Featuring Simon Corbell and Simon Currie
This article first appeared as part of Inspiratia’s Australian renewables market roundtable and is re-posted with its permission.
Despite being late to the party on renewables, Australia has quickly surpassed many other more mature markets in embracing innovative new contracting structures. With rapidly falling technology costs and abundant wind and solar resources – much of which remains untapped – the transition to subsidy-free solutions in the country has been dramatic.
Australian PPAs are today being signed with utilities, corporates, industrial energy users, traders and aggregators, and merchant price exposure is now an increasingly common feature on deals. In some cases, projects may combine more than one of these power sale elements, while a few still benefit from long-term government contracts.
The variety and invention in the market today is impressive considering Australia’s relatively short history in renewable energy. The country’s first wind farms were built in the early-2000s but for around a decade, development was sluggish due to political disagreements around subsidies. Its first utility-scale solar farm only came online in 2012.
Even more remarkable about the current marketplace is the speed at which it has developed, particularly in light of the significant slowdown it experienced under former prime minister Tony Abbott’s government. Abbott sought to review Australia’s renewable energy target (RET) scheme and for nearly two years, this uncertainty led to a period of stagnation, with barely any new investments in renewables.
In 2015, the tide started to turn. Abbott was replaced by Malcolm Turnbull and the historic Paris climate change agreement was signed, while the RET impasse was also resolved – albeit revised downwards from 41,000GWh to 33,000GWh by 2020.
As a result, the last two years has witnessed frenetic investment activity in renewables. dataLive, inspiratia’s project finance database, has tracked in excess of Aus$14 billion (£7.8bn €8.7bn US$10bn) of greenfield project financings in Australia since the beginning of 2017 alone – more than was invested in new renewable generation in the entire eight years between 2009 and 2016.
Demonstrating the pace of Australia’s transition, the German bank NordLB – active in the market since 2016 – has in recent times been feeding back deal structuring learnings from Australia to colleagues in Europe for the first time.
“We’ve seen Australia from being an absolute laggard in comparison to many other countries, and sprinting ahead, surpassing everyone else, both in terms of evolving structures, as well as views and mitigants for uncontracted exposure,” says Christian Krebs, NordLB’s head of structured finance origination for the Asia-Pacific region.
The dramatic buildout of the last three years means Australia is way ahead of its targets. In October , the country’s Clean Energy Regulator (CER) said 8,332MW of renewable generation was either operational or under construction – far exceeding the 6,400MW required to meet the 2020 RET.
“I think we have reached a tipping point,” says Simon Corbell, the former ACT environment minister who became Victoria’s first renewable energy advocate in 2016. “We now know how to develop and build solar and wind at scale. The volume of the pipeline that’s being developed or is now operational has dramatically reduced costs.”
Indeed, the state of Victoria ran a reverse CfD auction for renewable energy in September – pitting wind against solar – and came away with extremely low prices: between Aus$53.06 (£29.67 €33.07 US$37.85) and Aus$56.85 (£31.79 €35.43 US$40.56) per MWh for solar, and Aus$56.52 (£31.61 €35.23 US$40.32) per MWh for wind. The prices meant it could contract 928MW of capacity, or 42% more than its original target.
Backstopped by clarity around the RET, the renewables buildout in Australia has been driven chiefly by two factors: a tightening of the country’s supply-demand nexus, amid the exit of several coal and gas-fired power stations, and rising wholesale electricity prices.
But this in turn has also led to a tightening of margins, with the oversubscription of the RET reducing the value of the large-scale generation certificates (LGCs) associated with the scheme. “That’s really pushed projects to be much sharper in terms of their commercial viability and the margins they’re achieving for investors,” says Corbell.
As a result, the conversation in Australia around subsidy-free renewables and the incorporation of merchant price exposure is arguably at a more advanced stage than in certain more established renewable energy markets, for instance in Europe.
John Laing – the British infrastructure investor with renewables investments on three continents – has been active in Australian renewables for four years, and its track record serves as a microcosm of how the market has developed.
The group’s first Australian renewables deal saw it acquire a stake in the first phase of the Hornsdale wind farm, which benefits from a 20-year offtake agreement with the ACT government. In 2018, it bought the 174.9MW Finley solar farm, underpinned by a seven-year PPA with steel magnate BlueScope Steel for two-thirds of its output.
“We’re now seeing projects with increasing amounts of merchant revenue, and not just at the tail,” says David Beaton, Sydney-based senior investment manager at John Laing.
“We’re seeing projects with deferred start dates on their PPAs, and others with PPAs not covering 100% of the output. It’s a big part of the Australian market that equity and banks have had to get their heads around, and requires significant due diligence to understand the risk on a project and portfolio basis.”
The finance community now also has to contend with a growing and increasingly diverse list of PPA offtakers that have varying degrees of creditworthiness. In the last 12 months alone, dataLive has recorded PPAs being signed with Sydney Airport, telecoms group Telstra, packaging manufacturer Orora and brewing company Carlton & United Breweries – as well as a host of other corporates and industrials.
Some deals even feature multiple PPAs, such as John Laing’s Sunraysia solar project, which has 15-year contracts with a utility (AGL Energy) and a state body (the University of New South Wales).
“The range of different types of contracts we’re seeing is very heterogeneous, from the 5-7 year short-term PPAs, up to 15 years, with some including extension options,” says Niels Jakeman, a director at NordLB, which was among the financiers on Sunraysia.
“We’re seeing electricity-only, certificate-only and bundled PPAs, fixed prices, indexed prices and caps and floors: the full spectrum of different structures.”
But the current pool of offtakers that are both creditworthy and large energy users is already running dry. The feeling on the ground in Australia is that new kinds of buyers will be required to satisfy the scale of the buildout beyond the current RET target – and there are initiatives underway to address this.
For instance, aggregation models are being pursued by the likes of Flow Power to give smaller players a way into the PPA market. Meanwhile, Climate-KIC has led the creation of the country’s first Business Renewables Centre to help accelerate the purchase of renewables by Australian businesses.
“What we will also need to see, in my own view, is state and federal governments coming to the party to help with aggregation,” says Corbell, alluding to a plan by Australia’s federal opposition Labor party for a series of reverse CfD auctions.
Snowy Hydro – the federal government-owned utility – also recently ran an auction to contract some 888MW of wind and solar capacity from eight projects, securing prices below Aus$70 (£39.15 €43.63 US$49.94) per MWh.
Other state entities will likely follow suit, particularly as such arrangements have proven to be useful ways to catalyse investment in additional phases of a project whose first phase might have a state-backed offtake for at least part of its revenues.
Wirsol and Edify Energy used this thought process when they financed a portfolio of three solar farms in Queensland and Victoria in March 2017. One project had a 20-year PPA with the Queensland government, another was contracted under a 13year PPA with utility EnergyAustralia, and the third was fully-merchant.
“We worked in that case with the sponsors to use the first two to get the third off the ground,” says Jakeman of NordLB, which was part of the lending club on the deal alongside the Clean Energy Finance Corporation and local bank CBA.
That transaction – while less than two years ago – demonstrates the rapid evolution in CfD architecture, not just in Australia but globally.
Queensland government’s PPA effectively operates as a one-way CfD; if power prices are above the strike price, the developers will keep the upside. In contrast, the structure more recently employed in Victoria’s auction shares the downside risk between the government and the owner.
“That’s going to be a feature going forward: much greater risk-sharing between all of the players, in order to give the banks and the developers enough protection, but not so much that other stakeholders look back and have regrets about why they did this,” says Simon Currie, founder and principal at advisory firm Energy Estate, and former global head of energy at the law firm Norton Rose Fulbright.
“We’ve seen in multiple jurisdictions that where things are too rich, they get unpicked. None of us want that; we want things to be balanced, so that people aren’t in five years’ time asking whether it is a bad deal for consumers.”
Away from the contracted side of the market, the outlook for merchant renewables in Australia – at least in the near-term – is positive. And with high LGC prices which are forecast to drop post-2020 once the RET has been achieved, some projects are structuring PPAs with deferred start dates. This allows them to capture higher prices in the short-term, while benefiting from the long-term price certainty of the PPA.
That is the case on the Sunraysia solar farm – developed by China’s Maoneng – whose PPA with AGL doesn’t kick in until 2022, two years into its operation.
“AGL was seeking a PPA to commence around the same time as its planned shutdown of the Liddell coal generator in 2022,” explains Beaton of John Laing, which went on to acquire Sunraysia.
“This enabled the developer, Maoneng, to let the project benefit from those initial years of higher merchant prices, before bringing in a longer-term, reduced-price PPA which provides long-term price certainty for the project.”
In Australia, there appears to be a general acceptance that merchant risk is lower than it was two or three years ago, firstly because of the high forward prices in the market – “interesting juice,” says Currie – but also because of where LCOEs are today for wind and solar.
On the back of this, a variety of specialised investment funds are emerging including Infradebt, a boutique manager that is building a decent loan book in renewables, as well as a range of green bond products. Vanilla deal structures are being replaced by more innovative solutions.
Of course, merchant risk won’t be for everyone, but the participation of NordLB and John Laing – as just two examples – on deals with robust structures to mitigate exposure to wholesale prices serves to highlight the evolution of capital that is underway in Australia.
As more renewables are built, there will inevitably be issues around price cannibalisation, but the market expects that the promise of widespread energy storage – pumped hydro as well as batteries – can help firm the system.
Australia is namechecked as one of the most exciting storage markets in the world – in the same league as California. It is already held up as a leader in pumped hydro, with more projects in development than the rest of the world combined.
It is also pioneering on the battery front. Neoen’s Hornsdale wind farm in South Australia features a 100MW/129MWh battery supplied by Tesla – the world’s largest – that has already saved Aus$40 million (£22.4m €24.9m US$28.5m) in grid costs after its first 12 months of operation. Meanwhile, the Victorian government’s Aus$25 million (£14m €15.6m US$17.8m) energy storage initiative has supported two projects to date.
The combination of renewable energy and storage changes the game completely. Renewables in Australia are already a cheaper solution than new-build fossil fuel generation, and are increasingly competitive against the gigawatts of existing coal capacity that the country still has to take off the system.
Government initiatives will be helpful in catalysing investment and the market will have one eye on the outcome of the federal election, due no later than May 2019. But against the backdrop of ever-improving economics, and with growing demand for renewable power from end consumers, the renewables transition in Australia is now – simply put – unstoppable.