Investment trends in renewable energy in Australia

Energy Alert

  • Thomas Zhong

Australia's ability to achieve its renewable energy target has been hampered in recent years by excess supply and falling demand in the wholesale electricity market and political uncertainty regarding incentives for renewable generation. However, positive signs are emerging from businesses and government who are determined to remove the investment impasse with innovative investment vehicles and greater certainty regarding investment incentives.

Market trends

For five consecutive years to June 2014, the overall demand for electricity in the National Electricity Market (NEM) has declined. This can be attributed to the slowdown in industrial demand, the reduced energy use by price-conscious consumers, the increased adoption of energy-efficient technologies and the continuing popularity of residential solar panels despite the reduction in the feed-in tariff levels. 

However, the demand for renewable energy shows a more positive trend. This is largely in response to the Australian Government’s implementation of the 33,000 GWh Large-Scale Renewable Energy Target (RET) by legislation passed in June 2015. The bipartisan support for the revised target is viewed as alleviating the political risk historically inherent in the Australian renewable energy industry. To meet the RET, Australia requires approximately 6000 MW of new renewable energy capacity to be constructed by 2020. 

In addition to the RET, the Small Scale Renewable Energy Scheme will continue unchanged and the Australian Energy Market Operator (AEMO) forecasts that solar installations will more than triple by 2025, equating to 21% of total generation and 7.5% of total electricity supply in the NEM1. This will further contribute to the likely fall in electricity demand from the wholesale electricity markets by consumers. 

The contrast between the fall in overall wholesale electricity demand and the need for additional renewable energy capacity has led to a cautious market sentiment for investors and developers of large-scale renewable energy projects. Even with a strong large-scale generation certificate (LGC) price of A$80 (January 2016) and the overarching political support under the RET, the expected positive investment response has not eventuated. Electricity retailers have been hesitant to enter into long-term off-take agreements due to the inherent oversupply in the wholesale electricity market, an uncertain demand risk and a lack of revenue certainty beyond 2020. 

The large-scale projects that were successfully funded in 2015 were primarily onshore wind and solar PV projects. The ongoing development of those technologies has resulted in levelised costs of electricity (LCOE) which are now competitive with traditional fossil-fuel generators. 

The Australian Power Generation Technology Report (November 2015) concludes that wind power is the lowest cost renewable technology currently available – with a LCOE of ~A$100/MWh (comparable to integrated gasification combined cycle coal plants)2  and forecasts that in the next 15 years to 2030, the capital costs for solar PV plants will reduce by 35-50%. 

Trends in incentivising renewables investment

As it stands, the energy market continues to meet generation liabilities with previously banked certificates. However, if insufficient capacity is generated, this will increase demand - placing upward price pressures on the existing certificates. Therefore, with the increasing urgency to meet the RET, governments and businesses alike are taking matters into their own hands – seeking to break the impasse in the cautious investment market. 

This is being done in a number of different ways - by government investment vehicles, investment by large generators and retailers and by an innovative agglomerated purchasing vehicle. 

  • In March 2016 the Australian Government established the $1 billion Clean Energy Innovation Fund3, which is to be managed by Clean Energy Finance Corporation (CEFC) and the Australian Renewable Energy Agency (ARENA). The Fund will provide debt and equity for clean energy4 technologies and projects and will be subject to a target rate of return and risk level to be prescribed by the Government. Whilst ARENA will continue to manage its existing portfolio and deliver its current solar round, the Fund marks a shift in ARENA's role from grant based to a debt / equity funder. The Fund is due to commence on 1 July 2016. 
  • In April 2016 CEFC and Palisade Investment Partners announced a strategy with an objective of accelerating the delivery of $1 billion in Australian renewable energy projects. The strategy involves funds managed by Palisade and is aimed at obtaining institutional investment in renewable energy at an earlier stage of project development. CEFC will work with Palisade to target projects and build a portfolio of renewable projects. CEFC is contributing an initial $100 million in equity and Palisade $400 million in equity through its managed funds and its clients (these clients including VicSuper and Qantas Super).
  • In February 2016, AGL Energy established an investment vehicle, the Powering Australian Renewables Fund (PAR Fund) to entice investors to contribute to a pool of ~$2-3 billion for investment in large scale renewable projects. AGL has committed to invest $200 million and it will seek partners to contribute $400 to $700 million equity. It is anticipated that the PAR Fund will assist AGL to meet its legislated obligations under the RET by bringing approximately 1,000MW of renewable energy capacity online. The PAR Fund will provide power purchase agreements for 5 - 10 years, providing a level of certainty required for investors in otherwise tentative market conditions (although commentators have questioned whether 10 years is sufficient). At the same time AGL announced it was investing in a US based solar and battery storage developer.  
  • Also in February 2016, Origin Energy notified the market of their intent to assist in pushing additional renewable energy projects through the pipeline in order to meet their respective RET. Key to their ambitions will be the commissioning of the Darling Downs 200MW Solar PV plant in Queensland in respect of which Origin has sought funding from ARENA. And in March 2016, Origin signed its first contract to buy electricity from a large scale project, committing to a 15 year off take from the $164 million Moree Solar Farm which was completed last year. 
  • The Melbourne Renewable Energy Project comprises a consortium of businesses, universities, cultural institutions and local councils5 led by Melbourne City Council who seek to drive investment in renewable energy by committing to the group or joint purchase of 120GWh per annum of energy from a new utility scale renewable energy system connected to the NEM. The consortium's intention is to generate 25% of Melbourne's electricity from renewable energy by 2018 with the objective of becoming carbon neutral by 2020. The Melbourne Renewable Energy Project is offering a 10 year (+ 3 year extension) fixed price power purchase agreement backed by a retail service agreement. The energy will be provided by one facility (or conceivably a combination of different systems) and may be developed by a single retailer (provided it is also a generator) or by a consortium including a retailer and developer / contractor. This model both recognises the inherent limitations in on-site renewable generation and seeks to justify the investment of participants by combining energy requirements. The tender for the project was released in April of this year. 
These recent market signals demonstrate that businesses and governments alike are aware of the investment impasse. Factoring in project build times of 14 to 24 months, it is clear that significant financing will need to be unlocked in the short term to enable the construction of the ~6,000MW of renewable energy capacity and meet the RET deadline by 2020. 

Impacts on the NEM from higher levels of intermittent generation 

An important issue for increased wind and solar penetration is the ability of the grid to remain in a secure operating state with high levels of intermittent generation. South Australia is an important test bed as it has some of the highest levels of wind and solar generation relative to electricity demand of any region in the world6. Specifically, in 2014/15, wind accounted for 37%, and solar PV installations generated 7%, of South Australia's requirements7

A recent report identified potential challenges for management of the South Australian power system during the loss of the Heywood Interconnector link to Victoria which results in South Australia being islanded from the remainder of the national grid8. In consequence, AEMO is developing internal procedures to manage those periods9

Another issue arising from increased wind and solar penetration is volatility arising from commercial decisions made by non-scheduled generators. Generators with a rating of less than 30MW can be registered as a non-scheduled10, such that they are not required to submit dispatch offers11. GDF Suez has proposed a rule change under which some or all of the generators with a nameplate rating below 30MW would become scheduled generators, soft scheduled generators, or be subject to a proxy bid process in order, it is claimed, to 'alleviate inaccurate and inefficient dispatch outcomes by providing more accurate information … of when non-scheduled generation is likely to run'12. This proposed rule change could have a significant impact on the operation of the wholesale market and may also impact AEMO's ability to maintain the security of the power system13

What can DLA Piper do for you? 

We advise across the range of stakeholders in the renewable energy sector in the Asia Pacific region - including sponsors, lenders, contractors and funds. We are currently representing the CEFC, ARENA and various sponsors, contractors and operators. Our current and recent transactions includes wind, solar, hydro, biofuels and biomass projects. As a result of this broad experience, our understanding of the sector is informed by international best practice and current market knowledge.

1 AEMO, National Electricity Forecasting Report 2016, dynamic forecasting interface

2 The report is generated based on key financial assumptions: inflation of 2.5% p.a., percentage debt of 70%, asset life of 20 years for wind etc. For the full list of financial assumptions, see Table E1 of the Australian Power Generation Technology Report.

3 The fund will make $100 million per year available for 10 years

4 That is, renewable, energy efficiency and low emissions technologies

5 Including Zoos Victoria, Moreland City Council, NAB, Melbourne University, Australia Post and City of Port Phillip

6 AEMO, ElectraNet Joint Report - Update to Renewable Energy Integration in South Australia, page 8.   

7 AER , State of the Energy Market 2014/15, pages 29 and 30.

8 AEMO, ElectraNet Joint Report - Update to Renewable Energy Integration in South Australia, page 1.

9 AEMO, ElectraNet Joint Report - Update to Renewable Energy Integration in South Australia, page 2.   

10 Rule 2.2.3(a).

11 Rule 3.8.2(a).

12 GDF Suez, Rule Change Proposal - Non-Scheduled generation in central dispatch, 24 December 2015, page 4.

13 GDF Suez, Rule Change Proposal - Non-Scheduled generation in central dispatch, 24 December 2015, page 2.