Eraring extension may burn a big hole in Australia’s biggest renewable energy tender

The controversial decision to extend the life of Australia’s biggest coal fired generator for at least two years may have more far reaching consequences than burning another six million tonnes of coal and giving Origin Energy direct debit access to the state’s bank account.

The decision to delay the closure of the 2.88 GW Eraring facility – and the fear that state governments may do the same with other coal generators – has added to the huge uncertainty that lingers in the electricity market, and the full impact may be felt in the country’s biggest renewable energy tender that formally opened last week.

Government tenders have often delivered remarkably low-cost outcomes, or at least that is what we are told because the details are often hidden.

The Queensland government could barely believe the prices it obtained through the likes of CleanCo for some major wind and solar projects, and the NSW government claimed the same with its first tender for new wind and solar last year, although some of the projects were not particularly new.

There is no doubt that federal energy minister Chris Bowen was hoping for a similar happy outcome when he officially launched the first big tender for new wind and solar under the Capacity Investment Scheme, seeking six gigawatts (GW) of new capacity – a dose he is likely to repeat at least another three times in coming years.

Those hopes will have been based on the sheer scale and number of the projects queuing “in the pipeline”, hungry for an off-take or underwriting agreement that they can take to their bankers to line up the finance for potentially multi-billion dollar projects.

But a word of warning this week came from the head of the country’s last remaining wind, solar and storage developer, Genex Power, saying that the uncertainty in the market means bidders are likely to hedge their bets, and that may mean higher prices.

“Uncertainty is the key word for us,” Craig Francis said at the Clean Energy Council’s Large Scale Solar and Storage conference in Brisbane this week. “The market outlook today is very different to what it was, and it is changing very rapidly. Navigating it is very tricky.”

This was a common theme at the conference. There is considerable speculation about the CIS and how project developers will bid into the scheme, which offers both a floor price and a collar.

If market prices are below the agreed floor for a project, then the government will provide top up payments. If market prices are above the collar, then the government receives part of the excess profits from the project developers.

In a way it is similar to the scheme that the NSW state government cooked up for Eraring, and the deal to extend its operation for another two years – albeit with the minimum capacity factor of your average solar farm..

It had been widely assumed that project developers would bid low into the CIS, but now the players are not sure because there are so many uncertainties in the market, particularly with the extension of Eraring and how Origin operates the biggest coal generator, and if other coal generators are given similar extensions.

There is speculation, for instance, that Victoria may find itself forced into a similar deal with Yallourn, despite it already having a secretive contract to keep it open until 2028. And the owners of the other coal fired generators in NSW will see what Origin has done with Eraring, and will want to have some of the same.

There are also questions about how the anticipated influx of new generation will be played on the market. The situation is complicated by the delays in new transmission projects, access to new renewable energy zones, and also political uncertainty with elections coming up in Queensland and federally over the coming 12 months.

CleanCo chief financial officer Brian Carrick said bidding prices from wind and solar projects were certainly not returning to the prices enjoyed just a few years ago when the company was able to sign up contracts with the Western Downs solar farm and the MacIntyre wind farm at low prices.

It was generally assumed that prices had been offered to Queensland state utilities as low as the $30s per megawatt hour for solar and the $40s for wind. Those days are long gone – prices have jumped for both technologies in the midst of the covid pandemic, the energy crisis and supply chain crunches.

The cost of solar modules has fallen to record lows, but the cost of labour and civil engineering has jumped. Wind turbine prices have come down from their peaks but may take another few years to return to where they were. And does anyone know where we can find a crane? Investors feel the need to price in increased uncertainty.

CEC chief executive Kane Thornton describes a “complex and challenging landscape” for new investment, which is much needed if Australia is going to reach its near term renewables and emissions targets.

“We have the pipeline, we have the capability we have the capacity. And now we have to get the fundamentals right to be able to accelerate renewable energy and deliver Australia’s target of 82% renewables by 2030,” Thornton said.

He cited the federal Coalition’s support for nuclear as another potential risk that would cause prices to rise.

“We again find ourselves in the absurd situation of having to justify renewable energy in the face of fantasy driven and nonsensical distractions. I’m talking of course about nuclear power. No, this isn’t the Mad Hatter’s Tea Party, although there’s an excuse for thinking it was.

“Everyone in this room knows nuclear power can’t compete, and will never play a role in Australia’s electricity system. But that’s not the point.

“A protracted debate about nuclear power will be yet another distraction. It risks confusing the public undermining investment investment confidence in new renewable generation that will slow down the energy transition it will drive up power prices and it all put at risk energy security. That’s why we’re standing up against nuclear power.”