Coalition may finally end investment freeze of renewables this week

There is growing hope that the investment freeze in large scale renewable energy in Australia may finally end this week, if Federal Cabinet can bring themselves to agree to a compromise deal with Labor.

Federal Cabinet is expected to discuss on Thursday the latest offer from Labor, which is to cut the 41,000GWh target for 2020 to 33,000GWh, down from its previous offer of 33,500GWh.

There is an expectation that a deal can be struck, but it may have a final twist. Many within Cabinet are resisting even the government’s best offer to date, of 32,000GWh, so may insist on splitting the difference once again.

Environment minister Greg Hunt has invited his Labor counterpart Mark Butler for talks, but there is no date announced, and no firm indication that Hunt has carriage of the deal. Industry Minister Ian Macfarlane has a more hard-line attitude.

If a deal is struck – and some suggest it will by Friday – then this will pave the way for some $10 billion in projects to finally move forward, but it could be six months before there are any announcements.

One of the big unknowns is the attitude of the big electricity retailers, which have argued that the RET should be cut even harder, or removed altogether.

Most large scale renewable energy projects will rely on a power purchase agreement with a retailer to secure finance, but retailers may be in no rush to sign deals.

One reason is that they still have a surplus of certificates. Another reason is that adding more renewables into an already over-supplied market will reduce returns for their fossil fuel generators. This was the main motivation of their push to cut the target in the first place.

UBS, in a note to clients, said AGL Energy may be most exposed, because nearly half (48 per cent) of its market capitalization is exposed to fossil fuels. Origin Energy has a lower exposure of around 19 per cent.

But if the retailers continue to play hardball, some developers are likely to test the “merchant” market. That means they will sell their output directly into the National Electricity Market and take spot prices (plus the value of the renewable energy certificates).

UBS says it seems clear that vast of new renewable generation will be wind powered and built in the eastern States, excluding Queensland, which has a poorer wind resource and few projects.

Western Australia may supply a few projects, and it is there that some developers say has the best chance of seeing large scale solar – because of the high local prices and excellent solar resources. One unknown is the potential of localised solar – in the 3MW to 15MW range – which could be underpinned by the corporate market, that some predict may emerge.

And while the new investment in renewables will have an impact on coal-fired generators, UBS says it will not have an impact on consumers. “If REC prices stay at the mooted $35-$50 or even at $60 we see little or no impact on final prices to consumers,” it noted.

By 2018, the situation may get worse for fossil fuel generators as environmental rules are increased and new competition emerges in distributed generation, particularly with the arrival of cheap storage.

“By then (fiscal 2018), the requirement to have more onerous carbon pricing/taxes/costs and a renewed emphasis on energy efficiency will be biting,” the analysts note.

“Tesla’s new household battery is, based on the US$ in the USA quoted price, about 29% below prices on offer in Australia. We continue to see mostly bad news for base-load fossil fuel generation in Australia.”