Emerging Issue: The bipartisan deal on the renewable energy target (RET) to source 33 GWh of renewable generation in 2020 was, at the time, seen as the certainty that the renewable energy industry needed to progress with projects stuck in limbo since the RET review launched by the Abbott government.
However, since the RET deal, progress has been slower than expected bringing new projects to market (notable exceptions include Ararat and Coonooner WFs in Victoria and Hornsdale WF in South Australia, which were all awarded contracts under the ACT wind energy auction) and recent reports(1) point towards a possible large generation certificate (LGC) shortfall as early as 2017. This is further reflected in the LGC price, which has doubled over the last year.
Figure: Weekly LGC Spot Price (based on end of week prices)
Source: Green Energy Markets
Part of the reason for the slow progress has to do with the seeming reluctance of tier-1 retailers to sign new long-term power purchase agreements (PPAs) for wind farm developments, which is a key requirement for these projects to reach financial close. This raises the question: “Why, given a significant shortfall penalty per LGC (approx. $93/MWh), are retailers not securing their long-term LGC supply by signing new PPAs?”
Focusing on Origin and AGL, they seemingly have different reasons for not contracting PPAs at this point in time.
Origin’s $25 billion bet on LNG through its Gladstone project has effectively linked its future revenue to the oil price. As the price of oil has dropped significantly over the last year, coupled with their investments in capital intensive LNG projects, Origin would be assumed to be a bit credit-strapped at the moment. Consequently, they are likely acquiring LGCs in the spot market to meet its obligations rather than signing long-term PPAs.
As for AGL, they seem more concerned about generation overcapacity, a perceived risk of large-scale customers switching retailer and the lack of regulatory certainty for long-term commitments. The overcapacity issue may be linked to AGL’s recent investments in fossil fuel fired generation, where the introduction of more renewable generation would effectively reduce the profitability of those investments.
As for the lack of regulatory certainty, there is an argument that the lack of a post-2020 target and the fact that current RET incentives dry up by 2030, makes long-term investments more risky. Retailers may be waiting for the outcome of the Paris climate negotiations (and possibly the next federal election) to receive greater policy certainty. Given the track record of Australian governments in reviewing, redefining and axing policies in this space, it is understandable that the policy outlook still may be seen as uncertain.
In addition to the above points, retailers may currently not see sufficient need to acquire PPAs. This may have to do with retailers being comfortable that they can acquire LGCs as required in the wholesale market, and accepting the associated price risk of not securing long-term offtake contracts.
In order to meet the RET, this may require a number of wind farms to go ahead as merchant projects, which is increasingly common internationally and is predominantly an option for larger wind farm developers with the required balance sheets to enter into ‘synthetic PPAs’ or other hedging arrangements. Alternative routes for securing PPAs, such as the second round of the ACT auction, would also be an attractive option for wind farm developers.
Whatever the case may be for the current impasse, it is clear that this situation will impact future renewable energy investments, and MHC will continue to monitor developments going forward to assess the impact on Australia’s renewable energy industry.
