Australian Remote Renewables: Opportunities for Investment

Australian Remote Renewables: Opportunities for Investment

The largely untapped remote clean energy market and funding support available from the Australian Government creates an attractive opportunity for overseas companies to enter at the start of this emerging market.

This report, prepared by AECOM for the Australian Trade Commission (Austrade) examines Australia s market for off-grid and fringe-of-grid renewable energy generation. This newly emerging clean energy market has high potential for growth. It is estimated the Australian off-grid market potential is approximately A$600 million. This consists of approximately 213MW of renewable project opportunities in the short to medium term. In the longer term, this could grow to over A$2 billion of investment, an additional 854MW or a total of over 1GW of market potential. Figure 1: Australia s grid infrastructure Australia has a renewable energy target of 20 per cent renewable energy generation by 2020, as well as a five per cent reduction in carbon emissions target, also by 2020. Australia s Energy Markets Australia s main electricity markets comprise of the National Electricity Market (NEM) and South West Interconnected Figure 2: Existing off-grid generation C o r a l S e a Source: AECOM One key driver promoting this market growth is the commitment from the Australian Government of up to A$400 million to support funding a targeted 150MW of installed off-grid and fringe-of-grid renewables over the next five years, under the Australian Renewable Energy Agency s (ARENA) Regional Australia s Renewables (RAR) program. The grant funding is aimed toward two primary markets in the off-grid clean energy market: Communities market, supported via the Network Service Providers (NSP) who currently operate offgrid interconnected systems with renewable project opportunities between 100kW and 1MW. Industrial and mining market, supporting demonstration projects greater than 1MW with an aim to prove the potential and value proposition of renewables in this sector including two or more projects greater than 10MW in scale. NEM Primary Fuel Type SWIS Biogas Distillate Geothermal Hydro Source: AECOM Power Generation Natural Gas Under 1 MW Ocean (wave) 1-10 MW Solar Wind 10-50 MW Over 50 MW System (SWIS). The NEM is the world s longest interconnected power system with an end-to-end distance of more than 4,000 kilometres and services over nine million consumers across Queensland, New South Wales, Tasmania, Victoria and South Australia. Australia s Remote Clean Energy Opportunities > 3

The SWIS supplies electricity to two million consumers and spans the area surrounding Perth in southern Western Australia. The main source of electricity generation in the SWIS and NEM is through centralised plant fuelled by coal followed by natural gas. Community off-grid consumption 21% With A$4.2 billion invested in renewable and energy smart technologies in 2012 in Australia, the renewable industry currently employs approximately 24,300 people. The Clean Energy Council has estimated that over 13 per cent of Australia s electricity generation was produced by renewable sources in 2012. Industrial off-grid consumption 79% Off-grid and Fringe-of-grid Markets Only two per cent of Australia s population live within the off-grid electricity market which currently consumes over six per cent of the country s total electricity demand. The off-grid electricity market sources 74 per cent of its energy from natural gas and the remainder mostly from diesel fuel. It is the most costly supplied electricity yet has the lowest average emission intensity of all Australia s electricity markets even though only one per cent of electricity is currently generated from renewable sources. It is estimated that 15,812 GWh of electricity was produced by off-grid generation in Australia in 2012 from a total installed capacity of approximately 5GW (BREE 2013). Off-grid energy consumers include agricultural processing facilities, outstations, off-grid mines, small communities, and off-grid infrastructure such as telecommunication and desalination facilities. This group is currently supplied electricity from both off-grid interconnected systems and islanded power stations. The off-grid industrial sector consumes approximately 12.4TWh per annum or 79 per cent of the total off-grid electricity produced, of which the majority is consumed by the mining industry. As of April 2013, there were 73 mining projects in Australia at a committed stage, including nine with a positive financial investment decision, and 174 projects at the feasibility stage with a combined value of A$268 billion capital expenditure required over their lifetime (BREE, 2013). There has been a recent trend toward higher energy intensity which has risen at an average of 2.3 per cent per annum between 1990 and 2010 and increasing electricity demand growth associated with rising use of energy for mining exploration activity and the need to exploit deeper and lower grade ores. Australia s mining industry is currently facing rising production costs, global competition and increasing pressure from regulators to improve environmental performance. This is now motivating many mining companies to focus more on managing operational energy costs. Renewables, particularly in off-grid mining and industrial applications, is a viable means of providing not only fuel savings but also energy security. Renewables, particularly in off-grid mining and industrial applications, is a viable means of providing not only fuel savings but also energy security. The off-grid community energy market is currently supplied primarily through state and territory-owned NSP s such as Horizon Power (WA), Ergon Energy (Qld), Power Water Corporation (NT) (see figure 4). The NT has the largest off-grid community electricity demand, accounting for 59 per cent of Australia s off-grid community electricity consumption (excluding NSW, VIC, ACT and external territories due to confidentiality). Off-grid communities are supplied power through a combination of liquid fuel, gas and hybrid renewable plant on reduced tariffs subsidised through Community Service Obligations. They consume approximately 3.4TWh per annum or 21 per cent of the total offgrid electricity demand. Network Service Providers who operate and maintain these off-grid interconnected systems or isolated power plants are likely to seek to minimise the current high costs to supply power to off-grid communities. Renewable energy is commonly understood to be part of the solution. Figure 3: Australia s electricity markets overview Electricity markets Capacity Consumption Emissions GW Share TWh Share CO2-e/MWh NEM 49.0 83% 199 86% 0.93 SWIS (WA) 5.5 9% 17.7 8% 0.82 Off-grid Remote Industrial Market 3.9 6% 12.4* 5% 0.61 Off-grid Remote Community Market 1.0 2% 3.4* 1% Source: AECOM, AEMO, IMO, Department of Climate Change and BREE * Excludes NSW, ACT, VIC and external territories of Australia for confidentiality reasons 4 > Australian Trade Commission

Figure 4: Existing off-grid generation by fuel type MWs 6,000 5,000 4,000 3,000 2,000 1,000 0 South Australia Queensland Northern Territory Western Australia Total Renewables 2 1 3 47 56 Liquid Fuels 35 146 327 705 1,222 Natural Gas 40 545 602 2,410 3,614 Source: AECOM and BREE Improved Economic Fundamentals Australia is a stable country for investment having experienced 22 years of uninterrupted economic growth and is well-positioned for continued prosperity. This is driven by a combination of its resource rich foundations which help to underpin domestic growth, a well-developed services sector, robust population growth and its proximity to expanding Asian growth markets. The viability of exploring renewables as a future fuel security and price off-set option has now become a more attractive proposition in off-grid Australia. The modular nature of renewable technologies, such as wind and solar photovoltaics, and the recent expansion of these industries with associated Figure 5: Historical comparison of electricity generation cost from Solar PV and Diesel Electricity cost ($/MWh) 800 700 600 500 400 300 200 100 Solar PV (total system costs) Diesel (fuel and carbon only) 0 2005 2006 2007 2008 2009 2010 2011 2012 Source: AECOM reductions in cost, means new opportunities are emerging for developing off-grid clean electricity supplies. Currently there is over 1.2GW of diesel generation capacity installed in off-grid Australia which supplies electricity to mines and communities at a cost of A$220/MWh to over A$300/MWh in fuel and carbon price only (excluding capital costs). These costs are expected to rise over time and are vulnerable to price shock events or supply chain interruptions in international markets. All sites will have different characteristics. In particular, the case for renewable hybrid systems depends on the delivered cost of diesel fuel at particular sites the higher the cost of fuel or greater the energy intensity, the more savings can be gained by integrating renewable energy. There is currently a strong business case for fuel off-setting through hybridising mature renewable technologies with existing off-grid generation systems such as liquid fuels or gas. It is currently cheaper to source electricity from a hybridised solar photovoltaic-diesel or wind turbine-diesel system than with existing diesel-fired generation alone in many off-grid regions of Australia. In the medium to longer term, volatility is expected in Australia s domestic gas markets as local producers are induced to service the Asian market demand through LNG export. This will likely further strengthen the viability of integrating renewables particularly as further technology cost reductions are expected and energy storage devices evolve. It is currently cheaper to source electricity from a hybridised solar photovoltaic-diesel or wind turbine-diesel system than with existing diesel-fired generation alone in many off-grid regions of Australia. Estimated Market Size AECOM has estimated the market size potential for integrating renewables into Australia s existing off-grid electricity market through a forecasted high and low penetration potential. The establishment of ARENA s RAR and other Government support programs were taken into consideration in addition to future renewable technology development which will further enable uptake. The Bureau of Resources and Energy Economics (BREE) Australian Technology Energy Assessment developed in 2012 assumed that solar photovoltaics and onshore wind are expected to continue to have the lowest levelised cost of electricity of all of the renewable options up to 2030 in Australia. Of note are the costs of solar photovoltaic technologies, which have declined dramatically in recent years as a result of a rapid increase in global production of photovoltaic modules. The ability of wind and solar to integrate into existing off-grid power stations will likely result in these technologies obtaining the majority of the future off-grid clean energy market share. Australia s Remote Clean Energy Opportunities > 5

Figure 6: Existing off-grid electricity generation market penetration Source: AECOM In the short to medium term, it is forecasted that hybridising renewables will begin at a low penetration in remote regions of WA, the NT and Qld with up to a possible 213 MW or approximately A$600 million in capital value of project opportunities available. As confidence and demand for more remote energy grows and technology costs fall and develop over time, there may be a higher penetration potential and an additional 854 MW or a total of over 1 GW of additional installed off-grid renewables capacity, at a capital value of approximately A$2 billion, may be available. Opportunities for Investment The largely untapped off-grid clean energy market and funding support available from the Australian Government, creates an attractive opportunity for overseas companies to enter at the start of this emerging market, in areas such as: Renewable hybridised generation systems which represent the greatest potential area for investment particularly when associated with existing diesel-fired power plants. Industrial/mining growth regions of WA, Qld and the NT. Community growth regions where aggregation of smaller projects particularly in mining towns such as Roxby Downs (SA), Weipa (Qld), Karratha, Newman and the greater Pilbara (WA) have shown significant electricity demand growth as a result of fly-in-fly-out and permanent population expansion in recent years. Off-grid interconnected systems such as the North West Interconnected Systems in WA operated by Horizon Energy, Darwin to Katherine System in the NT operated by Power and Water Corporation and Mount Isa Grid in Qld operated by Ergon Energy. System integration expertise and remote training programs will be essential to ensure reliability and provide sustained confidence to end users. Deployment of cost effective enabling technologies will support greater renewable energy integration and uptake. For potential market entrants looking to establish or expand investment in the Australian off-grid clean energy market, a long term approach to understanding the Australian market and developing collaborative domestic partnerships with the local industry, end users and finance sector is advised. 6 > Australian Trade Commission

Date: September 2013 Disclaimers The information is made available on the understanding that the Australian Trade Commission (Austrade) is not providing professional advice. Therefore, while all care has been taken in the preparation of this report, Austrade does not accept responsibility for any losses suffered by persons relying on the information contained in this report or arising from any error or omission in the report. Any person relying on this information does so entirely at their own discretion and Austrade strongly recommends the reader obtain independent professional advice prior to acting on this information. Austrade assumes no responsibility for any company, product or service mentioned in this document, for any materials provided in relation to such products, nor for any act or omission of any business connected with such products. Investors should always consider whether an investment is appropriate for their needs and seek out independent advice as appropriate. AECOM acknowledges that the datasets used to define the market size may have anomalies and therefore are not complete. As such, some figures presented in the paper are subject to significant uncertainty. All stakeholders should obtain their own advice before making any financial investment or decision based on the information contained in this paper. AECOM does not accept any liability for any investment decisions made on the basis of this information. AECOM were engaged by Austrade to undertake a broad study of Australia s electricity industry to gain detailed insight into how the current policy and market is impacting off-grid renewable investment. This preliminary report provides a summary of current industry perspectives on Australia s off-grid renewable market.

The Australian Trade Commission (Austrade) is the Australian Government s trade, investment and education promotion agency. Through a global network of offices, Austrade assists Australian companies to grow their international business, attracts productive foreign direct investment into Australia, and promotes Australia s education sector internationally. www.austrade.gov.au/invest