The rapidly disappearing subsidies for wind and solar in Australia

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Energy markets are now showing negligible value for renewable energy certificates within 2 years. It gives lie to the nonsense and scare campaigns about the “crippling” cost of wind and solar.

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One of the loudest, most controversial and misinformed debates around Australian energy policy has been the level of subsidies for wind and solar farms.

It is mostly based around the renewable energy target and the market price of its principal pricing signal – the certificates known as LGCs, which have been trading at or above $80/MWh for some time.

This has led to some outrageous claims about the amount of money that is supposedly being pocketed by renewable energy developers, such as the Saudi company that owns the Moree solar farm.

Conservatives, and the Murdoch media in particular, continue to parade and parrot the false story and fake news that the renewable energy target will pocket some $45 billion of subsidies out to 2030.

It’s nonsense. Such claims are based on the assumption that all LGCs attract the market price – currently around $80/MWh. But in reality only a small percentage of “merchant” generators do that.

And those claims also assume that the price will remain at those inflated levels until 2030. Clearly, they are not.

The price of LGCs is already showing signs of significant decline as it becomes clear that the RET – which seeks 33,000GWh of new renewables by 2030 – will not just be met, but could be significantly exceeded.

That has pushed the future price of LGCs down sharply (see chart above, the yellow line at the bottom).

Many analysts expect that the price will fall to zero once the new build is completed and the excess of certificates flood the market. It is not a matter of if there is a price crash, says Tristan Edis of Green Energy Markets, but when.

What is often forgotten in the tirades against wind and solar is that many project developers have already forgone any subsidies, because they have signed long-term contracts, known as PPAs (power purchase agreements), for between 12 and 15 years.

Most of these contracts, particularly those signed in the last 12 months, provide effectively zero value to the LGCs. These include projects such as the 530MW Stockyard Hill wind farm, the 200MW Silverton wind farm, and the 470MW Cooper’s Gap wind farm.

Those contracts – like most others for wind and solar farms – were signed with the realisation that the LGC market price was heading to zero, or negligible, value in the 2020s.

But the key is that the prices for both the electricity and the LGCs have been struck below the prevailing cost of electricity, sometimes as low as $55/MWh.

This has also been the case for the ACT’s goal of sourcing the equivalent of 100 per cent renewables for its electricity by 2020. That program requires the LGCs to be surrendered at no cost to ensure the ACT’s efforts are additional to any national target.

So far, the ACT has done well out of its contracts because the first two wind farms have actually been returning money to ACT consumers, rather than requiring a top up over the market price.

It is important to note that the price of LGCs actually have little to do with the actual cost of the solar farms or wind farms, but are merely a financial instrument that provides an incentive for retailers to meet their obligations.

So, why are the LGC’s at such a high price of $80/MWh when that level of subsidy is not needed, and renewable energy projects can be developed and operate at an all up price of $55-$70/MWh?

Simply, it’s yet another example of where the incumbent utilities, in this case the retailers, are playing the market. Not illegally, but simply because the rules allow them to do so.

The price is high because not enough renewable energy generation has been built to meet the progressively higher annual targets, creating a shortage of LGCs.

This occurred because of the three-year investment strike that was caused by the Abbott government’s attempts – supported by many energy incumbents – to try to scrap, and then reduce the RET, from 41,000GWh to 33,000GWh.

That investment delay meant there was a shortfall in LGCs, so prices hit the market cap – it had nothing to do with the cost of building wind and solar farms.

Because of this, some retailers are still taking advantage of the rules. ERM power, for instance, in 2016 chose to pay the “shortfall charge” for not meeting its required number of LGCs.

It was a quite deliberate move. ERM has a three-year grace period to make up that shortfall, so while it paid a $150 million fee, that fee is fully refundable, and ERM will make a handsome profit – already estimated at $45 million – by buying the LGCs when the price falls.

Indeed, ERM CEO Jon Stretch discusses this very strategy in our latest Energy Insiders podcast, which you can listen to here.

According to the Clean Energy Regulator, around $238 million of shortfall charges have already been paid, and will likely be redeemed. Mark Williamson says retailers are likely to take a similar approach if the spot price for LGCs remains high this year and next.

“We’re pointing out the reality that the longer the spot price stays in the mid-$80 range, well above the $65 penalty price, there will be some temptation for some to pay shortfall, or to use the flexibility to carry forward less than 10 per cent of their liability,” Williamson says.

“And there is the prospect of more shortfall to come the longer it’s up there.”

Tristan Edis, from Green Energy Markets, predicts there could be a surplus of 80 million LGC once the RET is met.

“Across the life of the RET scheme to 2030 we are looking at a massive oversupply,” he says. “The question isn’t if we’ll see prices collapse but when.”

Edis agrees that because projects are still to be completed, a shortfall could continue until 2019, ensuring that the price stays high, and retailers paying the shortfall charge.

Even as late as 2020, retailers could still elect to pay the penalty price, or shortfall charge,   judging that the oversupply in 2023 will be so big that they can pick-up lots of them very cheaply.

They can then use these cheap LGCs to make good on the shortfalls they incurred in 2020 to claim back penalty refunds from the regulator, as ERM is doing.

The other complication is the structure of the proposed National Energy Guarantee, or any other scheme, and whether that allows generators to “double dip” into creating both an LGC and a NEG emissions obligation.

(That much may be academic if the Coalition retains its meagre emissions targets for 2030, as it has promised to do. Most analysts say the 26 per cent emissions target will be largely met by 2020 by the build out of the RET)

“If the NEG were to allow double dipping where a generator can create both an LGC and a NEG emissions obligation entitlement from the same megawatt-hour of generation then LGCs become worthless pieces of electronic paper that don’t mean anything for abatement purposes,” Edis says.

“If instead, they follow the prior recommendation from the AEMC for a baseline & credit scheme, where a renewable generator would have to choose between either an LGC or a NEG entitlement but couldn’t create both from the same MWh, then LGCs retain an ongoing value equal to a NEG entitlement.

“The second option that disallows double dipping will provide a far smoother transition that avoids pulling the rug from underneath participants in the secondary market for LGCs.”

So, if renewables don’t need subsidies going forward, then what’s the problem?

The problem is that without further incentives, or reasonable emissions reduction targets, the main energy retailers will have little or no reason to build new wind or solar, and will be happy to keep spinning maximum profits out of their fossil fuel generators.

That leaves only the household and corporate market as potential parties to contracting new wind and solar farms, and additional demand created when coal generators are due to retire.

There could be plenty of activity in the corporate market – with Sanjeev Gupta’s GFG Alliance contracting one solar farm already for its Victorian steel works and planning to build 1GW of new solar and storage for its South Australian assets.

Numerous other corporates are turning to wind and/or solar, with companies like Carlton & United Breweries committed to 100% renewables, and others to follow.

And they can be sure that the costs of wind and solar will continue to fall, even below the mid $50/MWh pricing that has been reported for projects like Snowtown and Murra Warra in Victoria.

As the CER’s Williamson told RenewEconomy on the sidelines of Australia Energy Week: “I’m also hearing that even the ultra-low prices we’ve heard disclosed in PPAs (power purchase agreements), that we may see lower prices further to come.

“I guess that’s going to be interesting to watch, in the context that wholesale prices are decreasing, but are currently still above those prices of new-build variable renewables.”

Giles Parkinson is founder and editor of RenewEconomy.com.au, and is also the founder of OneStepOffTheGrid.com.au and founder/editor of www.TheDriven.io. Giles has been a journalist for 35 years and is a former business and deputy editor of the Australian Financial Review.

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16 Comments
  1. Andy Saunders 7 months ago

    I guess corporates signing PPAs have partly a PR motivation (to appear green), but also have a way of both risk-management against future price rises, and a way of avoiding too much retailer gouging…

  2. Ken Dyer 7 months ago

    One can only hope that all the nonsense by the right wing commentariat and the LNP COALition will go away at the next election. And the sooner the better!

  3. David Osmond 7 months ago

    I’m not sure if this will be a huge effect, but….. if LGC prices collapse, then GreenPower should become extremely cheap, and hopefully we’ll see a big increase of people signing up to GreenPower (particularly those who can’t put solar on their roof).
    https://twitter.com/simonahac/status/995580811523997696

  4. Craig Allen 7 months ago

    How cheep do renewables have to get before they start to undercut the base cost of coal? At that point surely companies will be forced to transition away from coal by the economics, or just be outcompeted.

    • neroden 7 months ago

      Based on Lazard LCOE and current trends, new solar becomes cheaper than old coal… Right about now. It will vary by coal plant, so the closures will be staggered, but they should all be unprofitable in 4 years.

    • Shilo 6 months ago

      Its all very complex how the sale from either is done. In the end its the rules that matter more, and the rules are stacked in the favour of the RE not coal.
      The other problem for coal is the Government does not allow or has not allowed any new coal fired plants to be built reguardless.
      If Coal plants were allowed to be built you would see a very different battle.
      But currently its coal plants that were built 40 years ago on average vs the RE.
      If coal was allowed to be built now, I imagine quite a few mine mouth coal plants would go in, and no the costs for them to operate are not the $70per MWH that gets thrown around.
      Everywhere is the world has different advantages, some places are great for Hydro, some are great for wind, and some are great for solar. Within countries there are locations that are much better than others for wind and solar.
      Its the same for coal.
      Queensland and NSW are have excellent locations for coal in a world sense but until its seen if RE can really work, no more Coal plants are going to be allowed to be built.

      • Mike Westerman 6 months ago

        Shilo where is the evidence of coal proposals being disallowed when we have a government whose ministers throw coal around in parliament and make explicit pro-coal statements? The rules were written for the NEM by the then dominant pro coal generators who have staunchly resisted reform. You clearly have little grasp of both the market and the forces shaping it.

        • Shilo 6 months ago

          Mike to get a generation licence for a coal fired plant, was not just a matter of apply for one!!!!. The Government used to put it out for tender, it was always fully controlled. Mostly Government owned them. Seriously look at the actually history.
          What is your actual background?

          • Mike Westerman 6 months ago

            Shilo that may have been the case 30y ago pre NEM, when tax payers paid for coal fired power stations, when emissions standards were very lax, and coal prices were extremely low because the demand from China and India was not there. None of that is the case now. There are no private or public sector proponents offering to build coal fired power stations in Australia, and haven’t been for over 10y. You want to wind back the clock – good luck.

            My background is a professional engineer in power development, mainly hydro, for 39y – what’s you point?

          • Shilo 6 months ago

            My point is what I said, coal plants have been controlled by governments controlling the amount of them allowed to be built. That never changed. It was in place to make sure we all had power, and the government ended up trying to make money out of it. Hence Australia had very high domestic power prices.
            Now the game has changed and people are worried about co2, and wind and solar are being encouraged in Australia.
            If the Government of say queensland were to issue a tender for another 800mw of coal fired power, there would be bidders.
            There have been no such tenders or expressions put out by any governments in Australia for 10 years.
            Thats my point.
            The last one was Kogan Creek, in queensland.
            The system of supplying power and selling power in Australia has changed quite a bit and is still changing to be much more suited to RE energy. (as needs to happen)
            The price of coal someone is prepared to pay in another country has no bearing when there is so much, in say queensland. The main cost is what it cost to dig it out and get it into the power station, plus state royalty.
            However there is a Co2 problem so we have RE and have to get it to work, with lots of suppliers most of which have to make money and keep making money, all competing against each other. Not vs Coal plants, unless the rules change.

          • Mike Westerman 6 months ago

            Shilo I think your grasp on the development of the power market in Australia is a litte askew. Prior to the NEM, state governments competed with each other to limit the amount of inter-regional power, because they made money from royalties and dividends. The state electricity commissions were a protected species, running fiefdoms on behalf of powerful bureaucrats. As neoliberalism gained influence, there were countervailing bureaucracies like the Productivity Commission and the Hilmer Enquiry that pushed for sale of assets and market driven power supply. The rules were written to support the encumbents and to provide regulated returns on fixed assets. Unfortunately this also meant weak regulations enabling monopoly rents, and network charges have drive power prices from the lowest in the world to high levels. Policies to drive investment in RE have really been a fringe impact until their prices fell so low that they didn’t need subsidies, and now we have a veritable tsunami.

            What you say about international coal prices being irrelevant is only true where mine mouth coal is fully contracted to the power station, otherwise the mine owner will make more exporting. Coal cannot compete because most plants are old and inflexible, and so more costly to operate for low capacity factors, and this will only continue. It will drive out black coal generators in NSW first, then in Qld and lastly brown coal in Vic, unless these plants suffer a major failure prior.

            It is simply untrue that pollution has not price – as China is now finding, it has a heavy price in terms of health and environmental destruction. Like other externalities, eventually some generation gets to pay.

          • Shilo 6 months ago

            Your saying essentially the same as I am. Coal was controlled amount where and why.
            As for a coal mine selling overseas first, yes for sure, but they will also supply here. Also deposits of coal with no medium term chance of export have always existed and so they will supply.
            Then there are proper mine mouth power stations that own the deposit and feed them selves.
            As said there are places suited for RE and there are places suited to Hydro, as there is Gas, and others coal and even wood, biomass and Oil, Nuke and geothermal.
            No one is best suited to all locations world wide.
            Currently however there is a push to try to simply do, wind,solar, batt, hydro, geo thermal a bit of gas for as short as possible in Australia.

          • Mike Westerman 6 months ago

            I don’t think we are saying the same thing at all. You are saying coal was developed because governments willed it. No, they developed it because if you ignored the cost of externalities, and in the absence of international demand, it was the lowest cost power available. I was doing financial analysis on a range of power developments almost 40y ago – the only change is the relative cost of different technologies and the cost ascribed to externalities. Solar is now so cheap and still falling in cost that conversion of all energy consumption to solar PV is inevitable. The only “hurdles” will be how quickly, how it energy will be stored, what additional demand will come by increasing energy inputs into processes to reduce other resource demands, and how energy will be transported. The source question is answered.

          • Shilo 6 months ago

            Vaclav Smil, is a great sorce of information on the subject.
            Have you read any of his lastest thoughts.

  5. Brunel 7 months ago

    What is the price of electrons from those large solar power stations in Australia?

    Ironically the third world is a lot more transparent due to the solar power auctions.

  6. RobertO 7 months ago

    Hi All, So ERM owner thinks that it’s OK to make money out of us consumers (aim of all big business, Vales Point Coal Power Station saga NSW COALition sale) and at the same time fight against RE only to obtain wind fall profits from the fight against RE. As I have always said Profit is always king and ERM will always do what is in their best interests. Rick was right but for the wrong reasons. LGC will drop in value and ERM can pick them up for next to nothing and claim their refund (and its us consumers that will pay for that profit).

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