How long can Australia sustain world record renewables pace?
Since 2017 renewables investment in Australia has defied gravity. For three years Australia sustained a world-record rate of per-capita renewables deployment, delivering the large-scale Renewable Energy Target (RET) a year ahead of schedule.
The investment tsunami has defied sagging wholesale electricity prices, the emerging twilight of the national renewables’ subsidy scheme and a dip in energy demand from a global pandemic. But how long can this investment continue?
Keeping renewables build rates going will require more government intervention and underwriting and more non-commercial offtake deals from corporate backers prepared to pay a premium for the combination of a stable long-term price for (some of) their energy and warm glow that comes from supporting green electricity. How long this continues is now outside the realm of market signals and conventional investments and returns.
Australia’s governments have become so invested in the gold-rush of a beyond-market renewable build rate, that it has become too big to fail.
The critical pipeline of new projects approaching and reaching financial close has slowed since December 2020. Even projects with a significant share of their offtake contracted appear to be struggling to make financial close, as wholesale prices show few signs of recovering.
In the six months to April 2021 only two projects worth a total of 134MW have crossed the “finish” line to financial close. Earlier this month two more solar farms appear to have reached financial close, both owned by Lightsource BP Australia, bringing the total to 455MW for the half year.
If that rate of close was to continue until the end of 2021 it would be around 910MW – one third of the 2700MW delivered in 2020 and even further behind the boom years since 2017.
NEM VWA quarterly wholesale prices, by state 2016-21
The 550MW Stage 1 of the massive 1.2GW Macintyre wind farm also appears close to financial close with the investment of Korea Zinc and the government backing of CleanCo for 400MW of supply. The Queensland Government is scaling up a parallel renewables generation system while still running its 20th century coal based one.
Queensland Government owned Stanwell Corporation has signed a contract for 350MW of the 450MW Clarke Creek wind farm, so it’s reasonable to expect that deal may also close in 2021.
In total there is around 3.7GW of “probable” advanced projects trying to get to financial close. But that has been made harder by weakening commercial conditions: generation oversupply, low wholesale prices, the RET subsidy ending by 2030, LGC prices gradually easing, and weak spot prices for renewables in the absence of large-scale storage to soak up oversupply.
Commercial players have effectively abandoned the new renewables market. The spot value of the electricity from renewables projects is trending well below $50MWh, as shown in the table below. These prices are almost certainly below the cost of supply. Governments and some non-energy corporates are still willing to pay the premium needed to cover developers’ costs in exchange for political value or brand value: managing the growing expectations of investors and shareholders.
VWA spot prices for wind and solar, by month April 2020-21
|NSW1 Large Solar ($/MWh)||NSW1 Wind (MWh)||QLD1 Large Solar ($/MWh)||QLD1 Wind ($/MWh)||SA1 Large Solar ($/MWh)||SA1 Wind ($/MWh)||VIC1 Large Solar ($/MWh)||VIC1 Wind ($/MWh)|
Source: NEM Review
Corporate PPA’s are still around for some of the 3700MW of projects considered “probable”, , but there may be a limit to how much risk listed businesses are willing to take.
Outside the rails run of government contracts, things are getting a bit tougher:
- The 1500MW Forest wind farm proposed for Queensland is now on delay after its approvals were fast-tracked by the Queensland Government. The reason given is the lack of face-to-face meetings during COVID-19.
- The proposed 280MW Cultana solar farm and battery in South Australia has been shelved by embattled GFG Alliance, which will now sell the rights to the projects. These projects may have good prospects, given GFG’s partner Zen Energy secured a 10 year supply contract with the SA Government in December last year.
- Tilt Renewables is still trying to close its 400MW Rye Park wind farm in NSW even though it already has around half of the offtake contracted by gold miners Newcrest.
- Neoen’s massive 400MW Goyder south wind farm and battery in South Australia may benefit from the approval of the $2.3 billion EnergyConnect transmission line to NSW, although its real value will depend on other renewables investments and closures in NSW. The project, still yet to reach financial close, has already contracted a 100MW PPA with the ACT government.
- The 300MW Rodds Bay solar farm in Queensland was approved in 2018 but appears to have stalled.
There is plenty more government money to come: the Queensland Government has just announced an upgrade to renewables investment from $500 million to $2 billion. the NSW Infrastructure Roadmap hasn’t really kicked in yet and the Victorian Government is dialling up its second round VRET2, even though VRET 1 has only delivered half its six projects in the four years since the auction. The troubles of the other three indicate that money isn’t everything: developers also have to work with AEMO to agree the terms of connecting to the grid. If their project is located in a weak corner of the grid, this can be hard going.
It’s too big to fail. The winners are those who can get on the government and corporate cash going around. The losers are everyone else who simply rely on the market to get a project across the line. That ship sailed a long time ago.
When too much pumped hydro is barely enough
While all eyes are on the Federal government’s flagship Snowy 2.0, up in Queensland, several potential developments are lining up to join CleanCo’s existing pumped hydro energy storage (PHES) plant at Wivenhoe. Subscribers can read our backgrounder on this plant and its changing use case here.
First off the blocks is Genex Power’s 250MW Kidston project, repurposing an old gold mine into a PHES facility. Genex have already built a 50MW solar facility at the site and are considering future wind and more solar investments there. The Kidston project reached financial close in May this year.
Alongside it is the “Big T” at Toowoomba, utilising the existing dam at Lake Cressbrook as its lower pondage. Energy developer BE Power is partnering with power turbine giant GE to develop the project which is targeting 2024 for commissioning.
While at an earlier stage of development, the third project dwarfs the other three in scale. Borumba, based at another existing dam, will be subject to a feasibility study by the Queensland government over the next couple of years. Its maximum power rating could be four times that of Kidston and it is expected to be able to run for up to 24 hours at maximum rate, allowing it to deliver more than twice the energy of the other three projects combined. The projects are summarised in the table below:
Queensland PHES project status
|Project||Location||Proponent||Capacity (MW)||Status||Duration/ MWh|
|Wivenhoe||Wivenhoe, NE of Brisbane||CleanCo||570||Operating||10 hrs/ 5,700|
|Kidston||Kidston, North QLD||Genex Power||250||Financial close||8 hrs/ 2,000|
|Borumba||Sunshine Coast hinterland||Queensland government||1,000||Feasibility||24 hrs/ 24,000|
|Big T||Toowoomba||BE Power||400||Development||10 hrs/ 4,000|
With Queensland set to quadruple its existing PHES capacity, there must be strong signals in the wholesale market for this type of storage, which relies on highly volatile prices to arbitrage between the cost of pumping and the value of generating, no?
Well not exactly. While prices are temporarily elevated due to the outages at the Callide coal plants, Queensland has been actively keeping wholesale prices low since 2017 when its biggest generator Stanwell was ordered to adjust its market bidding behaviour to put downward pressure on prices. With high rooftop solar penetration Queensland regularly records daytime negative prices in late winter and spring. But is it enough to warrant all this pumped hydro? There are a few pointers to the rather tenuous economics of PHES.
Our analysis of Wivenhoe’s operations since its transfer from CS Energy to CleanCo suggests its spot market revenues would translate to a 1 per cent return on capital if built at today’s PHES costs of around $2m per MW. It may be able to earn some more by selling cap contracts, but not several times more. More pumped hydro capacity would only erode these returns.
The Borumba site has been identified as a suitable location for PHES by the Queensland government since 1983. They opted to build several coal plants instead in the intervening few decades.
As identified by the AFR, Kidston has got over the line thanks to multiple sources of government funding. These include: $56m from ARENA, $610m of cheap money from the Northern Australia infrastructure fund, and Queensland government funding of $147m for the transmission line to connect it into the grid. This doesn’t leave much of the estimated $777m capex cost to be covered by commercial debt or equity. One imagines that the other projects will be predicated on similar levels of government support.
As our article below on the challenges of picking winning technologies notes, PHES is a mature energy technology where there’s no real prospect of the cost plummeting through repeated deployment. While it appears to have a potential future when there’s even more solar and wind online and the coal fleet disappears, this opportunity could be a decade or more away. In the meantime, there’s every chance that batteries will come in and steal much of PHES’s lunch. However, as Queensland’s announcement of a supercharged Renewable Energy and Hydrogen Jobs fund shows, the economics of energy is rapidly decoupling from reality.
Do you believe in rainbow energy?
There’s a brutal reality in modern life: successful technologies make a lot of money. The technologies they beat in the market fall by the wayside: beta format VCRs, Filofaxes, Blackberry mobile phones. The losers are quickly forgotten because the winners take all the chocolates.
In the decarbonising energy world, there was a quaint view a decade ago that a rainbow of clean energy technologies would replace fossil fuels. As it turns out, that’s not true either. Wind and solar PV have been so successful and become so cheap, that other types of renewable generation (wave, solar thermal) have been unable to keep up. Other technologies, like carbon capture and storage, are proven to work, given decades to develop and millions in government support, but like a rec urging nightmare keep running but never make any progress.
But there are still believers in rainbows out there. This was a good week for rainbows. As our article above explains, pumped hydro projects (PHES) are coming thick and fast in Queensland. Solar thermal and storage got a boost from AGL’s announcement that they were considering repowering the Liddell site this way. And the federal government announced more funding for carbon capture and storage (CCS).
It’s easy to work out why the winners win. They share several features. They are modular, which means that key components can be mass-manufactured, and they can be installed in a wide range of locations. They are starting from a low deployment base, which, means as manufactured goods they benefit from Wright’s law. This states that with every doubling of production volume, unit costs fall by 15 -20 per cent due to learning effects and scale economies. So, solar PV panels have seen an 80 per cent fall in unit costs in the last decade, and similar cost reductions are plausibly predicted for batteries and hydrogen electrolysers. The other costs involved in deploying them can also be driven down by repeated deployment, due to the standardise nature of the underlying technology.
None of this applies to the rainbows. PHES is a mature technology, with little scope for large cost reductions of its major components and with site specific challenges to be solved with each project.
Solar thermal has been thoroughly outpaced by its direct competitor for utilising the sun’s power, solar PV. In principle it should have an advantage when combined with storage as it can deliver dispatchable power over a longer period than current Li-ion batteries. We documented some of its challenges in a blog last year, but in summary, it’s clear that capturing this power using mirrors, some kind of heat storage medium (molten salt, water, oil…) and then using the heat to boil water to drive a turbine introduces much complexity that PV panels avoid with their direct conversion to electricity. AGL’s partner, RayGen, has managed to add ammonia to this mix (i.e., it uses water as the heat storage medium and then uses it to boil ammonia to drive the turbine – the ammonia is condensed later and kept in a closed loop, so it doesn’t require a constant supply).
CCS also remains technically complex and a couple of demonstration projects aside, has largely been abandoned as a power plant technology. It’s clear that the logic of CCS requires a carbon price, and a material one at that. One of the only successes in the field, the Petra Nova plant in the US, simply turned off the CCS part of its plant last year, because it couldn’t offload the CO2 to oil companies any more. A technically successful trial at Queensland’s Callide A coal plant was shut down in 2015, because the economics didn’t stack up.
A few oil projects have been using CCS successfully for many years. In these projects the CO2 has economic value as it is used to squeeze more oil out of the well, but obviously this use case is not consistent with a net zero carbon future. The IEA remains convinced that CCS will be necessary to capture industrial emissions, so to the extent public funding is still warranted, it’s probably in this context. Half of the six projects that benefited from a $50m handout by the Federal government this week fall into this category, and all of these also look to build some kind of use case for the CO2 rather than just pipe it somewhere safe underground.
Each of these technologies looks a long way from genuine commercial viability, judging by the proportion of capital funding that governments need to put in. AGL and RayGen are partnering on a solar thermal project at Carwarp in Victoria to which ARENA has contributed $15m of the $27m capital cost. As noted in the article above, Kidston PHES got over the line thanks to three separate streams of government funding.
The trouble is that the success of the stars has created this myth that as long as governments throw enough money at a technology, it will eventually become cost competitive and the “training wheels” of subsidies can come off. That argument has some validity for technologies that are subject to Wright’s law, that have a good chance of breaking out of the fabled “valley of death” for new technologies once they have achieved sufficient volume. But some technologies look wobbly enough to need those training wheels indefinitely.
The 1980s are back in Queensland. While King Wally Lewis led the Maroons to dominate the State of Origin series, the Bejelke-Petersen Government was applying its own unique brand of agrarian socialism. A centrally planned and controlled state economy that racked up billions in debt that still cripples state finances to this day.
Queensland has always been something of a reluctant participant in the National Electricity Market. When it was launched in 1998 successive Queensland Governments retained tight control over existing generation and network assets. There was no hint of privatisation even though it would have provided much needed relief for debt levels tipped to reach $130 billion by 2025.
Faced with the challenge of climate change in a coal-heavy region, the political solution evolved by the Queensland Government is becoming clear: maintain the existing coal-fired system for as long as possible, while building a second parallel renewables grid alongside it.
The resulting over-supply is likely to have an enduring effect on already weak wholesale electricity prices. That means lower electricity prices (political winner). It also means most new investment will need to be underwritten by the state (even more state debt).
In these days of low interest rates that doesn’t seem to bother the Palaszczuk Government. As we observe this week the State is charging ahead with funding for massive new renewables and pumped hydro projects, while adamant it will also rebuild the recently damaged Callide C coal power station.
The Kidston pumped hydro project west of Townsville will go ahead with massive state and federal government funding, one of a growing portfolio of potential pumped hydro projects you can bet that if Kidston needs extensive government support, the others will, too. The market is now nothing more than a dispatch mechanism in that state.
Australia’s export focussed gas industry is trying to navigate domestic political posturing on the emissions from its projects and exports while developing new projects as global energy prices are booming. In the absence of climate policy constraining local emissions, activists are defaulting to the less credible argument of trying to stop emissions at the gas well head and coal mouth. Like a global game of whack a mole where half the world isn’t playing. BHP is lining up the sale of its thermal coal mines as prices set an eight-year record. The price of reputation is measured in millions of dollars.
The campaign to allow modest export constraints on rooftop solar – Australia’s most popular renewables – gained momentum this week with an unlikely coalition of welfare groups, consumer advocates and energy analysts all supporting the AEMC’s proposed rule change.
And the ACT government is stepping up pressure on gas consuming households to switch to electricity, while pushing electricity prices up by around $200 a year to pay for its expensive renewables contracting.
Have a great weekend.
Chart of the week: new renewables
The pipeline of new renewables projects appears to be stumbling. According to the Australian Energy Regulator there is 3.2GW of probable projects trying to make financial close, but since December last year only two projects worth 134MW have achieved it. This suggests progress towards getting new renewables investments is becoming more difficult given sustained over capacity and weak wholesale prices, even weaker spot prices for renewable generators, reducing duration and value of the Renewable Energy Target subsidy and increased network constraints.
The likely antidote to these conditions is even further government intervention with the state government signing up offtake from large projects in Queensland. Non-market corporate PPAs appear to have enabled the financial close of another 330MW of large scale solar in Queensland and NSW. This has not been reported yet by the CER. Another 950MW of wind generation in Queensland appears likely as it has been backed by the state Government.
New probable and committed large scale renewables projects, May 20-Jun 21
Source: CER, Boardroom Energy
Probable projects as at June 2021
|Project Name||State||MW Capacity||Fuel Source|
|Macintyre Wind farm – Stage 1||QLD||540||Wind|
|Clarke Creek Wind Farm Stage 1||QLD||450||Wind|
|Goyder South Wind Farm Stage 1||SA||400||Wind|
|Rye Park Wind Farm||NSW||400||Wind|
|Rodds Bay Solar Farm||QLD||300||Solar|
|Cultana Solar Project||SA||280||Solar|
|Ryan Corner Wind Farm||VIC||218||Wind|
|Blue Grass Solar Farm||QLD||200||Solar|
|Kaban Green Power Hub||QLD||157||Wind|
|Berrybank Wind Farm Stage 2||VIC||110||Wind|
|Carwarp Solar Farm||VIC||100||Solar|
|Lakeland Wind Farm||QLD||100||Wind|
|Hawkesdale Wind Farm||VIC||96.6||Wind|
|West Wyalong Solar Farm||NSW||90||Solar|
|Woolsthorpe Wind Farm||VIC||70||Wind|
|Vales Point Solar Farm||NSW||62||Solar|
|Snowtown North Solar Farm||SA||44||Solar|
|Byford Solar Project||WA||30||Solar|
|Mannum Solar Farm Stage 2||SA||25||Solar|
|Walgett Solar Farm||NSW||25||Solar|
|Planet Ark Power-Schneider Electricity solar||SA||5.7||Solar|
|Kalbarri Microgrid Project||WA||5||Solar|
|Orange Community Renewable Energy Park||NSW||5||Solar|
|SA Water floating PV||SA||5||Solar|
|Byron Bay Solar Farm||NSW||4.99||Solar|
|Manilla Community Solar||NSW||4.5||Solar|