NEWS

The opportunities for Renewable Energy in NSW

30 November 2011

Speech at the CEDA “Reinventing the state of NSW #3: Finance, Energy and Water” lunch by Miles George

Good afternoon ladies and gentlemen. I am going to speak briefly about opportunities for renewable energy in New South Wales.

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 have a large pipeline of wind and solar development projects, including several here in our home state of New South Wales.

In New South Wales we own and operate the Capital and Woodlawn wind farms outside Bungendore with 189MW of aggregate installed capacity. Together these two wind farms provide enough renewable energy to power the equivalent of more than half the homes in nearby Canberra.

Infigen has also moved into the development of utility scale solar photo-voltaic generation with a view to adding this technology to our generation portfolio. Our main focus for this endeavour has been in NSW where we have three projects approved for development once effective policy settings for utility scale solar projects are implemented.

In this brief presentation I would like firstly to debunk some commonly cited misinformation about naturally variable sources of renewable energy such as wind energy. This is important because misinformation is often held up as grounds for opposing or postponing or even abolishing the deployment of renewable energy – usually for the purpose to advance alternative opportunities for burning more fossil fuels. We should not allow misinformation to become a barrier to investment in renewable energy in New South Wales.

So firstly, the notion that the variability of wind energy generation presents a barrier to substantial deployment in Australia’s large existing portfolio of coal, gas and hydro powered plant is nonsense. Wind turbines typically operate over 80% of the time and their variability in output is very small relative to the hourly variability in demand that the existing electricity generating system has to cope with. Australia’s Electricity Market Operator (AEMO) has shown that it can forecast wind energy generation with 97% accuracy one hour ahead of time. Forecasting the much larger swings in demand in the system is a much tougher job that it also manages successfully.

The second piece of commonly cited misinformation is 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 megawatt1. The lights have not gone out, and electricity price movements have been largely similar to other states.

If we look at wholesale electricity prices around the states for the FY11 financial year we see that South Australia had less than half the number of high price events that affected New South Wales and Queensland for the same period2. New South Wales and Queensland have the lowest levels of wind energy generation among the States and spot prices here achieved high price events significantly more often than any other region. Peaking generation capacity will be built here because these high price signals evidence maximum demand growth in excess of energy demand growth. This is the usual trigger for new peaking capacity investment and is largely unrelated to renewable energy deployment.

The third piece of misinformation relates to the cost of the large scale renewable energy target (LRET for short) and its relationship to rising retail electricity bills. Poor policy decisions in relation to small scale renewable energy technologies have lead to additional costs for electricity consumers. After network costs this was the largest contributor to increased retail electricity tariffs in New South Wales as widely discussed in the media this year. But these costs are not related to the LRET.

IPART stated in its “Regulated retail electricity prices from 1 July 2011” report that the LRET will cost households on average around $19 per annum or around 1% of an annual electricity bill, not the 6 percent number often cited, which includes the cost of the small scale scheme.

So my first conclusion is that opportunities for renewable energy in NSW will be best served if we don’t allow misinformation to impair effective decision making within government and in the relevant regulatory authorities.

I will now talk briefly about the effect of regulatory uncertainty on opportunities for renewable energy investment in NSW.

In Australia utility scale renewable energy investment is underpinned by the LRET that was enacted in 2009 with bipartisan support. Despite the ongoing political wrangling over pricing carbon, support for LRET has been reiterated by both parties frequently and recently. Whilst poor renewable energy policy decisions of the past have led to a delay in renewable energy deployment, and very little investment at all in NSW, the market for renewable energy investment is slowly improving – but uncertainty still remains.

Both major political parties have a carbon emissions reduction target of a 5% decrease on 2000 levels by 2020. Despite all the noise the only real argument is how we get to that target. To quote Mike Hutchinson, Infigen’s Chairman “the political prospect of repeal of the carbon pricing legislation raises investment risk, reduces investment opportunities, requires higher returns and will stimulate higher electricity prices and greater risk of power shortages. If the Opposition is to persist with this threat then it needs to provide details on how its “direct action plan” would provide equivalent economic conditions for investment, as well as emissions abatement. While pundits may doubt that repeal is a constitutional practicality, the commercial fact is that the mere threat drives up the cost of capital and drives down the scale of investment.”

The upcoming RET review in 2012 is another potential roadblock for further renewable energy investment. This review is being viewed by some electricity retailers as an opportunity to further delay or water down their obligations under the target. To what end? The same electricity retailers have large investments in upstream fossil fuel resources and fossil fuel electricity generation facilities. Renewable energy investments compete directly with the incumbent retailers’ plans for more fossil fuel generation investment.

Wind energy will deliver most of the renewable energy target precisely because it is the most cost competitive renewable technology. I have already covered the fact that incremental wind energy generation does not require incremental peaking capacity. And I see no merit in the argument that we should delay the RET scheme to give other renewable energy technologies a chance to catch up.

Australia has had a mandatory renewable energy target in place since it was first introduced by the Howard government in 2001. There has been much fiddling with the target over the decade of its existence. If renewable energy opportunities are to be realised in NSW what is needed now is some legislative certainty, not further delay, dilution, or threat of repeal.

As a country with 0.3% of the global population we produce carbon emissions at about six times that weighting. While the introduction of a carbon price is a good start to reducing our emissions, the LRET is needed to play a key role in delivering the reductions necessary to achieve the current modest bipartisan target for improvement. It is therefore vital that uncertainty in relation to the LRET is removed sooner rather than later and I would encourage the Commonwealth Government to limit the scope of the upcoming LRET review to prevent any reduction to the target, slowing of the trajectory, or weakening of the penalty for non-compliance.

There has been more than sufficient time for electricity retailers to plan for compliance within the boundaries of the scheme. The retailers have taken full advantage of the market oversupply of renewable energy certificates created by poor policy decisions of the past. They should not now be allowed to manipulate the scheme further to their benefit.

Turning now to regulation in New South Wales we are keenly awaiting the release of the NSW wind farm planning guidelines. We have noted that the state with by far the most installed wind capacity in Australia, South Australia, recently made significant changes to their planning scheme to make wind farm planning decisions more straight forward. South Australia rejected completely the Victorian government’s arbitrary planning approach requiring a 2km buffer zone between wind turbines and neighbouring residences – a 2km buffer zone that does not apply to less regulated polluting industries. Opportunities for renewable energy in NSW will be improved if the State adopts planning rules more aligned with South Australia’s measured approach.

I do accept that some in the community will be opposed to wind farms for a range of reasons. While I respect those views, I disagree with many of the reasons advanced for holding those views. I am particularly concerned about the methods of some opponents with hidden agendas, in the guise of good citizenship, that seek to instil fear into communities through spreading misinformation and baseless allegations about health effects of wind farms. 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.

Whilst regulatory uncertainties remain at the Commonwealth and State levels, the quantum and pace of new investment across Australia and in New South Wales in particular will be hindered.

Over 7,000 MW3 of announced renewable projects representing a potential investment of up to $15 billion across New South Wales is currently at risk. Securing a reasonable portion of that potential investment would be sufficient to stimulate economic activity widely in rural and remote areas of New South Wales where it is often difficult to attract other industries.

At our recently completed 48 MW Woodlawn Wind Farm near Bungendore in New South Wales we created over 150 direct jobs during the construction phase. Together with the economic activity generated by our nearby 141 MW Capital Wind Farm, we spend over $4 million annually in that local community. This includes payments for land leases, direct wages, contractors, accommodation, hardware, infrastructure upgrades, sponsorships and donations. Many of our landholder hosts see wind energy as an opportunity to diversify their income streams and provide the potential to “drought proof” their farms.

The industry also provides great employment opportunities for apprenticeships and work experience, engineers, planners, developers, operators, contractors and many other roles, diversifying the employment opportunities available to the local community. As the industry grows so too will ancillary benefits and opportunities including the potential to develop local service industries and to manufacture and repair component parts. We have found that it is only after construction of a wind farm begins that the local community truly appreciates how beneficial it can be for the local economy.

Whilst the mandated RET is the ‘stick’ for the expansion of the renewable energy industry in NSW there are also the ‘carrots’ of reduced carbon emissions, regional employment and development opportunities, and importantly also the prospect of more stable electricity prices in the long term.

The wholesale price of electricity is going to increase materially in the coming decade due to factors unrelated to the mandated renewable energy target. The price of coal for thermal generation is rising towards international parity after decades of subsidisation. The price of gas on the East coast of Australia is expected to almost double in the medium term as Queensland LNG developments provide an export market alternative for gas producers. If gas is to be a transitional fuel to a low carbon future, the carbon price and hence the wholesale electricity price must rise dramatically to support this fuel switching.

While it’s true that the capital cost, on a per MW basis, for renewable energy is currently higher than that of a coal fired or gas fired power station, it is also true that there is no carbon or fuel price risk with renewable energy, and in Australia no scarcity of renewable fuel resource. The upfront capital invested in renewable energy can provide a long term hedge against future energy price increases. The deployment of a substantial share of renewable energy across New South Wales has the potential to provide the State’s businesses with a long term and known cost supply of clean energy.

New South Wales has missed out on most of Australia’s renewable energy investment to date, but it has the resources and the capability to secure a substantial share of the future investment opportunities. What’s needed is a clear set of rules from government and regulators, and people prepared to work together to contribute to investment certainty. I believe that government and industry working together can achieve the target national interest outcome for renewable energy deployment in a manner which also generates excellent regional investment and employment outcomes for New South Wales.

Thank you for the opportunity to speak with you today.

[1] Additional peaking capacity was installed to meet increased peak demand

[2] 8-12 ESOO

[3] Page 22 ESOO Executive briefing

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