Australian Power Retailers Give Renewable Energy Target 3 Years to Live

In this little piece from The Australian, keep an eye out for some truly desperate characters, who are having real trouble coming to terms with the fact that Australia’s electricity retailers have given the LRET no more than three years to live.

Investment stalemate puts renewable energy target at risk
The Australian
Andrew White
16 April 2016

A stand-off between investors, banks and electricity retailers has put Australia at risk of missing even the lower 2020 renewable energy target, with a lack of long-term supply contracts stalling the needed $10 billion of development for new solar and wind farms.

Despite hopes a compromise deal on the 2020 RET last year would give the industry certainty to invest, new projects have been stalled as investors and other project developers push for longer-term contracts to underwrite their investment.

Investors said they were being asked to assume too much merchant risk in selling power on the spot market and were uncomfortable with committing to new development. Banks wouldn’t lend as much for projects without long-term contracts, forcing investors to put more equity into a project, industry sources said.

Infrastructure Capital Group chairman Andrew Pickering said energy companies were offering three to five-year contracts for prospective wind and solar energy developments, rather than the 10 to 15 years needed to justify investment from infrastructure funds.

“The problem will be that the retailers, not only do they not want to deploy their own balance sheet for these things themselves … they don’t want to offer long-term fixed-price contracts to support these projects,” Mr Pickering said.

“They think they can offer short contracts, and for us at least that is a little too far up the risk curve for our liking, a little too much merchant risk in the portfolio.”

The industry is facing a critical period, with an estimated $10 billion of investment — equivalent to all spending since 2001 — needed over the next four years to meet the 2020 RET target of developing another 6000 megawatts of capacity.

Clean Energy Council chief executive Kane Lucas said more than 6000MW of projects had been given planning approval but were yet to be financed or started. Each project takes about 18 months to develop, according to industry estimates.

Mr Lucas said there was also a surplus of Large Scale Generation Certificates — sold by renewable energy companies to electricity retailers to help underwrite the cost of new projects — which was acting as a drag on development.

“This is a critical year for the target,” he said.

“Each of the retailers will have their own targets, but through this year there needs to be a number of projects reach financial close and ready to be in production in the next year or two when that shortfall hits.”

The federal government last year cut the RET from 41 gigawatt hours of generation to 33GW/h after a year-long review by businessman Richard Warburton that stalled investment and slashed jobs.

Prices of certificates collapsed from above $60 a megawatt to as low as $22.50 in July amid concerns the target would be cut. But they have since quadrupled to $83.50 in January, a level industry observers say makes green energy projects highly profitable.

John Titchen, the chief executive of GoldWind Australia, a Chinese wind turbine supplier, said the industry should be building capacity at the moment because the strength of the LGC price showed the market was concerned about a shortfall of capacity.

“The LGC price is strong, the market conditions are right for investment,” Mr Titchen said.

GoldWind has partnered with CECP Wind-Power Corporation to develop the White Rock wind farm west of Glen Innes in the New England region of NSW.

The 175MW project will be the largest in NSW when it comes online late next year.

But work will start later this month despite the project having no long-term supply contracts, with Goldwind funding the development via its own balance sheet and taking merchant risk on the project.

ICG’s Mr Pickering said that without a change in supply contracts the market was likely to require a new class of investor, such as equipment manufacturers like GoldWind with the balance sheet and risk appetite to finance developments on expectations of strong prices.  “The risk premium for these projects is going to go up,” Mr Pickering said.

“The banks will not be able to gear up very much so the capital will need to be equity and I am not sure who is going to provide it.

“It is unlikely to be infrastructure funds like us. I am not sure how much the retailers can fund, so I would expect to see a new class of investors, be it the equipment suppliers, more developers who have a bit of a balance sheet and like to take risk.’’

Green Energy Markets analyst Tristan Edis said the market needed to go through a period of adjustment to bring in new investors, but there was still uncertainty about the long-term price and supply for the large-scale generation certificates.

“I think we will see some investment but it will probably be too slow and not enough to meet the target,” Mr Edis said.

The chief executive of the government-funded Clean Energy Finance Corporation, Oliver Yates, said the volatility of the price of the certificates had caused concerns for some investors, but they would have to fall a long way for investors to lose money. A wind farm can receive about $40 a megawatt hour for power and about $80 for the certificates for a combine price of $120. That combined price would have to fall below $50 to lose the owner money.

“The underlying asset is still good, but you can’t get as much debt as you used to and will have to put more equity in,” Mr Yates said, “That should not affect their long-term returns, because if they put more in and develop the project the market will turn eventually and they will get long-term contracts.”

The GoldWind investment is among a handful of new investments announced since June when the new RET was settled.

Origin recently announced a 15-year deal with Spanish group FRV for the offtake from the 56MW Moree Solar Farm and is evaluating Darling Downs as a site for utility-scale solar in Queensland. “Origin supports the RET and, consistent with our renewables position, we intend to meet our obligation under the target,” the company said.

AGL, the country’s biggest emitter, said in February it would establish a $3 billion fund to house renewable energy projects, including its recently completed solar project in western NSW. AGL will tip $200 million into the fund and invite others, including infrastructure funds, to invest alongside.

The Clean Energy Finance Corporation has also announced a partnership with fund manager Palisade to accelerate $1 billion of investment in renewable energy, while the federal government has announced a $1bn clean energy innovation fund.

Environment Minister Greg Hunt said more than 550MW of investment had been announced since and innovative new ways of financing projects were emerging.

“We expect more major announcements in the near future with a significant pipeline of investment,” Mr Hunt said.

Mr Lucas said there was a strong incentive for retailers to correct the market and buy capacity as they would face fines for failing to purchase 20 per cent of electricity from renewable sources by 2020.
The Australian

Andrew White has a long way to go before he can rate himself as an energy market journalist.  Having let the likes of Chinese wind power outfit, Goldwind’s John Titchen pitch up pure commercial nonsense, in a feeble attempt to lure suckers into investing in one of the greatest Ponzi schemes of all time, Andrew might have pressed these characters as to the real reason retailers are refusing to play ball with outfits like Goldwind.

Where Titchen talks up the current price of LGCs (at $83.50), which he gushes is making wind power projects “extremely profitable”, what the likes of Titchen, Tristan Edis and the other wind industry parasites and spruikers will never admit publicly is that the LGC price is entirely based upon the “fines” being threatened against retailers by Kane Lucas of the CEC in the last paragraph.

The threat of “fines” on retailers raised by Lucas (which he calls “a strong incentive to retailers to correct the market and buy capacity”) is what is referred to as the “shortfall charge”: a $65 per MWh tax levied on Australian power consumers for every MWh that a retailer falls short of the annual LRET target.

The $21 billion cost of that penalty will all be passed on to Australian electricity consumers, which retailers will collect in full, noting its cost as a ‘Federal Tax on Electricity Consumption’ on every power punters’ Bill.

The shortfall penalty (along with the full cost of the LGCs aka RECs) skyrockets between now and 2020, at which point the shortfall penalty will amount to something in excess of $1.5 billion annually and, with the addition of LGCs issued to wind power outfits, take the LRET’s direct cost to power consumers to over $3 billion every year, until 2031.

At around $93 the ultimate cost of a shortfall penalty and LGC is equivalent (due to the tax treatment of the penalty versus the LGC – the penalty is not tax deductible, the LGC is); and the entire cost of both is paid by power consumers on top of their retail bills.

Year	Target in MWh (millions)	Shortfall in MWh (millions)	Shortfall Charge Recovered by Retailers @ $93	Total Recovered by Retailers as RECs & Shortfall Charge @ $93
2015	18.85	2.85	$265,050,000	$1,753,050,000
2016	21.431	5.431	$505,083,000	$1,993,083,000
2017	26.031	10.031	$932,883,000	$2,420,883,000
2018	28.637	12.637	$1,175,241,000	$2,663,241,000
2019	31.244	15.244	$1,417,692,000	$2,905,692,000
2020	33.85	17.85	$1,660,050,000	$3,148,050,000
2021	33	17	$1,581,000,000	$3,069,000,000
2022	33	17	$1,581,000,000	$3,069,000,000
2023	33	17	$1,581,000,000	$3,069,000,000
2024	33	17	$1,581,000,000	$3,069,000,000
2025	33	17	$1,581,000,000	$3,069,000,000
2026	33	17	$1,581,000,000	$3,069,000,000
2027	33	17	$1,581,000,000	$3,069,000,000
2028	33	17	$1,581,000,000	$3,069,000,000
2029	33	17	$1,581,000,000	$3,069,000,000
2030	33	17	$1,581,000,000	$3,069,000,000
Total	490.043	234.043	$21,765,999,000	$45,573,999,000

 

The escalation in power prices that inevitably follows the full imposition of the cost of the penalty and LGCs (laid out above), guarantees that the entire LRET policy is doomed.  Hence, power retailers offering power purchase agreements ‘PPAs’ (referred to as “fixed-price contracts” above) limited to three-year terms (five years, at best).

Bankrolling renewable projects requires a PPA to give any kind of valuable security to the lender; and for wind power projects requires PPAs with a minimum term of 10 years (preferably 15 years) to make the venture anything like viable.

However, locking in for that kind of period is commercial suicide, when the value of what is being purchased (the avoidance of a legislated fine, the cost of which sets the value of the LGC) all depends on a policy, which achieves nothing more than killing whole industries and crushing families and households. By refusing to enter PPA’s for the 10 years or more needed to make a wind project viable, the retailers have choked off finance and thereby killed any prospect of new wind power capacity. Offering PPAs of 3-5 years is a recognition that businesses and households are not going to tolerate or survive the cost of the penalty imposed and the LGCs issued under the LRET.

In short, power prices matter.

Ask South Australians and Germans, whose governments both launched into wind power with a vengeance, resulting in power prices that are the highest in the world and the destruction of thousands of jobs and entire industries.

Then there is the small matter of what are euphemistically called “cost of living pressures”.

With around half of its population a net beneficiary of welfare (meaning low fixed incomes), Australian households will suffer disproportionately as power prices inevitably double again over the next three or four years.  Households without power (and there are tens of thousands of those) or which struggle desperately to afford it (and there are hundreds of thousands of those) vote.

And it won’t be long before they tumble to the real reason behind their spiralling power bills (if they haven’t been chopped from the grid already).

Whether it’s a Liberal/National Coalition or a Green/Labor Alliance, voters will dutifully (and rightfully) punish whichever of them is in control, if the LRET remains in place for much longer.

It’s the political toxicity brewing around a policy that will achieve nothing more than crippling power prices, energy poverty, business failures and rising unemployment, that is guiding retailers to act with clearly sensible commercial prudence.

It was fear of the then looming imposition of the shortfall penalty that led the Coalition and Labor to slash the ultimate annual LRET target from 41,000 to 33,000 GWh in 2015.

For the time being “hope” has displaced “fear” (eg Greg Hunt’s wishful expectation of “more major announcements in the near future with a significant pipeline of investment”).  However, these boys are deluding themselves.

If there was a shred of confidence in the LRET and/or the commercial value of wind power, retailers would be beating a path to the door of wind power outfits like Goldwind, and locking in PPAs running out to 2031, when the LRET expires.

However, the facts tell otherwise. Capping the terms of the PPAs being offered at 3 years is a self-fulfilling statement by retailers about the life expectancy of the LRET. Having forced the Federal Government to slash the LRET once, the retailers know full well they can do it again; and to do so once and for all.

Soon enough, among the wind industry, its parasites and spruikers deluded hope will be displaced by rational fear.  The retailers are banking on it.