Australian analysts have warned that some of the country’s wind farms could be forced to close down under proposals made by the Abbott government’s RET Review panel.
Insiders are aghast at the assumptions made by the panel about the possibility of closing the scheme to new entrants and providing “grandfathering” arrangements for existing assets.
They say the proposals – and the assumption that LGCs, the certificates that are the currency of the scheme – will hold value are flawed, and the panel has not considered the basic refinancing risks of all projects under any scenario.
“I’m amazed at how flawed this document is,” said one close observer. “It is internally inconsistent, it is intellectually flawed … and it doesn’t even try to cover up its bias. It is 160 pages of self-serving logic.”
Another noted that almost every wind farm in the country will be up for refinancing for next 3 years. “They will be in major financial distress, and they are all at risk of falling over.”
While wind farms in Australia can have long term power purchase agreements out to 2030, the financing arrangements are much shorter, usually around 5 years.
This means that most, if not all, wind farms, will be up for refinancing in the next few years. When that happens, the major banks will review the state of the market, and are either likely to raise the price of debt, or do an “equity sweep” – calling on project owners to invest more cash.
None are likely to do so.
And in some cases – because the value of the LGCs will be effectively zero – as Bloomberg New Energy Finance has pointed out – and the price of wholesale electricity has fallen due to the removal of the carbon price and over-capacity brought about by the construction of thousands of megawatts of gas-fired generation – many wind farms will struggle to make debt obligations under current terms.
In its report, BNEF warned that a “whole host of Australian and foreign companies and lenders could be exposed to asset impairments, and almost all will suffer significant write-downs in the mark-to-market value of their investments.”
This dire situation was confirmed last week by Infigen Energy, which warned of potential bankruptcies last week (an extraordinary enough statement for a listed company). Infigen Energy head Miles George – who doubles as the chair of the Clean Energy Council – warned that many other companies are in a similar situation.
Those wind farms on merchant contracts are most at risk, but even those with PPAs have clauses which allow bankers to review the financing arrangements.
Analysts suggest that Australian banks will be mortified when they understand the full implications of the review panel’s recommendations.
“Every time there is a refinancing, banks redo the base case model for the project. As the situation gets worse – with a lower LGC price – they will have to squeeze all of their parameters to make sure they get repaid,” one said.
“When they pull all those levers – a shorter amortisation period, a higher debt-equity ratio, then the equity holders are going to have to tip in additional capital to keep the projects going. The project owners are not in position to do that.
“And if the equity holders start falling over, banks might be left with wind farms to run and operate. But there will be no real market left, and no real market value in those projects. It may be that they have to turn them (the wind turbines) off.”
Even the other scenario recommended by the RET Review panel – that of downgrading the target from its current level of 41,000GWh to a “real” 20 per cent target of around 25,000GWh with targets set annually, would not be practical.
Analysts warn that there would unlikely be any new entrants because of the price uncertainty with rolling targets and – as a result – the higher cost of capital. It is highly unlikely that any Australian bank would provide debt finance in these circumstances.
All of Australia’s big four banks are at risk, but particularly NAB and ANZ, who have project financed most wind farms in Australia.
