A major reform intended to drive investment in renewable energy and storage capacity into the next decade could have the opposite effect on wind farms, a new report has warned, instead further burdening the very sector that is most in need of support.
The Clean Energy Investor Group report, put together by Baringa, examines the potential impact on Australia’s wind industry of the proposal for an Electricity Services Entry Mechanism (ESEM) to succeed the Capacity Investment Scheme in 2027.
The ESEM, one of the key reforms to emerge from the National Electricity Market (NEM) Review led by Tim Nelson, seeks to bridge the gap between the short-term contracts energy retailers want and the long-term certainty necessary to deliver large-scale renewables.
But the CEIG says that while the Nelson Review panel has correctly identified the problem – insufficient new investment due to tenor gap – it has “solved for a different one;” fungibility of financial contracts, rather than entry of new physical plants.
The report by the CEIG, which represents big investors in renewables in Australia, is one of the first from the industry to cite specific problems with the new market design, which is expected to lead investment as the renewable energy target expires and the Capacity Investment Scheme is wound down.
Many of the details of the ESEM have yet to be finalised, and many in the industry have been waiting to see the final design, but the CEIG has decided to get in early.
The new mechanism is proposing to operate by procuring “core in-market services,” which the NEM Review panel has suggested should include bulk energy, shaping and firming.
And instead of contracts being settled against actual generation, as is typically the case with current power purchase agreements (PPAs), ESEM contracts would settle against a reference generation profile.
This approach, the report notes, will work well for battery storage projects or for solar-battery hybrids, or even for stand-alone solar projects, which can forecast future generation profiles much more safely than wind farms.
For wind farms, the report warns, the panel’s shortlisted contracts – Dispatch-weighted Average (DWA), Time of Day (ToD) and baseload swaps – could place greater risk on investors, adding further headwinds to an industry that is already experiencing rising costs and high levels of investment uncertainty.
“The proposed ESEM bulk energy contracts could shift too much new risk onto wind farm investors, increasing costs and complexity,” the report says.
And further, “any additional complexity and cost could flow downstream to consumer power bills, exacerbating a cost-of-living crunch.”
CEIG CEO Richie Merzian says that while the ESEM sounds like it will work well for contracts for energy market services like firming and shaping, the federal government “doesn’t need to reinvent the wheel” to attract new wind farm investment.
“The concern is that the government might back in an approach that focuses more on fungibility than it does on practicality,” Merzian told Renew Economy on Monday.
“Right now, looking at hybrid generation LTESA [long term energy storage] contracts …they can write a fixed shape. You can do that with the with solar hybrids… but with wind it gets harder – and wind is where things are getting more expensive, where things are getting trickier.
“We do not want a repeat of 2025, where Australia experienced one of the lowest levels of windfarm investment,” Merzian says.
“New wind generation contracts should settle against actual output, much like commonly used Power Purchase Agreements, rather than against a forecasted profile, which puts further risk on the generators.
“And go with a safe pair of hands, like ASL [formerly AEMO Services] to manage it,” he adds.
“Given we’re at a point where we’re looking at… every opportunity we have to incentivise more wind projects actually getting to financial close … the analysis… shows why going with something that manages the risk based on generation is probably the safest way that we can move forward.”
Merzian says consultation on the proposed reforms, led by the federal Department of Climate Change, Energy, Environment and Water (DCCEEW), is due to resume soon, building on in-principle support from Australian Energy Ministers for the NEM Review Recommendations.
The hope is that DCCEEW will take the wind industry’s concerns on board when it comes to the design of the contracts.
Particularly considering – as the report points out – that the pilot Contract Co-design Working Group had no representation from any developers whose core business and risk exposure is wind project development.
