“Let us not talk falsely now, the hour is getting late” – Bob Dylan
Under Matt Kean, NSW has started to plan more seriously for a lower-carbon future. It’s possible to see the current policy as just a statement of intention and that, over time, more will follow. As it stands, though, there is pretty much a complete lack of teeth, a lack of skin in the game. NSW consumers pay more for electricity than in other states and arguably that is at least partly due to a lack of government commitment.
NSW’s emissions are very largely sourced from coal (50%) and land transport (18%). There are very obvious, well-proven measures that by the government’s own admission would be profitable for NSW, which nevertheless are not being undertaken.
For instance, the NSW government says that renewable energy is cheaper than fossil energy.
“Some low emissions technologies, such as firmed renewable generation and home energy efficiency products, are now the most cost-competitive new way to generate power and reduce electricity bills.” Source: NSW Net Zero Plan
It’s well known that, although wind and solar have lower LCOE than new-build coal or gas, there are three main obstacles to speeding up their deployment. These are:
- Revenue uncertainty;
- Lack of transmission;
- The need for firming.
Of those, the NSW government is only addressing the lack of transmission. Revenue uncertainty is the main issue facing wind and solar developers right now. Electricity prices have fallen and are projected to stay low for the next few years, although higher in NSW.
There is no need to show a graph noting that REC prices are less than $10 per certificate in out years.
In short, a merchant operator, even with locked in MLF (which they mostly can’t get) still has no revenue certainty. Of course, it’s the same for coal and gas operators. But a carbon policy is definitionally not technology-neutral. It favours low or zero-carbon.
Govt PPA the most economic way to procure energy
By far the most obvious way to promote renewable energy and also likely lowest cost to the government and to taxpayers and electricity consumers is for the government to guarantee the revenue via a PPA. This policy has been adopted in the ACT, Victoria and Queensland, and widely overseas.
Equally, Snowy Hydro, owned by the federal government, has also procured 800MW of wind and solar via PPAs. I would argue that the average price achieved under those government and quasi-government PPAs is significantly lower than the average of all PPA prices, thus procuring power and energy in those states more cheaply than in NSW.
Equally, I think that a merchant wind or solar plant likely has a WACC at least 3% higher than that with a long-duration government PPA. I also state without proving it here that the cost of capital is more significant to wind and solar than it is to coal or gas, because the coal and gas prices are a bigger part of the LCOE for those technologies than fuel costs are for wind and solar.
In short, for wind and solar the capital cost and the cost of capital are the main drivers of the required price. And the cost of capital is driven by the revenue certainty.
The following graph shows the electricity price required to earn target WACC for a 25-year life wind farm with capacity factor of 40%, MLF 0.95, $12/MWh of annual operating cost and a capital cost of A$1.8 m/MW. Essentially, if your WACC is 6%, you need $15/MWh more than if your WACC is 3%. Spread over annual NSW electricity consumption of 70 TWh that’s over $1 bn per year of savings and over 25 years it’s $25 bn. That’s why it’s worth talking about.
Experienced finance people will likely scoff at 3% WACC, and to be sure it’s very low and would likely require, essentially, a 20-year PPA escalating with inflation covering all output. We get there with a low equity beta, 65% debt mix and a cost of debt of 3% (10 year bond rate + 2% debt premium).
I’ve talked about the government risk in PPAs previously, but in my view they are minor – essentially the risk is if the project isn’t delivered or if the price of some competing form of electricity falls below the PPA price. A third risk is crowding out, but this is harder to quantify. There are also upsides in that the PPA risk can maybe be sold down subsequently or otherwise recycled.
REZ – Central West Orana
According to Reneweconomy, this zone has attracted 27GW of proposals but it is only supposed to support 3GW of power. So 27GW of serious proposals implies a very competitive bidding process. Almost the most positive sign, and causing your analyst to reach for the valium, was the supportive message from John Barilaro, normally more likely to be blathering on about nuclear power. This will be supported by a $ 16 m ARENA study to look at the required transmission link.
We also note here a separate Transgrid proposal for generator funded transmission between Gunnedah and Tamworth which is said to be supporting the New England REZ. As most people know, Gunnedah and Tamworth are part of the Northwest slopes and plains and not part of New England but never mind.
In short, the transmission difficulties are going to go away over time.
Reliability and energy efficiency
We covered these topics back in December 2019 and will revisit when there is more progress.
NSW carbon emissions in context
Australia, unlike China, publishes its emissions data, even if tardily.
Most of our emissions come from energy of one form or another. We include fugitive emissions as being energy-related.
Intriguingly, emissions by state for 2018 were released only in May this year.
Clearly NSW is less emissions-intensive than QLD or WA when considered on either a per capita or per unit of GDP basis.
All of NSW’s fugitive emissions are coal, whereas those in QLD are about half coal and half gas. Coal is 50% of NSW emissions, 39% from coal fueled electricity and 11% from fugitive emissions.
A further 18% of emissions are from road transport.
Coal and land transport are 68% of NSW emissions
Adding it up, 68% of NSW emissions are from coal extraction and or coal burning and land transport. So just two activities to think about. One might think that a relatively easy task for a government.
NSW policy is net zero by 2050
ITK doesn’t have much interest in 2050 targets. We regard them as perhaps well-meaning, but nevertheless meaningless gibberish by governments that don’t treat the problem seriously. You cannot expect any voting population, financier or policy maker to take a 2050 target seriously unless it is perhaps enshrined in legislation – and even then it can be undone.
In terms of the age-old marching slogan: “What do we want…. Action, When do we want it…. NOW!”
However NSW has gone further, it has a “Net Zero Plan Stage 1, 2020-2030”
This plan envisages without specifically stating it’s a target that NSW emissions will reduce by 35% by 2030. That, of course, exceeds the federal government policy.
The first 1/3 of this document is designed to present climate change as an economic opportunity for NSW. About page 12 we get to the priorities which are listed as:
- “Drive uptake of proven reduction technologies” (this appears to be code for “supporting renewable energy”); But not so far at least financial support. We will return to this point.
- Empower consumers to make sustainable choices. This translates to “give consumers information”. ITK believes that information is useful, eg energy star ratings on white goods, but it’s hardly a major commitment.
- Invest in the next wave of emissions reduction innovation. This appears to mean financially supporting some R&D. That’s certainly good news, and of course, relatively low cost. However we note it so far hasn’t translated to much in terms of, say, Martin Green’s historically world-leading solar efforts at UNSW.
- Ensure the NSW Govt leads by example. That too is useful, but since the Government has already concluded that renewables are cheap it again is just a profit-making exercise.
Hidden at the bottom of page 13 is the statement
“Based on the new initiatives set out under this Plan, emissions in New South Wales are expected to reduce by 35.8 megatonnes by 2030. This means the State’s annual emissions are forecast to reduce by 35% on 2005 levels, and it is the NSW Government’s objective to achieve this.”
Show me the $
To provide a bit of context about how much investment NSW is putting into climate change reduction it’s worth noting that NSW Treasury has received over $40 bn from privatisation of its various electricity assets since 2011. ITK supports that privatisation program for many reasons. But for the purposes of carbon policy, the point is that the sale of the assets allows NSW to focus only on what is best for the state without having to consider the commercial interests of a wholly- or partly-owned electricity business.
So, ignoring grants and programs of less than $50 m in size, the NSW government’s financial commitment appears to be:
And some of that money is from the federal government.
I also note in respect of infrastructure owned by the NSW Govt targets of;
- Doubling solar consumption target to 126 GWh by 2024;
- Using NABERS ratings on GOVT buildings (once NABERS ratings are available);
- 10% fully electric vehicles by 2023
- Replacing Sydney’s bus fleet with electric buses (note there is no date set and NSW progress on this is not very visible)
- Rolling out diesel electric passenger trains.
I am an accountant by training and a financial analyst by profession. Therefore I greatly welcome the NSW government’s commitment to publish Annual State of the Environment Reports, including any actual emissions reductions, emissions forecasts and economic analysis .
Also the NSW Climate Change Council (a body no one except its members has ever heard of before) but which in my opinion has a strong list of members, including Martijn Wilders, Andy Pitman, Sam Mostyn, will be asked to report on potential improvements to the plan.
If they are looking for a few tips there are plenty about.
Reducing land transport emissions
Let’s start with electric vehicles and government buses. Let’s announce an electric bus target date. Say 2025 for 100% electric buses in Sydney, Newcastle and Wollongong. Electric cars. Simple low-cost measures include, (1) travel in bus and transit lanes. (2) 50% cut in rego (3) No government levies on parking, free on-street parking at metered sites, although still time-constrained. Plus some further accelerated investment in charging, including some on-street charging points as can be found in most European cities. This stuff is, so to speak, not rocket science.
Further than electric vehicles, NSW could contemplate (1) ZEV policy as adopted by 10 USA States and (2) some actual fuel emission standards for cars and trucks that are at a minimum up with the latest European standards.
Those are the kind of policies that mean a lot more than words written on a glossy government document, no matter how well intentioned.
David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.