Australian renewable energy industry facing destruction

The Australian renewable energy industry has warned that it faces destruction if – as is now widely anticipated – the Abbott government decides it wants to drastically scale back the renewable energy target, or even close it to new entrants.

Miles George, the head of Infigen Energy – the country’s largest listed renewable energy company – warned that such an act of “economic vandalism” could force his own company to collapse within months, and many others would follow.

In an interview with RenewEconomy, George said that moves to curtail the RET were clearly ideologically driven, because the Abbott government’s own review had found that the impact of the scheme on consumers – the original justification for the review – was minimal.

“We are talking about the destruction of an industry, with no apparent good reason,” George said. “That is vandalism. If there was a reason, the price impact on consumers, then you might understand why they are pursuing that. To still continue with the process of the destruction of an industry, is what I can only call vandalism.”

He said that his own company’s board would need to make a call within months about whether its business was sustainable, or to use shareholders money to prop up the account while market prices fell because of policy uncertainty. Other companies were also facing financial problems.

George was also dismissive of reported moves to have the RET modified to include gas-fired generation – a proposal supported by the largest energy retailers, who are also heavily invested in gas-fired generation, which is now been priced out of the market.

“It avoids the fundamental problem, that we have got a lot of old, coal-fired plant that is 45 years old and which is incentivised to run to failure – they have low short-run marginal costs, the plants are fully depreciated, and there is a disincentive to closure because of remediation and contract costs. Putting gas into the system is not going to solve that.”

It also comes as the government reportedly considers a massive, multi-billion dollar pipeline from the Northern Territory to the eastern states to bring more gas to the electricity market.

RenewEconomy: Your outlook for the year ahead painted a bleak picture of potential asset write-downs and the breaking of debt covenants. Is it really that bad?

Miles George: It is really. As you know, we have been making the point that the real 20% is not that much different for us, or for the industry, than the closed to new entrants scenario. We have built 17,000GWh of new generation, and under the current target there is another 24,000GWh to go. If the target is reduced to a “real” 20 per cent, then there is just 8,000GWh to go.

We have existing investments of $1.2 billion, but that is under threat because the large-scale generation certificates (LGCs) could be in surplus for another three years, that means the price could fall to around $30, little more than half what he had calculated under the policy settings.  That would be pretty much terminal for us. The government’s own modelling shows what the price should be if there was legislative certainty right now – it should be around $55. That is similar to what was our investment cases for our projects. Our financing is based on that kind of assumptions.

At a price of $30, the economics don’t work. That will have an effect not just on value of equity in those projects, but also on ability to repay and service the debt we have. If there is a view that LGC prices are going o stay where they are – we would have to seriously consider whether or not we can survive, and to make a call on that within three months to enable us to protect shareholder funds.

RE: Is Infigen Energy particularly vulnerable, what about the rest of the industry?

MG: Pacific Hydro  (Australia’s largest renewable investor) is in a similar position because they have a largely uncontracted portfolio. Meridian energy also has a merchant plant recently completed in Victoria. There are others. Quite a lot of wind farms were financed by PPA – while may be protected to some extent from the weak market price of LGCs, those contracts will roll off and also become exposed. Even those projects which have long-term PPAs in place have a “sharing mechanism” for the risk of regulatory change. It’s a change of law provision that addresses.

RE: What could provide policy certainty. It seems that reaffirming the  41,000GWh target and pushing for a 4-year review timetable is the only way. But that is not going to happen.

MG: The government needs to make its position clear. We were encouraged by reports that the back-bench had been told about the need to be economically pragmatic, rather than ideological. So how does that work in the RET? The government cannot get changes to the legislation through, and if a “real” 20 per cent is proposed then the industry would be left in limbo. It would be irresponsible of the government to allow continuing legislated uncertainty. This legislation had bipartisan support for a long time, $20 billion was  invested – you can’t leave that in limbo until the next election.”

RE: There are reports that a “low emissions target”, rather than a RET, is being considered. This will effectively allow gas into the scheme. Why is that a bad idea?

MG: As I understand it, the push to include technology like gas-fired generation into the RET is based on the argument that gas produces less carbon missions than coal. The considerable flaw in that argument is that gas prices have started to rise, from $4/gigajoule to up to around $10/GJ, according to the industry minister. That pushes the price of electricity from gas from around $60/MWh to over $100/MWh, and peaking plant prices even higher.  It is going to be a stretch to think that ga- fired generation is going to be re-invigorated by a mechanism like that.

RE: Would these incentives be given to existing generators, or only to new gas generators?

MG: It would be ridiculous if such an incentive was given to existing gas-fired generators. I haven’t read detail of what is proposed. Apparently it is intended to somehow replace coal-fired generation. It avoids the fundamental problem, that we have got a lot of old, coal-fired plant that is 45 years old and which is incentivized to run to failure – they have low short run marginal costs, the plants are fully depreciated, and there is a disincentive to closure because of remediation and contract costs. Putting gas into system is not going to solve that.

RE: So what is next for the renewables industry?

MG: We are conducting as best we can an advocacy campaign with the government, and with backbenchers, trying to convince them of the merit of leaving the RET  alone. We felt that when the government review found that scheme did not affect prices for consumers, that should result in leaving the RET alone. There are no remaining good reasons to alter the RET from what it is now – the main driver is an ideological one, there is no economic reason, certainly not one that looks after consumers.

RE: Is the industry contemplating legal action?

MG: It depends what happens. My responsibility is to shareholders and it is to ensure their interest is looked after. If the outcome is that does not adequately compensate existing plant, there is a clear manifestation of sovereign risk. That has been demonstrated in Spain, where they took decision with retrospective legislation – and are now seeing a barrage of legal action.

RE: And what will be the broader impact?

MG: We have already seen some bigger players lave the country – Recurrent Energy, Suntech have closed research, and we have local manufacturing putting off people. Keppel Prince warns of 170 jobs lost there. We see similar things happening in Geelong, where a car parts manufacturer has started making components for the large scale solar industry.

RE: So what is driving this – is it ideology, or is it the power and influence of the incumbent fossil fuel generators?

MG: It seems to be ideologically driven. If the focus of the RET Review was on the impact on the consumer, then that would be a great thing. But the review found no such impact. If the review finds that there is still a case to change the RET, then the driver must be ideologically driven.

RE: Last week, you described potential changes to the RET as economic vandalism. Was that over the top? What did you mean by that?

MG: We are talking about the destruction of an industry, with no apparent good reason. That is vandalism. If there was a reason, the price impact on consumers, then you might understand why they are pursuing that. To still continue with process of destruction of industry, is what I can only call vandalism.