Going once, going twice… sold to the ACT

The ACT has gone back to the market to top up its renewable offsets. As the population and its energy use grows, new contracts were required to keep up with its much-vaunted 100% renewables policy. The ACT has managed to prove this blog wrong (probably not that difficult a feat but even so…) as our prediction that Neoen would have to find a commercial offtaker for its giant South Australian renewables project has already been invalidated – at least in part – by its success in getting a 100MW tranche of Goyder underwritten by the ACT. The other successful project is GPG for Stage 2 of Berrybank wind farm in Victoria. Both companies are overseas developers that have previously been successful in ACT auctions: Neoen for Hornsdale wind farm stages 1-3 and GPG for Crookwell wind farm. The prices ae significantly lower than the ACT’s previous auctions: $44.97/MWh for Goyder and $54.48/MWh for Berrybank, compared to $77-97/MWh for the previous auctions.

The auctions always include some kind of local content rider to ensure there is some direct investment into the ACT even when the generator is built elsewhere. This time there is a requirement that each of the winners build a battery in the ACT at least 10MW/20MWh in size. There is no feed-in tariff for the battery – the proponents have to strike other commercial deals or make money arbitraging FCAs and energy markets. There is no obvious rationale for this battery requirement, expect that the ACT government has seen other jurisdictions with big batteries and thought “we want some of those”.

As a reminder to how the ACT policy works: the ACT committed some years ago to “100 per cent renewable energy” by 2020. As the ACT is plugged into the NEM within the NSW region, in practice it has no say on where the electrons come in and the territory does not have the space to become self-sufficient in electricity in any case (although some of the target is met from rooftop PV and some mid-sized solar farms in the ACT). So, most of its electricity still comes from NSW’s fleet of coal plants. What it can do is write fixed price contracts with renewables generators around the NEM for an amount equal to the territory’s annual electricity use and then voluntary surrender the RECs from those projects in order to show that it has brought on renewables that would not otherwise have entered the market.

The policy is popular among ACT voters – the government that set it up was re-elected, and the opposition is on board. There is a cost – the local distribution network picks up the tab for the contracts and passes it on through network tariffs. Technically, the fixed price works as a “contract for difference” – the ACT agrees to pay the contracted generator the difference between the spot price they receive for their power and the fixed contracts price. If the spot price is higher than the fixed price, the generator has to pay the ACT the difference. So in Q1 2019, the ACT actually made money on the deal.

The ACT government argues that this feature means that it has basically hedged away some of the volatility of wholesale prices on behalf of the electricity users in the territory and that because the strike prices are fixed in nominal terms, the deals will get cheaper in real terms over time as inflation erodes the value of the contract (there is a potential sting in the tail – the generators can opt out of the contract if it’s no longer a good deal for them).

The hedge is not a very precise one though. First, ACT users pay wholesale prices based off NSW prices (and which their retailer hedges annually anyway) while most of the contracted generation is in South Australia or Victoria, including the winners of the new auctions. Secondly, most variable renewable generators tend to earn less than the average spot price because their output coincides with other similar plant in the region. In the most recent quarter, this discount for the ACT contracted generators was between $5-13/MWh depending on the plant. ACT customers have to make up this difference. A review of the previous auction by Jacobs advised that there was merit in instead linking the fixed price contract to the NSW spot price, regardless of where the generator was located as a way of better hedging ACT users’ energy costs. It doesn’t look like the government decided to do this, given the low auction prices achieved.

Another point made by Jacobs was that the ACT government should be mindful of the risks of concentration of contracts among the same proponents or the same region. Again, this does not seem to have factored into the decisions with Neoen wind farms in South Australia already representing over half the existing contracts (by output) and GPG also being a previous winner. But in the light of the low prices achieved, that consideration may have been secondary.

The total paid for 2019/20 was $72.6m plus the costs of the rooftop PV feed-in tariff. The ACT’s jurisdictional regulator, the ICRC, has allowed $23.63/MWh in its regulated retail price. At an average household consumption level for the ACT of 6.5MWh/year, that’s around $154/year.