Below is a transcript of the first part of my interview with Pacific Hydro's departing CEO Rob Grant reflecting on his time at the dedicated renewable energy power project development company. A summary of the interview is available here.
The second part of the interview, to be published, looks at Pacific Hydro's entry into power retailing and the changing nature of the power market with the emergence of solar and changing models for retailing energy.
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RG: So, since 1996 we started as a hydro company mainly because the founder of the company, Philip van der Riet, had a view that Australia had resources that were still untapped in terms of hydro. It was the right thing to do when everything was about coal and there was an opportunity at the time of the deregulation and privatisation of the power markets across Australia or particularly Victoria to start up a small company like Pacific Hydro because it was basically ten million bucks.
But he quickly found out that having developed a few projects and got them into operation that Australia didn’t have anything else to do in hydro and we didn’t have a wind market really anywhere in the world at that time. There was a bit starting to happen in the UK and Europe.
So, we then went offshore to Asia and started developing hydros up there and probably if it hadn’t been for the Asian Crisis, we would have stayed up there and kept growing up there. We successfully developed and built and operated hydro plant in The Philippines for ten years, but the ability to grow post Asian Crisis was quite difficult. We did establish ourselves in Thailand to establish a regional view of hydro in the region in Southeast Asia. It was actually from that… some work that we were doing on a project from there that one of our consultants told us of an opportunity in Chile – this is sort of in the late 1990s, early 2000 –that’s how we ended up going looking at Chile.
It was fortuitous and I think that was one of the great things about Pacific Hydro that we were small enough at the time to be very nimble. We had to really cut our cloth pretty quickly to what was available and what was working and what wasn’t. So South America wasn’t a strategic imperative for us. But once we did get there and listened and had a look around to what was possible, we pretty quickly realigned our strategy to be more South America focused while we were still trying to look at Southeast Asia.
So, both Geoff and Philip supported that strategy to move to South America or take a look at it.
I was fortunate enough to be able to pick it up when we just started the first of our projects in Chile and really just consolidate the business around growing in Chile and then to open an office and a business in Brazil. Meanwhile winding back the Southeast Asia business because the scale, growth or the opportunity for growth in The Philippines anyway which was where we were based was quite limited. We did develop some projects in Fiji as well, but got out of there after the coup because that’s not a great political environment.
So, when I became CEO having worked in Australia for ten years at that time, acutely aware of the policy risk that was upon us including political machinations in Australia. I took a view that we probably needed three legs to the stool in terms of strategy and we needed diversification and we needed partially as a function of Industry Fund Management’s (IFM) ownership at the time to have a market where we could deploy capital in a planned and strategic way.
Part of the reason for IFM buying us was to be able to deploy a lot of capital into a business to create the long term returns which their shareholders need (superannuation funds are the shareholders). So, Australia wasn’t giving us that at the time. We had opportunity. We were obviously a first mover in Australia, but it was subject to these political machinations. Chile was like those developing economies growing rapidly and putting in new power stations at the rate of about three hundred or four hundred megawatts per year and needing to grow that over the next ten years at a pretty steady rate. So having bought water rights, they were able to go and deploy capital quickly, but Chile’s a relatively small market globally and we then therefore identified Brazil as a market which probably would be the prize of Pacific Hydro ultimately. It is so big and it is really the homeland of renewable energy in the world in many respects. You know, it’s just integrated into their DNA, mainly because of a very large hydro history they have. It’s sort of akin to New Zealand, but even more so. Also like Tasmania before Basslink; they don’t have any coal firing their system up.
You go to those markets and you hear from the people that ultimately determine your destiny, which are the politicians and policymakers, that they want you there, they need you there and you’re important to their economy. For a business that’s got lots of capital at risk is really the only things you want to hear.
So, that’s sort of how we ended up there. We’ve just sought during my time as CEO to consolidate that and position it as the platform for growth for the next ten years. Basically with Brazil you don’t do Brazil, you do a part of Brazil, it’s like the US- it’s massive. And it’s growing a lot, so it’s a matter of just consolidating a couple of key positions or areas in Brazil and getting on top of those and developing projects within them.
TE: So, with Brazil I know that you’re involved in wind. Have you got hydro interests or are you looking to develop hydro projects in Brazil as well?
RG: Well, we would if they opportunity arose, but we haven’t got a competitive advantage in hydro in Brazil because they’re so expert at it.
What we saw in Brazil was all the same conditions from a resource point of view that Australia had, but pretty much ten years behind Australia in terms of policy development and actual deployment on the ground. So we were able to jump in and take a first mover advantage in wind.
And that was the right call because Brazil’s put in as much wind in five years as we’ve put in in Australia in ten years, so they just realised it. Everyone rushed in and they’ve started to build a very large wind sector - it’s ten gigawatts at the moment I think and they’ll keep going. And it’s very complementary for their hydro system as well.
TE: Can I sort of bring it back a bit. I mean was it just simply, ‘okay we’ve got a hydro capability, let’s just pursue that’. Was there ever a point where there was this sort of bigger vision of where things would ultimately go? Because why bother when all you’ve got is a two per cent renewable energy target in Australia. You do one project or two projects, you’re not really going to be able to build a long term, sustainable business. Was there a sort of overriding belief that this is only the start, this two per cent or 9500 gigawatt-hour RET is just the start and we’ll see something bigger and better over time? Or was it just take it as it comes, and we’ll sort of live hand to mouth; we’ve got a project here, we’ve got a project there, they sort of all work together and things will work out in the day? How did it evolve?
RG: When I started we were six people out in Surry Hills and it was a bit like that. A strategy meeting basically was to survive the rest of the week. Cash was always a problem and new projects were a problem and it’s very capital intensive and nothing in Australia, so go to the Philippines, God, who knows anything about The Philippines? So, it was very much a survival strategy.
We probably didn’t write a strategy plan until about 1998 or maybe even 2000, like a formal three year plan, even though we had the support of the industry funds from ’96 onwards. But even they were at a nascent stage that we were their first infrastructure investment. So they’ve gone from ten million dollars investing in us through to their current infrastructure investment of thirty or forty billion dollars. So, everybody was at the beginning.
The deregulation and privatisation of the power market was just in that early stage. The Americans were coming and the Poms were coming and buying stuff. It wasn’t really clear where it was going to go, but you knew you were part of a very dynamic and quite significant change in electricity history. Where you ended up was really just based on how big your ambition was and we didn’t have a clear picture that it was going to be hydro, or it was going to be wind or it was going to be solar.
It was just that we knew that the SECV and the old government utilities were pretty moribund in the sense that they were a bit slow and they didn’t quite pick up what was going to happen in the market. There was a growing demand. They weren’t allowed to do anymore of it.
In came the Americans. They were doing lots and investing lots and looking like they were going to grow lots.
So, in that environment it seemed like anybody could make a go of it and we would differentiate ourselves by being clean. We thought that would sell in some point in the market and have some value associated with it. In the end by 2005 we had about nine thousand shareholders and they all… some were long suffering and some just came at the end and did very well, but they were all committed to a cause. Most of them economic gain, but also to the idea that you should be able to invest in a cleaner future.
TE: Yeah. I’ve even had old shareholders at Pacific Hydro have written to me lamenting the fact that Pac Hydro became privately owned and they don’t have many opportunities really to invest in Australian listed companies that are pure play renewables. It’s hard to get one that represents a half reasonable investment to sink your money into, at least in Australia it is.
RG: Very difficult.
So, look, Asia was offering opportunities for private companies to go up and just build power stations during the time prior to the Asian Crisis. So, it was exciting in that sense.
It was, from my own personal point of view, quite a risky career step, but by the grace of God I took it and it’s been an amazing ride ever since.
But could you ever do Pacific Hydro again? Yeah, possibly, probably not. You know, we are a product of our time and more from the point of view of deregulation than an MRET creation.
You know, we will participate somehow in the move to solar. That’s not MRET really driven. It’s a consumer driven movement.
You ask the question later on about where’s it going. I think the next exciting stage is having built a dynamic company like Pacific Hydro, we’re now a… we’ve become a utility.
God help it’s boring. But the whole sector, renewables sector has become utility scale, whether you’re in Australia or around the world. Everyone’s doing wind because it’s a utility product that’s proven technology and we know that it can make a difference environmentally.
Where’s the next wave going to come? It’s the consumer finally realising that they have the opportunity to control how they basically use or generate power and possibly store it.
TE: Since you joined in 1996 it’s a long timeframe what have you noticed in terms of the progression of renewable energy technologies because you moved into wind in really what was an early stage in that industry’s evolution. Now, it’s a standard operating technology for utilities, but it wasn’t when Pac Hydro initially got involved.
RG: Look, we’ve always tried to build the company on proven technologies and ones that could be banked in the project finance market. We didn’t have a lot of shareholder capital or money to use from corporate debt. So we had to always ensure that we get as much debt into the projects as we could. Which typically meant having low risk technologies which is why hydro worked well.
Having gone to Asia with hydro, what Geoff was also doing at the time was scanning the environment for what would come next to Australia in terms of a proven technology that would be competitive in the right commercial environment. As he was out there scouting the world, wind was starting to get going in the US, a bit stop start.
I don’t know if you remember they had… the early days of wind in the US was in California and they had these very small turbines on lattice towers and they would carpet the landscape such as in the Altamont Pass in California and had a bit of a shaky start in the US. But the Europeans at that stage were, particularly the Danish obviously, were getting into it and even the English. So Geoff went across , saw what the technology was like, saw what the commercialisation was like in terms of companies executing projects with wind.
So, by the time we actually invested in wind here in 2000 at Codrington, that was the first commercial wind farm, so the first private wind farm, but there had been Crookwell up near Canberra and there was one at Albany, which are both government projects, had been built. But by the time we got to Codrington we were using 1.3 megawatt units which was the maximum size at the time and that had come through a rapid progression from about five hundred kilowatts, eight hundred kilowatts to one megawatt units in the five years prior to that. So, those 1.3 megawatt units are still running pretty well ten years later down at Codrington.
But now we would be doing two and a half, maybe three megawatt units. Again, in ten years they’ve doubled in capacity and the economic efficiency has increased substantially as a consequence. Whether they’ve hit a sort of plateau at a particular size, I think onshore probably yes at three meg, offshore who knows? They’re at five megawatts now. So, that’s really been I suppose the most dramatic transformation is that is the multiple megawatt units that are now offshore.
TE: I mean with Codrington I think that… when I was looking at the numbers – this would have been a few years ago – it was looking at about a twenty-eight per cent capacity factor for that project. What would you be looking at as a standard expectation for a project nowadays in Australia?
RG: Today you'd need mid to high thirties minimum. In Brazil we get… there are some opportunities there which are in the mid forties, amazing capacity factors.
Since Codrington everything has gone to scale, so machines, the size of the project, the connections, it’s… As we learned as a small hydro company is that it’s as expensive and complicated to do a ten megawatt or two megawatt project as it is to do a thirty as it is to do a hundred megawatts. So, to the extent you can spread all the fixed cost across a bigger asset base, a bigger project base, the more economic and competitive your projects become.
RG: The Australian story in policy terms is fascinating. We didn’t have anything up until about ’97, then Robert Hill went off to Kyoto and signed us up to the Kyoto convention and it was from that point that Australia needed to start to do something. Howard started talking about it in ’98 I think, ’99 and put the two per cent new renewables target on top of about eight or nine per cent in relative terms.
It then started to dip away in terms of political support I think when… You know, wind in the early… in the 2000s was very sexy and everyone loved it and thought it was great and new technology and Australians love to adopt, be new adopters.
But it started to get a bit difficult around the mid 2000s and we were trying to get Portland up at that stage and if you remember, Cape Bridgewater had actually been taken as a development project by I think it was Energy Development, EDL, one of the other developers at the time, it had been taken to VCAT (Victorian body charged with ruling on appeals to planning approval decisions) and been knocked back and…
TE: So, did they originally have the Cape Bridgewater site for wind?
RG: Yeah. They had it and they sought to have it as a… and same when the Codrington was built, built it pre MRET and it had been taken to the… got taken to the VCAT and knocked back mainly because there’d been a similar sort of thing as the Altamont Pass. They were going to carpet the landscape with small and fast spinning turbines. So, we ended up buying the project mainly to get the data from Cape Bridgewater to correlate with Codrington and then we ended up owning the project. What we realised pretty quickly was that it was the premier site for Victoria in and around Portland, but having been knocked back by VCAT, you couldn’t do anything with it.
So, we put in place a development proposal that had the planning approval for a much larger project which included Yambuk which is really Portland stage two and got approval for the one next door to Codrington which is Yambuk and then the ones at Cape Bridgewater, Cape Nelson, Cape Sir William Grant under a ministerial approval to deal with the previous VCAT issue.
It was part of that approval process that we needed to provide the undertaking to build a large component of the machinery in Portland, so it was going to have the benefit of not only reducing CO2 and providing capacity for the MRET, but also to put employment and a new technology into Portland.
Hence the need for whomever we chose as a supplier for our Victorian projects to set up manufacturing and that’s how Vestas, or NEG Micon at the time, came to us with a blade manufacturing facility. We selected them. They set up a blade manufacturer down there. And then they starting exporting the blades.
But unfortunately what started to then happen in the mid 2000s was that federal support was running off, the Libs were getting cold feet about it.
We encouraged the Labor government in Victoria to put the Victorian Renewable Energy Target (VRET) in and that sort of mid 2000 period was supported by VRET rather than by MRET.
A change of government in 2007 and off we went with the 45,000GWh target after that.
But the thing is all of that policy tooing and froing takes an enormous toll on the business and it’s quite disruptive in terms of the way you go about planning and funding and structuring your people. I mean the political risk in Australia is probably higher than Latin America,in many respects around this particular this issue. Hence that need for us to get offshore in somewhere where policy is not a problem, where it doesn’t oscillate between 2 per cent and 5 per cent, state, federal, all of that, issues that we had in the 2000s here.