Q&A: Pacific Hydro's Lane Crockett

This is part one of a two-part interview with Pacific Hydro's Lane Crockett. Part two will be published tomorrow.

In part one, Crockett discusses:

- Whether the 20 per cent renewable energy target (RET) can be achieved

- The economics of developing wind power projects

- The review of the RET, regulatory uncertainty and power purchase agreements (PPA)

CAN THE 20 PER CENT RENEWABLE ENERGY TARGET BE ACHIEVED

TE: According to projections from Green Energy Markets to meet the renewable energy target we'll need somewhere in the realm of one thousand to fifteen hundred megawatts of new renewables capacity going… being committed every year starting this year till 2018.  Do you believe that such a target can be met?

LC: Oh, easily, because I mean the renewable energy industry has been working to get those projects ready for quite some time now, so it's almost… it's like a frustrated pipeline of projects ready to go out there.  It just needs the market signal to start delivering them at those levels.  So, the resources are here, the investment is available, the debt is certainly available, it's just literally… and the projects…  there are many projects through the planning system that are… well, not… ready to go tomorrow, but are substantially ready or what you might be call advanced development.  So yes, absolutely.  And the problem that can occur is that if there's no contracting… If you try and compress those what sort of six to eight thousand megawatts into a few years down the back end, that's when you're going to have an issue.

TE: Yes.  Okay.  But I suppose if we start seeing the retailers coming to the table reasonably soon, then you don't see a challenge there where you're running out of time and trying to build too much, too quickly?

LC: Not at all.

TE: Okay.  At the same time there seem to be a number of challenges emerging with developing projects in various different states. There have been issues around South Australia that now that we have such a large amount of wind in one area, we see pool prices being noticeably reduced when we've got high wind events and potentially there being in the near term constraints placed on the interconnector with Victoria. Then at the same time I think everyone was looking at well we'll move on to Victoria, we'll develop projects there, but now we've seen changes in the planning regime that make it much more difficult. That's something that Pacific Hydro have pointed out that some of those rules were perhaps excessively onerous. And New South Wales are also looking at putting in some new guidelines too.  Do you see them as perhaps getting in the way of this very rapid pipeline that we need to start rolling out?

LC: Okay.  I guess I'll start back at South Australia where you started.  In South Australia you're right, but I wouldn't necessarily call it a saturated market. Certainly it's not such a big demand in that state and you now have enough generation that you're not actually actively seeking new generation and the price is becoming reflective of that.  However, it won't take much to change that, so if some of the bigger loads that could come online do come online, like Olympic Dam and there's also some augmentation on the interconnector underway I understand that can change the game there quite quickly.  So yes, as of today, it's probably not the most attractive market for new investment because the prices are quite low.  Mind you, that's good for South Australians.  It means that that investment has been made in their state.  They've got the benefits of the jobs and the economic activity there and lower energy prices as a result. 

Now, in Victoria it's a different scenario.  As you say, one of the issues that has come up is planning.  I don't see the planning in the short-term as being a problem because there are – I'm trying to remember off the top of my head – a couple of thousand megawatts of planning approved wind farms.  So, in the short-term there are a whole lot of wind farms that are readyish to go. So it's more of a longer-term issue for Victoria who will miss out when the companies or the community wind farms that were going to try and get planning approval won't even attempt to go ahead with it. So beyond the projects that are approved now you can't really expect much to happen after that.  So, Victoria is okay in the short-term, but in the medium to long-term, it will lose out. 

And then New South Wales… Look, New South Wales is a very prospective market, but I guess the planning part of it we don't know yet how it will pan out.  There's been quite a bit of consultation around that new planning regime, but to be honest it's not quite clear whether it's facilitating or making more difficult what we do. 

But I guess the comment on planning in general is we support a merit based planning system, so each project is assessed on its merits and certainly you can have criteria that it should be assessed against and it's openly done, done in the way that planning has been done for centuries. But what we very much do disagree with is putting arbitrary limits or arrangements in where people have rights of veto and that sort of thing. 

ECONOMICS OF DEVELOPING WIND POWER PROJECTS

TE: Lane, wholesale pool prices right now are pretty depressed and also the REC price seems to be stuck at around forty dollars.  Do you see this situation improving in the near term?  And what prices do you think we need to make new wind farms viable?

LC: Okay, let's start with the energy price. The energy price this year or in the last financial year has been very low and many people would say unsustainably low. We expect of the first of July for there to be a corresponding change in the energy price to account for the price of carbon.  How that will affect the merit order and any sort of market pricing effects at this time is hard to say.  But certainly there'll be some adjustment for carbon. So, certainly ... from an investor and a generation owner's point of view, that's good and to be frank, from a person who is buying the electricity from a purchase point of view, it shouldn't really make a great deal of difference because the wholesale rates are unsustainable and effectively a buyer is paying for … higher prices anyway because the spot price isn't necessarily reflective of the contract price in the market.  So, retailers have assumed a higher price even if they were paying a lower price on the spot market.

And as you also rightly say that price of RECs at probably a shade under $40, needs to be a bit higher.  It needs to be around the sort of $50 mark to bring in new investment for onshore wind farms, for example.  So, generally that's why you're not seeing a lot of new projects go ahead right now because the price, the market prices and the market signals are too low. 

In saying that, there's probably no better time than today to contract long term for a new wind farm.

TE: And why is that?

LC: The cost of wind turbines are about as low as they've ever been. That's partly because of the Australian dollar and it's partly because the market for turbines is soft worldwide and it tends to be driven a lot by the US market. And the US market, because of some regulatory uncertainties, is in a low demand phase and so turbines are really good value.  So, if you're a retailer looking for a PPA, there's probably no better time than right now.

THE REVIEW OF THE RET, REGULATORY UNCERTAINTY AND OBTAINING LONG-TERM POWER PURCHASE AGREEMENTS WITH ELECTRICITY RETAILERS

TE: At the same time there's quite a bit of regulatory uncertainty surrounding what's going to happen with the Renewable Energy Target.  I think while what we're hearing from the political parties that there is bipartisan support, there's nonetheless a review of the RET coming up this year.  In addition the underlying wholesale price of electricity is dependent on the carbon price and we don't know what that might be over the life of a wind farm investment.  Do you think that until those issues are resolved we're going to continue to see some reluctance on retailers to contract quite entirely legitimately? 

LC: Well, I wouldn't say it was legitimately.  There is really frankly no reason to assume that there's regulatory risk around the Renewable Energy Target.  There's a review, yes.  I accept that. 

The review looks at the efficacy of the legislation.  It's not there to look at the targets and I think you'll find when the terms of the review come out that will be quite clear.  It's not there to say, 'ooh, should we make it 15per cent or 25 per cent'.  It's there to say is the legislation working to do what it's supposed to do because it's looking at the performance of the legislation relative to the objects of the act.  The objects of the act are that the targets are being met and will be met. Now, they have been met obviously, but the reviewing authority will also look at will they be met and then it will determine from there, but it's not within its remit to say if the targets should be moved. 

And the Renewable Energy Target is the number one item of legislation that underpins new investment in renewable energy.  Also it almost doesn't matter to some extent whether there's a carbon price or not.  The renewable energy target will still enforce that there's 20 per cent of energy will be from renewables in 2020. 

And the fact is there's a review of the Renewable Energy Target every two years, so to think that every two years we'd go through this and the target might potentially be changed is not right.

TE: Okay.  I think the forward price for wholesale electricity prices is something in the realm of $55 once the carbon price is introduced midway through this year, so we're seeing the carbon price uplift already, and at the same time you said a renewable energy certificate price in the realm of $50 would be about right to make projects look commercially attractive. 

I suppose the issue then is come 2016 when Tony Abbott has had his double dissolution election that he's promised us, then we might see electricity prices drop back again to very depressed levels.  Do you think that there's enough room there though for the LGC /REC price to be flexible such that really there's no excuse not to contract with renewable developers?

LC: I guess you have to hope so.  The penalty in tax-effective terms is $93 per MWh. That should be sufficient in combination with even depressed electricity prices to make it worthwhile… although some of the modelling suggests it gets pretty close to that penalty. 

But I would have thought you wouldn't want to be a retailer that's in a situation of paying a penalty because of the reputational issues.  All of those retailers are selling, the big ones are selling to mums and dads and I'm sure they don't want the reputation of their business tarnished by having to pay a penalty because they didn't contract well enough and in advance to ensure that they meet the target.

And you only have to have one retailer meet their share of the target and then you'd have to question… then effectively no other retailer has the excuse not to.

TE: Pacific Hydro's Chairman, Garry Weaven, on ABC Radio's Saturday Extra program stated in relation to the Renewable Energy Target, “We need the retailers not to play games and to start actually providing contracts for the output of new wind farms. Essentially that's what it's about, rather than hanging out for perhaps some change in policy which will allow them to continue with their coal-fired assets or to build gas assets.” 

I know that wasn't your statement, Lane, but in what way do you see the electricity retailers playing games in any way, and do you think there's a justification for the ACCC to intervene to prevent further concentration and vertical integration in the electricity market?

LC: Well far be it for me to say what my Chairman meant to say, but to go to the factual basis on which Garry's coming from is the fact that Origin have been out in the public saying well look, why don't we have a 25 per cent by 2025 target. But at the same time they have been seeking a relaxation in the target between now and 2020.  So, Garry is quite right in saying that some of the retailers have been looking to alter the look of the target. 

We're of the view that there should be an orderly rollout of infrastructure under the renewable energy target because that's what will provide the most efficient use of resources and the most cost efficient outcome.  Because there are two real reasons for the RET: one is to build industry capacity in renewables so that we can manage our transition to a clean energy system; and the other is to achieve the emissions reduction through the lowest cost rollout of renewables.  So, to that second point, to have an orderly rollout will mean the lowest cost.  If you put it all off through back-ended the target to 2025 you're going to pay a lot more for it because resources will become stretched. You're going to have to pay more for things, you have to bring out massive cranes from overseas to be able to meet the targets for erecting a number of wind towers within a set period of time.

So, what I think Garry is saying is it's much better for the energy industry as a whole and for consumers to do it in an orderly fashion. Then the point comes to well, there is a great deal of power held in three large, integrated energy businesses. And I suppose the concern is if those businesses take a bit of an exception to a certain piece of government policy, are they likely to attempt to try and operate in a way that may harm that policy or make it difficult for it to operate? 

So look, I think there's nothing wrong with the ACCC looking at the way that things are working. But I would have thought probably the Climate Change Authority - who's doing the RET review – will need to try and understand how those three big retailers are operating because they are the game.  At the end of the day, they do… most of the contracting and the obligation is through those three big parties.

Part 2 of this interview will be published on Friday and will cover Pacific Hydro's interest in solar including their Solar Flagship bid, as well as their entry into electricity retailing and what kind of things the Clean Energy Finance Corporation could do that might assist or be counter-productive to the renewable energy sector.