Federal energy minister Chris Bowen’s grand plan to secure at least 32 GW of new wind, solar and storage projects through his Capacity Investment Scheme may deliver a power shift in more than one sense: It might just loosen the shackles of dominance from Australia’s biggest energy utilities.
A common complaint from developers of wind, solar and storage in the Australian market has been the difficulty in securing long term power purchase agreements.
As RenewEconomy and ITK principal David Leitch have long noted, the big Australian “gentailers” – AGL, Origin, EnergyAustralia – have shown little interest in securing the new capacity needed to replace their ageing coal and gas assets, and have been reluctant to sign many long term contracts.
That has been left for others to do, and in turn has become a centrepiece of the Brookfield bid for Origin Energy, and its promise to do three times as much in the coming decade – 14 GW of new wind, solar and storage – than Origin itself has intended.
That bid now looks unlikely to succeed, given the opposition from Australia’s biggest super fund manager Australian Super, and its apparent interest in tapping the super profits from LNG and pocketing the dividends rather than re-investing into renewables.
But the unveiling of Bowen’s plan, and the success announced a day earlier of the first tender under the Capacity Investment Mechanism, run jointly with the NSW government, suggests a profound shift in the power balance.
That first tender will deliver three big batteries, and three new virtual power plants, and may cost NSW consumers little, or even nothing. That’s because the design of the scheme is targeted at removing the downside risk of battery projects, or for wind and solar projects in the other NSW tenders.
According to Brad Hopkins, the head of commercial for AEMO Services, that’s significant. It means that project developers are no longer dependent on landing a 15-year PPA with a big utility – the most natural customer because of the huge load they service for their customers.
Some have found long term PPA’s with corporate customers, but these tend to be shorter, and still not sufficient to secure low cost debt or equity.
By providing a guarantee of minimum revenue, through what’s known as a Long term Energy Services Agreement (LTESA), essentially a put option, project developers can eliminate the worst case scenario in the project’s financial modelling, and make it easier to attract finance and investors.
“Previously, people needed a 15 year PPA with a credit worthy utility in order to get a project built,” Hopkins tells RenewEconomy in the latest episode of its award-winning weekly Energy Insiders podcast.
“They’re showing up to our tenders, and they’re saying, we need enough financial support from the LTESAs to pay our debt back.
“But they say we’re happy and we’ve got a five year contract with a medium sized company or a large corporate or a new entrant retailer. And our equity investors are happy to take the risk that we get another contract in another five years.”
Energy utility executives agree, with one saying that the change could have a profound impact on the shape of the market going forward, particularly as the big utilities are also under pressure from the growing impact of rooftop solar, and new competitors such as Tesla Energy, which is applying for a full retail license in Australia.
Morgan Stanely analyst Rob Koh also highlighted the potential impact to utilities in a short note to clients this week, saying that Bowen’s upsized CIS will present more challenges, in the form of more competition, than opportunities. (Although one suspects there will be some of the latter, particularly for the likes of Brookfield).
Koh also observes that the success of the NSW tender could have an impact on talks around the future of Origin Energy’s Eraring coal generator, the biggest in the country and which it currently intends to close in August, 2025.
The NSW government has been urged by an independent review to talk with Origin about an extension, at least for a few units, and Origin is thought to be arguing it needs compensation to keep going, particularly in the fact of negative wholesale prices in the middle of the day, thanks to rooftop solar.
Koh suggests that the new battery projects secured by the NSW tender – for a 500MW, two hour battery at the already shuttered Liddell coal plant, a 415MW, four battery at Orana and a 65MW, two hour battery in western Sydney – may dilute that argument because the batteries will help reduce the size of that solar duck.
(This would be a delicious irony, having already seen the Liddell coal plant close and seeing its battery capacity seal the fate of the country’s largest coal generator).
Koh has some other observations about the impact of the CIS. He reckons it will lead to lower wholesale prices and a fall in the prices of large scale certificates, given that the CIS route means no extension of the renewable energy target, for which LGCs were the main currency.
Koh also suggests the market dynamics for price caps – for which the government owned Snowy Hydro is the dominant player – could change, as price spikes may no longer be worth defending, and the caps market could focus only on the value of peaking plants.
He also suggests that while independent power producers will be favoured over incumbent gentailers, some like Origin may benefit because they are already “short” of generation capacity.
There is assumed to be no shortage of wind, solar and battery projects in the pipeline, and AEMO documents some 150GW of capacity across the grid that has made enquires about grid connections.
The question is how much of this will be available to bid into the CIS, and meet the promise of being built in time to deliver the 82 per cent renewable target being pursued by the federal government.
Wind farms are being held up in the planning process, across the country, but no more so than in NSW where the planning department appears to have taken a set against the technology.
This was highlighted last week by the absurdity of the wind “suitability” map that was changed last week, and some of the proposed new planning rules that the industry says will make it all but impossible to get new approvals.
It’s not the only thing that could stop Bowen from reaching the 82 per cent renewable energy target. As numerous experts have written on RenewEconomy this week, here, here, here, here and here, there is still lots to do – on transmission, social licence and behind the meter technologies.
But now one key part of the policy equation has been addressed, and – depending on the final structure of the mechanism – may not cost the government anywhere near as much as some would suggest because the high price of risk and doubt will largely be eliminated. That’s a good thing.
