How solar tower and storage won on costs

As the South Australian government basks in the glow of procuring a second world-leading and game-changing renewable energy technology project for the state, attention is turning to the finer details of the deal; in particular, how a solar tower power plant with molten salt storage won the government tender on costs.

SA Premier Jay Weatherill announced on Monday afternoon that solar thermal developer SolarReserve had won the tender to supply 100 per cent of the government’s long-term power needs via a 150MW, $650 million solar tower and storage facility to be built in the former coal town of Port Augusta.

The project, dubbed Aurora, won the 20-year contract to deliver power at just $78/MWh which, as we reported here, is amazingly cheap: around one-half of previous estimates for the technology, and significantly cheaper than the gas generation fleet that currently dominates the state’s generation profile.

So how did SolarReserve come to such a low cost of supply?

The answer lies in two key elements of the deal. The first is the length of the power off take contract SolarReserve has signed with the SA government, which at 20 years, allows the company to amortise debt over a longer period.

The second key factor is the $110 million of recoupable finance promised by the federal government in April, in a deal with SA Senator Nick Xenophon to help accelerate the development of a solar thermal plant or large-scale solar project at Port Augusta.

The deal, struck in exchange for Xenophon passing the federal Coalition’s tax cuts, was welcomed at the time by Weatherill, who confirmed the loan – over and above any funding from CEFC or ARENA – would put solar thermal “right in the running” to win the SA government’s tender.

And so it did. Speaking in an interview on Monday, SolarReserve CEO Kevin Smith remained hazy on the finer details of the contract (we assume the SA government gets to keep the LGCs generated by the power plant), but did concede that if the federal government withdrew its promise of equity funding, the company would have to go back to the drawing board on costs.

“We’ve built that into the structure that we’ve offered to the South Australia government,” he said, while stressing that the money was not a grant. “I think it’s interesting to point out that that’s an equity investment; so they get that money back, plus they get a return. So there will be actually profits that’ll go to the federal government for repayment and the equity investment on that funding.”

Asked whether the project was a “loss leader,” however, Smith’s response was a clear “no.”

“Investors and lenders do not let projects be loss leaders,” he said. “Lenders keep everyone honest. It is a modest return project… We hope to make some money on the back end of the deal.”

(ITK analyst David Leitch crunches the numbers on the project here, and concludes that it “is clearly not commercial.”)

On the length of the contract, Smith said 20-years was a pretty typical time-frame for the industry. “That allows us to bring in long-term financing… long-term debt … and that allows the capital cost to be amortised over a longer period, (and) drives down the cost of power.

“As soon as that debt is paid off, we are looking at significant price reductions after that,” he said.

For the SA government, the solar thermal and molten salt storage project has the obvious benefit of ticking the box for both its tenders – to provide 75 per cent of its long-term power supply and 25 per cent of its electricity load from dispatchable renewables – and the longer-term benefit of putting downward pressure on the state’s power prices.

“The government load peaks in the middle of the day, and the rest of the market’s load peaks at six or seven in the evening,” Weatherill said.

“So what that gives us the opportunity to do is to play this power into the point of the day when it’s most needed.

“That’s why it works, financially, for both parties. And that’s why it’s an incredibly powerful offering for the South Australian market.

“There will be benefits for the South Australian tax-payer, but broader benefits for the South Australian community as we put downward pressure on prices,” he said.

“As power companies are aware that this project is going to come on board, they’ll be starting to write forward contracts that factor it in – just as they factor in all market conditions at the moment.

“So we’ll see those benefits flow to us. And, of course, when the project is up, we’ll see the downward pressure on prices.

And then there is the unquantifiable – but undeniable – value, as one of the Twitterati put it yesterday, of the market confidence that comes from a government that is “actually doing stuff” to progress Australia’s energy market transition.

“This is our energy plan working,” Weatherill added. “We said we wanted to take control of our energy future. We are now doing this in an way which is incentivising private sector investment.

“That’s always been the ambition here; to make sensible investments, use our purchasing power to bring in other competitors to actually cause the changes in the market, but in a way which doesn’t sterilise existing market operators.

“So as new contracts are written in this market, which is now beginning to free up, you will see downward pressure on prices. The trajectory is all downwards, which is what the purpose of the energy plan has all been about.”