Case Study: The Accomplishments and Shortcomings of Australia s Renewable Energy Target: A Pure Market-Based Support Mechanism

Transcription

1 RENEWABLE ENERGY INVESTORS AND FINANCIERS Case Study: The Accomplishments and Shortcomings of Australia s Renewable Energy Target: A Pure Market-Based Support Mechanism Lessons for Other Jurisdictions October th World Wind Energy Conference & Exhibition Jerusalem

2 RENEWABLE ENERGY INVESTORS AND ADVISERS Megawatt Capital Renewable Energy specialist investor and advisory firm Established in 2013 to apply the extensive power investment expertise and experience of its executives Formed by Mark Schneider, an experienced Renewable Energy Banker and Power Engineer For 11 years Mark led the Australian Power Investment business for Investec Bank (Developer of 206MW Collgar and 70MW Oaklands Hill Wind Farms) Holds Australian Financial Services Licence As Principal Develops renewable energy projects together with international and local partners Achieved pre-construction Financial Close on 100MW First Stage of Hornsdale Wind Farm in August 2015 after winning an ACT Government Feed-In-Tariff As Adviser to cleantech, renewable energy and power clients Arranges equity and debt finance Assists in shaping and implementing business strategies Mark Schneider

3 Presentation Outline Slide Name Slide No 1 Structure of Australia s Deregulated Electricity Market The Complex Interaction between a Deregulated Market and the Impetus for Renewable Energy 6 3 The Answer: The Renewable Energy Target 7 4 History of the Renewable Target Outlook for the Renewable Energy Target 10 6 Lessons for Other Jurisdictions 11 3 RENEWABLE ENERGY INVESTORS AND FINANCIERS

4 The Structure of the Australian Electricity Market The structure of the Australian National Electricity Market ( NEM ) separates electricity retail (unregulated) from transmission and distribution (regulated) All energy generated is sold into the NEM at the reigning half-hourly regional reference price ( RRP ) by generators All energy sold to customers is purchased by retailers from the NEM is charged at the RRP The RRP is determined by a half-hourly reverse auction in which dispatchable generators bid for the right to sell power Generators are ranked in an order-of-merit in inverse order to the prices bid, and are then dispatched in this order to meet demand in each 5-minute period Wholesale hedge contracts are used to manage price exposures to the wholesale RRP. These hedges include futures contracts, fixed for floating swaps (or Contracts for difference), caps and swaptions Typical maturities for these derivatives run up to 3 years 4

5 Structure of the Market: Flow Diagram AEMO Power Generator Transmission Company Distribution Company Electricity Retailer (Market Customer) End Use Customer Flow of money Physical Electrical Flow Dispatch Instructions Bids (offers) to Generate at a price 5 RENEWABLE ENERGY INVESTORS AND FINANCIERS

6 Stimulating Renewable Energy in a Deregulated Market Government has effectively written itself out of the picture So how do you Order a transition to Renewable Energy? No one to give an Order to No one to issue the Order All the actors are purely commercial in their motivation Renewable Energy is more expensive (compared with existing fossil fuel power) The market structure is based on achieving lowest cost through a reverse auction 6

7 The Answer: The Renewable Energy Target A Simple Market-based mechanism Designated quantity of power to be delivered from new renewable energy sources each year 20% by 2020 Approved Renewable Energy Generators receive 1 transferable and tradeable Renewable Energy Certificate for each MWh of energy delivered to the grid Any party purchasing power in the wholesale market must buy renewable energy in the appropriate proportion each year (11.11% in 2015) Or pay a penalty of $65 ($2010) Renewable Energy Certificates are the instrument to signal transfer for renewable energy Renewable Energy Generators sell their RECs to Renewable Energy Buyers and the certificates can be surrendered to the Renewable Energy Regulator to fulfil obligations 7

8 History of the Renewable Energy Target 2001: Howard Liberal Government establishes target of 9.5 TWh in 2010 (0.3 TWh in 2001) Sufficient to spur action, development of wind farms commences in earnest Long-term PPAs emerge 2005: Howard Liberal Government refuses to legislate for target beyond 2010 Activity slows 1 st renewable energy crisis 2010: Target expanded and extended by Rudd Labor Government 45.0 TWh by 2020, then flat thereafter Initial optimism dissipates as small-scale (largely solar) generation dominates due to regulatory anomaly 2 nd renewable energy crisis 2011: Designated allocation to Large-scale 41.0 TWh by 2020 Activity returns to wind farm development wind energy development boom Long-term PPAs re-emerge 2012: Review of Renewable Energy Target in face of strong political and commercial opposition 3rd renewable energy crisis Dec 2012: Climate Change Authority upholds target Initial optimism dissipated by early 2013 announcement of election 4 th renewable energy crisis 2015 Negotiated Bi-partisan Target of TWh in 2020 and 33 TWh through to 2030 New Renewable Energy Boom 8

9 History of the Renewable Energy Target (2) 9

10 Outlook for the Renewable Energy Target At last we have a target that is accepted by Parliament as a whole Sub-national jurisdictions such as the ACT taking action Commercial players now reconciled to having to take urgent action They have stopped undermining target Renewable Energy Certificate prices have recovered Long-term PPA discussions commencing Parties looking at merchant models 6000MW of new renewable energy capacity to be built by major projects 15,200 jobs 10

11 Lessons for other Jurisdictions Market-based mechanisms can work Not a blunt instrument after all They can spur real activity and investment in scale But Regulatory certainty is an essential ingredient The market will respond equally quickly uncertainty as to positive stimulus A personal reflection: In the end, renewable energy will win one way or another, but patience and resilience are required Counter-cyclical investment was successful in this volatile environment 11