Infigen's retail stand-off

A little while ago I caught up with Miles George, the CEO of Infigen Energy (Part 1 of the interview transcript is available here).

Infigen is the largest owner of wind power capacity in Australia and holds an Australian wind development pipeline of over a gigawatt of potential capacity, in addition to a significant holding of US wind capacity as well. 

What is particularly notable is that it is one of the few wind developers able to go it alone building renewable energy projects without the need for a long-term power purchase agreement with an energy retailer. 

At present about 45 per cent of its portfolio of projects have output that is uncontracted to a major retailer (what is referred to as ‘merchant' plant). Very few wind developers have had the capacity to take on these types of risks (Pacific Hydro probably being the other exception), preferring instead to push this all onto energy retailers. This, in addition to experience in operating significant amounts of wind power capacity, probably gives them a greater degree of appreciation of the commercial aspects involved in wind power projects. 

Unfortunately much of this more entrepreneurial development has been curtailed since the Global Financial Crisis, which has made financiers more risk averse. The company was originally set-up as an offshoot of the Babcock and Brown empire, built on plentiful and cheap debt. When the financial crisis hit, debt became difficult to obtain and Babcock and Brown was on borrowed time.

Miles George, the CEO of Infigen, managed to extricate the company from its ties to Babcock and Brown such that the company was free to pursue its own path. It still bares the legacy of a large debt burden, however, which means there is little spare cash left to return to shareholders. Consequently its share price has languished.

However in extricating itself from Babcock and Brown, Infigen managed to hang onto the crown jewels – a strong portfolio of wind development sites. According to George, its existing debt shouldn't hold them back from realising the value from this portfolio. But it now needs the energy retailers to sign power purchase agreements to obtain debt-finance. 

George now finds himself in a stand-off with the retailers. He knows there are not all that many other companies with equivalent quality, well prepared wind development sites. Time is beginning to run short if the retailers are to have any hope of meeting their liabilities under the Renewable Energy Target. So far they've been able to strike some extremely good deals with other developers such as Trustpower on Snowtown II and CBD's Taralga wind farm. But he doesn't think they'll find too many more of these deals, or they'll find the developers can't deliver. 

Sooner rather than later they'll need to come to him. He thinks the electricity and renewable energy certificates (referred to as ‘LGCs') are worth more than what retailers are presently offering, and he isn't willing or able to sacrifice on his financial returns. 

Other mature power project developers feel the same way. But all of them are worried that some retailers are willing to risk being caught short on renewable energy certificates in 2016, in the hope of persuading a future Coalition government to scale back the Renewable Energy Target in 2014.

On this point, at the Alliance to Save Energy conference last week, Shadow Climate Minister, Greg Hunt made a notable tweak to his language on the Renewable Energy Target. As usual he said the Coalition support the “20 per cent Renewable Energy Target”. But he also said that it will be reviewed in 2014 taking into account changes in energy demand. 

It seems highly improbable that the outlook for electricity demand in 2014 will suddenly shoot upwards, so this sounds ominous for renewable energy project developers.