AGL proposes new investment vehicle to remove renewable roadblocks | RenewEconomy

AGL proposes new investment vehicle to remove renewable roadblocks

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AGL to propose new investment vehicles to break renewable investment stalemate, suggests tighter rules to force closure of coal plants.

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AGL Energy says it is putting together a proposal to create new investment vehicles that could help unlock the stalemate that has brought investment in large-scale renewable energy generation in Australia to a halt, and threatens the ability to meet even the revised renewable energy target.

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AGL Energy CEO Andrew Vesey

AGL chief executive Andrew Vesey, in Paris to attend events on the sidelines of the UN-sponsored climate talks, says the company will come up with a proposal early in the New Year.

He did not give many details, apart from suggesting that the new vehicle would seek to solve the gap between what investors want – long-term contracts and finance – and what utilities such as his are prepared to give – only short-term tenders.

“We are thinking about innovative ways to get this moving again,” Vesey said. “Infrastructure investors want to invest …  so we’re looking at creating mechanism and investment vehicles so investors can get to those assets.”

The big three utilities have been accused of maintaining a capital strike in refusing to sign any long-term power purchase agreements deemed necessary to secure finance for large-scale wind and solar projects.

Only those directly supported by the Australian Renewable Energy Agency, the Clean Energy Finance Corp, or contracted under the ACT government’s feed-in tariff scheme, have got financial approval and begun construction.

Environment minister Greg Hunt convened a meeting of regulators, developers, and utilities late last month in a bid to find away around the impasse.

The problem is blamed on the lack of long-term policies, constant changes in those policies, the prospect of further changes, and the reluctance of utilities to undermine the earnings of their existing coal and gas assets.

This is despite the fact that the renewable energy certificate price has soared to more than $77/MWh, and analyst reports suggesting that up to 3,000MW of capacity will need to have been committed within the next year to avoid a big shortfall.

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The big three utilities have been accused of maintaining a capital strike in refusing to sign any long-term power purchase agreements deemed necessary to secure finance for large-scale wind and solar projects.

The target is further undermined by the structure that means if the retailers do not meet their obligations, they pay a penalty price but pass on the cost to consumers, although that may involve some brand risk.

Industry insiders suggested AGL is looking to create a vehicle that could match the needs of both the developers and obligated parties, but it could mean “hoovering up” many undeveloped projects, which could then be built by AGL and sold into a vehicle owned by institutional investors and others.

The advantage for AGL could be that it would not need to provide long-term contracts, and might eliminate some of the competition in the development.

Certainly, Vesey said there was no shortage of interested parties wanting to develop projects. The problem was the lack of finance.

Kane Thornton, the CEO of the Clean Energy Council, agreed with this estimate: “Clearly there is a lot of enthusiasm to build new renewable energy projects in Australia, with commercial innovation and negotiation underway to find the most effective way to commercialise new projects.”

The deadlock around the RET is blamed by some on the structure of the Australian industry, and its dominance by entities that are both retailers and generators.

If they were separated, the retailers were more likely to sign long-term contracts, but the gentailers were more reluctant because they were seeking to protect their generation assets.

Vesey alluded to this, saying that there was 7,000MW of excess baseload capacity, wholesale prices were falling and some generators were not making money.

“One of challenges ahead is to get supply and demand back in balance, so renewables can be brought along on market fundamentals,” Vesey said.

“We have got to see old, inefficient plant exiting the system. We never advocated either government or other generators pay for that.”

That comment appears to be in response to a recent proposal put forward by ANU academics that suggested the closure of a coal-fired power plant be subsidised by rival generators.

But AGL has relatively young and less polluting plant (in terms of emissions intensity, not aggregate emissions). It sees no advantage in paying for others.

Instead, Vesey alluded to the tight controls in the US on the age of plant and emissions intensity. That could see the closure of up to 200GW of coal-fired generators in the US. He experienced similar rules imposed when he was running coal-fired generators in Chile.

RenewEconomy also asked Richard Lancaster, the head of CLP, the owner of EnergyAustralia, which in turn owns the Yallourn brown coal generator, if the company intended to close the brown coal generator. Lancaster said this was an issue for “local management” and needed to be done “in conjunction with government with a carefully thought through and managed plan.”

Meanwhile, Vesey pointed to the experience of South Australia, which is already running at more than 40 per cent wind and solar, and will pass the 50 per cent level in 2016. It will then aim, according to Premier Jay Weatherill, to get as close to 100 per cent renewable energy as it can.

“South Australia is leading the way,” Vesey said. “It really is. We look at South Australia as an example of the way the rest of Australia will be. ”

But he said this will require changes. Not just of the closure of old coal plants – as is happening in Australia. AGL also wants capacity mechanisms introduced to encourage the installation of large-scale battery storage, or “advanced gas” generation to cope with the higher penetrations of renewables.

The use of capacity mechanisms is a contentious one, given the experience in Western Australia, and fierce debate about their use, or relevance, in Germany.

But it is recognised by some that a market in frequency control is needed to ensure smooth running of the system, and to avoid price spikes as occurred in an incident a few weeks ago, which some say cost participants $30 million.

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