Q&A: Pacific Hydro's Lane Crockett - Part 2

In part two of an interview with Tristan Edis, Pacific Hydro's Lane Crockett discusses:

-- Entering the electricity retail business

-- Moree Solar Flagships Project

-- Solar projects beyond Moree

-- The Clean Energy Finance Corporation

ENTERING THE ELECTRICITY RETAIL BUSINESS

TE: It seems that Pacific Hydro have decided if you can't beat them, you might as well join them with your announcement that you'll be establishing an electricity retail business.  Do you think you can build this up to a level on the timeframe that you'd like to build out your power project development portfolio without PPAs from the major electricity retailers?

LC: Well, no.  Just because we're opening a retail business doesn't mean that we are not out in the market seeking PPAs for projects that are under development.  We see them as acting together.  So, for us it's just an alternative path to market.  So, at the moment we have some contracted plant, we have some merchant plant where we use financial hedges and other instruments to sell both the energy and the RECs, and the third pillar of that revenue strategy will be to sell directly to retail customers.  So, to us these all three can live quite happily together and it's all about getting the infrastructure in the ground in the most cost efficient and effective way.

TE: Does Pacific Hydro have any targets for the amount of gigawatt hours of customer load you can manage to obtain and the mix of customers that you're looking for in building up a retail arm?

LC: Yeah, of course. But it's not something I can elaborate on at this point in time.

MOREE SOLAR FLAGSHIP POWER PROJECT

TE: Now, the solar flagships… you were one of the original winning bidders.  That's now being reopened for tender.  How optimistic are you that Pac Hydro can succeed in the reopened tender considering you're competing against two other bidders who are energy retailers that aren't likely to face the same problem you've encountered with securing a power purchase agreement (PPA)?

LC: Well, ultimately it's someone else's decision of course, but in terms of our confidence, we believe that we addressed the issues that were stopping us getting to financial close.  There were effectively two of those.  One was that commercially the project had some issues that weren't quite working and by going out into a competitive market and getting much lower capital prices, we were able to then sort that out.

TE: That sounds to me like you've got a new panel supply contract with substantially lower prices, because obviously BP Solar was an original member of the consortia and now they're no longer in the solar panel business.

LC: Correct.  And by going out into a competitive market today, nearly a year after we were awarded the original tender we were able to secure far lower module prices to deliver that project.  And so it means we were able to pass on a greatly reduced funding request to the Commonwealth Government.  So, that must be very attractive to the Commonwealth Government. 

On a secondary point, we were having trouble securing a power purchase agreement in the market. We had been in discussions with both TruEnergy and AGL because once we'd won the tender it had become non competitive. But when they [the Government] reopened the tender  - it went back into a competitive situation and we were no longer able to discuss power purchase agreements with them. 

So, Pacific Hydro stepped up to the plate.  Because we were entering into a retail business anyway, we determined that we could do a power purchase agreement ourselves and then on sell the energy into both the retail and wholesale markets.

TE: So, does that mean you're taking a merchant position or that you'll have some customers contracted or are already contracted such that you're not exposed to pool price risk or renewable energy certificate price risk?

LC: Sort of yes, yes and yes.  What we've come up with – and I don't really want to get into it in any detail because it's a part of a competitive bid arrangement – is a mix of those things.  But effectively Pacific Hydro, because it writes a PPA for the project, while it will look to pass some of the risk on to other it will take a hundred per cent merchant risk from that plant.

TE: Very, very interesting. 

LC: But I'll just put that in context.  We already own merchant wind farms in Australia and we already manage, energy and [renewable energy] certificates coming out of those merchant plant which aren't in long term contracts, so this is not a new business to us in any way.

TE: Yes, but when some of those other projects were developed as merchant plant, finance was much easier than it is today post the Global Financial Crisis?

LC: To be honest the debt market hasn't really changed much for projects whether they be merchant or non merchant before or after the global financial crisis.  If you had a plant with a long term PPA, all banks even before or after [the GFC] see that as fairly low risk and will come in and gear it to a certain level.  They will gear a merchant plant to a lower level and that might have shifted a little bit, but effectively you still get the same structure; you just pay a little bit more for it.

SOLAR PROJECTS BEYOND MOREE

TE: Are you looking at pursuing any other solar projects outside of the Moree project?

LC: No.  Look, at the moment the Moree solar farm really is our number one solar project.  We're waiting to see what happens with that before deciding where we're going to go next with solar.  It really needs a lot of focus because it is a big plant and there's a lot of work involved in it. It takes up a lot of time and resources and you've got to remember that is sits alongside our development pipeline of four hundred megawatts of wind. So we've got to be careful not to take on too much.

TE: As you mentioned in response to the prior question, solar PV panel prices have gone through incredible price reductions within a very short period of time.  Does Pacific Hydro see solar PV as a possible material competitor to wind in capturing a share of the large scale Renewable Energy Target?

LC: Yes.  Exactly when and by how much, I couldn't say, but people like Bloomberg have done the analysis on this.  They say somewhere between around 2014 and 2018, there'll be some sort of change in direction of technology mix.  I guess it also depends on factors beyond just the underlying power generation technology. There can be quite big differences between projects using the same technology depending on region and resource quality. So, the economics of a project in the windiest parts of South Australia versus the less windy parts of New South Wales can be quite a broad range. It could be possible that some PV projects could slot in between those reasonably soon, but it's still some way to go. PV is going to struggle to compete with a good wind site in Victoria for a while yet.  So, there's a lot of variation to consider in answering those sorts of questions.

TE: So, the bottom line is it's the future and we can't be certain, but there are some signals there that if this trend in panel prices continues then it could be a player in the Large-Scale RET?

LC: Yeah.  Look, I don't expect the price of panels to keep falling at the same rate as they have.  I mean it's been quite extraordinary in the last two years.  So, that will flatten off to some extent I think but you can't be sure.  So, it'll be interesting to see as it sort of levels off a bit how quickly it will compete with wind.

CLEAN ENERGY FINANCE CORPORATION

TE: It looks as though the Clean Energy Finance Corporation will not be cordoning off renewable projects it funds from creating renewable energy certificates.  Are you comfortable with what's being proposed or is it something that concerns you significantly?

LC: Well, I suppose to be correct, it was recognised that there could be interaction between what the Clean Energy Finance Corporation does and that it could create some distortions in the renewable energy target market.  So, firstly that's good.  That's something that Pacific Hydro was very upfront about and a number of other industry players that they should recognise the potential harm that could be done to that (the Renewable Energy Certificate) market. 

Now, obviously we're going to have to work with them from here on to try and put something in place to ensure that they don't end up undermining the REC market and I guess it comes down to materiality.  If they are going to just do a few projects here and there, then they're not really going to crowd out the Renewable Energy Target. But if they were to bring forward the whole five billion in quite a short period of time with a massive amount of projects, clearly that would distort the existing market.

But, they've got other things that they can be doing as well which was in the report. They recognise that there may be some opportunity for them to support investment in infrastructure.  And I'm not really talking about infrastructure to support the twenty per cent RET.  I'm thinking more about infrastructure that would support the renewables beyond the twenty per cent RET. Potentially laying the platform for  future renewable energy development beyond the 20% RET. We believe that would be a really positive and effective way of helping the country to achieve the long term energy transformation. 

TE: So, that would be, for example, supporting demonstration projects in say geothermal or solar thermal. And funding power line infrastructure on timelines post 2020.  Is that what you're thinking about?

LC: Well, the large transmission infrastructure takes years and years to plan and then develop and then build.  For example just creating the easements and then doing the planning … it just takes an extraordinary long time.

 The problem that we have is that we have some very resource rich areas that you just can't connect into at the moment.  You've got the wind in the Eyre Peninsula.  You've got mammoth geothermal resources in mid and north South Australia.  And then if you look at solar thermal opportunity which is west of the Great Divide. We've got a great backbone coming down the coast of eastern Australia, through Queensland, New South Wales and Victoria, yet as soon as you start to go inland that becomes stringy little lines. So if we're going to transform away from polluting coal to clean solar thermal - which could be the best long term method of generating dispatchable energy – then that's something that's eventually going to have to happen. 

TE: It seemed to me from reading the Expert Review's report that the Clean Energy Finance Corporation could even potentially see itself playing a role in funding wind farms. Perhaps there's a role there for them to help independent power project developers such as you in overcoming some of the difficulties you've been encountering with obtaining PPAs. For example, they might be able to finance merchant power projects where banks may be too uncomfortable with providing the level of debt that you'd ideally like to lower your costs as much as possible?

LC: It's a tricky one, that one.  Look, I think there's a bit more thought to be done on what could be done by the CEFC to help get the investment flowing under the renewable energy target.   Yes they didn't restrict wind from funding, but there are some sensitivities around doing that.  Some of the retailers develop their own wind farms.  They might see that as some sort of distortion to the market for them that was unreasonable. 

TE: Okay, let's move onto another example. Western Australia was one of the most attractive places for new wind farm development. The underlying cost of power is very high and they have excellent wind speeds there as well. Yet while there's a large number of projects planned for north of Perth, there isn't enough power line capacity to connect them.  There's been a proposal sitting there for many years to upgrade that power line but the regulator has balked over who's going to pay for it. Do you think that's a legitimate role for the CEFC to be a circuit breaker that could come in and help fund those projects and then recover costs through some other means rather than a regulated rate of return?  

LC: That's effectively what we were advocating for, probably on a more generalistic basis rather than trying to be specific like that.  This could help enable deployment of very cost efficient renewables  and I imagine particularly in that case you've talked about there'd be a lot of end energy users that would appreciate that new infrastructure as well.  So, I would say there's some potential there. 

But I guess what it does highlight which is something that we consistently argue for, is the fact that the regulatory arrangements both in Western Australia and in the rest of Australia are not well set up for new entrant investment and infrastructure. And they certainly at the moment don't take into account at all our… the country's intent to transform the energy system. 

Part one of this interview can be found here.