Australia: Where to with renewable energy in Australia

WHO SHOULD READ THIS

  • Current and potential participants in the Australian renewable energy industry.

THINGS YOU NEED TO KNOW

  • The Climate Solutions Package launched to support Australia's 2030 target of achieving a 26-28 per cent emissions reduction and other initiatives.

WHAT YOU NEED TO DO

  • Understand the Climate Solutions Package, as well as the State policies and programs, and what they mean for your operations.

The re-election of the Morrison Government has had supporters of renewable energy wondering if this will mean a loss of momentum in the shift to renewables in Australia.

Certainly the election outcome brings the focus of national climate and energy policy back to the Coalition's Climate Solutions Package, released in February 2019 in the run-up to the 18 May federal election, and the work of the Energy Security Board and the COAG Energy Council on the "leftovers" of the former National Energy Guarantee (NEG) framework, being the retailer reliability obligation.

The question now being asked is will the Morrison Government re-visit the emissions element of the NEG, whereby the average emissions level of the electricity they sell to consumers is in line with Australia's Paris commitments?

  • If the answer is "no" to reviving the low emissions obligation, then attention will turn to the role that can be played by:
  • The States via their own renewable energy targets and programs;
  • The corporate sector via renewable energy Power Purchase Agreements or PPA's (driven both by sustainability
  • objectives and the economics of renewables); and
  • Implementation of AEMO's Integrated System Plan, particularly the removal of transmission grid impediments to renewables.

During the election campaign, the Coalition made a virtue of the huge investment in renewable energy projects in recent years, although being quiet on the role of the inheritance of Labor's pro-renewables policy architecture: the RET, CEFC and ARENA.

Will the re-elected Morrison Government adopt a benign approach to renewables? What will be the impacts of Snowy Hydro 2.0, the so-called Battery of the Nation centred around Tasmanian hydro energy and the Underwriting New Generation Investment (UNGI) program under which a short-list of 12 projects were announced just prior to the election being called. Will the promised feasibility study into a new coal-fired power station at Collinsville in north Queensland produce more than another report?

Climate Solutions Package

The Morrison Government rejected Federal Labor's higher 45 per cent emissions reduction target, and argued that Australia's 2030 target to reduce emissions by 26 to 28 per cent below 2005 levels is responsible and achievable. They pointed out that this target will see Australia reduce the emissions intensity of the Australian economy by two thirds, and emissions per person halved by 2030. They say that our target is one of the strongest efforts among G20 countries – stronger than Japan, Canada, the EU, Germany and New Zealand.

To support achievement of the 26-28 per cent target, the Morrison Government has announced its Climate Solutions Package, comprising:

  • A $2 billion Climate Solutions Fund to reduce greenhouse gas emissions across the economy through the existing Emissions Reduction Fund, "including giving farmers, small businesses and Indigenous communities the chance to improve the local environment and benefit from new revenue opportunities";
  • Continued support for the transition to reliable renewables underway in the National Electricity Market through Snowy 2.0 and funding for the Battery of the Nation Project in Tasmania and Marinus Link, a proposed second inter-connector between Tasmania and the mainland;
  • Developing a National Electric Vehicle Strategy "to ensure a planned and managed transition to new vehicle technology and infrastructure so all Australians can reap the benefits"; and
  • Support for households and businesses to improve energy efficiency through a program of small-scale grants. The Morrison Government package does not include any injection of new funds into the CEFC or ARENA.

Climate Solutions Fund

The Climate Solutions Fund builds on the more than 193 million tonnes of greenhouse gas abatement claimed to have been achieved through the Emissions Reduction Fund (ERF). An additional $2 billion injection into the Fund is expected to deliver more than 100 million tonnes of low-cost abatement out to 2030.

Examples of abatement projects that will be supported by the Climate Solutions Fund:

  • Remote Indigenous communities will be supported to reduce emissions by using traditional knowledge to manage
  • fires in northern Australia and creating employment for Indigenous people living on Country;
  • Small businesses will benefit from support to replace lighting, air conditioning and systems to help reduce energy costs;
  • Farmers will be supported to re-vegetate degraded land, improving water quality, reducing erosion and salinity, and drought proofing farms; and
  • Local communities will benefit from support to reduce emissions from waste.

Project participants join the scheme by registering a project with the Clean Energy Regulator. Once a project is registered, participants can bid to secure a contract with the Australian Government by participating in an auction.

Participants run their project according to the method they have chosen to use, report on it and ensure it is audited when required. The projects then receive Australian Carbon Credit Units for the emissions reductions they have achieved. These credits can be sold to the Australian Government under contract, sold to the secondary market, or used to offset emissions from other sources.

The Safeguard Mechanism will continue to be used to support the emission reduction efforts of the Fund. Under the Mechanism, larger emitters (those with emissions of at least 100,000 tonnes of CO2 emissions per annum) are given emissions baselines they must stay within.

These baselines have been based on historical Scope One emission levels but the Clean Energy Regulator is soon to move to a more forward-looking method of setting baselines. If an emitter captured by the Mechanism exceeds their emissions baseline in any one year, they must purchase offsetting carbon credits. The baselines are designed to ensure that major emitters do not unwind the emissions abatement benefits from the Fund.

Snowy 2.0, Marinus Link and Battery of the Nation

Snowy 2.0 will be the world's second-largest high-tech pumped hydro power station and increase generation capacity by 2,000MW. The Morrison Government has committed $1.4 billion in equity for Snowy 2.0 to firm up intermittent renewable energy and massively boost storage.

Following board, shareholder and planning approvals, Snowy 2.0 Exploratory Works have begun. These works are being carried out in order to provide Snowy Hydro with a greater understanding of the underground geological conditions at the proposed location of the power station. Separate planning approvals for Snowy 2.0 Main Works, including preparation of an Environmental Impact Statement, are underway. If approved, these main project works are expected to commence in 2020.

First energy output from Snowy 2.0 is expected in 2024.

Critics of Snowy 2.0 say that it is all about protecting Snowy Hydro's competitive position. The Snowy 2.0 business model demands that it will only sell at peak times, and only at a fraction cheaper than the current gas generators that control the price at such times. The modelling shows it will look to sell at around $100/MWh, or more.

Without Snowy 2.0, Snowy Hydro Limited's generation assets could struggle to compete in an increasingly competitive and decentralised world. The increasing demand for firming products may be offset by the market over-supply of firming technology, causing competitive downward pressure on prices and potential decrease in Snowy Hydro's market power, which it wants to retain.

The existence of Snowy 2.0 is likely to underpin existing coal generators because it will "maintain the economics of baseload supply."

The Morrison Government is also backing the next step towards Tasmania's Battery of the Nation project with a $56 million investment to accelerate the delivery of the Marinus Link – a proposed second interconnector with the mainland.

The Marinus Link is designed to unlock 2,500MW of new pumped hydro capacity in Tasmania. Hydro Tasmania has identified three sites for further investigation of their pumped hydro potential. The Battery of the Nation project is one of the 12 shortlisted projects under the Federal Government's UNGI program.

Underwriting New Generation Investment (UNGI)

The UNGI program will provide financial support to firm generation capacity as part of the Morrison Government's commitment to lowering electricity prices and increasing reliability in the system. It will be technology neutral, providing a level playing field to enable the best and lowest cost generation options to be supported. All technologies allowed under Australian law are eligible under the program, including greenfield and brownfield projects, such as upgrades or life extensions of existing generators.

The program's objectives are to:

  • Reduce wholesale electricity prices by increasing competition and supply;
  • Assist commercial and industrial customers and smaller retailers to access affordable energy supply arrangements; and
  • Improve reliability by increasing the level of firm and firmed capacity in the system.

It is a multi-phased program, open over 4 years to June 2023. The government has agreed to a shortlist of 12 projects representing a range of fuel types, which includes:

  • Six renewable pumped hydro projects;
  • Five gas projects; and
  • One coal upgrade project.

The shortlisted projects include every NEM region and represent a combined capacity of 3818MW of new generation. Thegovernment has stated that it will continue to engage with proponents of projects that have not made the shortlist but may meet the program's objectives and eligibility criteria. This will support the development of a pipeline of mature projects that the government can work with over the life of the 4 year program. The Federal Energy Minister is expected to move quickly to announce next steps with the program.

Hydrogen

The COAG Energy Council commissioned a report from the Hydrogen Working Group, chaired by Alan Finkel. Their report was delivered in August 2018. Public consultation was invited on the Finkel report during March 2019. Presumably next steps on a national hydrogen strategy will be discussed at the next meeting of the COAG Energy Council. States like Queensland and Western Australia are very focused on so-called renewable hydrogen, where hydrogen is produced using renewable energy sources. We will have more to say on the "hydrogen economy" in a forthcoming Insight article.

State Policies and Programs

In September 2018 the Victorian Government announced the results of its renewables reverse auction which was broadly aimed to help achieve the Victorian Government's legislated renewable energy target (VRET) which is targeting 25 per cent of all generation by 2020 and 40 per cent by 2025 from renewable sources. The auction was targeting 650MW of new capacity.

The government announced that the auction would support 928MW of new capacity. The auction guarantees output price for project developers via 15-year contracts, for 669MW of the 928MW of capacity being built, whilst the other 259MW will be exposed to the market. The 928MW comprises 254.6MW via three solar farms and another 673.5MW in wind farms. Total capital investment in both forms of capacity is $1.16 billion.

The Victorian Government has not committed to further auctions at this stage stating that it will determine the need for any additional bids to meet its VRET target "based on market and national policy conditions".

Presumably the Victorian Government will be assessing the impact of the re-election of the Morrison Government which has made no commitments to support new wind and solar projects.

In Queensland, where the State Government has a 50 per cent target for renewable energy by 2030, its own reverse auction process (Renewables 400) has not progressed. In September 2017 when expressions of interest closed, the total capacity on

offer exceeded 15,000MW, with nearly 6,000MW of energy storage and 9,000MW of renewable energy comprised of wind, solar (including integrated photovoltaic (PV) with storage and solar thermal), and biomass.

The Queensland Government has in the meantime established a third government-owned electricity generation company, CleanCo, which is taking over gas and hydro assets from the other government-owned generators. Its mandate is to deliver 1000MW of new renewable energy by 2025, supported through an initial funding injection of $250 million. It is now expected that the reverse auctions will be re-visited once CleanCo is fully operational later in 2019.

The Role of AEMO

Throughout the East Coast market, project developers are grappling with the challenges of securing a connection to the grid and curtailment of what they are able to supply including via revised Marginal Loss Factors.

Marginal loss factors (MLFs) dictate how much of a generator's output – be it wind, solar, gas, thermal or hydro – is credited by the market operator, AEMO. A factor of 0.75, for instance, means the wind farm will get payment for only 75 per cent of its output. A rating of more than 1.0 means it will be credited with more than its nominal output. AEMO has released its final MLFs for 2019-20, confirming that the wind and solar farms near Broken Hill are the worst affected by the changes, along with other solar farms in south-west New South Wales, some wind and solar facilities in north-west Victoria and some solar farms in north Queensland.

In releasing the final MLFs for 2019-20 AEMO said, "the location of new generation has a significant impact on the size of loss factors. In the near term, AEMO is committed to providing the market with as much transparency as possible about where new generation is expected to connect to the grid. AEMO is also considering more frequent MLF update publications which may assist in identifying changes and trends, as well as working with industry and the AEMC on possible options to reduce the impact of large year on year changes in MLFs".

" In the longer term, Australia will need a stronger energy system to transport energy from where it is produced with fewer losses, to where it is consumed, minimising costs to consumers. AEMO's Integrated System Plan is a blueprint for Australia to do just that. We need to start implementing this now."

In the meantime, private enterprise is showing that it is prepared to be part of the solution. A case in point is the revived Copperstring transmission project, connecting the north west of Queensland around Mount Isa and Cloncurry to the NEM. In doing so, it will also enable Queensland's so-called Clean Energy Hub in north and north west Queensland to connect to industrial load in places like Mount Isa. Copperstring 2.0 has attracted Morrison Government financial support to complete a feasibility study. It has also gained co-ordinated project status from the Queensland Coordinator-General.

Corporate Renewable Energy PPAs

According to Energetics – an adviser on corporate PPAs – since 2016, corporate PPAs have supported renewables projects with a combined capacity of nearly 3600MW, of which about 3100MW enabled investment in new projects. As at April 2019, approximately 50 per cent of the project capacity supported by corporate PPAs is solar, 8 per cent a mix of wind and solar, with the remainder wind. Victorian projects continue to dominate, accounting for 46 per cent of project capacity (about 1700MW) supported by corporate PPAs. It is estimated that 80 organisations have concluded some 30 corporate PPAs.

A growing number of renewable energy operators are offering 'firmed' products, which smooth out the intermittency associated with wind and solar production and go some way towards reducing the risks associated with volume of energy contracted and its time of use. This generally offers clear benefits to energy users, especially if they hope to engage a retailer in managing the contracted generation as part of a supply-linked PPA.

When contracting directly with a renewable energy generator, the overwhelming majority still have a strong preference for PPAs of at least ten years' duration.

The core drivers for corporate PPAs continue to be achieving cost reductions, minimising exposure to energy market volatility and reducing greenhouse emissions. However, the question being posed is whether there is enough demand to satisfy the renewable project pipeline.

Macquarie Capital is on the record recently as saying the demand is there. A range of companies – including toll road operator Transurban, supermarket chain Woolworths and Amazon – are all currently tendering for renew able power in the Australian market. So far in 2019 a number of PPA deals have been announced. For example, Westpac has pledged to source 100 per cent of its electricity from renewable sources by 2025.

Under a PPA unveiled in April 2019 with Bomen Solar Farm, due to be operational in the second half of 2020 near Wagga Wagga in New South Wales, Westpac will source 63 gigawatt-hours of renewable electricity annually to power its operations globally. The PPA would deliver 45 per cent of the bank's 100 per cent clean energy target by 2021 and a range of options including rooftop solar installations on its larger buildings and further supply agreements would be assessed to hit the 2025 target. Westpac cited both the environmental and economic benefits from the PPA.

Also in April, thirteen Victorian water utilities banded together to forge a major renewable energy off-take deal that will supply between 20 and 50 per cent of each corporation's total electricity needs. The utilities, under an umbrella organisation called Zero Emissions Water Ltd, have signed a deal with the 200MW Kiamal Solar Farm – Victoria's largest such project to date, which is being developed in the state's north-west by Total Eren.

In early 2019, Viva Energy announced that it had entered into a long term PPA with Acciona which owns and operates the Mt Gellibrand wind farm near Colac, 65km west of Geelong. The agreement, which is a financial contract, secures pricing for Viva Energy on approximately 100GWh per annum of electricity, which represents around a third of Viva Energy's Geelong Refinery's annual electricity needs.

Summing Up

While many in the industry and energy sectors would welcome a re-visiting of the full NEG package, including a low emissions obligation, such a move would likely meet resistance from the same people that forced the Turnbull Government to back away from the NEG. The renewable energy sector will be weighing up different forces at play over the next three years:

  • Potential crowding out by the Federally-backed pumped hydro projects and Federally underwritten coal and gas projects;
  • The likely success of AEMO, working with the States, in untangling the transmission grid impediments to wind and solar projects in parts of the NEM;
  • The impact of State reverse auction initiatives and the emergence of the Queensland Government-owned new clean energy generator;
  • The emergence of a robust national hydrogen strategy, particularly one based around renewable energy; and
  • The expected continued take-up of corporate renewable energy PPAs by organisations focused on both control of their GHG emissions and of their energy cost

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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