Australia’s prolonged renewable energy policy uncertainty, and the effect this has had on the sector’s ability to secure long-term power off-take agreements, is holding back a “mountain of global cash” looking for investments, a new report has found.
The report, Ernst and Young’s latest Renewable Energy Country Attractiveness Indices (RECAI), released today, notes that Australia’s renewables sector currently faces the task of developing around 5GW to 6GW to meet the 33,000GWh RET.
Ironically, this race to meet the modest 2020 renewable energy target after “many months of uncertainty” and “little progress” during 2014-15, has had the overall effect of boosting Australia’s investment attractiveness to number 10 in the EY 2016 ranking, up from 13th spot in September 2015 – although still well below the #4 position Australia achieved in 2013, just before Tony Abbott’s Coalition burst onto the political scene.
But the report stresses that while state government schemes – such as the ACT’s highly successful large-scale renewables auctions – and corporate off-take potential have helped drive new optimism, few long-term “bankable” power purchase agreements have come to market.
The report points to a number of factors behind this PPA roadblock, including prolonged policy uncertainty, price slumps in Large-scale Generation Certificates (LGCs), vertical integration and the short tenor of the retailers’ own commercial and industrial customers, that have led to few long-term PPAs being signed with third-party developers.
Overall, it notes, “with declining time before the RET ends in 2030, the case for long-term PPAs for 15 years or more appears increasingly difficult without long-term policy certainty.
“Ultimately, more far-reaching energy policy measures will be critical to take Australia’s renewable sector beyond recovery and into long-term growth.”
As far as the Turnbull government is concerned, last week’s federal budget and the official commencement this week of a federal election campaign, have offered few signs that this is on the agenda. The policies of federal Labor look a little more hopeful.
While the sector waits for political leadership, EY Oceania Power & Utilities Leader Matt Rennie says the “mismatch” between the 3-5 year PPA terms being offered and the 15 year terms that developers can bank, is holding back a “mountain of global cash” looking for alternative energy infrastructure investments.
“It is difficult to comprehend the sheer volume of global pension fund money that needs to be invested in energy infrastructure, and particularly non-conventional energy,” says Rennie.
“The market is extremely competitive because of pressure to deploy capital and limited opportunities globally. We’ve seen this in the results of renewable energy tenders in Mexico, India and Dubai over the past few months, with prices of between US$29/MWh and US$40/MWh respectively for solar projects, and rising multiples for renewable assets globally.
Rennie says this level of investor appetite puts Australian energy retailers in the box seat – and the report points to the March 2016 signing of a 15-year PPA by major retailer Origin Energy for the 56MW Moree Solar Farm, as a landmark deal that could work to spur more long-term contracts.
Additionally various state government-related procurement initiatives have provided liquidity in PPAs, and an Australian corporate PPA market looks likely to develop in the footsteps of similar markets in the US and Europe.
“The race to meet the current RET is now driving deals, but ultimately longer-term policy certainty will be required to drive long-term growth in the renewable energy in Australia, and that is what the sector will be looking for following the upcoming Federal election, regardless of who is in power.”
Globally, the report notes that renewable energy deals accounted for 50 per cent of transaction volume in the power and utilities sector globally in 2015, generating $US68 billion – led by the top three ranked investment countries: United States, China and India (same as 2015).
In his editorial for the report, EY’s head of global power and utilities corporate finance, Ben Warren said the global shift to renewable energy had now moved beyond decarbonisation to being “quite simply, what makes most sense.”
As such, Warren added, “we are now in an era where policymakers and regulators must shift their focus on market access and fair play; where technology improvements and costs curves will lead to a level of renewables deployment not even imagined; where developers and independent power producers become energy services companies and value chains and business models are stretched; and, finally, where a rethink is necessary in the way capital flows around the globe.
“However, …the ability to climb the index — or remain in it at all — will depend on both industry and policymakers delivering results, not just promises,” Warren said.
“Tendered capacity must be converted into assets in the ground, and commercial viability must enable supply and demand to interact freely in the market.
“(And) there are still those that need to get with the program — some utilities are, sometimes with the help of their regulators, trying to hold back the tide. Instead, they need to start swimming, or they will struggle to stay afloat.
“After all, with 195 countries globally, renewable energy attractiveness will always be relative now that the fundamentals of security, sustainability and affordability rule the day.
“We have reached the final frontier, and there is nowhere to hide for those markets or companies who don’t deliver — developers and investors will simply go elsewhere.”