Huge penalty charges loom as renewable investment remains at standstill

Australian consumers face paying nearly $2 billion in so-called “penalty prices” in a few years time if the two-year standstill on renewable energy investments continues much longer, according to a leading industry analyst.

Green Energy Markets says that unless 4,400MW of new renewable energy capacity is committed in 2016, then the federal renewable energy target will likely miss its revised goal of 33,000GWh by 2020.

That means that a penalty price for any shortfall will be passed on to consumers. Instead of paying renewable energy developers for the output from wind farms and solar farms, the money will go straight into government coffers.

The need to commit to 4,400MW of new large scale renewable capacity contrasts to what was achieved in the last three months of 2015 – when minor projects totalling just 8.5MW were accredited. In the first month of 2016, still nothing of significance has been committed.

In all of 2015, just 448MW of large scale projects were committed. But half of that capacity came from the ACT government scheme which is not included in the RET.

Green Energy Markets’ Ric Brazzale says the problem is that not a lack of projects. There is some $15 billion of “shovel-ready” wind farms waiting for contracts, and possibly up to 100 different large scale solar projects, as revealed in the recent funding programs proposed by ARENA and an auction from Ergon Energy.

But because of the Federal Coalition government’s tinkering with the RET – firstly its attempts to remove the target and then to reduce it – project finance is proving impossible to achieve.

The constant changes and the lack of certainty means that off-takers such as big utilities are not entering long term contracts, and that means that lenders will not come to the party.

The only projects that are going ahead are those with long term agreements such as the ACT government’s successful tendering program. But those projects, which may total nearly 500MW of wind and solar, will not count towards the RET. Most renewable energy companies are not big enough to take “merchant risk.”

This graph below from GEM suggests what may happen in various scenarios. Under the most pessimistic scenario, where only 1,000MW of new capacity is committed each year, the 33,000GWh target will not be totally met with actual capacity until about 2023.

In the meantime, a penalty price will be paid for any shortfall. In the worst case scenario, that could total more than $550 million in 2019 alone, and more than $500 million in 2020.

Large scale generation certificates are already selling at more than $77/MWh. Brazzale says this means that the market is already pricing in failure, and has been doing so for several months, ever since it went above the penalty price is set at $65/MWh.

While for most utilities with tax obligations, it still makes sense to build rather than pay penalty (or get their consumer to pay) up to $92.86/MWh, for some obligated parties with no tax bill, $65/MWh is the cut off point for their interest.

The issue is who is to blame, and who cops the fallout?

Opponents of renewable energy will be quick to lay the blame at the feet of the renewable energy itself. Others suggest that utilities are at fault, but they will argue that they are dealing with changing government policy, albeit influenced by the utilities’  own objections and attempts to have it repealed.

If one utility passes on a penalty price, that may involve reputational risk. If they all do, then it will simply reflect the failure of the market.

The government may not be too upset because it will pocket the penalty price as revenue. But it will look foolish, because many will argue that it is its own intervention in the market that has brought the stop to investment.

In the rhetoric favoured by environment minister Greg Hunt, it will be the Coalition that is imposing an “electricity tax” and asking the public to pay for “phantom credits.”

Brazzale argues that the shortfall may not be such a big deal, because the market is a self correcting mechanism that should avoid his worst case scenario. The required capacity will  be built, it just may take two two three, or possibly up to five extra years to do it.

“That revenue will be lost to the (renewable energy) industry,” Brazzale says. That, he suggests, should provide extra incentive to find ways to get the capacity built.

Right now, renewable energy companies are enjoying the rewards of the high LGC prices. Some new developments are expected to be announced in coming months, such as the 25MW solar project flagged in Perth’s outskirts, but most likely not enough to avoid a shortfall. Then the blame game will begin.

“Not meeting the target in any year is not that dramatic as it is not due to a shortage of potential projects,” Brazzale says.

“When we consider the capacity of projects that were submitted to the ACT, Ergon and ARENA tenders we can conclude that the resources are in place to deliver on the target provided that financiers can get comfortable with the policy and regulatory risk.