity even more.

  • Ken Dyer

    “grind to a halt unless the Turnbull government extended the national renewable energy target”……. With that idiot Canavan touting the Longford Gas project and the Adani coal mine and other fossil fuel burning white elephants, one wonders whether he and the other right wing climate denying idiots will ever understand the beautiful set of numbers that Origin has presented. I doubt it though.

  • DDD

    Surely the sale price Origin received for the asset will be a reflection of the future cashflow it is expected to generate which is directly impacted by price, volume and duration that Origin are committed to pay for the off-take. So if they paid half as much for the energy, they would have received very little up front cash for the asset sold?

    Or have I missed something?

    • Tom

      Doing a calculation – with 530MW capacity at a capacity factor of 35% (my assumption), for 8760hours/year for 12 years (2019-2030 inclusive) = 17.5 million MWh.

      Let’s say $50/MWh X 17.5 million MWh = $875 million worth of energy over those 12 years.

      Something is wrong with the quoted sale price of $110 million. The proposed Granville Harbour wind farm in Tassie is expected to cost $200 million to build, and will only have a 99MW capacity.

      Are you sure Origin didn’t sell it for $1.1 billion?

      Edit: Looking a bit more into it – it looks like Stockyard Hill isn’t actually built yet. The $110 million price tag would make more sense if this is the case, but then there’s the question – what the hell is the $110 million being paid for if there’s nothing there? The permits?

      • frostyoz

        Unbuilt. The land, the planning approval and the connection contract.

  • Johnnydadda

    “..Origin will sell Stockyard Hill Wind Farm – Australia’s largest wind
    development – to Chinese company and wind turbine manufacturer Goldwind..” our foreign owners du jour.

  • Kevan Daly

    The other good news about this deal is that Goldwind can pay m$110 upfront, build a 530 MW wind farm, supply energy at sub $60/MWh for 11 years, all without the LRET scheme’s RGC’s and still (presumably) meet its required internal rate of return. The LRET scheme should be abandoned for all future wind projects.

  • john

    $60 per MWh.
    I expect at the price the company will be positive cash flow.
    I also expect the next contract will be stuck at below $50 MWh.

  • Mark Diesendorf

    This financial deal, as summarised in the article, is confusing to say the least. $60/MWh sounds great until we consider the other half of the deal: that Origin will sell the 530 MW wind farm to Goldwind for $110 million, at least one-tenth of its capital cost, which has to be over $1 billion. Can the authors, or someone who understands finance, please explain?

    • David leitch

      Hi Mark

      You make a good point. Origin’s cost to develop the project to its current state is possibly under $20 m (that’s a rank guess). So in effect Goldwind is paying say $80-$90 m for the right to sell electricity to ORG for about $58 MWh.

      I hear that the expected capacity factor is around 45%. The turbines seem to be about 3.45 Mw and the development cost may be closer to $2 m a MW than $2.4 m. That’s just a guess. So for 45% capacity factor, $58 MWh real price and $2 m/MW capital cost, opex is say $18 MWh if you are lucky the project IRR might be around 6% over 25 years.

      Let’s also assume 65% debt financing at say 5.5%. So the weighted after tax shield cost of debt is 2.5%. If the project IRR is 6% backing out the weighted debt cost says the equity IRR is (6%-2.5%)/equity weighting 35% or around 10%. The cost of equity for a low risk project, if that is what this is, might be around 7.3%, so on paper there is head room to pay something for the right to build this project.

      All that said you are taking a risk on the price you get after the PPA expires and you also have to trust you can operate the turbines at 45% capacity factor for 25 years. For me the project is riskier than say a 20 year PPA with a State Govt.

      I guess the advantage Goldwind has is its the turbine manufacturer so it may be able to get the opex under $18 MWh (normally I use $20-22, which you can get from Infigen’s P&L reports).

      So that’s as far as I can get with the numbers without better data.

      • Thanks David – great analysis. Appreciate you walking us through the calculations.

        It looks like Goldwind is assuming they will get their upside in the second PPA (2030-EOL). This looks like a bet that
        * power prices from 2030 are high (i.e. limited gas for power generation);
        * the REC scheme is extended beyond 2030; and/or
        * battery technology becomes price competitive at this scale.

        Cheers.

        Dave P.

  • juxx0r

    So after they sell the LGC’s the power is free?

  • Ian

    Can anyone enlighten me, How are the LGC’s and STC’s linked to the renewable energy target? With this flurry of investment in renewables, especially the utility scale projects, the national targets are are not far from being reached. If the LGC is $75/MWH and the PPA is $60/MWH then the combined payment is $135/MWH, but if the LGC is all used up then payment is closer to the $60/MWH. Is that the way this system works?

    • frostyoz

      The spot price of an LGC today is about $80/MWh, but the forward price of LGCs in the period 2020-2030 is forecast to be much lower than that.
      Also, we don’t know whether the PPA extends beyond 2030, when there may be no such thing as LGCs.

  • Jouko Lampila

    Just to make sure:
    I am from Europe, Finland, and I’m not sure which dollars you are talking about; Australian (AUD) or American (USD)? What is the practice?

    • Alastair Leith

      Australian project so almost certain to be A$ quoted.

  • Jon Albiez

    This will most likely play well for Origin. First of all they’re carrying significant debt levels so this will alleviate to a small degree. Second, that’s a great price for the output. Third, Origin are heavily focused on gas and can easily scale their OCGT and CCGT plant to meet contractual obligations in the absence of wind.

    As much as renewables will play an ever increasing part of our future mix gas is the transition fuel that will get us there, and Origin knows it.