In the article, Time for panic stations on wind power?, I noted that because wind farms have lead times of a few years, there is concern time is running short to address an emerging shortfall of supply in 2017 under the Large-Scale Renewable Energy Target (LRET). But this could actually present opportunities for commercial-scale solar and for companies that can bypass the big retailers and go direct to commercial and industrial power customers.
So far Origin Energy and Energy Australia have been holding out on signing onto long-term power purchase agreements for wind farms, because they’re hoping the Coalition will water down the level of the Renewable Energy Target. AGL has also put a halt to further development concerned that it might come true.
This can create a self-fulfilling phenomenon, because waiting to develop projects makes the target more difficult to achieve. This then encourages government to intervene to water down the target.
However there’s some interesting wrinkles that could mean solar becomes a bigger player in the large-scale renewable energy target, producing substantial numbers of large-scale renewable energy certificates known as LGCs.
1) Non-traditional buyers for renewable energy certificates may emerge and the price will rise
As the time window for bringing on new wind to meet demand becomes tight, larger power customers will become nervous, as will some of the smaller energy retailers. To prudently manage their risks they really need to start entering the spot market for LGCs to meet their obligations under the RET, at which point prices will rise and rise quickly. They also might begin to consider contracting direct with developers to cover some or all their LGC needs.
A number of larger renewable project developers are already in discussions to directly contract with end consumers. This hasn’t happened in the past but the reality is that if these guys don’t come to market, they’ll get burnt paying the penalty of nearly $93.
Pacific Hydro’s large-scale Moree Solar Project, as an example, has recently made news with a $60 million funding announcement from the Clean Energy Finance Corporation. This project is now highly likely to proceed to construction even though it won’t have a power purchase agreement with a big retailer because Pac Hydro intends to sell direct to end customers.
2) Commercial rooftop solar developers will begin producing LGCs
To date solar developers have heavily favoured producing small-scale renewable energy certificates known as STCs, even though they are eligible to create LGCs. This is because with STCs they get them all deemed upfront in accordance with the expected system’s generation of power over a 15-year lifetime.
But STCs have their prices capped at a maximum of $40 by government edict. With low wholesale power prices, the market fundamentals suggest LGCs will ultimately rise well north of the $40 cap on STCs. $80 per LGC could be a possibility. At this point it becomes very tempting for developers of larger solar installations to produce LGCs instead of STCs in spite of not getting them all upfront.
In addition, $80 per LGC makes the economics of commercial solar projects look noticeably more attractive. What’s more because commercial solar is about avoiding the purchase of retail electricity, the decline in wholesale electricity prices is not a major problem.
3) Finance products are emerging to support commercial solar
Commercial solar has been held back to a large extent because potential clients are reluctant to sink upfront capital into a non-core business of energy supply even with returns above 15 per cent. Plus many rent their premises.
A possible solution was for solar developers to own the project and sell the electricity back to the client. But banks were unwilling to finance the developer because the project size was too small to justify all the due diligence they’d need to do.
But there are some emerging sources of finance that could help address this problem.
Firstly the Clean Energy Finance Corporation is helping to hold the hand of the Australian banks in developing leasing products for commercial-scale solar. Meg McDonald, COO of the CEFC told Climate Spectator that of the $10billion pipeline of project financing proposals they are evaluating, 24% are for solar and a great majority are below utility scale. That’s a lot of solar.
In addition the United States has now developed a quite sophisticated market in raising finance for businesses who own the solar installation but lease it to the householder (they call them third party owned solar). The chart below illustrates that nearly $3b in finance has been raised by solar companies to roll-out leased solar systems. These companies are now sniffing around the Australian market for opportunities.
Announced project financing raised by residential third party owned solar companies in the US
In addition a number of councils now offer a facility whereby lenders to building energy-efficiency upgrades can get repaid via council rates. Council rates are number one in the pecking order of creditors if someone goes bust, substantially reducing the risk of lending to solar projects.
4) Solar PV projects can be rolled out within months, not years.
The experience from the Australian residential solar sector illustrates that solar PV can scaled-up very quickly. While grid connection is a more involved process for commercial rooftop solar than residential, each system involves tens of kilowatts instead of just two or three. So it seems reasonable to expect that if the market conditions are conducive, there would be no physical constraints to commercial solar rolling out a few hundred megawatts in 2014, and a gigawatt in 2015.
There would still be a need for new wind farm development under such scenario, but it would buy time for wind farm projects to scale-up, and ensure enough supply to meet the Renewable Energy Target.
Markets are funny things – the moment it looks like there’s an emerging supply crisis, innovations come forward that surprise us. So far it’s happened every time in just about every major environmental market as shown by a Grattan Institute study.