Australia’s renewable energy renaissance may be over in 5 years

The lack of long-term policy settings means that the Australia large-scale renewable energy target could collapse by 2020, once the new target is met. But the uncertainty is also creating problems for current projects, because bankers and customers are nervous.

Just weeks after emerging from a two-year investment drought, the large-scale renewable energy sector in Australia is facing the prospect that their industry will “fall off a cliff” within five years, unless longer-term policies are developed.

The revision to the renewable energy target – its cut from 41,000GWh to 33,000GWh – means that around 5,500MW of large-scale wind and solar capacity will be built over the next five years.

But because this target is only made out to 2020, and then flatlines for the next decade, the risk is that the market will completely shut down in 2020 unless any longer term policy signals are provide.

The uncertainty is also creating problems in the current market, with long-term power purchase agreements and banking finance difficult to obtain. There is even talk of a capital strike, because of the perception that a re-elected Abbott government would further cut the renewable energy target, or remove it.

Oliver Yates, the head of the $10 billion Clean Energy Finance Corp, which the government wants to close, and prevent it from investing in large-scale wind and small-scale solar in the meantime, says the structure of the scheme meant that revenues post 2020 were at risk. And this was causing problems for the industry.

More certificates may be produced by, say, larger rooftop solar arrays. Solar installations of more than 100kW also produce LGCs, even if they run on different economics (they compete with retail and business prices rather than wholesale prices).

Even now, a whole bunch of such projects up to 1MW in scale are being built on shopping centres, warehouses and elsewhere. That is likely to continue into the 2020s, potentially causing a flood of certificates on the market.

That has the potential to reduce the value of the LGC, and the revenue returns of large-scale wind and solar farms, and that prospect is making it harder to get people to lock into long-term offtake agreements, and to provide finance.

“If you want to avoid a precipitous fall in the price (of renewable energy certificates), you have to pack up the renewable energy industry in 2019 and go home,” Yates told the Clean Energy Summit in Sydney on Wednesday.

“Economics 101 tells you that REC revenue constitutes 50 per cent of revenue for projects, and after 2020 50% of revenue is at risk.”

Kobad Bhavnagri, the head of Bloomberg New Energy Finance in Australia, agreed that the outlook for large-scale developments was uncertain, making finance difficult to obtain.

“Anyone thinking about long-term, solid contracts has to consider, is the Coalition committed to long-term policy. The track record of this government means that they’re not your friend.”

He noted that the major retailers could effect another “buyers’ strike” that could force a policy change, as they effectively had done in the last two years. “They have the capacity to game the market because of their market share. It is a vicious cycle.”

He also said new renewable energy, particularly from large rooftop arrays that generated excess certificates, could push the price of those certificates down towards zero.

Right now, the renewable energy industry needs the renewable energy certificates to compete with existing coal. But coal is not moving easily out of the equation, particularly with the removal of the carbon price.

While renewables, particularly large-scale solar, but also wind energy, will fall in price between now and 2020, it will be unlikely to compete with four-year fully depreciated coal-fired power stations, meaning it will still need some ongoing policy signal.

Unless there is a mechanism to force out coal-fired generation, then the uptake of large-scale renewables without subsidies on the main grid may not occur until after that coal-fired capacity is retired, after 2030.

Hence the importance of the longer-term policy. Labor is making renewable energy a key part of its document, although the details are hazy.

Yates said it was possible that some projects might not get built, or it could mean that the RET is cut again.

“Or the government could acknowledge this problem, and provide a long-term trajectory,” he said. It was clear that Australia needed to add more renewables, year-on-year post 2020, to effect its energy transition and meet carbon targets.

“These are the financial barriers that the industry faces,” Yates said, noting that this was exactly why the CEFC was created, to help navigate those barriers.

Jack Curtis, the head of Australian operations for First Solar, which has built most of the big solar projects in Australia, says there remains a “high perception of value risk” in Australia. That pushed up the cost of equity and the cost of finance in Australia compared to other countries, particularly the US.

Still, others said that they were confident the RET would be met. John Titchen, the head of Goldwind Australia, said it was a competitive market with a big surplus of projects.

“The RET has always been met,” he said. “There is a diverse range of options for financing renewables,” he noted, adding that this included the CEFC, as well as the balance sheets of international energy groups such as Goldwind, GE and others.