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Australian Energy Week, 8 – 11 May 2018

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18 May 2018

Developments and trends in meeting the Renewable Energy Target

11 May 2018

Mark Williamson, Executive General Manager

Presentation slides

documentasset:Developments and trends in meeting the Renewable Energy Target, from Australian Energy Week 2018

The major announcement in this presentation – and we’ve issued two market updates about an hour ago on the Renewable Energy Target – is that we are saying that there is now enough large scale renewable energy build that is both fully financed and under construction to meet the 2020 Large-scale Renewable Energy Target. We originally said that all the build that was necessary to be under construction by the end of this year, so it is ahead of schedule. I’ll also be showing you that there is still a lot more to be announced and moving into the construction phase. Of the build that we say has financial close and is under construction, I’ll also be showing you that almost half of that is either already built or generating, or is getting very close to the point of first generation.

While we put all our data up monthly and very transparently, we do think everybody is underestimating the pace and I’ll give you some of the evidence for that.

So what I’m going to cover is clearly the Large-scale Renewable Energy Target will be exceeded, I’ll give you a bit of a breakdown of the pipeline. The commercial and industrial area – all market analysis is underestimating what’s happening there – it is really in a vertical take-off and that will provide surprise liquidity in terms of large scale generation certificates. I’ll talk a little bit about prices because spot LGC prices are still high even though we say the target will be exceeded. Last year was a record for small-scale and again today we have made an announcement – another market update – on the small-scale scheme and we are saying that it looks like this year being a new record year again. And then I’ll finish off with some resources you can have a look at.

When the Large-scale Renewable Energy Target was reset in mid-2015, we tried to quantify that to a megawatt hour build. We said that excluding the ACT Government and GreenPower which was additional, there was about 6 gigawatts of additional build that needed to be committed, through a final investment decision, by the end of 2018, and all be built by the end of 2019. We assumed in that a 75% wind, 25% solar mix, which was quite bullish on solar at the time. But today in our market update we are revising that 6000 to 6400 megawatts, because of the high proportion of solar that I will step you through shortly. So firstly of that required build, which we say is 6400 megawatts – over 1500 megawatts of that has been accredited under the Renewable Energy Target and is generating. We also have over 1500 megawatts of accreditation applications before us, so we accredit before the point of first generation, so it’s another 1500 odd megawatts which is very close to the point of first generation. The rest is between that and a little over 6 and a half thousand, so past the 6400 has a final investment decision, financial close and is under construction. In addition to that we say there is another 1450 megawatts with power purchase agreements between strong counterparties that we expect will go on to be fully financed this year and under construction. So that brings us to a total of over 8 gigawatts that we believe will be under construction or already built before the end of this year.

In terms of build times, we are seeing large scale solar projects being built in around eight months, we are seeing large wind farms reaching first generation in about 14 months and then progressively ramp up to full generation over the next say four to six months.

So this is one of the major shifts we’ve seen in the market – the first 6 gigawatts built in the first 15 years of the scheme only had four per cent solar, this next pipeline of almost 8 gigawatts that we say is firmly announced, with six and a half of that under construction or built, it’s almost half solar. And of that solar, a huge shift has been the amount that’s gone single axis tracking, and most of the projects that haven’t gone single axis tracking are close to the coast in Queensland where there are cyclones and they couldn’t necessarily get all the warranties for the trackers. So this produces one high capacity factor for solar compared to fixed panel solar but also generates a lot more early and late in the day, to kind of constantly match peak demand.

This is a bit of a state by state analysis, so you can have a look at that later, these numbers do in fact reconcile with my earlier slide. The below the line is the firmly announced, the above the line is the accredited. So this includes the baseline generation such as hydro that was in place when the scheme started operation. So 15.7 gigawatts in total, about 6 and a half thousand below the line which is the stuff that hasn’t been accredited – so this has regard for swinging into the accredited, that 1500 megawatts.

The states where the action has been happening is primarily Queensland, NSW, Victoria and to a slightly lesser extent South Australia. It has been fairly low in the West so far but we do think there will be projects to come.

Now this is one of the real surprises on the upside – last year we accredited about 27 megawatts in the large scale scheme between a 100 kilowatts and 1 megawatt capacity – so commercial and industrial scale. This year we have had about 100 applications, and we could get anywhere between 500 and 1000 applications and anywhere upwards of about 140 megawatts, and given the shape of this graph here it’s just really hard to know where this might go. So this is clearly a sweet spot and it will, this year, put on a good sized utility power station and of course these are things we can’t track in advance, we only see them after they are built and we get the accreditation application. So next year who knows where this might go, and this is a point most market analysis looking at liquidity have been really not seeing.

Since the deal was done to reset the Large-scale Renewable Energy Target, this shows the large scale generation certificate spot price. During the review it got down to around the low $20 range, it was just over $50 around when the target was reset, it then ran up quickly because the market could see, although it was a large surplus, that the surplus would decline quickly, because of the time it takes to make the commercial decisions, do the deals, get financing and then to build. However, it ran up and gave that very clear build signal, because you can see the spot price which is still in the mid-$80 range plus a wholesale price, given we’re seeing projects being announced in the low $50 per megawatt hour.

Now I’ll come back to that again, this is the surplus of certificates that are after the annual surrender period. The RET works on a calendar year and the liability has to be settled by the 14th of February in the following year. So what this shows is the surplus of certificates has been declining but after the last 14th of February surrender it was still about 9.3 million certificates in the market. On the right hand side there, and we’ve said in our market update again we think the market will remain in surplus, even though a lot of commentators were saying it will end up in a deficit of at least 5 million certificates.

Now those couple of little dark boxes on the right hand side is the scheme had very close to a 100% surrender with large-scale generation certificates, until the 2016 calendar year where we had some material shortfall for the first time. It was a little bit less last year but in total there is 3.66 million certificates or $238 million sitting in consolidated revenue. Now there is a three year rule within which those will have paid the shortfall charge which is $65 per certificate, not tax deductible, where the cost of certificates is. They can in fact redeem it. But I guess my point here is – the longer the price here remains above the $65 shortfall price- in that mid-$80 range – some liable entities, retailers, will be tempted to take shortfall and that’s potential loss sales of LGCs and money that might end up stranded in consolidated revenue if not redeemed within three years.

So I’ll come back to the spot price again and the forwards. So the calendar ‘18 year forward and the spot price haven’t moved much at all, although we did say in January and February, the target would be met, we are now firm enough saying there is enough build actually happening to meet the target and it will be exceeded. The calendar ’19 forward prices again have not really moved – interestingly though the Cal 20s have and are down a little over $30 range the forward prices for calendar year 20. Even $30 that is a big price when you add on wholesale prices of about $80 and you’re seeing projects getting over the line on PPAs disclosed at the low $50. So it’s fascinating to see the forward is coming off, and we say there will still be a surplus in the next two years of 5 million. But that is relatively tight given the escalating liability.

Last year was also a record year for the small scale scheme, where we had – in fact we just passed- 1100 megawatts, because the certificates can still be created up to twelve months after the year. So that was actually our record year, in our other market update an hour ago, we are saying at the pace its going it will probably be around about 1400 megawatts this year. Now to put that in context, in 2016 it was just over 700 megawatts, so we are likely to see a doubling of installed capacity in over a two-year period. This is a consumer product, where it will go who knows. Certainly both for household solar and for commercial and industrial we are seeing all sorts of innovative business models where people will put a free system on people’s roofs and give them net benefits on electricity prices from day one. So it looks like these innovative business models are really driving a lot of this.

So to conclude, the 2020 Renewable Energy Target in our view, will clearly be exceeded. There is enough build underway to meet the target and still a lot more to come. And I should say that first chart I showed you where we say there is 8000 megawatts firmly announced with 6 and a half gigawatts of that actually under construction – that does not assume anything from the Victorian or Queensland processes, this is simply my markets team have been tracking announced build and verifying that, so what comes out of the Victorian process and Queensland process will be on top. Also it doesn’t include things such as the announcements from Sanjeev Gupta who intends to do a gigawatt in South Australia for Greensteel and a range of other things. There will be surprises on the upside so we do expect it’s likely to go beyond that 8000 megawatts.

We do believe, while the surplus is declining, we do believe it will stay healthy, it won’t get into negative territory and we do expect LGC prices to moderate, we’ve got to see when that actually starts to happen. Last year we had a record year for total installed capacity at around 2.1 gigawatts and about half of that was in the large-scale scheme, and half was in the small scale scheme. That was a record year.

This year this will double, so we will see around about 2600 megawatts of large scale renewables generating and probably around about 1400 megawatts of small scale. But it could go beyond that. Then in 2019 we are currently expecting about 3500 megawatts of new large scale to come online and we won’t try to predict for 2019 where the small scale scheme might go to, it’s a consumer product and only a mug would try and predict that, but definitely you can pretty well say that 2019 will be a much bigger year.

We have a lot of resources on our website and all the information on the pipeline project we are tracking is fully there and updated every month.

Thank you.

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