Special Report Part 3 - Whyalla Solar a lesson in markets

The saga around the Whyalla Solar project teaches us that grant-tendering is a thicket of thorns. Markets and price signals deserve greater consideration.

This is the third part of our special report investigating how the Whyalla Solar Oasis project came to flounder. Click on these links to access Part 1 and Part 2.

As explained previously, the government, via the Renewable Energy Demonstration Program (REDP), had got itself into a pickle. It had announced $60 million for the Solar Oasis’ Whyalla project involving 300 solar concentrator dishes, yet only a single prototype of the dish technology had been built with limited operational testing. Furthermore there was little sign of progress on the next iteration four dish project funded under an earlier grant.

To control for the risk that the Solar Oasis might not deliver, the government asked them to jump through a series of hoops in progressing the project as conditions for receiving funding. This led to a protracted 22 month negotiation to iron out a range of problems associated with government’s lack of understanding of the technical and commercial practicalities involved in staging the project. Finally a funding deed was signed off in March 2012.  

The challenge of raising financing

However while Solar Oasis now had an agreement with the government for $60 million (but highly contingent should something go wrong), they still needed to secure a further $170 million from other financiers.

Even with government funding, Solar Oasis’ economics as a standalone project appear highly challenging based on public information. 

To provide a simplistic comparison, developers find it difficult financing wind farms which cost about $2 to $2.5 million per megawatt of capacity, producing about 35 per cent of their rated capacity on average. Even after the government grant, Solar Oasis involved a capital cost of $4.25 million per MW but would only produce about 19 per cent of its rated capacity on average. For each MW of full output the capital cost of wind is about $7 million versus $22.5 million for Solar Oasis. 

In its favour Solar Oasis would produce power during the day and particularly during hot days when power prices are at their highest. But it is hard to envisage it could capture three times the revenue of a wind farm to make up for the higher capital cost.

When the government announced funding for the project it left a number of experienced players in the renewable energy sector scratching their heads as to how such a project could manage to fly.

Still Tony Roby, former executive chairman of Wizard Power, is adamant that the project had a range of highly credible financial backers, and the economics were viable due to a range of innovative commercial structures. 

A new crew takes control in government

While Solar Oasis was still engaged in negotiations over the funding deed, there was yet another change in government machinery. The government, in a deal with the Greens, agreed to establish the Australian Renewable Energy Agency. ARENA would now take on responsibility for all the REDP projects including Solar Oasis. 

This involved a new set of personnel, most with no ties or reputation bound to prior government funding decisions. In addition it had dawned on the Department of Resources, Energy and Tourism that it had precious little to show for several years of low emission energy programs.

Midway through 2012 the government finally pulled the funding for the oft delayed HRL brown coal power project. No doubt sceptical eyes were being cast elsewhere too.

Solar Oasis lost a major financial backer around this period, which would no doubt have drawn the attention of ARENA. The lack of an operating pilot plant, the challenging economics, the problems over the energy storage project, and the long delays over the funding deed would probably have all played on the minds of the ARENA board.

ARENA calls time

According to Roby, a very well capitalised Chinese state-owned enterprise was keen to fill the gap. But Solar Oasis needed the government to extend deadlines set-out in the funding deed while this prospective investor undertook their due diligence. ARENA was willing but wanted evidence this investor was thoroughly committed to the project once their due diligence was complete. 

Roby believes the evidence ARENA wanted was entirely unreasonable.

ARENA’s CEO Ivor Frischknecht says it wasn’t anything beyond standard commercial practice, but was unable to say exactly what they asked for.  Roby counters that ARENA had no need to obtain detailed assurances anyway. ARENA had no money at risk until plant was built and operating. In addition the commitment of the Chinese investor would have been addressed through a binding contract with it all documented and available to the government at financial close before construction commenced. 

What can we learn from this debacle?

With the information available it’s simply not possible to discern whether the government was right to withdraw its $60 million in funding. But this is not really the question we should ask. 

The story of Whyalla Solar is one that has been repeated over and over again across many projects funded under Australian government grant programs for low emission energy technologies.

So the more critical question we need to ask is: how on earth can we avoid getting into such a difficult and protracted mess in the first place?

So far the government’s approach to supporting low emission energy technologies has been: ‘let’s put out a tender and see what ideas float up and then commit to fund a handful of once-off projects that we think are the best ones.’

Yet while such an approach sounds logical and straightforward, in reality it has prickles all over it.

Firstly, defining what are the ‘best ones’ to date has been incredibly vague and open to highly subjective judgement.

Also as soon as government decides it wants to provide support through committing money in advance to individual projects it enmeshes itself in not just technological, but also commercial risk. The government is essentially tying itself to a project proponent’s ability and motivation to successfully and deliver the project on a timely basis and then operate it over an extended period. 

If you chose poorly you could find taxpayers money sunk into a half-built power station, or a barely functioning power station. But because government is generally highly conscious of such risks, what has tended to happen is not very much at all, and the money ends up back in Treasury’s hands.  

There are circumstances where committing money upfront is unavoidable and indeed desirable. For example, the ANU big dish prototype tells us a great deal about the potential of this technology. But it wasn’t set-up to maximise generation of electricity or other sources of revenue. It’s highly unlikely such a project would have ever been possible without government agreeing to provide funding as it was constructed.

But this raises another critical issue: developing successful new energy technologies has never been achieved through a once-off single project, but rather a long process involving multiple iterations. There’s not much point supporting development of a prototype, a pilot or even a commercial-scale demonstration without thinking through the likely need for government to continue to assist at the next stage.

Wizard Power’s technology has been awarded government grants for several stages in the scale-up of its technology, but they were entirely a product of accident rather than design.

The other issue we need to consider is whether we even needed to commit money to Wizard Power and the offshoot Solar Oasis specifically. There are lots of other companies with promising solar thermal technology and energy storage. What made this technology attractive was its potential to provide low emission power when we most need it, from a resource (sunlight) that is almost unlimited. So why not establish a market for electricity where anyone who actually delivers these valuable attributes is rewarded? And why attach minimum requirements around project size to qualify? 

Using markets and price signals to get what we want are much harder to establish than simply calling a tender. But they could potentially avoid an awful lot of pain later down the track.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles