“It’s a bloodbath.”
That was one of the milder responses late last week to news that Australia’s fleet of wind and solar projects – and many thermal generators for that matter – will be “de-rated” in the next financial year because of severe congestion in parts of the grid.
As RenewEconomy reported exclusively on Friday, it was the second major de-rating in a row for many wind and solar projects as the Australian Energy Market Operator advised on the latest “marginal loss factors” (MLF) for each power plant.
The MLF is a key calculation because it can make or break a power project. It reflects how much of a power plant’s output at source arrives at destination (load) and is credited for payment.
An MLF of 1.0 means a power plant gets credited for all its output. An MLF of 1.04 means it gets a premium, probably because it is close to load. But an MLF of lower than 1.0, such as 0.9 or 0.8, means a big reduction in output credits, and revenue.
Many solar and wind farm operators contacted by RenewEconomy say the latest downgrades – of up to 20 per cent in some instances, and more than 5 per cent in many cases – will have a major impact on the industry.
This graph below shows how MLFs have fallen in north Queensland, one of the regions most affected due to the influx of many renewable energy projects in the region.
Developers say that some existing projects may face equity calls or refinancing demands from lenders because of the anticipated fall in revenue. Other projects that are not yet developed, or yet to get finance, may find themselves stalled at the gate.
“Some projects won’t go ahead,” said the head of one international developer.
Such an outcome will have impacts on both wholesale electricity prices, and potentially on the price of large-scale certificates, the currency that underpins the renewable energy target. It will also push up the costs of wind and solar farms, because equity owners and lenders will demand more return for the increased risk in revenues.
And it could affect recent tender winners, such as from Victoria’s VRET, and Snowy Hydro’s recent tender. Some of those winning projects are in areas vulnerable to low MLFs, even if some of the projects have not moved forward enough to have gotten a firm answer from AEMO.
The worst aspect of the annual MLF calculations, according to the developers and project owners – all of whom wish to remain anonymous because of the sensitive nature of their situation – is the constant change.
It is a situation not experienced elsewhere. In Texas for instance, the grid owner is responsible for the MLF, and for building enough capacity to cope with output.
Each wind and solar project gets a set output, usually at the 1.0 rating. But, as we reveal in this recent Energy Insiders podcast with Warren Lasher, the head of system planning for the local grid operator ERCOT, Texas has been carefully planning its grid and renewables uptake for a long time.
In Australia, however, this is not the case. Some developers have been canny, and worked out where in the grid they can develop projects not subject to such variations.
Some have been completely blindsided, in certain instances by poor modelling done internally or by consultants, and in other cases because they were simply unaware of the scale of impact, or the number of other projects competing for space in the same part of the grid.
Everyone recognises that it is a problem, including project developers, the clean energy lobby, regulators and the market operator. Agreeing on the solution is a different matter.
The Clean Energy Council says the MLFs, as structured in Australia for the past 20 years, are no longer fit for purpose, and it wants the industry rule-maker, the Australian Energy Markets Commission, to come up with a solution that reduces volatility as soon as possible.
CEC CEO Kane Thornton also warned that the pipeline for future projects would be at risk if the issue was not addressed.
“Predicting MLFs into the future is something no-one has been able to do with any accuracy. Consequently the current process introduces risks that are virtually impossible to manage after investment decisions have already been made,” he said.
The CEC is considering a range of options, but is also keen on a “short-term” solution while a suitable long-term plan is found.
Some also suggest they are getting a double whammy – being hit by both network constraints and by the MLF calculations. One party suggested it was understandable to be subject to one manner of de-rating, but it was unfair to cop both.
Among the solutions being considered are what is known as “dynamic” MLFs, meaning that they adjust for every 5-minute interval, rather than a “static” number for the year based on an average of 30 minute intervals. This is what occurs in New Zealand.
This would create considerable volatility, and would likely encourage, or force, wind and solar projects to have some sort of storage to aim to produce output at less congested times. Others say this volatility won’t please investors and lenders.
“You simply can’t have revenue jumping about like that, it’s clearly wrong,” said David Leitch, analyst at ITK and a contributor to RenewEconomy, and co-host of our Energy Insiders podcast.
Leitch suggests that getting an MLF guarantee of 5 to 10 years when projects are approved – as is the case in some European countries – would be a better solution. “Again more disclosure about projects in the connection queue would enable planners to get better decisions,” he says.
Another project developer suggested there are both short-term and long-term “solutions”.
“In the short term, I am now focused on ensuring that AEMO has the correct inputs for their modelling, such as considering the actual generators that come online in the relevant financial year, as opposed to “prospective” or wishful thinking of certain generators.”
This was important because it seems clear the MLFs are judged on projects that are “committed” but yet to begin construction, and so others may be hampered by rival projects that do not in fact get built.
Over the longer term, this project developer echoed Leitch’s observations: “Transmission and generator planning are critical to maintaining a unifying MLF so that investors are not getting burnt every other year,” he said.
The issue was addressed by AEMO in an information session last September, and while it said it was keen to provide more certainty to the market, and make MLFs more easy to forecast, it conceded this would require changes to NEM rules that could take two years.
The AEMO says it has little discretion and it is a time consuming process, relying on metering readings from the previous financial year. Its presentation admits, however, that because of the rapid changes: “Data may not reflect operations conditions.”
But it said there were pros and cons to each option.
“AEMO put forward a range of options to industry last year and will continue to consult on the best way forward,” a spokesperson said. “In the interim, we recognise the need to increase certainty around how MLFs are calculated, while we continue to consult with industry on the best way forward.”