Victoria renewables auction points to another fall in wind and solar costs

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Victoria is not releasing price details of Australia’s largest renewable energy auction, but there is enough information to point to another significant fall in the cost of wind and solar.

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Ararat Wind Farm.
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The Victoria government may not have been upfront about the fine details and costs of its ground-breaking renewable energy auction, but there is enough information floating around to suggest that another significant fall in the cost of wind and solar in Australia has occurred.

The auction was the largest ever renewables auction in Australia, seeking 650MW in capacity. The results were so good, and the prices so low, that 928MW of wind and solar will be built as a result – although it should be pointed out that not all of that capacity is actually contracted.

Only 121MW of the 336MW Dundonnel wind farm, for instance, is contracted to this scheme, it now emerges. The rest of that wind farm’s output will be sold on the wholesale market, or contracted to other buyers.

But while Victoria has chosen – unlike the ACT government that ran the country’s first renewable energy auctions – to keep the actual prices and contracts hidden from view, we know enough to suggest that the state has secured a large part of its wind capacity at an effective price of below $50/MWh.

And solar is not far behind. According to developers and proponents, it has fallen from about $70-$75/MWh a year ago in Victoria to the mid $50s/MWh. In other states with better solar resources, such as Queensland and South Australia, the talk is that the cost of solar is trying to nudge $40/MWh and below.

That’s a remarkable prospect that is confirmed by the assessment of UK billionaire Sanjeev Gupta, who recently suggested that would be the sort of price of solar submitted in any auction for “dispatchable” energy conducted by the federal government. It’s a price that puts new coal, let alone gas, well out of the ball park.

This is the extraordinary situation facing Australia’s policy debate, and the energy industry. Almost everyone now recognises that wind and solar costs continue to fall faster than imagined – as they always have – and the addition of storage and smart technologies like batteries and demand response will accelerate the transition.

This is one of the reasons that utilities and most big business are desperate for some sort of national policy to be put in place. They don’t believe for a minute the ridiculous modelling put forward by the Energy Security Board that the investment in large-scale wind and solar could have been brought to a halt for a whole decade by the National Energy Guarantee.

But they do want measures to be put in place to bring about some sort of orderly transition – partly to defend their own assets, partly to avoid surges in costs and prices brought about by any free-for-all on policy. The fact the Coalition is dominated by ministers and MPs who don’t believe there is or will be a transition, and want to focus only on “fair dinkum” power, is not helping.

But back to the Victoria auction results.

The auction was based around a series of strike prices that would constitute a guaranteed payment for the wind and solar farms. For wind it was $56.82/MWh, and for solar it ranged from $53.06/MWh to $56.85/MWh, depending on whether there was tracking technology.

This means that if the wholesale price of electricity in Victoria – which averaged more than $90/MWh last financial year – remains above those strike prices, the extra money earned by the wind and solar farms will go back to the government.

The current futures market puts prices in Victoria at around $70/MWh for 2020, when most of these projects are expected to come on stream.

If the prices fell below the strike price over the 15-year term of the contract, the government would provide the top-up.

The variables in the bidding for the auction came in a form of top-up payment – one a “base” price which would be decided on a fixed payment per megawatt installed, and one a “revenue cap”.

The details, as mentioned above, have not been released, but the talk is that the “base price” was either zero, or even negative in some cases (meaning that those developers didn’t think they needed as much as the strike price to make the investment work). The revenue caps were also surprising low.

This theory is supported by what little information has been provided on the record, from the only Australian listed company to have a winning project, Tilt Renewables.

As mentioned above, it owns the 336MW Dundonnell wind farm, the biggest winner in the auction, although little more than one-third of the capacity of that wind farm will actually be contracted by the government to supply electricity from the grid.

The rest of the wind farm will operate on a merchant basis, or contracts to other parties if it can find them. But here is where it gets interesting.

According to a stock exchange statement from Tilt Renewables, Dundonnell is expected to generate around 1250GWh into the grid each year, and generate about $40-$50 million of “free cash flow” before debt payments, or $30-$40/MWh.

Free cash flow normally  represents revenue from the sale of electricity and renewable energy certificates, minus the cost of maintenance and warranty. i.e. its operating costs. These costs typically account for around 20 per cent of revenue. If you add those costs back in, it is expecting revenue of $40-$50/MWh.

But that’s not the whole story. In Tilt’s case, the equation is complicated by the costs of connection, and the price of a 40km link to the grid. And because Tilt is also treating this as an operating expense, the numbers don’t look quite as juicy – they’ve now jumped up to around $60-$80/MWh.

Dundonnel has an expected capacity factor of around 36 per cent. Given that other wind farms could produce higher output, and be closer to the grid, it suggests that revenue for other wind farms could be lower.

And in Tilt’s case, given that the bulk of the project is being sold on the wholesale market, with the potential for some trading of LGCs – even at the forecast low prices for those certificates of $10-$20/MWh from 2020 – it may be a reasonable bet that Victoria is getting its contracted share of the output for less than $50/MWh.

Like the $45/MWh contracted proposed by the ACCC for the new “dispatchable” generation, having a guarantee for at least part of the output helps in the financing and keeping overall costs low.

One analyst put the back of the envelope calculations –  with a merchant tail price of $55/MWh real, and an assumed 8 per cent internal rate of return – Tilt could have allowed for a price of $A50/MWh from the Victoria contract (with a negative base price of, say $6/MW).

“That would be a new record low,” he said.

We will likely never know what Victoria is effectively paying. Even at the strike price of $56/MWh it is a significant development.

When Goldwind finalised the financing for the Stockyard Hill wind farm last year, it was thought that the $52/MWh contract price was an outlier. But other projects have also come in the mid $50s/MWh.

Victoria’s deal also delivers a significant discount to the price of contracts awarded by the ACT government in its ground breaking auctions, with bids coming in at an average of around 80/MWh, although some came in at the low $70s/MWh, such as the Coonooer wind farm,.

The Ararat wind farm, for instance, signed a deal for about one-third of its output to the ACT at a price of $87/MWh, and has since signed other contracts with the Victorian government and retailers such as Flow Power.

It was interesting to note that Tilt also said that the capital cost of the Dundonnel wind project, which is using eighty 4.2MW Vestas turbines, had fallen by around 6 per cent to $560 million.

Indeed, the head of Vestas Australia Peter Cowling told RenewEconomy in the Energy Insiders podcast last month that costs below $50/MWh were approaching. In that interview, he underlined the need for constant policy (of the type provided by the Victorian government) which would help lower costs, and the need for wind to stay ahead of solar.

And there is no doubt that solar is also producing substantial falls. Originally, the Victoria government reserved 100MW of capacity in its planned 650MW auction because it was assumed it would not be able to compete with wind, and also to create some diversity in supply.

In the end, solar made up more than 254MW of capacity, mostly because its costs, too, have fallen dramatically. Part of that is driven by an increase in module efficiency.

Enel Green Power, for instance, the co-owner of the 27.3MW (AC) Cohuna solar park – the smallest facility to win a contract – says its use of “bifacial” models will deliver 77GWh a year, or a  “capacity factor” of 31 per cent. That is an extraordinary high level for a solar farm in Victoria, and explains why solar is chasing down wind on the cost curve.

And it appears that Canadian Solar’s Carwarp solar farm is matching that. Canadian says 100MW (AC) facility is also using bi-facial technology and will produce 267GWh a year – a capacity factor of 30.7 per cent.

In overseas markets, solar is matching wind in the best regions. A tender in Jordan attracted bids of less than $US25/MWh, despite the huge political risk of the region, while Egypt – another country where political risk adds to the cost of finance – is conducting another auction and told bidders it is not interested in any bids above $US25/MWh.

Next stop for Australia is the Queensland renewable and storage auction known as the Renew400. The results should be known soon, and promise another step change in costs.

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