Australia wind and solar projects: 2018 starts with a claret run

About 800MW of utility-scale renewables confirmed in the past six weeks

Yesterday’s announcements by Powershop of PPAs which will facilitate the 135MW “Crudine Ridge” wind farm in NSW  and the 200MW “Kiamal” PV farm in Victoria can be added to the 250MW NSW “Sunraysia” PV farm in NSW and the Telstra consortium’s 135MW PPA to facilitate the 225MW stage 1  of the Murra Warra wind farm in Victoria to make around 800MW confirmed since December 20, 2017.

That’s a pretty hot run rate.

Around 617-700MW of wind, Hornsdale 1, 2, 3 Ararat, Kiata and White Rock wind farms and the 50MW of Kidston PV have been commissioned since the start of 2017.

That still leaves about 3.2GW of wind and about 2.65GW of PV, let’s call it 5.5GW to come on line. All of that is, of course, in front of the meter (utility-scale).

In particular there is something like 300MW of PV projects in Queensland that might be online by around the end of March. These include Clare, Sun Metals, Lillyvale and Collinsville.

Projects that have started up since about Jan 1, 2017 – and we may have missed a couple of smaller ones – total about 800MW, but the 570MW in Victoria and South Australia nowhere near offsets the loss of Hazelwood and Northern Power Station in terms of energy.

Figure 1 Commissioned. Source: ITKe

It’s not completely straightforward keeping track of all the projects and how far along they are with building. Some projects have changed owners as developers take profit and keep moving.

3GW of wind under construction – more coming

Also we find there tends to be excitement about PV projects, which are newer in terms of their impact on the market, but the growth of wind is quite significant – particularly bearing in mind the higher capacity factors.

The PPA prices for wind came down nearly as hard in 2017 as those for PV; from about $80/MWh or $75 at the very low end in say 2016 or 2015, to $55/MWh in 2018.

We think there are three main drivers of lower prices for wind projects: (i) scale effects, on average wind farms are getting bigger Stockyard Hill and Coopers Gap are big projects; (ii) WACCs are lower; (iii) Chinese turbines have been accepted into the market and everyone else has had to match those prices.

Another thing to note is 669MW of wind development in Queensland, much of this was identified by Windlab software. Lurking in the background is the Kennedy Energy Park 1200MW project. In Victoria there are other projects that will be bidding into Victoria’s reverse auction process.

Figure 2 Wind farms under construction. Source: ITK

2.6GW of PV

There are 27 PV projects on our list, some of which are connected to, or have sub projects. Although Queensland dominates the list, Victoria has a surprising 700MW. We continue to expect that NSW which (i) needs the energy and (ii) is clearly lagging in new investment, will at some point see a large catch up.

By now everyone understands that NSW has a huge PV resource, a good wind resource, is a net energy importer, is close to Snowy 2.0, but has a state government which has a strong National Party component.

Regrettably, the National Party in NSW has managed to paint itself into the silly corner. It looks like an uneducated, ill-informed and stupid party most of the time, particularly when it comes to electricity. As a result they do their constituency a disservice.

As a result NSW has the oldest and will soon have the least reliable generation on the NEM and has done the least to ensure electricity reliability, let alone decarbonise.

On the other hand, this represents an opportunity. And because wind and PV can be built quickly, there is still plenty of time to sort out the mess.

Figure 3 PV farms under construction. Source: ITKe

Trends

Our expectations are:

1. There will be consolidation in the sector;
2. The average size of projects will increase;
3. Eventually there will be more domestic ownership. At the moment there is a very strong component of offshore ownership;
4. There will be an ongoing stream of investments; and
5. There will be a gradual emergence of renewable and or gas “firming” investment.

Duck curves

We will return to duck curves later, but the 2.7GW of utility PV is very roughly equal to 5GW of rooftop PV in terms of energy. However the extra energy will be more apparent earlier in the morning and later in the afternoon. Output in the middle of the day will proportionately not be much different to behind the meter.

Even so, and the same will go for wind in South Australia and Victoria, the optionality from being able to add say 1 or 2 hours of storage to access peak prices, expected to be in say the 6:30-8:30 time frame, is going to get looked at more and more.

Investment impact on average prices

Despite what we all want to believe, it’s not clear that any amount of wind and PV investment will necessarily lead to lower average prices than presently exist. This can be seen from the South Australian market where futures prices are still $20/MWh higher than in other states, no matter which year we look at.

Prices are set in the spot market by the last generator bid into the bid stack. Even if 99 per cent of the bids are at zero, if the last bid accepted is at $90/MWh that’s what they all get. Particularly at times when the wind isn’t blowing or the sun isn’t shining, currently the thermal bidders see that as an opportunity to earn a return on their investment.

The lower the average capacity utilisation of a generator, the higher the price it needs to charge when it is dispatched to earn a return. Obviously, if the thermal generators are gas, and there aren’t many of them and the gas price is high……..

So what’s required for lower average prices is sufficient competition in dispatchable energy.

Wind correlations

We are particularly excited to see more wind farms in Northern NSW, because we expect to find that a lower correlation between wind there and wind in, say, South Australia. White Rock, the first of the Northern NSW farms to commission has had 50MW running since mid August 2017, and about 150MW since January this year, so it’s still a bit early to tell.

Nevertheless if we take total half hourly wind output from each of  South Australia, Victoria, Tasmania and NSW over the past 12 months what we see is:

Figure 4 half hourly wind correlation, 12 months to 31 Jan 2018. Source: NEM Review, ITK

It’s probably the correlations of the individual states with total output that are of most interest. Naturally, as South Australia has a 43 per cent market share, it’s highly correlated with total output but it’s interesting that Victoria – which has a lower share of total output than South Australia – is more highly correlated, in the past year, with total output. Generally speaking we expect that wind farms that are less correlated will be more valuable as they offer diversification benefits.

The proof of the pudding is to look at the standard deviation of output (66 per cent of the time the output will be within 1 standard deviation either side of average output) and compare it to the average.

Figure 5 Wind volatility. Source: NEM Review, ITK

We can already see that the variability of the total wind output in the NEM is less than the variability of any of the individual states and as more wind farms are built in northern NSW and Queensland we expect this volatility to reduce further. In fact, as more wind farms are built within states we expect to see the volatility of state output fall as well.

This has implications for the amount of firming investment required.

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David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.