Momentum beyond the Renewable Energy Target (RET)
Earlier this year, the Clean Energy Regulator announced that there were enough projects at a sufficiently advanced stage to meet the large-scale RET by 2020.
This is not surprising given that the Clean Energy Council says that 16 renewable energy projects with a generating capacity of 700 MW were completed in 2017 and that by the end of 2017, there were a further 34 projects with a capacity of 2563 MW under construction.
Many are questioning though, whether this momentum in the renewables sector can and will continue beyond the RET, under some version of the National Energy Guarantee (NEG).
While the business sector seems to have united around the NEG as the best option still on the table for much needed certainty around national climate and energy policy, the debate continues to rage on the following questions (amongst many many more):
- should we have some special scheme to underwrite the carbon and investment risk of investing in new coal-fired power stations, to offset the intermittency of wind and solar?
- is the emissions guarantee sufficiently ambitious (it being set to achieve the electricity sector's pro-rata share of Australia's 26% emission reduction Paris commitment)?
- is the emissions target being locked in for too long, tying the hands of a future government with more ambitious emission reductions goals (or even where it becomes clear that electricity sector emissions reductions have to do more of the heavy lifting as other emitting sectors lag in their emission reduction efforts)?
- can the reliability guarantee adequately deal with the closure of coal-fired power plants, even with the proposed three years' notice?
- is the (supposedly technology neutral) NEG too tough on coal?
- should we try re-nationalising AGL's Liddell Power Station in New South Wales (NSW) and keep it running for longer?
- should the Federal Government establish a multi-billion dollar fund to inject equity into new coal-fired power plants?
- should States with less ambitious renewable energy targets "free ride" on the back of other State's efforts?
- should the Australian Government adopt the ACCC recommendation to enter into offtake agreements for new power supply?
We suspect that these questions will be dealt with in time for an agreement or compromise to be reached at the COAG Energy Council meeting in August 2018 but the current uncertainty around policy settings is causing some energy project proponents to sit on their hands.
Notwithstanding this, we are seeing many other signs of momentum towards renewable energy.
- Power purchase agreements (PPAs)
PPAs are long-term contracts under which a business agrees to purchase electricity directly from an energy generator rather than the traditional model of buying energy from licenced electricity suppliers. They provide financial certainty for renewable energy project developers and often underwrite the finance for the development and construction of new projects.
Government bodies and universities
To date, the predominant source of PPAs for project developers has been state and territory governments and their energy utilities, together with 'gen-tailers' and retailers such as Origin Energy, AGL, and Energy Australia.
State governments in both Queensland (through its earlier Solar 150 tender and the more recent 400MW Renewables 400 program) and Victoria (through its 650MW Renewable Energy Auction Scheme) have set in train reverse auctions to secure long-term supply arrangements, with the results of those most recent auctions not yet known.
Locally, a deal was recently done in the Queensland local government sector by with the 15MW Sunshine Coast (Valdora) Solar Farm. It is expected that more local governments will seek to rearrange their supply needs in this way.
The university sector is also taking a lead. For example, the University of NSW (UNSW) has signed a contract to purchase a large part of the power from the Sunraysia Solar Farm, currently being developed by China's Maoneng in southern NSW. The 15-year PPA will cover 100% of the university's electricity demand, totalling 124,000 MWh per annum. The PPA was signed between the UNSW, Maoneng and utility Origin Energy – with the latter agreeing to a three-year "firming contract", which will ensure electricity supply to the university if the solar output falls short. The firming supply contract is three years in duration and is thought to be the first of its kind.
More recently, the University of Queensland (UQ) and Terrain Solar have won their final development approval for a 64 MW solar farm near Warwick in southern Queensland. This project will be able to generate 154,000 MWh of energy, more than enough to offset 100% of UQ's current and prospective electricity needs.
In the meantime, McCullough Robertson is seeing a growing trend towards so-called 'corporate PPA's'.
Although corporate PPA's are very common in other international jurisdictions, Telstra kicked things off from an Australian market perspective in 2017 when they entered into a PPA with the 68 MW Emerald solar farm owned by RES and Lighthouse Solar. This was followed up in late 2017 by Telstra's participation in a consortium with Coca Cola Amatil, ANZ and the University of Melbourne covering the 226 MW first stage of the Murra Warra Wind Farm near Horsham in western Victoria.
Since then, McCullough Robertson assisted BayWa r.e. in early 2018 to enter into a 12 year PPA with brewer CUB for 74,000 MWh sourced from BayWa's Mildura solar farm, currently under construction. CUB (through its global parent ABInbev) has the stated goal of sourcing 100% of its power internationally from renewable sources.
Elsewhere in the consumer goods sector, confectionery company Mars Group very recently contracted for energy through the Kiamal solar farm under construction in Victoria, to match the electricity requirements of its six Australian factories and two sales offices. The Mars PPA also involved a "firming contract" brokered by TFC Green.
Unilever then followed by announcing last month that it would be moving to 100% renewable energy by 2020. No specifics are available but this commitment is likely to be met by securing PPAs.
Finally, a very recent deal was for a "long term" PPA between Wirsol Energy's 85 MW Clermont Solar Farm in central Queensland with SIMEC ZEN Energy (the Australian energy arm of Sanjeev Gupta's GFG Alliance) for the majority of the plant's output. The deal with Wirsol also included a PPA for their 110 MW Wemen solar farm in Victoria.
One other announcement made during June 2018 by the South Australian Chamber of Mines and Energy (SACOME) is worthy of some attention. Off the back of soaring energy costs and supply reliability concerns in South Australia, SACOME coordinated a bulk-buying consortium of its members which ultimately contracted with SIMEC Zen Energy (also part of Sanjeev Gupta's GFG Alliance) to enter into an eight year supply contract. By collaborating, electricity supply was able to be secured for the members at a greater reduced cost than they would have otherwise achieved through standard market tender.
This joint purchase or bulk-buying consortium is a significant development and could be used to enable particular groups of customers to access and secure power purchase arrangements that otherwise would not be available individually.
We expect to see more of these joint purchasing arrangements in the near future and expect that they will particularly be of interest to electricity customers who might be co-located. For example, mine sites and other industrial or heavy energy users.
- Miner's friend or foe
Last year we wrote about some of the interesting developments in the take-up of renewable energy by the resources sector ( click here to read: Is renewable energy a miner's friend?).
We wrote of Sun Metals' decision to take hold of their zinc refinery's power supply (and price) destiny by installing their own 124MW solar farm outside of Townsville. That ambition is now becoming reality as their huge co-located solar farm recently commenced generating power for the refinery.
South32 has also announced its decision to install a 3 MW solar farm, integrated with their existing EDL-operated gas fired power plant at the Cannington Mine south east of Mount Isa in north west Queensland. It will generate electricity to supply the mine's accommodation village and airport, with the surplus power supporting the mining and processing operations at Cannington. The project will be delivered by Sydney-based SunShift which specialises in modular, movable solar plants. South32 say that renewable costs have reduced significantly, so while the Cannington initiative is in line with their commitment to the environment, they say it also makes economic sense. With the cost to install and operate the solar farm to be offset by lower fuel costs, the approach is an economically viable solution for the operation.
SunSHIFT is also working with New Century Resources to supply power for the reopening of the Century mine in north west Queensland in conjunction with the existing grid connection. The initial solar facility will offset approximately 70,000 litres of diesel per annum, reducing both operating costs and the site's environmental impact.
Image Resources has announced its plans to invest in a 3-4 MW solar farm near its Boonanarring mineral sands mine and processing plant north of Perth which, following construction, will deliver around 25% of the facility's electricity needs. The solar plant will be built, owned and operated by Perth-based renewable energy company Sunrise Energy.
Our final example of the resource sector's embrace of renewables are the initiatives of Oz Minerals to collaborate with Aurora Solar on a transmission line which will service both Aurora's 150 MW solar thermal (plus battery) project near Port Augusta in South Australia, as well as Oz Mineral's Prominent Hill Mine in South Australia. In addition to that collaboration, Oz Minerals has announced plans to build a solar and battery storage facility at the Prominent Hill Mine and has said it will look at further investments in renewables to support other big projects in the region.
In our overview of mining and renewables last year, we identified that government support through ARENA grants and CEFC finance would have a role to play in supporting these investment decisions. Unlike those earlier solar projects in the mining sector though, there has been no involvement from ARENA and CEFC finance in any of these subsequent projects, and a small grant only from the South Australian Government for the Prominent Hill solar plant.
The take-out here is that renewables projects in the resource sector are making economic and environmental sense without subsidies, reflecting the dramatic reduction in costs.
Here at McCullough Robertson we believe that the next big trend to watch out for is for some of the large global diversified resource companies to pursue their own emissions reduction and sustainability objectives through PPAs with renewable energy projects including joint purchasing or bulk buying syndicates or customer groups as identified above. We expect firming contracts to feature as a bolt-on.
- A Closer Look at Queensland
The Queensland Government is standing by its 50% renewables target in the face of considerable scepticism.
Beyond the 400MW reverse auction commenced in 2017 but yet to progress to the short-listing stage, there are some limited levers that it can pull. The Queensland Government also announced in 2017 its plan to establish a third government-owned generation company, dubbed CleanCo, in addition to its two existing government owned generation companies. During the 2017 election campaign, it was announced that CleanCo would deliver 1000 MW of new renewable energy generation by 2025. To date more details of how CleanCo will operate have yet to be revealed.
In another of its 2017 election commitments, the Queensland Government recently confirmed that budget funding of $50 million would be available in 2018-2019 to support the development of concentrated solar thermal with storage projects "to provide clean base load power". We expect this grant will go to CleanCo, although we are aware of private sector proponents looking into the feasibility of solar thermal in Queensland. We are also aware of a number of Queensland projects with development approvals in place but who require PPAs (either to secure funding or as a pre-condition to funding drawdown) in order to proceed to construction. Many of those developers are no doubt hopeful that CleanCo may yet come to the party.
The list of Queensland projects is impressive, to say the least.
On our reckoning, Queensland will have 16 operating solar farms with generating capacity of over 1400 MW by the end of 2018. All but two of those have PPAs in place.
2019 is expected to see Queensland's first wind farms in operation, with Mount Emerald in far north Queensland and possibly Cooper's Gap near Kingaroy. Together they will add over 600 MW of generating capacity.
A further six solar farms that are under construction are expected to come on line in 2019, four of those having PPAs and two opting to be merchant operations. In addition, stage one of the Kennedy Energy Park wind/solar/battery project (with a PPA) is likely to commence operations.
We know of five other solar projects that say they will commence construction before the end of 2018. Two have PPAs.
There is also over 1000 MW of wind farm capacity that has planning approval but no evidence yet of PPAs or a construction start date.
Pulling up the rear, we count 14 solar projects with planning approvals but no PPAs or date to commence construction and another eight still seeking their approvals.
What we have also observed is that at least half of these projects yet to move into construction say their projects will be "battery ready".
The future is bright
Irrespective of the NEG outcome and the Queensland Government's targets, it is clear that the renewable energy sector continues to evolve and perhaps even faster than the Federal Government's policy settings.
We have previously highlighted the opportunities for the resources sector with the take-up of renewables and are observing these opportunities be pursued by not just the resources sector, but also other heavy energy users as economically viable commercial options.
The rise of PPA's is a trend that we see altering the Australian energy landscape in the near future. Beyond government bodies and the education sector, we expect corporate PPAs to continue to be embraced and particularly, with groups of electricity customers seeking to control their own energy security and cost destiny by entering into joint purchasing agreements.
Over the balance of 2018, here are some action points that we suggest you look out for:
- short-listing of bidders into the Queensland and Victorian reverse auction processes, and possibly some decisions on successful bids
- more detail on how the new third Queensland Government-owned power generator ('CleanCo') is going to operate and where it is going to focus
- a workable compromise agreement on the NEG at the COAG Energy Council
- more corporate PPA deals, particularly in the consumer goods and university sectors
- more resource sector operations building renewable energy into their energy supply mix
- a resources major or two going to the market for a series of renewable energy PPAs to satisfy their medium-term greenhouse gas emission reduction targets, and
- an acceleration in the offering of derivative products that enable the sale of renewable generation in the forward contract market by firming it with dispatchable generation.
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