Investor News

Renewables boom may go bust

We read it all the time; the cost of wind and solar are dropping.

It's true. Take wind power for instance.

Back in 2014, the ACT government signed a power purchase agreement with Coonooer Bridge Wind Farm for $81.50MWh.

By late 2015 the ACT government struck a deal for $77MWh.

In late 2017 deals were being done at between $50MWh and $60MWh.

The implication is that wind power will be able to price coal power out of the market... soon.


The ABC recently reported on the strange state of financial affairs facing Australia's wind and solar investors.

Link: Renewable energy investment looks to be going from boom to bust as prices collapse

As it turns out, $55MWh appears to be a bit of a floor for wind power purchase agreements.

JP Morgan energy and utilities analyst Mark Busuttil said returns on a $55/MWh PPA — assuming the project was 80 per cent debt funded — would be around 11 per cent.

"We estimate that a wind farm costing $2,000/kW (kilowatt) with a $55/MWh offtake contract over the first 15 years, then reverting to a merchant power price of $75/MWh for the remaining 10-year life of the plant, would achieve a nominal internal rate of return of five per cent," Mr Busuttil said.

"The risk is that all free cash flows for the initial 15 contracted years would go solely to debt repayment, and equity holders would only generate returns beyond the contracted period."

In other words, equity investors would not see returns for 15 years. Even then, those returns would be highly dependent on volatile power prices which are more than likely tracking down as more supply is added.

Further declines place investors in a tough position, according to Len Gill, the Chairman of publicly listed wind farm operator Infigen:

"Recontracting these assets under long-term run of plant supply agreements to energy retailers would result in substantial erosion of security holder value based on current market prices for this product," Mr Gill said.

Also making life hard for existing wind and solar power projects is the recent downward rating of 'marginal loss factor' (MLF) for many wind and solar projects.

The Australian Energy Market Operator (AEMO) recently downgraded the MLF applied to many wind and solar farms, reducing the amount of revenue they thought they would receive.

'Marginal loss factor' is a discount (or premium) applied to the settlement of power supplied from a project and is designed to reflect the loss due to transmission.

Transmission loss is around 10% across the network but is higher the further the source of generation is from the point of consumption.

You can imagine the power loss if we actually built huge solar arrays in central Australia and consumed that power on the east coast.

The other part left out of the pricing equation, which we all pay for, is the cost of 'firming' intermittent wind and solar.

It's all well and good to have a wind power price of $55MWh, but we also pay to have the gas power generator running to step in when the wind isn't blowing (70% of the time). Or we pay for batteries or pumped hydro.

New wind and solar projects coming online look set to create a power glut by 2021. The article predicts this will result in downward pressure on prices.

In our opinion, the impact of adding even more intermittent wind and solar to the grid will be higher costs.

You see, the grid needs to be upgraded to handle the changing mix of lower 'quality' generation.

Storage needs to be added to smooth out volatile wind output and the inconvenience of the sun setting just as the evening peak electricity demand kicks in.

Diesel generators are acquired or leased, at tremendous cost, to cover a few peak consumption days during summer.

Large consumers are paid to stop consuming when the wind stops blowing and a coal power station has an unplanned outage so that households don't have to turn off their air conditioners.

It's true that, unlike coal, natural gas and uranium, wind and sunshine are free. However, they are also intermittent and diffuse, which means the infrastructure required to capture, transmit and firm them, is expensive.

It comes back to a simple concept: cheap, reliable or low emissions... pick any two.


Renewable energy investment looks to be going from boom to bust as prices collapse

26 April 2019 | ABC Online | Stephen Letts

Having burst out of an investment black hole at warp speed, the renewable energy sector's massive building boom looks likely to hit an uncompromising wall.

Source: ABC Online