29 April 2019

Is the appetite for investment in renewables still there?

Having acted on some of the most significant renewable projects in recent years, we sat down with Roderick Smythe and Shannon Etwell to look at whether the appetite for investment in renewables is set to continue despite political volatility, understand where it is being used, and if renewable energy is now a comparable alternative to conventional energy sources.


Q: Will the federal election imminent, there is talk of re-purposing ideas from the failed National Energy Guarantee, with the opposition in particular advocating a 50% renewable target by 2030. Will the recent appetite for lending and investment in renewables continue if more political certainty is not provided and a bipartisan approach agreed upon?

A: There is a potential for a slight drop off in the interest of corporates, but it will likely not be significant. You've got some decision points here – the federal election obviously being one of them. If the labour party wins, they have made it clear they are looking to hit 50% renewable energy by 2030, which will certainly trigger a gold rush. If they lose – you still have the Victorian and Queensland governments looking to underwrite a significant amount of renewable energy in those states.

The trend towards a corporate PPA in particular, to our mind, is being driven by two factors.

The first is levelised cost of energy (LCOE). Buying renewable energy is the cheapest way of procuring electricity. For a lot of the corporates who have a social responsible charter – they are also buying renewable energy for the branding benefits that being green delivers to them.

A lot of corporates have decided that with the stagnation of the renewable energy debate throughout 2018 that it’s time to move on. They are no longer waiting for a policy signal from Canberra and are just getting on with it and it is looking more and more like we have a situation where policy is catching up to reality as opposed to the other way around.


Q: As more of Australia’s large energy users (in the case of Telstra 1% of the nation’s energy consumption) look toward renewables to offset high energy consumption and take a more carbon-neutral approach will large corporates continue to execute the long term PPAs we have seen?

A: We are seeing a mix in the market. We are seeing some of the retailers write very long PPAs. For example the Snowy Hydro procurement process where 15 year agreements were being written.

These long term agreements work well for an energy retailer who has a large book, of which a part is made up of such long term agreements. The longer tenor the PPA, the lower the price the retailers are able to get for the supply.

Despite this, most corporates aren’t willing to lock themselves in for longer periods of time, so we are finding the majority of corporate PPAs will complete before the end of 2030 (and even well inside that timeframe), which is when the current Renewable Energy Certificate (REC) scheme runs off.

More commonly we are seeing projects doing a bit of a mix and match, with multiple PPAs in existence. There may be one long term agreement with a price locked for 15 years, to underwrite a certain level of supply, and two or three shorter PPAs that play on top of that, with the potential even for an uncontracted piece that just plays in the market.

It’s a smart way of giving your bank certainty that there is always going to be some level of revenue which helps underwrite more debt – but it also means that you can get more short term upside too.


Q: Will we ever see PPAs for a spot or merchant market?

A: While there is always naturally a push to go more merchant, we can’t see how banks can get comfortable with this, given the complications that have arisen on a couple of projects in terms of their access to the grid.

If we move to a market where we only have merchant pricing that’s going to mean we are seeing projects with much lesser gearing, so instead of being geared at 70-80% in terms of weighted average cost of capital (WACC) they will be geared at 40-50%.

There is also increased likelihood of projects being consolidated and ending up in the hands of corporates, similar to Infigen, who owns a portfolio of these assets.


Q: Circa March 2019, there are 89 renewable projects under construction (or due to start soon) in Australia. Is it plausible then, in addition to the advancements in storage technology, that renewable energy will soon be as reliable and affordable as traditional energy sources?

A: Currently, it would have to be a no in terms of reliability. We are seeing some battery storage facilities but it’s relatively ad hoc and is certainly not the norm at the moment. The pricing of battery storage for renewables means it uneconomic, which is why it not being introduced as part of most original facilities. There will be a push to go towards more sustainable storage solutions but right now the economics just don’t work without government funding behind it (government are currently addressing this on a small scale).

The reality is that on a dollar and megawatt basis buying renewables is cheaper than buying from a power station, so even though supply may be intermittent, you can always top it up with whatever you need from traditional energy sources. Unfortunately, at this point in time, adding battery storage will cause you to lose the economic viability, and there are a number of organisations who need the incentive of both the financial and social gains.

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