In an interview with Climate Spectator's Tristan Edis the chief executive of ASX-listed renewable energy group Infigen Energy, Miles George, discusses:
TE: Paying down debt is clearly a priority for Infigen. Does that mean developing new projects is going to take a backseat for a while?
MG: Well, I guess the linkage between the two is probably not right in the sense that what drives new development is really market conditions.
That’s the first precondition for investment and then the second precondition is having the ability to finance that growth.
For the last two years market conditions have been such that it hasn’t been attractive to build new projects in the wind space in Australia and so although you’re correctly pointing out we don’t have a lot of financial capacity, that hasn’t actually stopped us from doing the things we wanted to do in the current market circumstances.
So, for example, what we’ve been doing is progress the best of our development prospects to the point where they are ready for an upturn in the market, which we are expecting as the (REC) surplus deteriorates in Australia.
We’ve also focused our attention on those projects in the pipeline that we have here and in the US which would require the least capital investment. So, in other words, the projects where we either can bring in an equity partner at project level or there’s some other benefit that we get out of the project that enables us to reduce our cash equity investment.
One example of that is the Capital Solar project that we’ve been advancing. We’re in negotiations with ARENA (Australian Renewable Energy Agency) relating to funding of that project and that’s an example of that type of project where we have an equity partner and we expect to make some gains. Apart from the project benefit straight out, we expect to make gains from the development work that we did to bring that project up to the point that it’s now at and also for the use of our connection infrastructure that we have in place down in that precinct for the Capital wind farm and the Woodlawn wind farm. That’s been the focus for the Infigen development activity.
TE: Right. So, I suppose that’s the same for Woodlawn … all those can feed off the same existing grid connection and infrastructure.
MG: That’s right. So, Woodlawn essentially does that and there’s more capacity there to hook up… As I said, our Capital Solar project is about 35 megawatts, but there’s further capacity beyond that to hook up further stages of either Woodlawn or Capital wind farms, as and when the market conditions are right to do that.
TE: Do you see the LGC price as taking into account long-term electricity prices being a fair reflection of market fundamentals at the moment, the LGC spot prices?
MG: I guess by definition they have to be a reasonable reflection of market, but they’re lower than we expected and most consultants expected around about this time.
As you know, the expectation is that there will be a significant increase in LGC prices as the surplus created from the small scale renewable is eaten up. And I guess we’re expecting that’s going to happen this year. I guess we had thought it might have happened earlier than now, but that will depend, as we all know, on the behaviour in particular of the big three utilities, who between them represent roughly three quarters of the obligation under the scheme. So, if they choose to go unhedged for a longer period of time, that might mean that LGC prices stay depressed for a while.
TE: The modelling that I’ve seen forecasts that we will see a very large shortfall in LGC supply due to hit around 2016. Obviously we need to start building well before that point happens. Do you think there’s plenty of time left to address the extent of the shortfall that is predicted over the next few years?
MG: No. I think that time is now getting very tight which is why we expected that LGC prices would be rising earlier than they have because, as you said, it takes a long time to actually be producing LGCs. For a decent wind farm you’ve probably got an 18 months to two year construction period and prior to that you’ve got a six months or so period of getting all of the contractual arrangements and funding and all that sort of thing in place, which would mean you’d really have to start committing now.
And yet, as you’d be aware, there have been very few projects committed. The new build requirement to avoid retailers incurring the penalty is something in the order of a thousand megawatts a year for the next few years and yet there have only been a couple of projects announced in the hundred megawatt kind of range – and even those that have been announced in a very sort of weak way.
If you look at some of the things that have happened – Snowtown, for example - TrustPower sought a 50 per cent equity partner in that project, couldn’t get it, couldn’t get debt finance either. And then announced that it would do the project on the balance sheet.
It doesn’t sound very encouraging for other potential builders of wind farms that you’ve had Origin put its Stockyard Hill project on the backburner because of project related problems that it’s had down there, development problems and approval problems and so on. So, although there’s talk about new projects going up, and there are a few, it’s very small actually compared to what’s required on an annual basis between now and 2016, for example.
TE: Can I just clarify on project timing you said it might be 6 months to secure financing and supply arrangements after the PPA is in place, and then a further 18months to 2 years for project build making a total of two to two and half years to start producing LGCs. Now, would that be for a project that has its transmission connection arrangements all in place? Its planning approvals are obviously all in place. I presume you’ve essentially got a project that is just waiting for PPA and financing to be ready to go. Is that correct when you talk about that sort of timing?
MG: Yes, that’s right. Both of those other two items you mentioned – planning approvals and connection approvals – can take years, many years and so I’m assuming you’ve got those two things.
My point is that it’s certainly not going to be any less than two years from today in total. That is, construction plus the periods to negotiate, settle debt finance and all that sort of thing.
Debt financing can take three months plus on its own. By the time you’ve done those things you’re looking at, I would say, for a decent project like a hundred megawatts plant, you’re talking two years as a minimum.
So, you’re talking about somewhere in the first quarter of 2015 or somewhere between the first quarter and the third quarter of 2015 to be generating RECs. Well, that’s kind of cutting it pretty fine for somebody who’s got a 2016 REC shortfall.
We don’t know exactly how exposed the big three utilities are to LGC prices… to LGCs shortfall in 2016, but most of them have made comments about how they are partly or significantly covered out through 2015. What we don’t know is how steep the drop off is in 2016. We suspect it’s actually very steep.
TE: Have you seen any change in retailers’ appetite to negotiate PPAs since the RET Review released its findings recommending little change to the large-scale renewables target?
MG: I think we noticed a sort of willingness of the market to at least talk even before the RET Review outcome was finalised, I suppose in anticipation of the result that actually came out. In the three months or whatever it is since the RET Review came out that interest in talking has continued. But as you would expect of the utilities, their initial discussions with people are on the basis of a very low price that, at least for us, wouldn’t be attractive.
So, I think it would only be those developers who have a need for some reason or another to do a project quickly with less concern about the return on investment that might find that appealing.
TrustPower’s Snowtown 2 project is a good example of a project that has a very high capacity factor and a good connection and, so you could get that sort of project away if you’re prepared to give away, in my view, give away substantially the benefits … the attractive features of that project in a form of a pretty low priced offtake contract.
I mean we’re not prepared to do that either.
Going back to what you mentioned earlier, we have constrained capital. We certainly don’t want to be at the front of a pack that’s trying to get a project up. We want to make sure that any projects that we do develop are going to be developed into a market that’s going to give us a reasonable return.
TE: I suppose there’s a flipside to this. You’ve been developing wind projects for a very long time and probably have some very good sites with all the key milestones ticked off. That would suggest that you see yourselves in the future being in a very good negotiating position to get a good price as the impending LGC shortfall gets closer.
Is that really what you guys are expecting to see – is that we’ll see a lift in the LGC price and the value that you can extract from your projects will substantially improve in the next year or so?
MG: Yeah, we do see that. Our development pipeline does not have projects that are about to fall off the cliff in terms of the development approvals. So we are in good position.
A number of projects in the industry, as you’d be aware of, will have a problem for the developers that their planning permission will lapse before they actually get the project up. That can push people to do something, particularly in cases where the planning approval that’s been granted is not likely to be granted again.
And Victoria is the classic for that. So if you’ve got a project in Victoria that’s got a planning approval under the old regime, it probably will not pass the new regime. That’s an incentive for any developer holding a project like that to get it away or effectively lose it. Our pipeline has projects in which the planning approvals have a long way to run. So we’re not in that sort of pressured position of having to get a project up to avoid losing it.
TE: I suppose on that particular point though, you’re in competition with other people who might be in that position and they may weaken your bargaining power because other people are a bit more desperate?
MG: You’re right, absolutely. And so what that means is in the short-term… I don’t whether TrustPower is an example of that....But there are some developers who’ve been willing to sign offtake agreements with the utility at prices we wouldn’t find attractive at all and perhaps that is the reason.
So, if what you’re saying we’re going to have to wait for those guys to get out of the way before we can have our opportunity, yes I agree. Mind you in the context of a requirement for a thousand megawatts per annum we don’t think we’ll have to wait all that long. Yeah, there might be a few hundred megawatts of the sorts of projects you’re talking about that might get up, but that doesn’t particularly concern us.
TE: Do you see any opportunity or are you out there in the market place talking to large electricity consumers to see whether they may have appetite to buy direct, whether that might be say LGCs in bundles, let’s say, rather than say trying to buy their black and their green together?
MG: Yeah, we do. I mean we are talking to people along those lines. And I think that one of the notable market developments going forward is a separation of sales, electricity and LGCs.
Historically though you have to go right back to the early days in the early 2000s in Australia. They necessarily were bundled in order to attract project finance. And our PPAs, for example, most of them are bundled PPAs meaning the RECs and/or the LGCs and electricity go to the same party.
But we’ve also got some in our portfolio where they’re split, so electricity goes one way and LGCs go to somebody else. I think that model will increase going forward, so that a large user might negotiate an electricity contract with their electricity retailer and an LGC contract with somebody else, like us.
TE: There’s a reasonable prospect in the future that the carbon price could be rescinded and there is an extent to which your business has been exposed to uncontracted wholesale pool prices.
How might the roll-back of the carbon price affect your business?
MG: We’ve definitely had a benefit of the carbon price or, you know, an increase in electricity prices since the carbon price was introduced. I guess in the medium-term though we take the view that a new build project will require a certain economics and that economics is going to be provided by the sum of the electricity price, the LGC price and the carbon price and to the extent you take away the carbon price because you repeal the scheme, in order to achieve the same new build economics it just means the LGC price has to go up.
So, I guess in our view what will happen is it’s just a change for our business. It’ll be a change potentially in the mix of revenue streams that we get as between carbon price revenues and LGC revenues, but the net effect should be little.
TE: I suppose the contracts are arranged in such a way that you end up with that outcome, that sort of naturally adjusting outcome.
MG: Well, I was talking more about our merchant portfolio – so that would relate to the 45 per cent of our operating assets that are currently merchant exposed and it relates to new build. But for our existing contracted assets it’s not relevant because those… our existing contracted assets were contracted quite some time ago well before a carbon price and the carbon price doesn’t affect them. There’s no increase or decrease. It’s just the same price that’s in the PPAs that were set back in… whenever it was, five years ago.