Clean energy: the new policy frontier

Clean Energy Finance Corporation set to become the next political football; can the LRET be met?; and baseload generation becomes a marginal proposition in NZ.

It seems clear, now that the carbon price has made its way through parliament, that the next policy battleground should be centred on clean energy, and the mechanisms designed to support it. The ideologues have already been at work and sadly it threatens to become as unhinged and error-strewn as the carbon debate.

The government’s clean energy policy is currently centred around two basic principles – the 20 per cent renewable energy target (LRET) is designed to deploy the cheapest available renewable technologies, while the Clean Energy Finance Corporation will support the commercialization and deployment of those technologies that are likely to be the cheapest and the most useful in the future.

The CEFC is seen as critical to the successful deployment of emerging technologies such as large scale solar, or geothermal, and to the successful deployment of clean energy in general, because of the vital role it could play in enabling technologies such as hybrids and grids that some say it should support.

And because it is so important, the CEFC is a threat to some and destined to a political football, in the same way that similar mechanisms have done so in the US, where Australia now unfailingly takes its political cues. The Opposition promises to dump it, and as in the carbon pricing debate is more intent on throwing rocks than engaging in policy formulation.

It asserts the CEFC will simply aid projects that private investors wouldn’t otherwise touch. It seems a curious take for a party that supports all sorts of mechanism that ensure the viability of coal fired generators, aluminium producers, and the car industry to name a few – and it seems that is exactly what it is proposing with its own emissions abatement fund, the core of its direct action policy. At least the CEFC is designed to leverage private investment.

The design of the CEFC has been handed to its proposed inaugural chairwoman, the RBA board member Jillian Broadbent, and a panel of finance and industry experts. Submissions are formally due this week, and among the first to break cover is the US-based First Solar, the largest solar company in the world by market capitalization, the second largest in terms of manufacturing capacity, and the builders of the first utility-scale (10MW) solar PV plant in Australia.

First Solar’s broad recommendations may seem to be a statement of the bleeding obvious, but they do highlight some of the weaknesses in programs designed both in Australia and overseas. Principally, First Solar is saying that the goal of the CEFC needs to be properly defined – does it aspire simply to build more megawatts, or create the path for technologies currently too expensive to deploy to be sustainable without subsidies.

First Solar suggests the CEFC should focus on the gaps it can influence most – the cost of financing, which, with the lack of project opportunities in the first place and the difficulty in obtaining power purchase agreements - is the biggest factor preventing the deployment. It can do this either through loan guarantees, subordinated debt or tenor arrangements, or direct equity investments – and delivering experience on construction and technology.

One of the biggest criticisms about the grants based programs has been the reliance on bureaucrats to conduct due diligence (or not) on technology and pick winners from numerous applicants. First Solar argues that if the private sector is to be leveraged (and most people suggest a properly constructed CEFC should be able to leverage private funds on a 1:10 basis), then the CEFC should rely on the private sector to filter viable opportunities, as they have most at stake. This would allow the CEFC to take a broader portfolio approach to risk management. “The agency will then largely not be responsible for picking winners and being exposed to the backlash associated with failed projects,” it writes.

Meeting targets

One area of the CEFC design that will be contentious is it potential impact on the LRET. Wind energy producers, currently the lowest cost, are concerned that any mechanism would accelerate the fall of solar PV down the cost curve and, effectively, eat their lunch and displace them as the cheapest and most favoured renewable source.

But there are also concerns about Australia’s ability to meet the LRET in the first place. The delay in deployment caused by the policy mishaps over the incentives for rooftop solar threatens to cause a bottleneck as rival developers compete for limited equipment and labour resources.

While the Greens are considering pushing for more ambition, such as a new 2030 target with a considerably higher goal, some in the energy industry are agitating for a softer target. Origin CEO Grant King, for instance, has suggested a 25/25 target (25 per cent by 2025) to alleviate those bottlenecks, and the LRET is subject to a review next year.

Miles George, the CEO of Infigen Energy, the largest wind farm developer and owner in the country, says he is concerned that the LRET review is creating more uncertainty and more delays in deployment, a situation that may suit some energy retailers. “This review is being viewed by some electricity retailers as an opportunity to further delay or water down their obligations under the target,” George said in a speech last week. “To what end? The same electricity retailers have large investments in upstream fossil fuel resources and fossil fuel electricity generation facilities. Renewable energy investments compete directly with the incumbent retailers? plans for more fossil fuel generation investment.”

George said it was vital that uncertainty about the LRET be removed as soon as possible. “ And I would encourage the Commonwealth Government to limit the scope of the upcoming LRET review to prevent any reduction to the target, slowing of the trajectory, or weakening of the penalty for non-compliance.”

George was also critical of the NSW government, saying it was putting $15 billion of renewable energy investment at risk because of its lack of policy clarity. “What’s needed is a clear set of rules from government and regulators, and people prepared to work together to contribute to investment certainty,” he said.

Peaking early?

In the last few weeks we’ve written a few articles about the theory behind the possible substitution of baseload power by a new system that stacks intermittent renewables first and then supplements these with flexible output from dispatchable sources such as solar thermal with storage, hydro and/or gas. In Germany they are beginning to see this impact, with Statkraft looking to close two gas plants totaling 1000MW as it is displaced by increased wind power, and the high penetration of wind in South Australia has also succeeded in displacing coal-fired imports from Victoria.

In New Zealand, this is being felt even more acutely, with the addition of new geothermal and wind farms. So much so, that Deutsche Bank analysts say the role of thermal generation in the country may have to switch almost entirely from baseload to peaking. “As this new (renewable) generation goes first into the supply stacking, it comes out of the carbon fuel based suppliers volume, the last to be stacked,” it noted in a report on Contact Energy.

“This means that Carbon Generation suppliers have been cut back by over 22 per cent of what they would have supplied (before the addition of renewables). Unless demand growth outstrips new renewable supply, the role of gas thermal will move more and more to peaking.” It noted that given NZ’s strong pipeline of renewable generation and lack of demand growth, Contact’s Otahuhu B combined cycle gas generator, along with other baseload thermal generators, will increasingly be marginalised and eventually be rendered uneconomical to operate. There is no doubt that New Zealand’s energy market is complicated by its huge resources of hydro and the complex nature of its gas contracts, but its struggles to find a role for baseload gas does provide a glimpse, perhaps, of the future Australian energy generation.

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