The economics of building new wind farms in Australia is “getting worse, not better” the developers of some of Australia’s biggest new projects have warned, as rising construction costs, connection and transmission delays, and a fickle off-take market increasingly block the path to final investment.
Executives from companies ranging from global renewables developers to one of Australia’s biggest utilities have painted a grim picture of the current market for large-scale wind, in a series of presentations delivered at two separate conferences held in two different states over the course of the week.
Origin Energy CEO Frank Calabria says the soaring cost of building new large-scale infrastructure is an economy-wide problem, but is “showing up most visibly” in the energy sector given the scale of the projects that need to be delivered.
Within the renewable energy sector, it is wind farms that are feeling the economic pinch most keenly.
“The cost of developing a wind farm today is roughly 50 per cent higher than it was in 2020,” Calabria told the Australian Energy Council conference in Sydney on Thursday.
“Wind projects that were bankable a few years ago, are now finding it very hard to clear the hurdle. That is a problem, because wind is essential to the system we’re building.”
Origin has its own lived experience of this, with its huge 1.45 gigawatt (GW) Yanco Delta wind farm that is approved for construction in the south-west of New South Wales but is still yet to reach a final investment decision.
Just a couple of weeks ago, Yanco Delta made the list of 19 winners of the latest and biggest auction under the federal government’s flagship Capacity Investment Scheme, notching up the title for the biggest capacity awarded for a single project in the CIS program.
But Calabria says that even with the CIS support, the company is not yet in a position to make a final investment decision on what will be the largest wind farm in the Southern Hemisphere.
“The Capacity Investment Scheme has been an important bridge for energy helping close the economic gap for projects the market alone would not support,” he told the Sydney conference.
“The CIS is supporting our own Yanco Delta Wind Farm, and we are grateful for that. But even with CIS support, the economics of wind remain challenging.
“Progressing towards a final investment decision on Yanco Delta … is challenging with escalating costs, even with CIS support, but we will continue to work through the final steps of what’s required to make this call,” Calabria said.
“Our problem is not ambition; we want to build this infrastructure. The projects exist. The intent is there. The problem is economics – and it is getting worse, not better.”
Further down south, at an energy conference in Tasmania, developers of wind energy projects on the island state repeated a similar refrain.
“This presentation comes with a with a warning,” quipped Acen Australia CEO David Pollington. “Anyone who doesn’t like lots of hard work, disappointment, frustration, and who lacks perseverance, leave now!”
The Philippines-based Acen is developing three major wind projects in Tasmania: the 900 megawatt (MW), two-part Robbins Island and Jim’s Plain projects in the state’s north-west, and the up to 1.2 GW North East Wind in the north east.
Pollington says that costs for the fully permitted Robbins Island Jim’s Plains projects are already into the tens of millions, well before any sod has been turned.
This situation has no doubt been exacerbated by the Robbins Island project’s remote and environmentally sensitive location, which has in turn underpinned community opposition to the project and inspired a number of legal challenges.
But as the project approaches 10 years in the development pipeline, the costs continue to pile up – including for the long and winding transmission line Acen has to build to link the project to Tasmania’s grid – and to eat away at the project’s business case.
“I don’t mind saying we’ve spent about $25 million on the development of Robbins Island today [and] Jim’s Plains,” Pollington told the 8th Annual Tasmanian Energy Development conference in Devonport on Wednesday.
“The case that we put forward is the value of the project, and what it … offers the community, the company, long-term. We have a high capacity factor, one of the best wind projects I’ve worked on in this country, and in fact overseas as well – so far, the board’s believing me,” he said.
“[On] supply chain costs; look, we’re tendering all the time at the moment, because we’ve got major projects in New South Wales that we’re looking to go into construction in 2028 – something in the order of $6- $7 billion worth of projects.
“We’re seeing price increases, and they’re going to impact Tasmania, and it’s also going to be challenging to get the workforce here to actually build these things,” Pollington said.
“[In Tasmania], the transmission infrastructure largely doesn’t exist, so you’ve got Acen developing long transmission lines to be able to connect projects that are in the areas that were identified by [the Australian Energy Market Operator] as key renewable energy zones.
“Long-term revenue streams are unclear or absent. [I’ve] built many projects. I can guarantee no banks are going to look at you unless you’ve got a credible off-take, and that needs to be … bankable, someone with a credit-worthy account.”
Marc White, the principal consultant and COO of Goanna Energy Consulting in Tasmania said the more than 50 per cent price rises in the cost of building wind energy is, in turn, affecting the market for renewable energy offtake deals and, in particular, long-term contracting.
“Based on all the logistics and issues we’re facing in the market … we’re seeing retailers less willing to sign fixed price products, large corporates are looking for shorter deals, and the banks are becoming very nervous about longer term pricing outcomes,” White said on Wednesday.
“The [electricity] forward market [has] dropped – literally last week we’ve seen forward pricing for 2029 go from $103 a megawatt-hour down to 80 bucks a megawatt-hour and, of course, you know when you’re looking at new-build costs above $100 a megawatt-hour, this doesn’t augur well for our enormous rollout.
“It looks to me like the market’s thinking that there’s going to be a very different supply-demand outlook in those [forward] years than what it did just a couple of short months ago,” White says.
“So, the problem [from] that, I guess, is that my customers remain complacent.
They’ve got great deals that we did one or two years ago at $60 or $70 a megawatt-hour, and so when I say to them, you know, are you interested in a 10 year power purchase agreement of over $100 a megawatt hour, they don’t understand why they would need to confront that sort of future.
“And so unfortunately, just in the last couple of weeks, what we’ve seen is that gap between buyers’ expectations of what’s fair value and sellers’ expectations about what’s fair value has actually widened significantly.”
Andrew Kerley, general manager of wind development at Equis’ newly rebranded Australian renewables outfit GreenPoint Energy (GPE), had a slightly more positive take, based on the company’s experience with the proposed 224 MW Bell Bay wind and battery project proposed for near George Town in Tasmania’s north.
“We’re talking about $10-20-plus million dollars to develop a wind farm – to get investment committee board commitments to spend that money, allocate that not only the money but the people to work on these projects.
“You kind of need to have a … sort of a baseline of certainty; … all the right signals to say ‘yes, this is a multi-year thing’,” he told the TED conference on Thursday.
“The forecasts for what it’s going to look like in time are going to change over time. They’ll be wrong now. We know that – no forecast that’s ever done this far out will be an accurate representation of what happens in a couple of years.
“But as long as we’ve got the signals, like the CIS, like Hydro [being] willing to …enter into PPA discussions for projects that aren’t genuinely shovel ready but have a really clear path, and all the strong fundamentals… and knowing that there’s still months, years, and tens of millions of dollars to be spent from the developer to get there,” he said.
“When [the CIS] first came out, it was designed to be for sort of shovel-ready projects that needed just a little bit of help to get into a final investment decision.
“Bell Bay is obviously a lot before that, but [CIS backing] means that all the commitments that you make … like local content requirements, jobs across all different categories of demographics, we can actually tell all the contractors on day one, these are the commitments that we’re making under the CIS.”
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