TRUenergy, one of the big three retailers responsible for building or commissioning renewable energy projects to meet the 20 per cent renewable energy target by 2020, says that it is ready to invest in projects, and expects to make its first decisions before the end of the year.
The news will come as relief to the renewables industry in Australia, which has been all but stalled for the last three years because of the surplus of renewable energy certificates, which the big three energy utilities have been buying en masse to meet their obligations.
The big three utilities say they have enough certificates to last until at least 2015, but to meet the annual targets built into the RET scheme, they will need to start building or commissioning projects soon to ensure that there are sufficient certificates to meet demand.
Ross Edwards, the head of business development at TRUenergy, and responsible for thermal and renewable generation investment, says the company expects to re-enter the market for large scale renewables by the end of the year. It is considering building its own 120MW wind farm at Stoney Gap in South Australia’s Clare Valley, but is also negotiating power purchase agreements with third party developers.
Edwards says it is a good time to be negotiating deals – both for wind turbines and power purchase agreements. “With the exchange rates where they are at and the global supply and demand, (it) pretty well puts us in a reasonable position re pricing,” he told RenewEconomy in an interview this week.
TRUenergy will need a further 2,500MW to meet its MRET obligations, which means it will need to build two or three projects the size of Stoney Gap a year until the end of the decade.
However, Edwards said it was critical to have regulatory certainty, and explained why TRUenergy had a cautious approach to developments, because its investment in Cathedral Rocks wind farm had only made sense in one year out of ten because of the changes to the MRET and other policies.
In a wide ranging discussion, Edwards discussed their Solar Flagships bid, and its outlook for solar PV and solar thermal in Australia, and also explains why TRUenergy quit its investment in the Paralana hot dry rocks geothermal venture in South Australia last year.
Edwards discusses the outlook for baseload generation in Australia over the next decade (not much of one), and the prospects for peaking gas plants (Queensland looks most interesting). And he also discusses the utility’s approach to emerging technologies such as wave and tidal – and whether the company sees itself as an early stage investor, or an avenue to deployment.
Here is an edited transcript of the interview (conducted earlier this week).
How are you acquitted for the RET at the moment?
Pretty well. We look at the best ways to meet that obligation and do that through a range of alternatives, whether that be building our own, off-taking with other counterparties or buying in trader’s market.
Origin Energy said they had enough RECs to last until 2015/16. What’s your position?
All of the key players are really well positioned out to middle of the decade and we are in the same position
When do you start to think about future obligations? What’s on most people’s minds in the renewable energy industry is when new PPAs will be signed.
We’re working through those opportunities right now. I’m in the development side, so I look at the building opportunities. We also have our energy markets area which is talking every day to a range of different project proponents about different off-take opportunities. I see it pretty likely that we will sign some off-take contracts this year.
What sort of prices are you looking at?
Well, it’s an interesting time, they are pretty competiive. With the exchange rates where they are at and the global supply and demand pretty well puts us in a reasonable position re pricing.
That’s right. Developers such as Pacific Hydro were saying last week that it is a good time to sign PPAs, for exactly those reasons.
We see the same prices coming through, so what we are weighing up is what the price looks like, have we got regulatory certainty, are we confident in the scheme moving forward …
Do you think there is some doubt about the MRET?
No, not specifically. It’s had a challenging past, but it’s on the right footing now following changes to split it into small scale and large scale. But I think when you take a general perspective of regulatory risk in this space, when you continue to have changes to schemes that are designed to drive investment which are not expected by the industry, they make it harder.
Is TRUenergy lobbying for changes to the MRET?
We’ve been lobbying for certainty and no changes. We’ve been saying that for the last few years.
What sort of options are you considering for the new build?
So, in the middle of last year we split Roaring 40s up with Hydro Tasmania, so we’ve got some wind development sites at various stages. Stoney Gap in South Australia is probably most progressed in that category.
How far is that away?
We’d like to be in a position to put it forward for investment this year.
How big is that wind farm?
About 120MW.
So you are looking at a $250-$300 million investment?
In that order of magnitude. It depends on the pricing and the exchange rates at the time of making the commitment.
Any other developments in the pipeline?
Another key one for us is the 180MW Mallee Solar Park (in Solar Flagships). We’re pretty excited about that opportunity and we were pretty disappointed we missed out the first time round. We’ve kept that project progressing and think we are in a pretty good position for the second attempt. With the support of the Victorian government and the Commonwealth, we think it is a great opportunity. It is similar to the wind side, probably even more so, it’s a very good time in global supply/demand outlook for panel pricing, and I think one of the key things that will determine long term viability of large scale solar and whether or not it can compete against wind is not the panel prices, because they have become a commodity and are getting cheaper at an unprecedented rate, it’s how much does it cost to install it and build things on scale and size. I think that balance of plant and construction cost will probably drive the economics.
That presumably accounts for half the cost of the project, doesn’t it?
Starting to now. There’s equipment suppliers out there making there panels out there for a lot less than $1/watt now, and it couldn’t be more competitive I don’t think.
Why do you think your Solar Flagships project is more competitive than others? Have you been able to reduce the cost of that project significantly since the first round?
Our revised proposal is significantly lower than our original one.
What do you mean by significantly?
That’s probably all I want to elaborate on at this stage. It’s under review by both federal and Victorian governments as part of flagship process.
What else are you looking at? Are you bidding into the ACT solar tender, are there opportunities elsewhere?
We are really focused on the flagships and the residential level. We haven’t at this point put more into medium or large scale projects, because they need the grants mechanism to make economic sense, and we want to focus on the ones we have certainty to deliver.
Do you have any projections as to when solar might be competitive with wind. There are some suggestions it might be 2015/16/17. Some suggest that by the time you get to 2018-20 it could be accounting for half the new-build RET. Do you have a view on how that’s going to play out?
I think certainly the second half of the decade, but it’s contingent on panel prices continuing to improve, in efficiency and cost, and the construction costs coming down. It’s clearly not competitive yet, otherwise we wouldn’t need the solar flagships, but it has been coming down at a rapid rate, and will it keep coming down at that same trajectory. It’s a function of the things I nentioned and the whole industry being viable and progressing globally , and you are seeing solar being seen almost as a luxury in some countries, when their economies are in a challenging environment that it is too expensive, so they are shutting down a lot of the schemes and programs. It is going to be interesting to see how the solar market plays out in the next few years.
Do you see it as a luxury item, or something that can justify itself. I guess a lot of those schemes have been revised because the prices are coming down.
A bit of both. You’re almost seeing supplier selling at close to or below marginal cost. It’s clearly an oversupplied market, and there will be a shakeout. There will continue to be more of these companies either consolidating or not progress any further.
What other tehnologies interest you. Do you have a view on geothermal?
We’ve been a part of the Paralana joint venture with Petratherm and Beach in the past, so we’ve been looking at a range of technologies for quite a few years now. We would see wind being dominant source of the RET for foreseeable future. I would concur with Grant King’s comments the other day that geothermal is still a great opportunity, but it takes a lot of money to invest, to progress and to understand the opportunity, and that’s going to take some time.
So why did you quit the Paralana venture?
Ultimately, the risk profile of it and the capital requirements relative to other options, it wasn’t as attractive.
How much had you put in?
We had a pretty structured option arrangement, where it had to meet the milestones to progress. And we had a lot of delays and a lot of challenges with those time frames. Some of that was weather and other things, but ultimately companies like Origin and Beach are drilling in oil and gas exploration and have that sort of risk appetite. Whilst we were keen to investigate and have a gom if you like, ultimately as it progressed it no longer fitted with our risk appetite.
Any other renewable sources that appeal to you? Or is it just wind and solar?
In the medium term that is the case on the renewable side.
So you need about 2500MW in total to mee the MRET, or at least 250MW a year. How will you be acquitting that?
Some of it we will be acquitting ourselves, maybe one or two projects a year. We will be committing to offtake projects and continuing to buy on market.
Is your pipeline being impeded by new laws in Victoria and NSW, or interconnector issues in South Australia?
We have got a diversified pipeline at the moment, which we are looking to add to. You don’t actually want the whole pipeline to be developed today, because with these planning laws and changes some of these projects will expire. If they are not supported by offtake or held by someone who can take it forward, they may well fail. So we have a core group that we are focusing on progressing, looking for opportunities to add to that pipeline. The way it works in our business is that I need to put that project forward and it needs to compete against whatever the contractual alternatives are.
On other energy projects, you mentioned our interview with Grant King, and he said he didn’t think there was any need for any new baseload projects out to 2020, or not much before then. What is your reading of that situation?
I think we have a similar view. When you look at underlying energy growth, for some time that will be partially offset by the RET, and partially by energy efficiency. And now, when you look at independent outlooks, there is no real requirement for baseload energy, unless we are adding significant new customers. In Queensland, with coal seam gas (and LNG), they bring with them a lot of energy demand, so it is a posititive outlook there. But in the southern states, there is a combination of two speed economy on some industries, and most of those are the energy intensive industries, as well as the very mild weather, which is a short term thing potentiall but has certainly meant that demand this sumer has been lot lower than otherwise expected. The only other part there is closures, contract for closures, where you taking energy sources out, which can be replaced by gas and other things in the future.
Do you think this change in demand is permanent, or just a blip?
I think the jury is stil out. There has been a lot of different factors happening all at once. I think it is closer to a blip, personally I don’t think overnight everyone has changed their fundamental behaviour. But it’s not to say it should be on the same trajectory it was in last 10 years, but I don’t think we’ve hit maximum energy demand or that we are on the decline from here.
But how does that change the game for you, because you have different parameters to work with
We are continually assessing that. But we have held that view for a while. What we have seen is continued demand for peaking power for peak demand, so we are looking at open cycle gas plant. And we see the wind being key part of the future for the RET – so that is largely where the marketing will be for new generation opportunities.
So, those open cycles will be there to match peak demand or mostly to support wind?
It’s really to match peak demand.
I guess the experience in SA is that not much has been built specifically to match wind, it’s mostly been built to match peak demand?
To me, you are looking in the market to manage the wholesasle risk that you are exposed to as a retailer. So I think that all peaking plant is really to meet peak demand.
What are your projects for thermal generation. Because you have two large gas projects in Queensland don’t you, around 1,500MW in total? What is the latest thinking?
Queensland probably has the more likely need for a mix of peaking and baseload energy moving forward, and our projects are being permitted to cater for both. Initially, I’d see them more likely to be peaking opportunities. We’re just about to go through planning process.
There has been a lot of discussion around the big utilities and that they have too much power, and it’s impeding developments. How do you respond to that?
I don’t think so. I think market is working. The scheme and the approach make sense. We’ve had a lot of regulatory changes. We did an initial off-take back in 2033 for the Cathedral Rocks wind farm, and we’ve had one year in ten where it has actually made sense to have committed to that off-take agreement. So we have a bit of a history where significant changes in the market have meant that making a long term commitment hasn’t necessarily been the best strategy. There have been cheaper sources of RECs and cheaper ways of meeting compliance requirements. But now we have the split, it is in better shape. Developers are always keen for their projects to move forward, but they need to be competitive. What some developers have underestimated is how many certificates are still in the system. The other thing here is that anyone can build one of these things if they want to, they just got to get comfortable with regulatory risk. It is easy to look to others standing in front of project, but if you have a view on regulatory and price outcomes, then build the project. And a number of developers have been doing that.
That’s a bit of an indictment though when you say that the investment in Cathedral Rocks has made sense in one year out of ten.
It’s not been an easy market. The RECs prices and energy have traded below new entrant almost every year. So for us that plus the regulatory change has been th backdrop. Our concern is not to over-commit to something where they change the goal posts and all of a sudden we have a cost structure that we cannot pass through to customers. That has been the history, but I think the future is better, but it is still taking a little while for that future to become reality because of the excess supply of RECs in that system.
You mentioned the buyback of capacity – if you do sell capacity into that, what will that change for you?
We are just putting in a submission on that process on Friday, so I’m limited in what I can say. The way I view it – irrespective of who could win – the reduction tightens up supply balance and offers opportunity for new generation. We’ve been permitting down in Yallourn for a gas fired plant there for a little while, and we got peaking opportunities elsewhere in the state. If you took baseload out, you wouldn’t necessarily replace it with baseload, it would probably be a mixture. We need a systematic approach to closures so we can plan for it and avoid un-necessary shocks. That’s one of the benefits of what that scheme provides.
We are a significant player in the market. One aspect you mentioned on planning side – to me they represent a few challenges. There is no doubt these projects have an impact on communities and that they produce noise. Despite everyone best efforts there will always be detractors. Our question is what are acceptable limits and how they are considered in context of national target. We already got pretty stringent health and planning frameworks in place – if you make them more so, you put up cost for everyone. we think developers need to do more with community, but we already have some of the most stringent laws in place at the moment, we don’t think they require considerable change because that ill impact on cost of renewable energy moving forward.
Just on other technologies. Is solar thermal or wave or tidal on your horizon?
We looked at various technologies from time to time but we focus more on commercially proven technologies, which solar thermal falls into. But we made sdecision to focus on PV rather than thermal on flagships program/ On wave, we talk to proponents and we are keen to see the technologies progress. We don’t see ourselves as principl investors in the technology itself, but we do see ourselves supporting projects as they become commercially viable.
You mention solar thermal, how far is that away from having potential applications in Australia?
Our focus on PV reflects our view that we think PV is a better fit earlier than solar thermal. We have been monitoring that for last 5 years or so, and to see cost reduction on PV side, its very difficult to achieve that in the solar thermal space. Where solar thermal really kicks in is for very large projects. For us, we want to focus on smallish projects, though flagshps is still a big one, but we saw PV being more competitive.
If you don’t win flagships, what the next move in PV? Does the door close or will you look for a way to push the door open.
We will continue to find another way to push the door open. We think good opportunities for the state, with First Solar we have seen some pretty positive jobs and manufacturing elements having different profiles from different energy sources and diversifying away from community impacts on cost of wind, we are keen for it to be part of the mix, and we are hopeful for it being successful this time around, otherwise we will probably keep trying.
And what’s your position on the Clean Energy Finance Corporation?
Our general position is to try and let these markets work without distortions. What we were not keen for is for investment that have low levels of return and other things that have price outcomes in the market. We are keen to make sure that to extent CEFC participates in renewable enegy investment it doesn’t distort the market.
