Rising above a solar setback

The Conversation

The ‘collapse' of the Solar Flagships Program has recently hit the news. With Minister Ferguson re-opening the bidding for the photovoltaic (PV) component of the program, and extending the deadline for the solar thermal, it is worth exploring some of the issues surrounding the collapse, and the current environment. Much has changed since the inception of the program, particularly the cost of PV.

The failure of the projects to secure financing illustrates a key difficulty facing renewable energy project developers, namely obtaining Power Purchase Agreements (PPA). PPAs are contracts with an ‘off-taker', generally a retailer, to purchase the electricity generated for a period of time at a certain price. They provide a degree of investor certainty to ensure the project's ‘bankability'.

Without a PPA in place it is proving impossible for large-scale solar developers to secure financing from lending institutions.

For renewables, the cause of this difficulty is two-fold. There is a soft market for renewable energy certificates, and retailers are reluctant to enter into PPAs with third parties.

Under the Large-scale Renewable Energy Target (LRET), retailers are obliged to purchase what are now known as Large-scale Generation Certificates (LGCs) produced by a renewable source. In a previous certificate scheme, a combination of factors resulted in solar PV creating an excess of certificates (ultimately collapsing the scheme). Retailers ‘banked' these excess certificates, and subsequently there has been little need for retailers to enter into new agreements with renewable energy generators.

The subdued demand for certificates and the subsequent slump in certificate prices has been one of the main difficulties in negotiating PPAs for renewable developers.

Renewable energy developers – including all third party developers – are almost entirely reliant on securing a PPA with one of the big three retailers. The growing trend of vertical integration – the ‘gen-tailer' (generator retailer) model – makes this an increasingly difficult exercise.

The big retailers are now developing their own renewable energy projects, removing the need to involve third parties and sign PPAs with other developers. This situation also creates a natural hedge against certificate prices for the retailers (as they become both the creator and purchaser of certificates).

In this context, negotiating a favourable PPA as a prerequisite for financing was always going to be difficult for the Flagship contenders.

Decentralised rooftop vs large-scale centralised

Compared with concentrating solar thermal, PV is hard to scale up. This is because PV panels are highly modular. In the short-term, this means a distributed configuration (such as rooftop solar) has substantial advantages compared with a large-scale centralised approach.

Distributed generation can compete with the on-site retail price of electricity. This is typically four times higher than the price found in the wholesale market: the market in which a large centralised system has to compete. With the recent and substantial cost reductions, the point at which PV can compete directly with retail electricity prices, known as ‘grid parity', is rapidly approaching.

Given the smaller price gap, and the limited economies of scale, supporting distributed rooftop power in the short-term can be less expensive. This is something well recognised by Germany, which has recently stopped offering support to greenfield (where there is no existing structure) solar developments.

To date, the state based feed-in tariff (FiT) schemes, alongside the Small-scale Renewable Energy Scheme (SRES), have been supporting the deployment of such distributed solar. According to the Office of Renewable Energy Regulation, the installed capacity in Australia was over 1280 MW by December 2011. Although no official numbers are available, the current installed capacity today has been estimated to be as high as 1500 MW.

This provides a stark contrast to the failed large-scale PV project in Moree. As Greens Senator Christine Milne recently said, “we're three-and-a-half years down the track and nothing has happened.”

In that same three-and-a-half years, Australian FiTs have delivered almost ten times the capacity of the proposed Moree solar farm, while the highly effective German feed-in tariff has delivered over 15,000 MW of PV – one hundred times the capacity of the proposed Moree solar farm. In fact, the average installation rate in Germany last year, supported by FiTs, was equivalent to one Moree solar farm per week.

Feed-in tariffs are not without their costs. They have been criticised for the resulting charge levied across consumers (with several states initiating reviews into their costs). However, the German experience shows that well-designed schemes can manage costs by adjusting tariffs as PV prices fall, in an efficient and programmatic system.

This is quite unlike the ad-hoc adjustments in the Australian markets. These have created ‘boom/bust' cycles in the PV industry, and prompted calls for a nationwide harmonised approach to feed-in tariffs.

Importantly, the Germans consider the merit order effect, which considerably offsets the costs of FiTs, something currently overlooked in Australia. What's more, FiTs (both large-scale and small-scale) also generally include a ‘purchase obligation': this eliminates the need for a PPA, creating a truly level playing field.

The recent Grattan Institute Report seemingly foreshadowed the outcome of the Flagships Program, noting that “direct government grants to companies … [have] a poor track record both in Australia and overseas. Little of the announced money is ever sent”. Given the suitability of PV as a distributed generator and the difficulty in obtaining PPAs, considering other effective support mechanisms is warranted.

Dylan McConnell is a Research Fellow at the University of Melbourne. This article was originally published on The Conversation – theconversation.edu.au.