The minority ACT Labor government has taken the unusual step of offering a financial guarantee to bidders in the second round of its solar auction program.
According to a letter sent out to bidders on Tuesday, the government guarantee is being offered in response to concerns expressed about “sovereign risk” in the auction process.
It does not state what those sovereign risk concerns are, but it is presumed to be the precarious nature of Labor’s hold on power in the ACT, where it holds the same number of seats as the conservative grouping (eight) and governs with the assistance of a sole Green member, who is also a minister.
RenewEconomy has since confirmed that a guarantee has also been given to the winner of the first round of bidding, Spanish group FRV, which is to construct a 20MW plant near Royalla. (updated: see below)
The guarantee being offered in the second round equates to $1.75 million per megawatt, but will decline over years. That suggests the guarantee could account for around two-thirds or three-quarters of the capital cost of the solar plants. It could be paid, for instance, if the tariffs agreed to in the solar auction process are rescinded by a future government. (The Liberals are not fans of Big Solar).
Bidders and bankers said such a guarantee would help to reduce the cost of capital by a significant margin, reducing the cost of debt and the returns sought by equity investors, and in turn enabling more competitive offers in the solar auction process.
“Essentially, it means that the cash flows for the project are guaranteed,” said one banker familiar with the auction. “This will have an impact on the whole financing structure of the project,” he said, adding it had implications for debt and equity investors.
The ACT Solar Auction has been a ground-breaking development in the Australian renewables industry, even though such measures are now used widely overseas, most notably in South Africa and India, but also in US, China, and South America.
The first round resulted in a win for FRV to build its 20MW with a bid of $186/MWh, which equated to an offer of around $150/MWh if indexing is taken into account. The price has surprised some competing bidders, although comments by other aspiring solar PV developers since that time suggest that they, too, are operating in the same financial ball-park as FRV, although the metrics can vary widely given the nature of the solar resource, the terrain, the availability of grid connection, and land costs.
It is expected that up to 22 proposals, including at least one from local utility Actew AGL, will bid into the second round of the solar auction, with project sizes ranges from 1MW-2MW to up to 20MW.
The ACT government said last year it could allocate more capacity, if the bids were competitive. The closing date for final bids is April 16, while a winner or winners will be announced in June or July.
One reason why the ACT government would have been motivated to act on the guarantee was that the cost of financing – due to the political risk – meant that such attractive bids could not be repeated in the second round.
Pricing political risk into the bids would mean that the tariffs would be higher, and cost ACT electricity consumers – who will make up the difference between the wholesale electricity price and the auction bid – more money over the 20-year contract.
The government estimated the first bid would amount to 25c/week, or $13 a year, for each household for the project. It expects this cost to fall to $9.50 a year by 2020 as the gap between wholesale prices and the fixed contract narrowed.
However, bidders said there some concerns over the guarantee proposal, particularly the advice that not all bidders would be required to accept the guarantee. And not asking for it would deliver “extra points” in the evaluation criteria. There were questions over whether this would play in favour of Actew AGL, which is jointly owned by the ACT Government, and AGL Energy.
“During the Solar Auction process to date, it has become evident that some proponents and/or their financiers have perceived a level of potential sovereign risk in the design of the Auction,” the government wrote.
It said the guarantee is designed to recompense a successful proponent, on a “limited, diminishing and cumulative scale” for certain types of direct losses resulting from a “potential Government decision to repeal or otherwise directly reduce FiT revenues by legislative amendment (sovereign risk).”
It said the amount of any guarantee to be offered will be capped at a maximum sum in the first year and decline to zero, in a linear fashion, over the 20-year FiT payment period. The maximum guarantee on offer for a proposal will be $1.75 million/MW, but proponents may choose to request a lesser amount.
The solar auction targets 40MW of large-scale solar PV in its initial rounds, before being potentially expanded to other technologies in future years, and a possible target of 210MW over time.
The ACT Labor government late last year also announced an ambitious target to meet 90 per cent of its energy needs with renewables by 2020. The 90 per cent target envisages up to 90MW of large-scale solar PV by 2020, around 23MW of biomass from landfill waste, and the purchase of renewable energy certificates and output from up to 583MW of wind power in the ACT/NSW border region. It also includes around 72MW of small- and medium-scale rooftop solar PV.
It estimates that around a maximum 130-160MW of solar energy could be installed in the territory, and noted its reverse auction system could accelerate the deployment of solar thermal and geothermal technologies if these also looked promising.
Note: The existence of a guarantee for FRV was revealed by the Economic Development Minister Andrew Barr in the ACT Legislative Assembly last November. According to Hansard, he said:
“The guarantee entitles the proponent to be paid an amount by the territory to place it in an equivalent financial position as it would have been had the FIT entitlement not been varied. The undertaking does not include payment for losses of future earnings or profits. The guarantee was a necessary element to facilitate the proponent securing necessary financing, and I commend this instrument to the Assembly.”