Wind, solar investment surge “the start of bigger things to come”

The strong growth in large scale renewable project financing in Australia in 2016 could be just the beginning of a major wave of investment.

This is the prognosis of Bloomberg New Energy Finance associate Leonard Quong, who adds that if key policy settings remain in place the $2.5 billion in annual large scale project investment required for Australia to meet its Renewable Energy Target could be achieved through to 2020.

“We have seen a new sense of momentum and energy in the market,” Quong told RenewEconomy, speaking of the latter stages of 2016. “If some of the fundamentals looking forward are to be believed, this is the start of bigger things to come.”

Quong explains that the stage is set for a large number of utility scale wind and solar PV projects to attract financing and get off the ground in 2017.

This is due in a large part to the “paralysis” the large scale renewable market experienced in 2014 and 2015, itself brought on by the Abbott Government’s Renewable Energy Target (RET) review. This paralysis is the primary cause of the large scale generation certificates (LGCs) shortfall likely to eventuate in 2018.

The BNEF analyst notes that the RET reduction agreed to by the major political parties, a position advocated by the Clean Energy Council aimed at breaking the paralyzing deadlock, laid the groundwork behind the recent growth in project financing.

The significant factor being that as it was achieved in a bipartisan fashion, investors gained confidence that the policy will be in place over the mid-to- long term.

As to whether Australia can achieve the reduced RET, Quong is quietly optimistic.

“There are certainly no fundamental constraints around the world. Investors are chasing yield and the Australian market has always been a fairly desirable one,” says Quong.

“There are a few uncertainties that have to be grappled with, and those are quirks with the policy.”
Quong explains that solar or wind project revenues beyond 2030 is the key “quirk.”

With revenues from LGCs set to terminate in 2030, whether wholesale prices will be sufficient to deliver returns to debt and equity investors is crucial.

“A carbon pricing mechanism, by any name, could provide enough revenue support to make these projects viable without the need for renewable energy certificates,” says Quong. He adds, however, that carbon pricing is only one potential mechanism by which required revenue levels could be achieved.

A major trend set to emerge strongly in 2017, according to BNEF analysis, is the rise of utility scale solar. While wind project investments far exceeded utility scale solar in Australia in 2016, rapid price declines and solar PV’s inherent advantages in terms of project execution should see large scale solar take off.

“Given the shortfall in certificates now expected to happen in 2018, it gives quite an incentive for investors to look at solar,” says Quong. “With the shorter build times, potentially shorter development times, and with certificate prices now above $80/MWh, it certainly makes it quite attractive.”