Miles George’s address to the PWC Renewable Energy breakfast

20 April 2012

Good morning ladies and gentlemen.

I will set the scene for you in terms of the broader electricity industry and competition within the electricity industry. I will describe the evolution and effectiveness of the renewable policies that culminated in the renewable targets that we now have, together with the challenges and opportunities that this presents. I will give you Infigen’s perspective on the Commonwealth Clean Energy Future legislation, in particular the role of the Clean Energy Finance Corporation, the Australian Renewable Energy Agency and the carbon price, I will describe how each of these elements can make a contribution to large-scale renewable energy development, meeting the 20 per cent by 2020 renewable energy target and the transition to a low carbon economy. I will finish by addressing some of the additional barriers that need to be overcome to succeed.

By way of background to my perspective, Infigen Energy is a public listed renewable energy company that currently owns and operates around 1,600 MW of renewable generation capacity across 24 wind farms in Australia and the US. We are the largest developer and owner of wind farm operating capacity in Australia with 557 MW currently in operation, and we hold a national retail licence to sell electricity.

We have a large pipeline of wind and solar PV development projects.

Infigen has moved into the development of utility scale solar photo-voltaic generation with a view to adding this technology to our generation portfolio. To date our main focus for this endeavour has been in NSW where we have three projects approved.

We recently resubmitted a bid to develop 150MW of solar PV under the Commonwealth Government’s solar flagships program and we have further solar PV opportunities ready for development, once effective policy settings for utility scale solar projects are implemented.

We operate in competitive electricity markets across Australia (NEM and WEM).

The historic growth of these markets was primarily driven by cheap electricity available to manufacturing and industrial loads. The supply of cheap electricity was underpinned by a plentiful supply of cheap and stranded fossil fuel. This is now beginning to change.

Global demand for coal and gas has seen a trend towards export price parity in Australia. Despite this, projected electrical energy demand growth in the NEM is on average 2.3% per annum for the next decade.

The mandated renewable energy target of 20 per cent by 2020 and the introduction of a carbon price will both play important and complementary roles in influencing the deployment of technologies required to meet this growth.

We forecast over 8,000 MW of new wind investment by 2020 – with an expected capital investment of around $20 billion. While we see wind as getting the lion’s share of the RET, Solar PV economics are rapidly improving and we expect large-scale deployments in the latter half of the decade

The electricity industry has gone through a phase of consolidation and vertical integration in the competitive segments of the markets. The transmission and distribution monopolies remain and an oligopoly has formed in the retail 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 reluctant to enter into Power Purchase Agreements due to the unacceptable prices offered – prices well below that used by some state electricity pricing regulators to set retail tariffs. This has resulted in investment in renewable energy markets stalling.

Independent power producers are responding by competing with retailers for end-users. Infigen has a national retail licence to sell electricity and is actively seeking to develop these alternative channels to market. While there may be customer churn rates sufficient to demonstrate effective competition, this market structure has severely affected competition further up the supply chain.

It is essential that wind energy construction starts to ramp up soon if the expanded RET target is to be met at a reasonable cost.

So how did we end up here?

The RET began in 2001 with a target of 9,500 GWh by 2010. Former Prime Minister Rudd’s 2007 election campaign included a policy of 20 per cent by 2020 which effectively wrapped all the individual state based renewable policies into a national target. The enhanced RET was legislated in 2009 and resulted in Australia having annual renewable energy targets rising to 45,000 GWh in 2020.

By 2010 a combination of factors including

  • a solar multiplier which provided all upfront, 5 RECs for every one MWh of electricity expected to be generated over the expected 15 year life of the system,
  • generous feed in tariffs provided by the various states, and
  • falling solar PV prices saw unprecedented deployment of residential solar PV throughout Australia, resulting in a massive oversupply of RECs.

This resulted in artificially reducing the competitiveness of large scale renewable generation and, with lower REC prices, effectively stalled its deployment. The legislation was changed to separate the small and large scale technologies into two schemes, however much of the surplus of RECs already created by the small scale technologies was allowed to remain to meet compliance of the large scale target.

The current surplus is sufficient to meet demand until 2014. For this reason, there has been little recent growth in the large scale operating supply, and if this remains the case, it will result in a cliff edge outcome for supply.

2015 is currently short by almost the same number of LGCs that can be generated annually by all of the existing renewable capacity, which has taken over 10 years to deploy. From 2016 the target increases at a rate that will require today’s installed capacity to be constructed each year between then and 2020.

It’s a big challenge and opportunity but not insurmountable. The industry needs the barriers that are preventing investment decisions today to be removed.

The easy resolution to this, in the eyes of some, is to change or abandon the RET. They see the RET review, to be conducted by the independent Climate Change Authority later this year, as the opportunity to effect this.

In the media the RET often gets caught up in the carbon price debate. This is a shame and confusing to the wider audience. It is ironic because unlike the carbon price debate, one of the few constants in the RET to date has been the bipartisan Federal level support for it.

Many arguments that are expected to surface when lobbying for changes to the RET.

I will simply point to the fact that the RET and a carbon price are complementary measures. This is because a carbon price path that is politically acceptable and economically responsible in the near term is insufficient to stimulate renewable investment.

Arguments for change based on allowing other technologies to catch up, learning how to better integrate renewables into the network or potential cost increases due to an impending shortfall can easily be dismissed. The Australian Renewable Energy Agency will support emerging technologies while established technologies can generate the necessary momentum to remove the existing barrier to large-scale deployment. Cost increases are only likely if we don’t begin to act now.

Given the disruption caused by the REC surplus that has stalled a lot of new investment for some time now, the industry would love the RET to be strengthened so that it works as it was meant to work without the surplus. However in the interests of good public policy and stability of investment conditions now and in the future, our view is that there should be no change to the target, trajectory or penalty. Business needs certainty. The renewable industry has gone through a phase of tough market conditions due to poor policy implementation. The industry is ready to meet the challenge. But if uncertainty continues, the billions of dollars of investment mostly in rural areas of Australia, and the opportunity to help develop and transition Australia to a low carbon economy will be lost.

The Commonwealth Government has tried to address some of the challenges faced by the sector, by providing for the establishment of the Clean Energy Finance Corporation (CEFC) and the Australian Renewable Energy Agency (ARENA).

The cost profile for research, development, demonstration and deployment changes over time, and different types of funding arrangements and incentives are required at each stage to overcome the various barriers to progression.

The CEFC has just this week released its expert review report to the Commonwealth Government which includes 26 recommendations, all of which the Government supports.

The Government announced that CEFC will be established through legislation at the upcoming Budget sitting and will commence its investment operations from 1 July 2013.

From Infigen’s perspective some of the positive aspects from the review include:

  • The enormous opportunity for Australia and Australians to participate in the development of clean energy businesses that will inevitably be important parts of our economy and the world’s economies of the future
  • Having a renewable energy investment stream with a goal of investing 50 per cent or more of the $10 billion over 5 years
  • A focus on projects and technologies at the later stage of development
  • Being cognisant of the potential impact of its investment on other market participants in relation to the RET
  • Ability to provide concessional finance having regard to the broader economic benefits and positive externalities
  • Ability to provide longer term debt maturities than private sector lenders
  • Preparedness to be subordinated behind private sector lenders
  • Some scope to take electricity price risk
  • Open to proposals that involve extending and connecting the grid to a renewable resource.

There still remains a risk that without a PPA the private sector lenders may not be willing to finance merchant plant notwithstanding having the CEFC as a co-investor. This will raise the importance of having diverse channels to market to mitigate merchant price risk and encourage bank investment.

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 that will support the large scale renewable generation of the future. Other than funding some of the large scale solar projects, such as Solar Flagships, we don’t expect it to contribute to meeting the current renewable energy target in a meaningful way.

The introduction of a carbon price is an important step in preparing Australia for a low carbon economy. We need to recognise that there is a real cost associated with our emissions and get on the path to lowering them.

Infigen sees, and is positioning its business in the knowledge that, the RET is a complementary measure to support the growth of the renewable industry and to assist in de-carbonising the economy. Treasury electricity price projections support the view that these schemes are complementary insofar as wind power could compete with traditional generation technologies by the time the RET is currently scheduled to end.

Being an early mover in de-carbonising the economy will deliver Australia a sustainable and secure energy supply and insulate Australia from future fuel price shocks.

As a final point I would like to cover three common misconceptions about renewables, and wind power in particular, that can affect the industry’s social licence to operate.

The first of these has lead to restrictive planning guidelines and regulations that have the potential to cripple this emerging industry.

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. With this degree of successful global adoption there is ample evidence to substantiate the industry’s position that wind energy generation technology is safe, and that there are no adverse health effects.

It is also untrue that the variable nature of renewable energy generation requires new build generation capacity from fossil fuel sources to support each new megawatt of installed renewable capacity. This would be true if we started our story on a desert island with no other existing sources of electricity generation. But the South Australian experience highlights the reality for an existing large generation portfolio employing multiple fuel sources and generation technologies such as we have in Australia.

Wind energy now comprises over 20 percent of South Australia’s installed generation capacity and electricity production, and at times supplies over 50 percent of its electricity demand. All of this wind energy capacity was installed over the last decade but during that time no extra peaking capacity was commissioned for the purpose of supporting this deployment. Not one megawatt. The lights have not gone out, and electricity price movements have been largely similar to other states.

Finally, in an environment of ever increasing retail electricity prices, the renewable energy industry gets targeted for criticism every time a price increase is announced. The reality is that according to IPART the LRET currently costs the average household $19 per year. This represents less than 1% of the average household electricity bill. I’m sure you agree that this is a small price to pay to diversify and secure our energy future.

Thank you.

The speech was given at PwC Executive Business Breakfast on 20 April 2012