The extraordinary game of bluff in Australian renewables

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The deployment of large-scale renewables in Australia remains at a virtual standstill. Ironically, unless it gets going soon, the market risks being caught short and unable to meet its incremental targets. So who will be blamed for penalty prices passed on to consumers – the retailers or government? More spinning wheels.

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There are some funny games going on in the Australian renewable energy industry at the moment.

According to the spirit, if not the letter of the law, Australia should be busily constructing wind farms, and contemplating the business case for other technologies, to meet the country’s bipartisan renewable energy target of 20 per cent by 2020.

The industry, however, is at a virtual standstill, and – bar some mandates to offset the energy requirements of desalination plants and a few brave companies taking a punt on the merchant market – it has been the case for several years.

International renewable energy companies and component manufacturers and suppliers have been and gone, development teams have been downsized or disbanded, and the remainder have become masters at being able to look busy on the laptop. Thank goodness for online Sodoku.

Why is this so? The principal cause of this hiatus in the midst of our Clean Energy Future has been the botched handling of renewable energy targets by a succession of governments: from the unintended inclusion of solar hot water, because it was announced by John Howard (apparently unaware that it was not the same thing as solar PV), to the Howard’s government decision to freeze the initial target, and then the mismanagement of rooftop solar policies by state and federal Labor governments which has caused such a surplus of renewable energy certificates it has suffocated the development of large-scale facilities.

Throw into that mix the added uncertainty created because the premiers of NSW and Victoria say they don’t like wind turbines and would be happy if they never saw another wind farm (imagine them saying that about another $15 billion investment opportunity, such as coal or gas), or that Queensland has never built more than 12MW of wind power, or that South Australia is effectively near capacity, and needs a bigger connection to Victoria and/or NSW to make any further wind investment viable.

And then, of course, there is the uncertainty about the fate of the carbon price – here today, gone tomorrow? – and reviews of the RET itself, along with the role to be played by the Clean Energy Finance Corporation. All this uncertainty has fed into caution from the financial community, with banks reluctant to provide long-term financing: wind developers in other countries can lock in financing for 15 years, while in Australia contracts are as short as 5 years, meaning developers have to carry a refinancing risk as well.

The big three retailers – Origin Energy, AGL Energy and TRUenergy – still have enough certificates in their back pocket to last a few years. But therein lies the problem; unless contracts are written for the construction of new wind farms in coming years, Australia will be facing the task of building as many wind turbines a year as it has managed to achieve over the last decade.

One wind farm developer, Infigen Energy, pointed out last week that the shortfall in certificates for 2015 is almost the same as the certificates that can be produced by all of the existing renewable capacity, which has taken over 10 years to deploy.

From 2016, it notes, the target increases at a rate that will require today’s installed capacity to be constructed each year between then and 2020.

The irony is that this should be a good time for the obligated parties – the energy retailers – to lock in contracts. The strength of the Australian dollar, the competition among Chinese wind turbine manufacturers keen to enter the market, and a global surplus mean turbine prices have rarely been as favourable.

This raises another intriguing question. For the first time, the imposition of a penalty price – as early as 2015 or 2016 – on retailers who fail to meet their incremental targets is a possibility. If wind farms are delayed to the point where the incremental targets in the RET cannot be met, and the penalty rate of $92/MWh is applied to those retailers who fall short, who is going to be blamed – the retailers, or the government? And who is going to be most appalled – the retailers’ customers, who are imposed with higher electricity costs, or the voters?

And therein lies the extraordinary game of bluff that is being played out in the energy industry in Australia at the moment, as the major retailers wield their significant market power to play hard ball on power purchase agreements, the essential ingredient for a renewable energy developer if it is to get bank financing, and the developers hold out for a higher contracts – with both parties keeping a weather eye on whether they can meet the incremental targets set by the RET on one side, or the expiry of project permits on the other.

Behind the scenes, more games are being played. Origin has been pushing for the target to be extended to a “more manageable” 25 per cent by 2025. It’s favoured solution is a massive 2,100MW hydro project in PNG and it is trying to have this qualify for the RET too, arguing it should be extended to electricity delivered into Australian markets, not just produced there.

AGL appears best prepared to build its own wind portfolio, and has been happy to use the buyers market to pick up more developments, such as the massive Silverton wind farm near Broken Hill. The one major party to have actively re-entered negotiations, TRUenergy, is doing so because it doesn’t own a PNG hydro project, and does not have as deep a pipeline as AGL. It also owns Energy Australia, and no one really expected that the government-owned retailer had been busily hedging its bets against future liabilities by buying up RECs on the cheap.

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6 Comments
  1. Mike Reeves 8 years ago

    The business side of renewable energy targets and how it affects the economics of renewable energy needs to be simplified down into a nice, simple, graphic-laden article, I feel. Preferably something with a flowchart showing where the money comes and goes. It takes a lot of effort to understand RETs and a little clarity would be great. Maybe the energy companies are hoping the Coalition will get in and putting everything on hold until the situation clarifies.
    As for the market power of the retailers, how is this supported in legislation?
    Keep up the great work, really enjoy reading the articles.

  2. Michael Swifte 8 years ago

    I blame Martin Ferguson.

  3. David Rossiter 8 years ago

    And yet the compliance rate for RET by liable parties to date has been exemplary – the last published 2010 compliance rate by REC surrender, as opposed to penalties, was 99.96% as I recall. So maybe industry is smarter at investing than they are credited for in the article.

    Remember for years doom and gloom was always preached when there were excess RECs in the market – is this another doom and gloom report by Mr Parkinson – or is it a smart industry meeting its compliance obligations rationally??

  4. Ben Courtice 8 years ago

    A mind-bogglingly simple solution for the mess caused by the phantom RECs scandal that the Rudd government presided over would be for the current government to calculate the number of phantom RECs that were generated, and simply buy that many out of the market. Or to increase the RET, or bring the end date forward from 2020, by an equivalent amount.

    Or am I missing something?

    I think the government is missing something: political will.

    • David Rossiter 8 years ago

      Ben I think the RET has been required to be increased to clear the back log of small system SRECs. It was part of the legislated amendments in the last year or two – large and small RECs now amount to over twenty percent of electricity.

  5. Craig 8 years ago

    It is a bit rich that retailers who have reaped the financial benefits of borrowing forward their carbon obligations over the last few years are now asking for softer targets.

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