Can wind power rescue the RET

29 June 2012

The question posed is “Can wind power rescue the RET?” and I’m sure many of you will be surprised to hear me say no I don’t think it will – or at least not alone. Whilst achieving the national interest objectives of RET requires the availability of wind power – we actually have plenty of that; it firstly requires the resolution of a number of key challenges.

These include first and foremost the need for regulatory predictability in the RET legislation; the removal of regulatory barriers to deployment of renewable technologies – including a sensible network planning approach and workable development approval processes; more and better informed discourse on the costs, benefits and limitations of renewable technologies, including by regulators; and innovative funding solutions that allow independent power producers to invest in new generation assets that will increase competition in the now highly concentrated and vertically integrated energy market.

Where are we now?

It certainly has been a tough few years in the Australian energy market for renewable developers and independent power producers, Infigen included, but there is light at the end of the tunnel.  So how did we get here?

The enhanced RET, that resulted in Australia having annual renewable energy targets rising to 45,000 GWh in 2020, was legislated in 2009. Shortly thereafter poorly coordinated policies of previous and current governments, at the State and Commonwealth level, gave rise to the current surplus of Large Scale Generation Certificates (LGCs). This resulted in the low certificate prices that effectively stalled large-scale renewable investment.

Mild weather, lower economic activity and the emergence of price elasticity in the electricity market resulted in lower electricity demand over this period and consequently very low wholesale electricity prices. It is ironic, and at the same time very important to realise, that while retail prices are at record highs, the wholesale electricity prices earned by generators are at their lowest levels in many years.  You should ask your relevant electricity distributor about that (the State Government here in NSW) as their charges have been mostly responsible for the increases that households have experienced over the past two years. Alternatively ask your relevant State regulators (IPART here) as they allow for increased wholesale electricity price pass-through despite falling market prices.

Aside from projects that were already committed such as Macarthur in Victoria and Collgar in Western Australia, there has been very little new large-scale renewable project investment of any consequence in the last three years. The REC surplus has effectively delayed the deployment of 500-1000 MW per annum of large scale wind projects, which would otherwise have been required to meet the target between 2010 and 2014.  During the past three years the three largest obligated parties under the scheme have between them spent over a billion dollars acquiring and banking certificates from the small scheme surplus to meet their medium term obligations under the large scale scheme.  This has enabled the big three retailers to avoid making the longer term commitments required to support the orderly program of new utility scale renewable investment intended under the scheme. This deferral and compression of the available RET investment window will add cost pressure to satisfying the RET’s increasing demand profile from 2015, and result in a less efficient outcome than intended.

The intention of the so called dual linear target was to allow wind energy to be deployed in an orderly fashion through the early years of the scheme, and to afford other renewable technologies an opportunity to meet at least some of the target in the later years. It has since become evident that many of those emerging technologies, geothermal and solar thermal in particular, will struggle to deliver any meaningful capacity to meet the RET. Solar PV on the other hand has made a significant step towards becoming a meaningful contributor to the large scale renewable energy target. Wind power can and will seize the opportunities afforded to it by continuing to lead cost competitiveness in renewable energy technology.

Renewable Energy Target Review

Let me now move on to describe how I think the industry, governments and regulators can address the challenges that I have described.

Regulatory predictability is the key concern for our industry and we will be keenly observing the RET review to be conducted by the Climate Change Authority in the second half of 2012.  The Climate Change Authority is an independent body tasked with providing advice on the Australian Government’s policies for reducing carbon pollution, but ultimately the Australian Government will make the final decisions. The intent of the review is to assess the efficacy of RET in meeting its existing stated objectives. The objectives themselves are not up for review, as the Minister has said on a number of occasions.

To date the incremental annual targets of the RET have all been achieved; the costs have remained below the tax effected penalty; there is already a sufficient surplus of RECs to meet the targets between now and the next scheduled review in 2014; and there is a sufficient pipeline of renewable projects to meet all future targets out to 2020.  So the scheme has been effective in delivering the legislated annual renewable energy targets to date, but not quite in the manner intended.  In particular the intended commitments to long term investments in real assets that create real investment and real jobs in our regional economies have been squeezed out – by short term investments in paper trades by the three large obligated parties who have bought and banked enough certificates from the small scheme surplus fiasco to just limbo under the LRET bar for three years.

So how does that game play out?  I predict (with some confidence given it has already started) that certain parties will argue that electricity demand in 2020 is now forecast to be lower than when the legislation was put in place, and this should now give rise to consideration of a reduced RET target. Perhaps electricity demand will be lower in 2020 than previously forecast, but perhaps it won’t. Revisiting the 2020 RET target each time a new electricity demand projection is produced will only lead to further uncertainty.  This was previously acknowledged in the establishment of an absolute GWh target for 2020, and supported at the time by the electricity retailing majors.

One of the major electricity retailers has already been lobbying for a reduced and variable target, against their previously held and well argued position in favour of the current absolute target – when that policy suited them better.  It’s important then to remember that the RET is a national interest policy, and it should not be beholden to changing vested interests, particularly from Australia’s increasingly concentrated, and vertically integrated electricity retailing oligopoly.  The three major retailers already have effective control over the scheme through their dominance of the obligated party market, and their use of certificate banking to freeze out the requirement for new real asset investments by independent power producers. We should not put the fox in charge of the henhouse when it comes to the RET review.

Others will argue that the RET is a major contributor to ever increasing retail electricity prices. The reality according to IPART is that the LRET will cost the average household $3 per month in the next financial year. This represents less than 2% of the average household electricity bill. It’s a story all too common in Australia that vested commercial and political interests have campaigned successfully to confuse and distort the public perception of the RET scheme, and in particular the very small component of cost that is represented by the utility scale element of the scheme. As I said before if you are interested in the real reasons why your domestic power bill has gone up so much, look no further than your local electricity distributor, because that’s where the vast bulk of the increase has come from.

The loudest calls will be from those who will argue that with a carbon price there is no need for the RET.  It is important to remember that the expanded RET and a carbon price were always intended to be complementary measures. The RET is still required because a carbon price path that is politically acceptable and economically responsible in the near term is insufficient to stimulate renewable energy investment and provide the security of a clean energy supply for Australia.

The renewable energy industry wants the ability to plan for future demand in order to deliver the annual RET targets at least cost. Given the disruption caused by the certificate surplus that has stalled a lot of new investment, the industry would love the RET to be strengthened so that it works as it was meant to work before the large surplus came into being – stimulating real utility scale investments and jobs in our regional areas, rather than shuffling and banking of certificates like Monopoly money. However in the interests of stability and predictability of the scheme providing stable investment conditions now and in the future, and in the interests of good public policy, our view is that there should be no change to the LRET through the forthcoming review. This view is shared by the utility scale renewable energy industry.

We believe that The Climate Change Authority and the Government will recognise the risk to real investment by acting to ensure that the scope of this and future reviews will not extend to consideration of any downward revisions to the target, trajectory or penalty. If uncertainty continues, we will end up with a stop-start industry similar to the US experience – a roller coaster ride of investment boom and bust that does nothing but add to costs and reduce policy efficiency.

According to the Clean Energy Council up to $30b of new investment in proposed wind farms is at risk – of which $17b is represented by potential local Australian investment in towers, electrical equipment, civil works, design and development, construction and of course employment. By removing the distraction of RET regulatory risk, the industry can focus on the real challenge of working with energy regulators and market operators to help transition Australia’s energy market for deep integration of renewables into the electricity system.

Integrating renewables into the electricity system

Vast sums of money are currently being spent to maintain electricity systems designed many decades ago for generation technologies that are actually being phased out in many developed countries. Fifty per cent of the price increases announced recently by IPART in NSW is attributable to upgrading and maintaining electricity networks. Over half of a retail electricity bill comprises transmission and distribution charges. Addressing the rising costs of energy bills means modernising the way we transmit and use electricity, as well as how we generate it.

While it has been acknowledged that more work is required to understand how best to further develop these networks, progress is slow because many of the organisations tasked with delivering the solution have vested interests in ensuring the status quo remains for as long as possible. While this continues, networks costs continue to rise and capital continues to be invested in replenishing an antiquated existing system.

A simple demonstration of suboptimal network planning and design is the regular price separation that occurs between the South Australian and Victorian regions of the national Electricity Market (NEM). Wholesale electricity prices in South Australia are often lower than Victoria due the strong penetration of wind energy in South Australia. Victorian consumers could benefit from importing cheaper electricity from South Australia if there was sufficient transmission capacity. This can be at least partially resolved by simply upgrading a transformer; yet the process around assessing, agreeing and approving such investments is lengthy, with even this interim solution unlikely to be implemented until 2016/17.

In February 2010, the Ministerial Council of Energy (MCE) directed the Australian Energy Market Commission (AEMC) to implement a rule change for Scale Efficient Network Extensions to facilitate several generators to share a common connection node which is obviously more cost effective than each generator paying for their own dedicated connection assets—particularly in remote areas of the grid.  Unfortunately, after lobbying by some large market participants, the AEMC implemented a completely different rule change than the MCE had requested—a rule change so nobbled and impractical, no electricity market participants are ever likely to utilise its provisions. There is a fundamental conflict of interest between the organisations controlling the NEM and its objectives to “deliver a secure and reliable supply of electricity to customers at an efficient price”.

We can also look to overseas experiences. In Germany for example we can see that the deployment of a substantial amount of solar PV and wind has effectively displaced higher short run marginal cost gas generation – a significant contributor to wholesale electricity prices. We should be learning from these actual outcomes rather than making unjustified assumptions.

Planning guidelines for wind farms

Another regulatory challenge for renewable energy has been recent changes to wind farm planning guidelines in Victoria, and the proposed changes to wind farm planning guidelines in NSW, that will in both cases result in onerous planning consent conditions and higher development costs. The genesis of the changes appears to be the lobbying of a small but vocal minority who continue to make wild and unfounded accusations against the industry including wind farms causing a deterioration of land value, job losses, an increase in greenhouse gas emissions and causing huge electricity price rises.

Of particular concern is the accusation of wind farms causing adverse health effects.  This may be a driver of various set back and gateway provisions in the planning system changes. Firstly I’d like to point out that it is simply untrue that people suffer adverse health effects as a direct result of wind turbines. This industry has been in operation for decades with over 100,000 wind turbines installed globally in countries far more densely populated than Australia. No credible scientific or regulatory body in the world has found that wind turbines cause health problems over that period.

It is noteworthy that since the introduction of new wind farm planning guidelines the minority voices of opposition have not quelled. They will not rest until there is a permanent moratorium on wind farms. So here is the challenge for the various state governments and planning departments – at what point do you say enough is enough? It is unreasonable for an industry to continue to invest for the future when a tiny minority of opponents can wield sufficient influence to cripple the industry. While State Ministers ‘talk the talk’ in terms of supporting the industry for the proven economic benefits that it can deliver to their rural communities, there is very little ‘walking the talk’ when it comes to delivering planning regulations that do not discriminate against the industry. We are not asking for special treatment. We simply want fair and equitable planning treatment with comparable infrastructure.

Funding a clean energy future

A final challenge for Australian renewables I will address here is the issue of funding. The electricity industry has seen a phase of consolidation and vertical integration in the competitive segments of the markets. The transmission and distribution monopolies remain and a powerful oligopoly of three players has formed in the electricity retail market. Even our banking industry has “four pillars” but when it comes to electricity supply our three players control around three quarters of the market.

The consolidation has resulted in fewer natural customers for independent power producers and a resulting increase in market power gained by the big three retailers. For a number of years independent power producers have been unable to secure Power Purchase Agreements from the big three retailers on reasonable terms.  It has been much less risky for the big three to buy and bank certificates than to commit longer term in support of real rather than paper investments.  Without long term offtake agreements, financing of renewable projects becomes challenging at the very least. Banks cognisant of the regulatory risks in the Australian electricity market are even more risk averse when it comes to transacting with proponents of renewable energy technologies in that market. Some project finance is available as demonstrated by the agreement we secured with Westpac for our Woodlawn wind farm, however the risk appetite of financiers has been severely curtailed by regulatory uncertainty in the electricity industry, as well as the exogenous factors that make financing anything on reasonable terms much harder than it used to be.

The Commonwealth Government through the establishment of the Clean Energy Finance Corporation (CEFC) is trying to address some of the financing challenges faced by the renewable energy sector. The CEFC expert review report to the Commonwealth Government includes 26 recommendations, all of which the Government supports, including  having a renewable energy investment stream with a goal of investing 50 per cent or more of the $10 billion investment budget over 5 years; an ability to provide concessional finance having regard to broader economic benefits and positive externalities; an ability to provide longer term debt maturities than private sector lenders; a preparedness to be subordinated behind private sector lenders; and having some scope to take electricity price risk.

The establishment of CEFC may go some way towards addressing the funding issue but there still remains a risk that without a PPA private sector lenders may not be willing to finance merchant plant, even with CEFC as a co-investor. Infigen has a retail licence to sell electricity and is actively seeking to develop alternative channels to market that will facilitate the contracted and predictable cash flows required for financing.

Carbon pricing certainly helps support the case for renewable investment. In the longer term as emitters pay prices for carbon pollution that adequately reflect its true cost to the economy, renewable energy will move to compete directly with traditional sources of electricity. This will drive the REC price down and reduce the regulatory risk associated with the RET, potentially enhancing the availability and terms of financing available.

Each of the challenges that I have outlined can be overcome if the continuing strong and broad based community support for renewable energy translates into political will and effective policy outcomes.

Technologies that will deliver the RET

Finally, I will touch on the different technologies that we see contributing to the RET.

Factors that influence wind farm site selection include a strong wind resource, a strong network connection and community support. Opportunities will continue to exist for both large and small wind farms. Improvements in turbine design and reducing turbine prices mean that previously marginal sites can now be developed successfully.

There are many communities that embrace wind farms for their regional investment benefits and local employment opportunities.   A recent study by SKM for the Clean Energy Council shows that a typical 50MW delivers approximately $250,000 per annum to the host farmers, is constructed by workers who spend up to $1.2 million locally, and contributes up to $80,000 annually to community projects.

Wind remains the clear technology leader in terms of cost competitiveness, and we continue to expect wind to meet up to 80 per cent of the large scale target. Globally turbine prices have fallen substantially. New turbine suppliers are seeking to enter the Australian market, and we expect to see significant competition once the scheme’s real investment signal returns.

Solar PV also has an important place in our renewable energy future. Australia  has a world class solar resource. Large-scale solar PV has made rapid advances in the last few years with tumbling panel prices. The Commonwealth Government’s Solar Flagships program has resulted in the development of a number of potential large-scale development sites across the country. Small scale solar PV is competitive with retail prices in many regions, and we expect in the coming three to four years large scale solar PV will be competitive with wind in certain distributed applications, where transmission and distribution costs can be avoided or reduced. We see both ARENA and the CEFC playing key roles in supporting and accelerating the contribution of solar PV technology.

To a lesser extent there will be contributions from biomass and biogas generation towards the target. The Australian Renewable Energy Agency (ARENA) was created to coordinate around $3.2 billion in existing grant funding programs supporting research, development and demonstration of new renewable energy technologies. It will be an important agency supporting the development of future large scale renewable generation technologies but we don’t expect its projects to contribute to meeting the current renewable energy target in a meaningful way.

By Miles George, Managing Director of Infigen Energy, at the 10th Annual Australian Energy Summit on 29 June 2012. The presentaion slides are available to view here.