Origin says retailers may choose to pay fine rather than build renewables

Origin Energy on Thursday warned that major retailers were likely to choose paying a penalty price – the equivalent of a fine – rather than contracting to new renewable energy projects, echoing comments made earlier this month by major rival AGL Energy.

Origin Energy chief executive Grant King said it was now apparent that the renewable energy target would not be cut as much as many people – including Origin Energy – had wanted. But this did not mean that much renewable energy projects would get built.

The Abbott government has wanted to slash the renewable energy target altogether, and then tried to cut it to a true “20 per cent target” – Origin’s favoured position – that would reduce it from 41,000GWh to around 26,000GWh.

It was clear that it could not find support in the Senate for that and is trying to negotiate a compromise with Labor. Word from Canberra is that the Coalition is now talking in the “low 30,000s GWhs”, while Labor is sticking to the mid to high 30,000s GWhs.

But King pointed out that unless the closing date of the RET was moved beyond 2030, then large renewable energy projects would not get built.

origin ret

That’s because the surplus of renewable energy certificates is likely to remain until 2017 (see graph above), which would mean a rush of projects built over the last three years.

Because the developers needed to maximize their return while the scheme is in operation – a period of just 10-12 years – the price of the RECs required to get the projects built might be too high, and retailers could well choose to pay the penalty price instead.

“We will simply acquit (our obligation) from lowest cost,” King said. Outgoing AGL managing director Michael Fraser said a similar thing last week.

“We have sufficient cover,” King added. “Who going to build those projects. We are done. Who is going to write those contracts?”

“It won’t get built”, he added later.

King’s comments reflect the added complexity of the current RET negotiations, and hopefully mean that the two mainstream parties are looking at both extending the end date of the scheme, and to lift the penalty price to avoid what would amount to a “capital strike” by major retailers.

(As RenewEconomy pointed out earlier this week, a revisiting of a higher and longer term target- such as a 30% by 2030, or preferably 40% by 2030 – might be a better solution. However, it was interesting to note that Origin Energy also announced a 3MW solar project in Adelaide, financed with a power purchase agreement, which many believe may be the model for many new renewable projects in Australia).

The problem is amplified by the fact that wholesale prices continue to fall, and King sees no immediate respite, because of the over-capacity in the market.

King said there had been an assumption that the RET would either be curtailed, or cut to a “ real 20 per cent”, but this was now less likely.

However, King also indicated he was not in favour of taxpayer funds being made to help pay for closures of coal fired generators, as promoted by AGL and others.

He said there was so much over-capacity in the market that other coal generators could simply ramp up production to fill the gap caused by retiring generators, resulting in no net reduction in coal output or emissions.

Origin, meanwhile, says it is well placed for the low wholesale prices because it has less of its own capacity. King says it is better, in current circumstances, to be a “buyer” of wholesale electricity when prices were low, rather than a net generator. Origin owns a bunch of peaking gas generators that it can switch on when wholesale prices rise due to surges in peak demand.

Comments

16 responses to “Origin says retailers may choose to pay fine rather than build renewables”

  1. The Lismoron Avatar
    The Lismoron

    If I carried on with a course of action that provoked a fine, then I would (in the end) find myself in jail. Am I wrong here or are the main generators holding us to ransom.
    They need reminding that this is a democracy and if they (in any way) decide to be fined rather than “play ball” then the fine should be in the millions….. enough to allow us the people to overcome their disgusting self serving nonsense!!

    Given that we are monetarily sovereign, we can out-spend these weasals to achieve what we desire. We need to rid ourselves of these people’s tame government(s) in order that our democratic processes are not trampled upon by these low life people.

    1. Giles Avatar

      Funny you should mention Ransom. this is what we wrote last week – https://reneweconomy.wpengine.com/2015/utilities-hold-renewables-ransom-coal-pay-outs-34217
      basically utilities threatening on all levels, so they can protect current investments and try to mould energy transition in the image of their current business models. going to be fascinating to watch. you quite right on energy democracy.

      1. Mark Roest Avatar
        Mark Roest

        Given that truth, there is another approach: educate the public on the retailers’ dirty game, say “Game over!”, and run candidates on, win with, and implement severe regulation that forces them to shut down their fossil fuel plants, starting with coal, THOROUGHLY clean up after themselves under government supervision, and change business models to fostering distributed generation and smart, islandable microgrids for resilience and minimum levelized cost per kWh. Pay nothing for decommissioning — make them take it out of earnings and retained assets, and monitor their finances and stocks to ensure that they comply fully. They have already announced their callous disregard for the public welfare, so all of these actions are fair and just.

        1. Andrew Woodroffe Avatar
          Andrew Woodroffe

          Maybe the developers of re generation should muscle up together and start retailing direct to customers. It is not like retailing requires any hardward, just some admin and marketing. Being ‘gentailers’, they could then recapture the benefit of the low price impact of renewables on the wholesale market lost by pure generators (and why big re needs LGCs or similar). Being pure renewables players they would also be free of legacy issues like stranded coal mining and power plants or expensive to run gas plant or the risk of another carbon tax. Trustpower, Pac Hydro, Infigen etc talk to each other! Get in the game.

          1. Mark Roest Avatar
            Mark Roest

            That’s a very good suggestion, Andrew! On top of that, we could suggest that they also bring in storage; one way to start now is to make an allowance in the hardware system so that storage can be plugged in in about 2 years, when its cost will be dramatically less; the other way is to finance it now, and use energy management systems to take maximum advantage of the rules. Of course, the people need to be in a position to modify the rules to favor distributed renewable generation as soon as possible. That means organize the vote. But it also can mean organize the buyers, as in community solar, but to cover both solar on rooftops, where that works, and ‘solar gardens’ to make up the difference for those who don’t have good exposure. Organizing the buyers means the retailers don’t have to factor sales into their cost structure, as long as they provide the best performance and longevity to price ratio. It also means that you now have an organized political voice based on economics, which is very strong, and which you can use to expand the penetration of the new-old way of being (stewardship of the Commons), and win elections.

        2. Austin Wonaeamirri Avatar
          Austin Wonaeamirri

          The approach of the Greens, in other words.

          The more support for this approach, the better.

    2. frostyoz Avatar
      frostyoz

      There is no obligation on retailers to meet the RET target. The retailers’ obligation is to pay a tax (called the shortfall charge) if they have a shortfall against the target. Calling it or equating it to a “fine” suggests that they have not met their obligations, which is incorrect, and obviously misleads some people.

      1. Brad Sherman Avatar
        Brad Sherman

        Then clearly the ‘tax’ needs to be set at a level to ensure that CO2 emissions associated with electricity generation are actually reduced. The shortfall charge should be at least the cost of CCS, say $100 per tonne-CO2 eq or whatever the current cost would be of reducing the emissions (and ignoring the apparent reality that CCS is unlikely to ever be cost competitive with alternative forms of generation currently available.

        I currently pay a Greenpower surcharge to ensure my electricity purchases are from 100% renewable sources. Do you know if the retailers are able to use this end run of paying a fine to satisfy, legally, what I thought was requiring them to purchase actual electrons generated using renewable technologies?

        1. frostyoz Avatar
          frostyoz

          The retailers’ GreenPower obligations are satisfied by surrendering additional large-generation Renewable Energy Certificates from qualifying generators, and can’t be met by payment of a shortfall charge.

          1. Brad Sherman Avatar
            Brad Sherman

            Thank you! That’s reassuring.

          2. Mark Roest Avatar
            Mark Roest

            It’s only reassuring until you realize that gentailers with monopoly power can pay for certificates raise prices to cover their cost, and to buy the compliance of employees who know what’s wrong, and thereby game the system to keep their centralized, fossil-fuel-burning model as long as possible, thus damaging our world and our health with their carbon emissions. The system is supposed to force them to change to renewable energy, but in the least disruptive manner.
            The ways to fix this are to attract consumers and businesses away from the grid, thus weakening gentailers’ economic power, which weakens their political power, and to pull the rug out from under the feet of the management of the gentailers, by organizing to change the law, whether by persuading or replacing legislators, etc.

    3. Austin Wonaeamirri Avatar
      Austin Wonaeamirri

      That’s exactly what they’re doing. And not just on that issue. As we already know, they’ve sought to penalise businesses who use solar while staying on the grid through adding extra made-up costs onto their bills.

      And yeah, the fines for their refusal to contract to new renewable energy projects should be substantially increased.

      Just as others have said before too, the only obstacle to the action we need in support of renewable energy is political corruption.

  2. Jon Avatar
    Jon

    There is no obligation on retailers to provide capital, or PPAs, or underwrite other peoples projects in any way. Their only obligation is to buy sufficient LGCs to meet their RET obligation or pay the penalty price for each LGC they are short. As Grant King points out, retailers will seek to do this at lowest cost for each year of obligation. Many of these retailers already have significant cover, and given that demand is continuing to fall, and as this blog often points out, the business of energy retailing is rapidly changing, it would be a foolish person to try to predict the price of energy or an LGC in 10 or 12 years time. Remembering also that most financing models work over a 20 year time horizon.
    There is no ransom here just sensible business!

  3. Raahul Kumar Avatar
    Raahul Kumar

    Obviously the utility companies are trying to protect their business model. They need to be further split up, and more needs to be done to end run around them. Community owned solar is one viable model, there may be others to solve this problem.

    1. Peter Wade Avatar
      Peter Wade

      Yes have you seen what corenafund is doing? Its a snowball model with big goals and scores on the board

      1. Raahul Kumar Avatar
        Raahul Kumar

        No I hadn’t even heard of them. But Good News. I’m expecting the State governments to build a lot more solar, and Queensland seems to be doing good on that front now with the new Labour Government.

        http://statements.qld.gov.au/Statement/Id/76852

        And there are many community funded groups already

        https://reneweconomy.wpengine.com/2013/community-groups-look-to-crowd-funding-rooftop-solar-86008
        http://www.energymatters.com.au/renewable-news/em3513/
        http://www.environment.gov.au/about-us/grants-funding

        In my opinion, there isn’t enough though. All countries need a lot more solar, but Australia and Bharat, Africa and West Asia need a hell of lot right now. Anything goes, just build more solar.

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