Origin says retailers may choose to pay fine rather than build renewables

Origin Energy on Thursday warned that major retailers were likely to choose paying a penalty price – the equivalent of a fine – rather than contracting to new renewable energy projects, echoing comments made earlier this month by major rival AGL Energy.

Origin Energy chief executive Grant King said it was now apparent that the renewable energy target would not be cut as much as many people – including Origin Energy – had wanted. But this did not mean that much renewable energy projects would get built.

The Abbott government has wanted to slash the renewable energy target altogether, and then tried to cut it to a true “20 per cent target” – Origin’s favoured position – that would reduce it from 41,000GWh to around 26,000GWh.

It was clear that it could not find support in the Senate for that and is trying to negotiate a compromise with Labor. Word from Canberra is that the Coalition is now talking in the “low 30,000s GWhs”, while Labor is sticking to the mid to high 30,000s GWhs.

But King pointed out that unless the closing date of the RET was moved beyond 2030, then large renewable energy projects would not get built.

That’s because the surplus of renewable energy certificates is likely to remain until 2017 (see graph above), which would mean a rush of projects built over the last three years.

Because the developers needed to maximize their return while the scheme is in operation – a period of just 10-12 years – the price of the RECs required to get the projects built might be too high, and retailers could well choose to pay the penalty price instead.

“We will simply acquit (our obligation) from lowest cost,” King said. Outgoing AGL managing director Michael Fraser said a similar thing last week.

“We have sufficient cover,” King added. “Who going to build those projects. We are done. Who is going to write those contracts?”

“It won’t get built”, he added later.

King’s comments reflect the added complexity of the current RET negotiations, and hopefully mean that the two mainstream parties are looking at both extending the end date of the scheme, and to lift the penalty price to avoid what would amount to a “capital strike” by major retailers.

(As RenewEconomy pointed out earlier this week, a revisiting of a higher and longer term target- such as a 30% by 2030, or preferably 40% by 2030 – might be a better solution. However, it was interesting to note that Origin Energy also announced a 3MW solar project in Adelaide, financed with a power purchase agreement, which many believe may be the model for many new renewable projects in Australia).

The problem is amplified by the fact that wholesale prices continue to fall, and King sees no immediate respite, because of the over-capacity in the market.

King said there had been an assumption that the RET would either be curtailed, or cut to a “ real 20 per cent”, but this was now less likely.

However, King also indicated he was not in favour of taxpayer funds being made to help pay for closures of coal fired generators, as promoted by AGL and others.

He said there was so much over-capacity in the market that other coal generators could simply ramp up production to fill the gap caused by retiring generators, resulting in no net reduction in coal output or emissions.

Origin, meanwhile, says it is well placed for the low wholesale prices because it has less of its own capacity. King says it is better, in current circumstances, to be a “buyer” of wholesale electricity when prices were low, rather than a net generator. Origin owns a bunch of peaking gas generators that it can switch on when wholesale prices rise due to surges in peak demand.