An imaginary meeting with Frydenberg’s advisors about battery storage

It Didn’t happen.

Based on an idea your author first saw employed annually by “The Bank Credit Analyst” publication, the following is the record of an imaginary interview between ITK and Josh Frydenberg’s advisors. Unlike our podcast series this interview has no basis in reality and is a total figment of the author’s imagination.

Policy advisor: We know that new investment in the RET scheme will end in 2020/2021 and we’d like to understand how the Minister can develop policy beyond that time frame. We want him to look as smart as he is, keep the lights on, and demonstrate good faith with our international obligations. We want you just want to focus on electricity and leave the other 62% of emissions to one side. Josh  faces a difficult Senate, although we know the ALP and the Greens will support more renewables, and he  still face strong lobby groups who for a variety of reasons oppose more renewable energy. We know if he can pull this off, he will be seen as a future leader of the Liberal party and will clearly far surpass Greg Hunt.

ITK: Thank you for the opportunity. We appreciate that you are new in your job, you are bombarded daily with many ideas, some good and some less so. ITK sees that there are basically two policy weapons in the generation sector. We strongly support a carbon tax, its really the only way, but your Governmentt will never support that and so we reluctantly think that the combination of  baseline credit and reverse auction process is the way to go.

The reverse auction process provides a steady flow of new supply, which is essential for energy security, and the baseline credit process makes it more expensive for high emission generation. We won’t talk anymore about baseline credit because the arguments there are very standard, and in any case it will still lead to the question of what replaces closing, high emission, thermal generation.

ITK’s main advice is:

• Move from an RET target to reverse auctions. Reverse auctions have three main advantages.
  • They result in lower prices to consumers. We estimate about a 19% lower average electricity price for a Govt, backed 20 year PPA as compared with energy procured under the current RET target. We provide some evidence and theory for this later. Its too late to do that for the current RET but we think it could have saved $22o m of annual costs for consumers over the next 12 years, or more than A$2.4 bn in total.
  • The quantity of renewable energy procured comes online in a steady predictable fashion. This will help industry move down the cost curve. The boom bust nature of renewable energy is very poor for cost management. Predictability is the friend of optimization.
  • The third advantage is going to be the most important going forward. They will allow the Govt, to discriminate between “dispatchable” renewals and “as available” renewables such as conventional wind and PV plants. So some tenders can be called for “as available generation” and another tender can be called for dispatchable generation. I mean how good is this.

Policy advisor: Hang  on a minute we didn’t know there were any “dispatchable renewables” that were ready to power Australia, and I’m not sure we agree with you about the cost of capital.

ITK: Well dispatchable renewables is kind of the missing link in the fully decarbonized scenario. Lets leave aside hydro, the one resource Australia is a bit scarce on is water. The three leading candidates are bio generation, say from sugar cane, concentrating solar power [CSP] and wind or PV with storage. CSP may well be part of the answer but it remains a “fringe” technology at the moment. It would be a stretch to base Australia’s future energy security around CSP at this very instant.

On the other hand lithium based storage whether distributed, or at the utility level is an increasingly proven technology capable of being rapidly deployed, plenty of global producers driving costs down 15% a year.

At the recent “All Energy” conference, Tesla talked about their Kaui (Hawaii) project where they were able to provide a PV + lithium solution that came in about the same price as the oil based generation  Kaui is using in the evenings. So the cost for a PV+Lithium system capable of delivering 52 MWh at a 10-15 MW rate for five hours came to US$145 MWh. Of that the battery cost was just US$45 MWh according to the presentation made at “All Energy”.

If we translate that to Australia, and use a wind or PV cost of A$70 MWh, the price under a reverse auction model, we can see dispatchable electricity using “off the shelf” technology available today for A$130 MWh ($70 for wind + A$60 for storage).

We’d also expect that cost to decline at between 5-10% a year (pv and wind costs declining more slowly than storage) for maybe another 5 years. By 2022 we won’t be surprised if that combined cost is in the order of A$85-$95 MWh. That’s pretty exciting really. We think that’s a technology bet that is capable of being deployed today, and is arguably economic in Queensland TODAY.

Policy advisor: Hang on chum, I’m calling BS on the economic in QLD today part.

ITK:  Well I will admit it assumes you can get A$80 for your renewable certificates out to 2030. But if you accept that, here is the arithmetic:

First thanks to NEM Review here is the QLD electricity pool price over the past 12 months, sorted by time of day (14,000 half hours). We expect the gap between midday prices and late afternoon prices to increase, lots, as more PV is built in QLD but never mind that.

The key point is that the prices in the 3:30 PM to 8:30 PM are already excellent. Wish I had the capital to do it myself I’d be on the phone to my new best friends, at AES, LG and Tesla right away. First in best dressed.

Policy advisor: Wow, that is interesting but show me a few numbers and some evidence about prices under the RET v reverse auction.

ITK: I was hoping you’d ask that. We’ve presented some similar numbers before here at Reneweconomy, but recently Miles Georg, confirmed, what was in any case very obvious that IFN needs about 300 bps more on equity to allow for the risks around RET. The low prices in the ACT auction are another example. Our standard wind farm, has a capital cost of  A$2.4 m a MW a capacity factor of 35% and operating costs  of $22 MWh. This farm is assumed to run for 25 years and  have zero residual value, notwithstanding that the wind will still be blowing. We then calculate an electricity price which goes up with inflation, that gives us the target IRR (Internal rate of  return). The IRR is a standard finance calculation that is the discount rate which equates present value of  the inflows and outflows of cash over the project life.

The cost of capital calculations are summarised as;

Advisor: Well I’m still skeptical, but in any case, numbers on a spreadsheet a fairly meaningless. Don’t people in the share market say that NPV just means No present value and a competent analyst can make an NPV model come up with any number they want?

ITK: Hey, I resemble that remark.  So let’s look at the overseas evidence. I could pick countries like Saudi Arabia, or Chile which have seen some very low prices, but Texas, USA is fairly comparable to Australia. There is a gas lobby in the State. Hmmm, We would say a “big” gas lobby – but apparently in Texas the prefix “big” is taken as assumed. Much of the TX grid, ERCOT is only loosely connected to the rest of the USA grid and labour costs are, lower but comparable. The wind and solar resource are also comparable. Texas now has 14 GW of wind and excluding the Investment Tax Credit  [ITC] the LCOE of wind in TX is coming in at US$36-US$50 MWh. This was reported in Barak Obama’s State of Union Address this year, as well as analysis by Lazards and Bloomberg New Energy Finance.  $US50 MWh is A$66 MWh at current exchange rates, close enough to ITK’s estimate.

For PV solar reverse auction contracts are currently also around the US$50 MWh area, however that price appears to include the 30% ITC benefit. Adjusted for that we crudely estimate PV in TX at around US$71 or A$94 MWh. These numbers are similar to Australia.

Advisors: Well thanks for that. At least it gives us something to think about. Maybe I need a fact finding mission to Austin. I’m gong to run it by the Boss after lunch.

David Leitch is principal of ITK. He was  formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.