Learning from the mistakes of Solar Flagships

The recent failure of Solar Flagship projects to meet financing deadlines is simply due to a poor policy process and we’re in danger of repeating the same mistakes with the Clean Energy Finance Corporation.

It gave me little satisfaction to hear a prediction I made in April 2011 – that the selected Solar Flagship projects would fail to materialise – had proven correct (see page 35 of the Grattan Institute report, Learning the Hard Way – Detailed Analysis). Now all the wrong conclusions are being made about the reasons behind the current predicament, which tragically leaves us on the same path with the Clean Energy Finance Corporation.

Those opposed to action on climate change are crowing about how a lack of backers for the Moree Solar PV Farm and the Queensland Solar Dawn project proves solar technology is a dud. On the other side, the Greens are blaming the people involved, suggesting energy minister Martin Ferguson didn’t want Solar Flagships to succeed.

The reality is completely different. This is not a failure due to the product (solar), nor the people involved. It is due to a poor process. Solar Flagships’ primary problem is that it committed funding to individual projects well in advance of their construction via a tender selection process. Solar Flagships has encountered the same problems that have dogged just about every other emission reduction program that employed grant tendering to allocate funding. The report I co-authored, Learning the Hard Way, explains this sorry history in excruciating detail.

A tender, on face value, seems like a perfectly valid, competitive mechanism for allocating government money. But for funding carbon abatement projects it involves considerable complexity, which regularly means winning bids fail to materialise into operational projects.

This is because it is very difficult for businesses to develop well-informed bids as:

1. Bidders will probably have only done preliminary work in preparing their project. After all you’re not going to spend large sums of money on lawyers, engineers and environmental consultants until you’re confident there’s demand for your product. This demand does not exist for most low carbon electricity projects until they manage to win the tender.

2. Several years are likely to transpire between the time the bid is submitted and the date the project becomes operational. In the meantime there’s significant room for prediction errors across a wide range of important factors influencing costs and revenue, such as the value of the Australian dollar and the price of steel, glass, solar panels and electricity.  

3. The selection process run by government is infrequent (once a year at best), not transparent (all bids are confidential) and highly subjective. This makes it difficult to assess how your bid is likely to fare relative to competitors and can tend to encourage over-optimistic bidding.

To top it all off, once the tender process is completed the winning bidders face absolutely no competition to get their project built before anyone else, and no penalty if they fail to deliver. In the case of the Howard government’s Low Emission Technology Demonstration Program, we are still waiting on HRL and Silex Systems to confirm whether they will construct projects selected in a tender round held in 2005. Thankfully Solar Flagships improved on this one aspect by placing a deadline on winning bidders to commit to construction, although this deadline has been extended for Solar Dawn.

There is little reason why government even needs to commit funding to individual projects before they are built. The private sector has shown a ready willingness to finance solar, bioenergy, geothermal and wind projects, in many cases at significant scale, without government providing money upfront. Instead these projects have been built on the basis of government support provided per unit of electricity generated. If they don’t produce electricity they don’t get a cent of support and it’s a matter of first-in best-dressed. This can work through government setting mandated targets for a given quantity of renewable electricity (such as the Australian Renewable Energy Target) or mandated prices (Germany’s feed-in tariffs). Support should ideally be designed using a combination of both price and quantity to prevent boom-bust cycles (as occurs with Germany’s feed-in tariff program). 

This leads to my next concern – the Clean Energy Finance Corporation (CEFC). The government has said that the CEFC will use loans and equity investments to support renewable energy. This will encounter exactly the same problems as past grant tendering programs as it involves selecting individual projects and companies to fund, well in advance of them delivering any electricity. That it will employ merchant bankers to allocate the money does nothing to reassure me that the results will be any different to the past.

I will make a bold prediction: of the $5 billion allocated to the CEFC to support renewable energy, very little will lead to any electricity being generated. I am prepared to stand by this prediction no matter what the outcome of the next federal election. A $5 billion injection could do a lot of good for the renewables sector in Australia, but I can’t see this happening based on the current terms of reference for the CEFC.

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