Origin says cheaper to build renewables than pay penalty price

Origin Energy says there is no doubt that the influx of renewable energy will push down wholesale electricity prices in Australia, even with the much reduced 33,000GWh target agreed to by the Abbott government and Labor.

However, in an apparent change of emphasis since a few months ago, Origin also says it will be cheaper to build new large-scale renewable energy plants rather than pay the penalty price.

This is in contradiction of claims by both industry minister Ian Macfarlane and environment minister Greg Hunt that even the 33,000GWh target may not be able to be met.

A few months ago, Origin’s managing director Grant King, echoing comments from rival AGL Energy, warned that retailers may choose to pay the penalty price rather than build new renewable energy projects. Both companies had argued that the 41,000GWh target should be reduced.

But in the last few months, the big retailers have tried to push their renewable energy credentials, particularly in the consumer market with rooftop solar, and the coming push to battery storage and electric vehicles. That could have caused a re-think in their marketing and rhetoric on large-scale renewables.

Interestingly, Origin Energy – in a presentation to analysts and institutional investors on Wednesday – said it had options in both wind energy developments in Victoria (including its Stockyard Hill development) and in large-scale solar in Queensland.

It did not specify those Queensland plants, or the potential share of solar, but its comments support the hypothesis of Bloomberg New Energy Finance, which says that the Queensland market, which Origin noted was the only one likely to experience demand growth, could support a large amount of solar.

Several projects, including a mega solar project from Solar Choice, have received planning approval. Origin Energy noted that solar projects has a shorter development timeframe than utility-scale wind, which can take one to three years.

Origin Energy also noted that with 5GW of wind needing to be built (if no large-scale solar) to meet the 33,000GWH target, there was already 6GW of projects in place. And more than 4GW in various stages of permitting.

It noted that there is a window in the next five years where “it is more economic to build wind rather than pay the penalty price.” (Click on graph to enlarge).

The most interesting aspect of the graph to the right is that even under building costs of up to $95/MWh, the 33,000GWh target could be met. The three wind projects to be built under the ACT government’s reverse auction scheme all had prices below that – even though their price will remain fixed for 20 years.

There were a couple of other interesting graphs. This next one points to the fact that an additional 14TWh of renewable energy will push out the supply curve, and cause wholesale prices to fall.

Origin considers itself in a good position because it does not have a huge portfolio of baseload generation, and can, therefore, buy cheaper power on market.

But while the demand for gas should, in principle, increase with the boost in renewables, to provide flexibility for variable generation such as wind and solar, gas generation was likely to see a major decline, particularly in NSW and Queensland.

That’s because of the export from the huge LNG developments will push up the price of domestic gas.

At more than $10/gigajoule (GJ), which most analysts expect to be the minimum for the domestic gas price, Origin says it would require electricity prices of more than $100/MWh to divert gas to electricity production.