CLIMATE SPECTATOR: Australia's shiny solar chance

Climate Spectator

The world's lowest cost solar panel maker, First Solar, announced itself on the Australian scene over the weekend with news it would design and build AGL's two projects under the Solar Flagships program. Climate Spectator editor Tristan Edis caught up with Jack Curtis, vice president of business development and sales with First Solar, to discuss:

-- The company's near-term plans in Australia;

-- The need for local deployment to build confidence and bring down financing costs in Australia;

-- Achieving competitiveness against wind power; and

-- The importance of experience to reduce costs.

First Solar near-term plans for Australia

Tristan Edis: So, what's next for First Solar with this project in the bag? How do you see First Solar rolling out further projects now that there isn't a clear line of sight in terms of policy support for the next lick of large scale solar?

Jack Curtis: What's important about this project is that it's going to help validate to others that these projects can actually deliver and I think that's the real thing that impacts the potential for these systems to get built at a lower price in the future. So, one of the things that we're really focused on is getting these projects to a cost where government support isn't required and we've always targeted 2015, 2016 as the date roughly when that can occur.

And so, in order for that to be achieved you really need to see subsequent projects constructed and so we're focused on some of the programs that are contemplating similar projects such as the ACT Reverse Auction program. But we're also seeing quite a lot of private sector development around solar as the prices come down quite dramatically. People are seeing a potential crossover with wind in the next three or four years and so we're really trying to focus on enabling projects that don't require government support to start their thinking around what the economics need to be and what can be done to accelerate that. But obviously we'll be participating in any stable federal program over the next three or four years that can help replicate these kinds of projects.

The need for local deployment to build local confidence and bring down financing costs

TE: So, when you say validate to others that these projects can actually deliver, what do you mean?

JC: One of the greatest challenges that the Australian solar industry has faced is a misconception around what these projects really cost and so a lot of the industry numbers that used to be promoted were far off where solar actually has come on price. So building a project is the best way to address that.

And then the second part of it is not just the cost to build the plant, but also the cost to finance it. Generally the financing costs for solar are driven by a perception of the risk of the performance of that asset class. And what you tend to see in other markets that have evolved over the past three or four years is a real reduction in that financing cost that has delivered a much cheaper cost of electricity coming out of these utility scale plants which is often missed by analysts.

While the system price itself is very important, the biggest swinger in the economics is the financing cost. So the more that the price of these projects can be validated by actually getting plants constructed, the more the private sector can actually see them get constructed, see how they perform, see how they're different from a wind plant for example, the faster that you see not just the system price come down, but also the cost of funding these plants.

TE: So, is that a function of the need for local financing in Australia? First Solar has built a number of projects internationally and in the process of building a number of incredibly large projects internationally. So, is that international experience not sufficient for financing purposes in Australia?

JC: The unfortunate answer is that it's not. It's quite justifiable in some respects.

So, what we've found is that even when we point to some of these large plants that are actually under construction in North America, that are financed by people like Warren Buffet and by every institutional bank on the planet, what you generally see in a market's local banking community is a real need to see it executed in their own market. We have to spend a lot of time in new markets working with the banking community to help them understand the profile of these projects, help them understand how the technology performs. And while there is some benefit to being able to point to plants being financed in other jurisdictions, we're really seeing a local need for them to be constructed in that market before they really get on board.

TE: So, what are the financing costs or interest rates that you think are possible versus what you're currently seeing in the marketplace?

JC: So, I think a good barometer is essentially where we've seen the project IRRs in the US come down over the past three or four years. Where four years ago we built our first 10 megawatt plant and now have somewhere upward of 1.5 gigawatts actually under construction. We've been surprised by how quickly the return on equity expectations have come down, how quickly the market price of debt issued by local banks has come down and that's where we're really trying to drive the Australian industry.

Three or four years ago it's around 16 to 18 per cent and where we really want to get them to in Australia is to replicate where we've seen them in the US on our recent projects which is more in the 10 to 12 per cent range.

And that's something that we achieved much faster than we thought we would in North America and I think that largely comes down to two things. One, once equity and debt are comfortable with the technology, it's really then just a function of, you know, the viability of those delivering the project. And so, we got over that first hurdle fairly quickly and after that it's really shaped up essentially as an infrastructure asset class for these people to invest in. And now, when we go to sell one of our projects in the US, we see a very large appetite for these given it's essentially just a 25 year annuity payment for investors.

Achieving competitiveness against wind power

TE: When you say 2016, no government support … based on the last quarterly earnings presentation from First Solar, it talked about a cost in the realm of a $100-$140 per megawatt hour and an install cost I think of $1.40 to $1.60 per watt. That's still a bit higher than wind projects that they're now talking about needing around $90 to $110 a megawatt hour to make a project viable. What sort of price trigger point do you need to be competitive with just government support from Renewable Energy Certificates?

JC: That $100 to $140 compared directly with wind is too simplistic because it doesn't factor in the value that a utility will pay for the profile of solar electricity rather than a wind profile.

TE: So, that's a function of solar PV generating during the daytime when demand is high and wholesale market prices are high, whereas wind often will generate during low demand periods in the middle of the night. Is that what you're talking about?

JC: That's exactly right.

TE: What's the premium over the average wholesale price and do the electricity retailers have a good degree of comfort around this premium for PV over other generation types?

JC: It's an exercise that we started talking about probably about four years ago and when we first started, it was great in concept but we'd never really seen it validated in practice by a utility. However as utilities have actually owned these plants and see the extent that they actually do match load, we generally see anywhere from $10-$40/MWh premium over wind or just the base costs of electricity.

And to the second point of your question around utilities fully understanding it, having gone through this exercise with a couple of the local utilities in Australia over the past two or three years of this program, I think it's completely fair to say that a utility will pay more for a kilowatt hour of solar than it will for a kilowatt hour of wind.

The importance of local deployment and experience to reduce costs

TE: This AGL project works out to around $2.80 per watt so what bridges the gap to get to 1.40 to $1.60/watt other than just better, cheaper modules?

JC: So if those kinds of cost of capital numbers can be achieved over the next three or four years that we talked about, and given the solar resource that we have to work with in Australia, if we can get to a $1.40 to a $1.60 a watt on a Direct Current basis that's going to enable costs of $100 to $140/MWh.

If you compare that against the project that was just announced at AGL, you need to bear in mind that the 159MW capacity quoted is on an alternating current basis and the capital cost for that project includes all the development costs associated with interconnection, site acquisition, permitting.

By the time you back those things out you're at a number per direct current watt that's probably about 70 per cent of the $2.80/watt and then a lot closer to that $1.40 to $1.60 number.

And I think it's also worth pointing out that this is the first project or one of the first projects that has been done in a utility scale capacity and so a lot of the price reduction that's been achieved in other markets has been through replicating these kinds of projects. And so, we're really right at the beginning of the potential for cost optimisation as it relates to all the components except for the panel.

I often hear the argument, ‘well, solar is coming down so quickly internationally, why don't we just wait for it to come down and then do it in Australia?' What's often overlooked is that 70 per cent of that cost of electricity equation is localised. So, there's the funding cost. There's the construction. There's the engineering. There's the development cost. And we just haven't had an opportunity to realise any of the lot of hanging fruit around cost reduction in Australia. And so, that number, you know, for this project is higher than what we're seeing on projects in the US just because we haven't had a chance to build out hundreds of megawatts in Australia yet.

TE: Can you expand a bit on the areas where you can squeeze out significant costs with greater deployment in Australia?

JC: So, the first cab off the rank is generally construction. These plants aren't overly complicated to construct, but they're very modular and it's an exercise in repetition. So what we've essentially done over the past three to four years in the US is optimise the methodology of doing that, but doing it with the same subcontracting crews over and over again.

It's just like the first time you build, you know, a Lego structure and the second time you do it you build it faster, you find efficient ways to do it. Even though we obviously import those methodologies to Australia, at the end of the day you really need to realise that with a local workforce. And we were surprised by the amount of cost reduction that's been achieved just through optimising the construction methodology. But when you think if you go from installing 20 panels to two million panels, your ability to optimise time efficiency around each panel gets magnified quite significantly. So, construction methodology and efficiency in speed is generally one of the first buckets.

The second one is around supply chain. So, one of the things that we've been pleasantly surprised by is – and we're validating this on the 10 megawatt project we're building in Geraldton – is that it's actually going to be cheaper for us to have some of the balance of system components manufactured and procured in Australia which frankly was a surprise. And that's really driven by the shipping and logistical costs associated with the shipping, steel or steel structures from China or wherever. So being able to scale-up some of the local manufacturing around those components also very much contributes to that cost reduction potential.

And then the other one is system optimisation. So, while the actual construction of this plant isn't very complex, there are actually dozens of nuances that impact how you can optimise the levelised cost of electricity equation and that really only comes with experience in operating them. So, with our plants in the US sold to a repeat customer, every time we sell a new one we've always seen or been able to realise either an incremental improvement in value or cost reduction through them having operated one or two prior to the second or third one.