20 20 Vision Cleantech


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20 20 Vision Cleantech

  1. 1. 20-20 vision Investment challenges and opportunities arising from Australia’s 20% renewable energy target
  2. 2. Contents Foreword 1 Australia’s renewable energy market 2 Examining the investment drivers and barriers 5 Assessing the states’ investment environment 8 Ernst & Young Renewable Energy Attractiveness Indices 14 Supporting growth in the Cleantech industry 15 Glossary 16 III 20-20 vision
  3. 3. Foreword The Rudd Government came to power with a commitment to double the market share of renewable energy in Australia’s electricity supply from its current 10% to 20% by 2020. Achieving this will require an unprecedented increase in Australia’s use of non-hydro renewable energy technologies such as wind, biomass, geothermal and solar. Currently, non-hydro renewables represent approximately 2% of Australia’s electricity needs. To achieve the 20% target, more than half of all new electricity generation capacity installed in Australia will need to be renewable. The enlarged renewable energy target, in conjunction with the national emissions trading regime (Carbon Pollution Reduction Scheme), and possibly other complementary measures on the demand-side, are likely to herald a substantial restructuring of our electricity and associated energy supply system. The system will need to accommodate a more diverse mix of fuels and technologies across geographic locations that are quite different to what has prevailed in the past. While this represents a substantial challenge, it is also a significant investment and economic opportunity. According to modelling undertaken on behalf of the Energy Supply Association of Australia, achieving substantial greenhouse emission reductions by 2020, in the realm of 10% below 2000 levels, will require $33 billion of new investment in electricity generation capacity, of which $23 billion will be in renewable technologies. To support this major change it will be important for the physical and regulatory features of Australia’s electricity system and market to adapt. Those regions in Australia able to create the right investment environment to support the development of renewable energy projects are likely to capture substantial economic benefits and reduce the cost of achieving renewable energy and carbon targets. 20-20 vision examines the issues across all Australian states that will influence investment in large-scale renewable energy projects and achieving the 20% target. It investigates the investment drivers and barriers, with a view to framing a constructive discussion among industry and policy makers about creating a positive investment environment for renewable energy projects. This is based on learnings we have developed in supporting renewable energy projects in Australia and experience gained from assessing the investment attractiveness of countries and regions across the world through our Renewable Energy Attractiveness Indices. We envisage this publication will stimulate further debate on how best to achieve a smooth and cost-effective transition towards 20% by 2020 and we welcome any comments you may have. Dr Marc Newson Partner, Oceania Cleantech Leader November 2008 20-20 vision 1
  4. 4. Australia’s renewable energy market In reviewing the investment drivers and barriers for renewable energy in Australia, we need to consider the factors that shape the electricity markets and government policy. The key factors that shape the overall • Constraints around eastern and market for renewable energy are: southern interconnectors 1. Australia is not a single, seamless The eastern and southern states of electricity market – there are a range Queensland (QLD), New South Wales of differences in costs, regulations and (NSW), Victoria (VIC), Tasmania infrastructure quality between states (TAS) and South Australia (SA) are physically connected through several 2. The primary government driver for major transmission interconnectors. All renewable energy investment supports operate under one market structure, the lowest cost and most mature the National Electricity Market (NEM), renewable energy technologies (e.g., with one electricity market operator, the wind, biomass and solar hot water) National Electricity Market Management in the states with the best quality Company. However, the interconnectors renewable resources and the highest are constrained, hence trade between electricity prices regions is limited and electricity prices 3. Less mature technologies can take vary across the NEM. The states also advantage of a range of state and have different operators of transmission federal government grants, but tend and distribution infrastructure. Plus, to play a minor role in the Renewable states continue to enforce a range Energy Certificate (REC) market of their own regulatory structures, which operate in addition to regulatory Australia is not a seamless structures that are implemented by electricity market the NEM. These differences can affect a state’s attractiveness for renewable During the past 15 years, Australia’s energy projects. national and state governments have been moving towards a single, • Western Australia (WA) stands alone national approach for electricity market The Western Australian Electricity Market operation and regulation. However, (WEM) is not physically connected to the this continues to be a work in progress other states. It operates under a different and the ongoing transition reflects a regulatory regime and with a different legacy of state government-owned and market operator, the Independent Market operated electricity monopolies with Operator (IMO). This market is confined limited links to other states. to a grid in the south-west of WA (the South-West Interconnected System or SWIS), with much of the state operating on small isolated grids and stand-alone power generators. 2 20-20 vision
  5. 5. Diagram 1: Renewable Energy Certificates created by 31 December 2007 by fuel/technology source 8,020,419 6,577,793 5,465,187 2,391,665 2,263,501 684,380 786,993 275,684 77,333 54,926 28 118,437 499 8,402 22,428 Source: Office of the Renewable Energy Regulator, ) ) ) ) ge ct e SW r o as d e e ed ed ed ed r uo st ss dr st in Increasing Australia’s Renewable Electricity Generation, la du lg wa m m m m W wa wa M So Hy ga liq ro ee ee ee ee fil se of Annual Report 2007 May 2008, page 14 , Ba k d d nd lp (d (d (d (d ac oo oo of s ra La nt Bl ro ar d er W ,f s tu in ne nt te at yd ol -w ul ne po –s as he –h ric po m lw its its er ag its co m ra un at un un of co d tu rw n se n ng ul io n d io la ba io se ric at si at So at s- ba es er Ag er Sm ner as en oc s- en om as pr lg e lg lg om al Bi om al al Sm bi Sm fr d te an as s W ga ge wa Se The primary driver for into account). Thus, retailers have a These RECs can, and are, readily traded renewable energy major financial incentive to comply with between producers, retailers and market the scheme. intermediaries. The federal government supports the development of renewable energy Compliance with MRET is assessed As shown in Diagram 1, the primary power plants through a single, national through retailers acquiring Renewable beneficiaries of the MRET (over the mechanism: the Mandatory Renewable Energy Certificates (RECs) and period 2001-2007) were hydro, wind and Energy Target (MRET). This mechanism surrendering these to the government solar hot water. is essential to the financial viability of regulator. One REC is created for renewable energy projects in Australia. every MWh of electricity generated by accredited renewable energy generators, The MRET obligates electricity retailers to or deemed to be produced or offset by obtain a target amount of megawatt hours small-scale renewables, such as solar (MWh) of electricity from renewable photovoltaic (PV) and solar hot water. energy. For every MWh of renewable The value of RECs creates a premium electricity they are short from their above the underlying revenue from mandated target, retailers face a penalty electricity generation, allowing renewable of $40 (grossed-up to $57 once the energy projects to be financially viable. non-tax deductible treatment is taken 20-20 vision 3
  6. 6. Diagram 2: REC spot price, based on Australian Financial Markets Association average bid/offer $/Rec 60 Previous Fed gov’t announces increase 50 in target Federal election – start of the decline Reality of election sinks in – desperate sellers 40 Election of new Fed gov't with 20% target 30 20 Oversupply continues State gov’ts announce because housing regulations their own targets support solar hot water sales Source: Carbon Market Economics (and Ernst & Young analysis), Monthly REC Review, 10 July 2008, page 22 Se 7 De 7 M 7 Ju 8 08 Se 3 De 3 M 3 Ju 4 Se 4 De 4 M 4 Ju 5 Se 5 De 5 M 5 Ju 6 Se 6 De 6 06 Ju 7 0 0 0 -0 0 0 0 -0 0 0 0 -0 0 0 0 -0 0 0 -0 n- p- c- n- n- p- c- n- p- c- n- p- c- n- p- c- ar ar ar ar ar Ju M MRET (e.g., wind, hydro, biomass and solar hot However, projects using these The MRET was initially set at reaching water) in the states with the: technologies can take advantage of several 9,500 GWh by 2010, which would be federal and state government grants. • Best-quality renewable resources that held constant until 2020. The federal For example, solar PV receives a federal maximise the electrical output for a government has committed to increase government means-tested rebate capped given installed capacity, and this target to reach 45,000 GWh by 2020, at $8,000 per system as well as funding • Highest electricity prices, which reduce for installations in schools. There is also but it has not yet disclosed the targets the revenue that is required from RECs in the potential for grants of up to 50% of for the years in between now and 2020. order for a project to be financially viable the capital cost in off-grid or fringe-of-grid The government plans to legislate for this expanded target by early 2009. Diagram 2 illustrates how prices for RECs applications. And, in some states, solar have changed over time. The volatility PV receives a feed-in premium tariff for it shows is largely due to government electricity generation (the government The market for RECs regulatory uncertainty and change, coupled sets a price that retailers must pay for Unlike electricity markets, there are no solar generated electricity that is above with the illiquid nature of the market, due to constraints to trading between state market rates for conventional electricity). its small size and number of buyers. boundaries in RECs. A national market exists, with one price prevailing across In 2008 the federal government allocated Australia, and retailers seek to obtain Other government support for $500 million – over seven years - to the lowest cost RECs that are available renewable energy a Renewable Energy Fund to support nationally. This means the scheme tends to The MRET provides limited support for less pre-commercial renewable energy primarily support investment in the lowest mature renewable energy technologies, technologies and projects. cost renewable energy technologies such as solar PV, wave, and solar thermal electricity plants. 4 20-20 vision
  7. 7. Examining the investment drivers and barriers Key determinants of investment in large Assessing the projects For example, WA has some of the highest contributing to the 20% target quality renewable energy resources scale renewable energy projects: available in the country and also high This paper identifies the investment • Quality of renewable energy overall electricity prices, yet it has drivers important to large-scale renewable resources (wind speeds, temperature not been a substantial beneficiary of energy technologies such as wind, of underground heat sources, solar the initial 9,500 GWh MRET. Industry biomass and geothermal projects, which irradiance, biomass supply) feedback indicates this was because the are expected to make the bulk of the • Price of underlying electricity previous electricity market regulatory contribution towards the 20% renewable environment prevented a wind farm from • Grid infrastructure and connection energy target. It is heavily focussed on being established unless the operator issues wind power because, at present, this could exactly balance the wind farm’s represents the most financially viable • Size of the underlying electricity output with a customer’s demand. In technology in the near-term under market and its future growth prospects 2006 substantial regulatory reforms were the current government regulatory • Electricity market regulatory implemented and as a result we can expect framework. Other technologies, such as environment and market access more investment in WA in the future. solar PV, will have a different balance of • Ease, speed and cost of planning drivers shaping their uptake. Another barrier to investment can be seen process including extent of in the Gippsland region of VIC, where the From our experience in supporting the community support quality of the wind resource is excellent, development of large-scale renewable yet strong community opposition has • Availability of state government energy projects, the two most important inhibited the establishment of wind farms financial and in-kind support factors determining where projects are in that region. likely to be built are the: 1. Quality of the renewable Quality of renewable energy energy resource resources 2. Price of underlying electricity Renewable energy power projects have significant upfront capital costs with low Unless both these elements perform to very low operating costs. Therefore, a strongly, investment is unlikely to be critical element for commercial viability is viable. There are also other drivers that maximising the amount of output from a can undermine investment opportunities. given amount of megawatts of capacity. This is primarily dependent on the quality or intensity of the available renewable energy resource being exploited (refer to Table 1). Table 1: Quality of renewable energy resources Energy type Factors affecting output Wind Wind speed in metres per second Geothermal Temperature of the heat bearing rocks Biogas Flow rate of methane available over the period of the year from a given source of biomass Conventional Tonnage, purity and energy content of the biomass available at combustion a given site and the security of its availability over the period of biomass the year (this can have seasonal characteristics) 20-20 vision 5
  8. 8. For example, if annual mean wind speed geothermal regions is non-existent) and falls from eight to seven metres per cannot support generator output beyond a second, this reduces the available wind certain level without expensive upgrades. energy by one third. Similarly, year-round If a renewable energy plant’s output is versus seasonal biomass can reduce expected to exceed the capacity of grid capacity factors from 60-70% to 30-40%. infrastructure then it is likely to have its output curtailed, effectively reducing its Price of underlying electricity capacity factor and negatively impacting Between 40-60% of renewable energy its financial attractiveness. project’s revenue comes from the As a general rule, electricity generators electricity they produce, with the do not pay system charges for use remainder largely delivered from RECs.1 of transmission grid infrastructure Given electricity prices between states can capacity under the Australian regulatory differ by more than 25%, this is a critical framework, even though this is a service determinant for the relative investment of value to generators. Generators need attractiveness of different states. only pay for infrastructure required to In evaluating the attractiveness of get a connection to transmission lines, electricity prices, we need to look beyond with all costs associated with the existing a single year’s performance. Electricity infrastructure paid for by end-consumers.2 prices can be subject to exceptional However, if a generator wishes to set- once-off events that are unlikely to be up away from existing transmission sustained. Thus, this paper is based on a infrastructure, or where the capacity mix of information surrounding electricity of this transmission is insufficient to prices, including not only historical market support the amount of the generator’s data but also estimates of new entrant output, this general rule no longer applies. costs. We have also considered recent Generators typically find the cost of paying increases in fuel costs for gas and coal in for substantial additional transmission some states. infrastructure makes their project uncompetitive against other existing Grid infrastructure and generators, that do not have to pay for use connection issues of transmission capacity. Grid infrastructure capacity is essential Building transmission infrastructure is a for renewable energy plants to deliver highly capital intensive, complex and time their output to major sources of electricity consuming undertaking with multiple demand. In a number of states across beneficiaries. For example, upgrading Australia where there are high quality the transmission line from Perth-to- renewable energy resources, the capacity Geraldton from 132 kV to 330 kV over available on the existing grid is small 400 kilometres is projected to cost around (or in the case of highly prospective 1 RECs can be considerably different for landfill gas projects which gain significant revenue from NSW Greenhouse Gas Abatement Certificates. These abatement certificates will be phased out in 2010 with the introduction of the national emissions trading regime (Carbon Pollution Reduction Scheme). 2 Australian electricity market regulations specify strict rules that electricity grid infrastructure management control must be separated from management control of generators to avoid owners of grid infrastructure from using this as a tool to restrict competition to the advantage of their own generation assets. 6 20-20 vision
  9. 9. $300 million 3, which is well beyond the In some states, demand can reach low • Application costs scope of any individual or a collection of levels of 1,000 MW to 1,500 MW for • The extent of documentation and renewable energy project developers. some periods of the year. To ensure power studies required Moreover, this transmission infrastructure quality and reliability, the grid will require will provide benefits to not only wind farm a minimum level of generation online from • Availability of appeal mechanisms developers, but also electricity consumers controllable power sources such as gas and • Who can object to a project and their across the WEM and via economic hydro. This further reduces the available degree of influence over decisions development opportunities in the mid-west demand for renewable generators. States and regions within states, often WA region. Potential investors need to consider the differ in terms of the degree of local Upgrading the capacity of grid extent to which a market can absorb new community receptiveness to renewable infrastructure tends to be prohibitive for capacity without materially depressing energy projects. While high-wind areas of renewable energy project developers, prices. The lower a market’s electricity SA, north of Adelaide, have encountered acting as a major constraint on the demand and growth, the more likely a strong local community support, number of renewable energy projects given amount of new power plant capacity renewable energy developers have found that a state can support. This can counter will depress electricity prices. the Gippsland area of VIC very challenging. a state’s high performance in other These issues can impact on the time, renewable energy investment drivers. Electricity market regulatory resources and risk associated with environment and access attempting to develop a renewable energy Size of the underlying electricity Electricity market design, ease of project, several years before any revnue market and its growth prospects market entry, regulations and market can be expected. The bigger the electricity market and concentration can profoundly affect the the higher its growth, the more new attractiveness of a state for developing State government financial and power plant capacity it can support renewable energy projects. in-kind support without depressing electricity prices and Over the past few years there has been State governments have a wide array of encountering constraints in demand. a concerted effort to reform electricity programs to support the development of To ensure power quality and reliability, markets in both the NEM and WEM, renewable energy. electricity output needs to precisely match to improve competition and avoid Some provide direct financial support, electricity demand at all times. If demand discrimination against new entrants and while others reduce barriers and costs by is not available a generator cannot store particular technology types. Nonetheless, providing free information or supporting their electricity output for use at a later some states’ markets continue to have research and feasibility studies. These time and must curtail its output. This unique features that inhibit access to schemes are largely focussed on small- is an important issue for many types of the market by renewable energy project scale renewables or small pre-commercial renewable generation (as well as coal and developers, or tend to favour incumbents. renewable energy projects. Hence, they nuclear power plants) whose economics are relatively inconsequential to the depend on maximising output at all times. Planning processes and financial attractiveness of major renewable These plants have considerable fixed costs community support energy projects. with very low operating costs and limited Planning laws and processes can differ ability to control the timing of their output. In addition to these programs, a few states substantially between states and between Renewable energy generators therefore could benefit from past efforts in initiating local governments. Features that can have a strong financial incentive to avoid mandated renewable energy target vary include: markets where there is a reasonable schemes. While these state schemes will probability that demand will reach low • Whether the approval is handled by local now be wrapped up into a single federal levels that require to be curtailed. government or state government government initiative, they have helped to improve and sustain investor confidence. 3 Source: Western Power, Submission to the Economic Regulation Authority, Pre-Approval of New Facilities Investment, 330kV Transmission Line and Associated Works in the Mid-West Region of Western Australia, 9 April 2008 20-20 vision 7
  10. 10. Assessing the states’ investment environment Western Australia (WA) – the next to renewable energy generators receiving boom state for renewable energy higher returns for their underlying electricity than in other states. Positives Investment in upgraded grid capacity WA has several key elements that make it While WEM’s grid infrastructure the most attractive state for investment in faces some capacity constraints in large-scale renewable energy projects in the medium-term, there has been a the short-term: willingness to support additional capacity • Excellent wind resources along upgrades where required. Specifically, a the south-west coastline near commitment to upgrade the transmission population centres line from Perth-to-Geraldton from 132 kV to 330kV will provide a substantial boost • A reasonably good biomass for wind farm development along this high- resource base wind area of the state. • High electricity prices due to higher cost fossil-fuel generation than in the Challenges NEM states Some potential barriers to investment in • Recent commitments to invest in WA include: upgraded grid capacity • Complex market structure unfamiliar to Excellent wind resources many of the major Australian renewable Sizable areas of WA’s south west have energy developers average wind speeds above 8 metres per • Relatively small and isolated market, second. This enables the recently built although countered to some extent by wind farms, Walkaway and Emu Downs, its high-level of growth to achieve capacity factors in the region of 40%. • A market that has only recently been liberalised and is still highly Good biomass resources concentrated WA also has several biomass power plants Complex and unfamiliar market structure under development, including the 40 MW WA’s electricity market has two separate Bridgetown Plant, which is well advanced markets, one for electrical energy and with a purchase agreement in place with another for power plant capacity. Beyond electricity retailer, Synergy. being paid for electricity generation, Attractive electricity prices generators receive a separate payment The state rates highly because its for simply having plant capacity available underlying economics for conventional — whether this capacity is used or not fossil-fuel electricity generation are (referred to as ’capacity credits’). These substantially higher than in the NEM. capacity credits represent a substantial Since 2006, the short-term market for proportion of the overall market’s value electrical energy in the WEM has averaged with payments of $127,500 per MW. around $40-$50 per MWh. In particular, Wind farm operators receive less capacity gas prices in the state have increased credits per MW of installed capacity than substantially over the past two years, conventional generators due to their due to gas suppliers having access to the output being subject to wind conditions international market via Liquified Natural which can not be controlled. Gas (LNG) facilities. This, in conjunction with higher cost coal generation, translates 8 20-20 vision
  11. 11. Diagram 3: Western Australian Electricity Market load duration curve April 2007 to March 2008 Megawatts 4000 3500 3000 2500 2000 1500 1000 Source: Independent Market Operator of Western Australia, 2008 Statement of Opportunities 500 Report, July 2008, page 15 0 20% 40% 60% 80% 100% Duration of the year Small, isolated but rapidly growing market grid operator to manage. This made it Another constraint is the WEM is an island impossible for renewables businesses grid and has a relatively small electricity to establish their own projects without market. Its annual consumption is 17,000 involving other parties with pre-existing GWh. As illustrated in Diagram 3, demand thermal power plants. levels fall below 1,500 MW for around 20% Market liberalisation has now considerably of the year, restricting the amount of wind improved access for new renewable that can be absorbed without curtailment. energy market entrants. However, legacy However, current wind penetration levels issues remain for project developers are low at 190 MW, within the SWIS. The and the market continues to operate electricity demand is expected to grow by primarily through bilateral contracts, 40% over the next decade, reaching over rather than a transparent open pool 24,000 GWh per annum in 2017-18. market. While WA has an open pool Market only recently liberalised and still market, the Short-Term Energy Market highly concentrated (STEM), it is limited to small volumes Previously, investment in wind farm of electricity traded at the margin of the projects in WA has been inhibited by bilateral contracts. This leaves a small the market as it has only recently been and relatively illiquid market available for opened-up and liberalised. In 2006, the new entrant renewable energy generators government owned generator, Verve, held to sell their output into, if they can not 90% market share. This is expected to fall obtain a power purchase contract with an to around 60% by 2009/10. Prior to 2006, existing electricity retailer. Moreover, high generators were obligated to balance concentration in the retail market limits their output with their own customers’ the choices available to generators in demand rather than leaving this to the contracting their output. 20-20 vision 9
  12. 12. Victoria (VIC) – the all-round VIC to advanced stages. The state also By contrast, VIC faces less immediate quality performer elected to modify the design of its scheme constraints. According to the VIC compared to the federal MRET to improve transmission planner, Vencorp, “with Positives the degree of support it provided to new the appropriate technical solutions, wind In spite of a history of low electricity renewable power projects. Now that power generation of approximately 3,000 prices, VIC is likely to be the long-term the federal government has agreed to MW installed capacity (and possibly up to winner out of the enlarged MRET. Behind significantly expand the national MRET to 4,000 MW depending on where generation this positive outlook are the following 45,000 GWh, Victorian project developers is located) can be accommodated by the characteristics: are ready to exploit the opportunity. Victorian transmission network.” 4 • The most active state government in In addition, the state government has Challenges supporting renewable energy demonstrated a willingness to provide additional funding for innovative To date, VIC’s biggest barrier to • An open, liberalised electricity market investment has been its very low renewable energy projects. For example, regulatory regime electricity prices and to a lesser extent, the Solar Systems received $50 million for its • Good-quality grid infrastructure near 154 MW solar concentrating photovoltaic difficult planning approval environment. high-quality wind resources project in the north-west of the state. Low electricity prices While the state has not received as much Large underlying electricity market While VIC’s electricity prices are low, the investment in new renewables capacity VIC’s electricity market is as large as upcoming emissions trading regime should over the past few years (compared to SA), SA, WA and TAS combined and has the provide greater uplift in power prices we expect this is about to dramatically best transmission grid infrastructure because of its higher emissions intensity, change. While only 134 MW of wind power in Australia, including high-capacity compared to the rest of Australia. VIC is operational, VIC has approximately interconnectors to other states. This emits 1.3 tonnes CO2-e per MWh, which is 2,000 MW under construction or provides VIC with a major advantage over up to 30% higher than in other states. development. The enlarged MRET will the other high-wind states. In WA, SA Planning approval challenges enable a significant amount of it to and TAS, wind output will exceed demand VIC can significantly improve its planning become operational. and transmission capacity levels when approval process, which currently takes High-quality wind resources wind installed capacity reaches around significantly longer than other states and Although not as strong as SA, WA or TAS, 1,000-1,500 MW. This is not an absolute can involve considerable expense and VIC has a high-quality wind resource, technical limit on wind, but it will start to resources. Some areas of the state have with large areas achieving wind speeds of impact on the financial returns because also faced challenging public opposition, around eight metres per second. output is constrained below the levels which has not been as great an issue in available from prevailing winds. other states. Supportive state government The VIC government was the first to implement its own mandated renewable energy target, at a time when the previous federal 9,500 GWh MRET target was fully subscribed and this will prove to be critical in attracting strong future prospects. While the development of renewable projects in other states stalled, developers have continued to progress projects in 4 Source: Vencorp, Capacity of the Victorian Electricity Transmission Network to Integrate Wind Power, December 2007. 10 20-20 vision
  13. 13. New South Wales (NSW) – Supportive state government Tasmania (TAS) – about to bloom The NSW government rates ahead the mighty minnow of all states, except VIC’s, in terms of Positives renewables support. NSW was an early Positives The relatively unexploited nature of the adopter with its own renewable energy TAS has the best wind resources in wind resource in NSW, coupled with its target scheme. In addition, the state Australia and also some of the highest large electricity market and available government was the first in the world to electricity prices, which, in spite of its transmission capacity, make the state introduce a legally mandated emissions small size, makes it one of the better the next frontier for renewable energy trading scheme, the Greenhouse Gas places for renewable energy projects in the project investment. Abatement Scheme, which has provided short-term. significant financial benefits to landfill gas Under-developed, good-quality renewable World-class renewable energy resources power plants. Even though these schemes energy resources TAS is in the middle of some of the are expected to be folded into a federal While NSW lacks the quality of wind windiest areas on the planet, with its west- scheme, they will have ongoing effects resource possessed by some of the coast facing straight into the southern through enhanced investment confidence southern states, it is still comparable with hemisphere’s trade winds (the Roaring and industry capacity in the state’s clean many European countries that lead the Forties). Government-sponsored studies energy sector. world with their wind power capacity. indicate significant areas with wind speeds Wind developers have managed to find Challenges above eight metres per second. The a range of good quality sites around the Woolnorth Wind Farm, on the north-west Electricity prices low but expected Great Dividing Range. Although only one coast, achieved capacity factors of around to improve of these has proceeded to construction 40% for 2005 and 2006. NSW’s electricity prices have been to date, it is expected that many will depressed over the past few years, In addition, TAS has plans for substantial become commercially attractive under due to considerable excess baseload biomass power plants that utilise wood the enlarged MRET regime. In addition, capacity. However, rising coal prices, the waste residues. NSW’s large agricultural and forestry areas introduction of emissions trading and provide substantial bioenergy resources Challenges increasing construction costs for new that may become commercially attractive fossil-fuel plants means this will be less The greatest constraint to long-term once thermal power plant construction of an impediment in the future. investment in TAS is its relatively small costs subside from current inflated levels. Uncertain planning processes and higher electricity demand. Also, the market Biggest market with minimal constraints application costs has recently undergone micro-economic NSW is the biggest electricity market NSW could improve its planning regime, reform and is still heavily concentrated, in Australia with an annual electricity which involves greater application costs with one dominant government-owned consumption of approximately 75,000 compared to other states and this can generator and one dominant government- GWh. The high-level of demand and very present a barrier to less established owned retailer. low non-hydro renewables penetration developers. While the regime is less levels indicates there is room for several Small electricity market but room for growth onerous than VIC’s, but some projects in capacity thousand megawatts of new renewables have encountered difficulties even after capacity before curtailment might be For most of the year electricity demand ministerial approval has been granted. is not much more than 1,000 MW, with necessary. While there may be benefits from strategic upgrades in transmission current annual electricity consumption infrastructure in some areas (e.g., the at 11,000 GWh and forecast to grow to 1,000 MW wind farm proposed for Broken 12,600 GWh by 2017. Hill would exceed transmission capacity) However, there is still room for growth this is not a significant issue for wind farm in renewable energy capacity before development over the next few years. the market becomes constrained. The current wind installed capacity is 20-20 vision 11
  14. 14. 139.75 MW and further wind farms that Queensland (QLD) – Industry uncertainty and higher costs are under consideration include: the surrounding bagasse unfulfilled potential 138 MW Musselroe project, in the north– Investment in bagasse power projects has east; and another 360 MW in Robbins Positives been inhibited by fluctuations in global Island and Jims Plains in the north-west. sugar prices and concerns surrounding QLD has two primary positive attributes: Even if all these projects proceed in the sugar industry’s on-going viability. full, wind would still represent a readily • Very good-quality biomass energy The sugar industry has been subject to manageable 16 % market share. resources primarily flowing from its volatile and record low prices in the past substantial sugar industry seven years, combined with encroaching Considering the availability of 500 MW residential developments and tree • A large and growing electricity market (600 MW short-term) export to the VIC plantations onto land previously utilised market via Basslink, and a large amount High-quality biomass resources for sugar cane. This has made sugar mills of highly flexible hydro generation, it The state’s sugar industry provides a reluctant to make substantial capital is conceivable that TAS could support considerable base of biomass waste investments required to upgrade their further capacity beyond that already material (bagasse) that could support power plant equipment. In addition, the under active consideration. several thousand GWh of generation. cost of construction and equipment for Analysis commissioned by the federal Furthermore, TAS’ hydro electric system, the steam-turbine power plants used for government prior to the start of MRET in which provides the majority of its bagasse has increased significantly. 2001, suggested QLD’s bagasse resource electricity, is suffering from a long-term would produce around half of all RECs Absence of wind farm development decline in water inflows caused by climate created under the scheme. Wind mapping exercises indicate that change. This may provide scope for QLD has some high quality wind sites in further growth in generation from other Growing electricity market selected locations. Thus far interest from renewable sources. QLD’s electricity market is about to developers has been limited because overtake VIC as the country’s second Barriers to entry other states often have better quality and largest and is expected to grow much Perhaps the key question mark for TAS is better understood resources. While the faster than VIC or NSW over the next its openness to new entrant generators. 500 MW Coopers Gap Wind Farm proposal decade. There is little, if any, prospect Joining the NEM in May 2005 was an is a positive sign, QLD is missing from the that a new renewable energy plant could important economic reform that should radar screen of most wind farm developers. encounter demand constraints, unlike assist private sector investment. To date states such as SA and WA. Low electricity prices no business other than the incumbent The QLD market has substantial excess government-owned generator has Challenges generating capacity and high-quality, developed a major renewable energy low-cost black coal deposits, leading Unfortunately, while QLD’s renewable project in the state. to low prices for electricity generators. energy resources and sizable electricity market could support new projects, While prices were quite high over the past current market conditions are not two years, this is considered a transitory conducive to this investment in the near phenomenon caused by withdrawing term. This is due to: significant coal plant capacity due to water supply rationing as a result of the drought. • Industry uncertainty and higher costs Also, the emergence of substantial coal- surrounding bagasse seam methane reserves means it now • Absence of substantial wind farm has some of the lowest cost gas-fired development activity electricity generation in the country. • Low long-term electricity price fundamentals 12 20-20 vision
  15. 15. South Australia (SA) – the king electricity demand. While other states are SA’s electricity consumption is relatively about to lose its crown also thought to possess substantial deep small at around 14,000 GWh for 2008. geothermal resources, the vast majority Demand is below 1,500 MW for about half Positives of the exploration and drilling activity has the year and reaches as low as 1,000 MW SA has captured the lion’s share of new been concentrated in South Australia. for 2% of the year. Also current projections renewables investment during the past Good electricity prices suggest only moderate growth, reaching seven years since MRET commenced, SA has consistently averaged the highest 15,500 GWh by 2017. moving from near zero renewables in electricity prices in the NEM since its In December 2007, SA had 780 MW its electricity supply to 17%. In many inception. These higher prices have been of wind power operational or under respects, it serves as the MRET success sustained due to a lack of access to low- construction, which is expected to story and beacon of what’s possible for the cost, high-quality coal resources that exist generate around 2,450 GWh per annum. rest of Australia. SA has been attractive in VIC, NSW and QLD. Thus, the 780 MW of wind already for investment in the past largely due to operational and committed has the A straightforward planning regime good-quality wind resource and higher potential to reach quite high penetration Feedback from industry indicates underlying electricity prices than the levels when low demand levels coincide wind farm developers have found SA’s rest of the NEM, plus a reasonably with high wind speeds. planning approval process reasonably straightforward planning approval straightforward. Many high-wind regions Interconnectors to VIC can support a environment. Looking forward, it also has of SA are long-term farming communities further 520 MW of export, which will a rich geothermal resource. that look favourably on the idea of provide further room for growth. However High-quality wind resource exploiting a natural resource, welcoming this low-level of demand, in conjunction SA has large, sparsely populated regions the jobs and leasehold income flowing with relatively weak transmission of the state exposed to high average from wind farms. infrastructure across many of the best wind speeds exceeding eight metres per wind regions of the state, will inhibit second. According to the South Australian Challenges the development of wind projects. As Electricity Supply Industry Planning SA faces two fundamental and inter- wind capacity grows beyond 780 MW, Council, wind farms being built in that related issues that pose near-term a project’s output is more likely to be state will achieve outputs three times constraints on its ongoing attractiveness constrained off. higher than is common in Europe. SA had for renewable energy investment: more than 300 MW of wind operational While SA has vast geothermal resources, as at December 2007 and 480 MW under • It is a small electricity market and one most of the development is in the construction, which is expected to become which is growing slowly remote north-east of the state, around operational over 2008 and 2009. This • Its transmission infrastructure is already 500 kilometres from major electricity adds up to a total of 780 MW – equal to encountering capacity constraints in transmission infrastructure. To achieve around half of all wind power capacity some areas the hundreds of megawatts planned by installed or under construction around geothermal developers, SA will need In addition, and partly in response to several hundred million dollars investment the country. 5 these issues, SA has applied unique in transmission infrastructure. A promising geothermal resource requirements on operating wind farms SA also possesses a vast geothermal which increase costs. Additional regulatory requirements for resource (at three-kilometre plus wind farms Capacity, demand and infrastructure Regulatory authorities in SA have been underground), with some of the constraints hottest rocks on earth outside volcanic conservative in their approach to granting While SA has excellent wind resources wind farm generation licences. This has led regions. The energy contained within and a large, untapped geothermal to extended delays and additional costly the geothermal resource in the Cooper resource, it requires increased operational requirements for SA wind Basin is estimated at more than 70 transmission infrastructure capacity farms that do not apply in other states. times Australia’s entire current annual to be properly exploited. 5 Source: Electricity Supply Industry Planning Council, Planning Council Wind Report to ESCOSA, April 2005. 20-20 vision 13
  16. 16. Ernst & Young Renewable Energy Attractiveness Indices To help investors compare the global investment environment for renewable energy, Ernst & Young publishes: • The Renewable Energy Country • The United States Renewable Energy Attractiveness Indices – evaluating Attractiveness Indices – evaluating 50 25 countries across the globe states across the US Download the Country attractiveness Download the United States Renewable indices 2008 - Q1 & Q2 2008 Energy Attractiveness Indices Q4 2007 (pdf, 1.3mb) (pdf, 216kb) Alternatively, the global Indices Alternatively, the US Indices publication can be downloaded from publication can be downloaded from www.ey.com/renewables www.ey.com/us/utilities Building on these two publications, an Australian Renewable Energy Attractiveness Indices publication will be released, which will rate the states across Australia in terms of their attractiveness for investment in a number of renewable energy technologies beyond large-scale renewables. 14 20-20 vision
  17. 17. Supporting growth in the Cleantech industry Ernst & Young supports state and federal governments in improving the environment for investment in clean technologies and new renewable energy capacity. In addition, if you are developing a renewable energy project in Australia or considering other investments into technologies relating to energy efficiency, waste management, water and other environmental improvements, we can help to assess project viability, obtain finance and negotiate with market players. As well as traditional services in accounting and tax, we can also assist you with: • renewable energy project finance • advisory relating to carbon market • financial modelling and valuations instruments such as Renewable Energy Certificates, Energy • investment due diligence Efficiency Credit Certificates, and • mergers and acquisitions the forthcoming Carbon Pollution • market entry strategy Reduction Scheme. • government concessions and grants Contacts Jon Dobell Dr Marc Newson Oceania Managing Partner, Partner, Strategic Growth Markets and Oceania Cleantech Leader Entrepreneur of the Year Tel: +61 2 9248 5659 Tel: +61 2 8295 6949 marc.newson@au.ey.com jon.dobell@au.ey.com Tristan Edis Associate Director, Cleantech and carbon markets Tel: +61 3 9288 8026 tristan.edis@au.ey.com 20-20 vision 15
  18. 18. Glossary CO2-e Carbon Dioxide equivalent GWh gigawatt hours IMO Independent Market Operator kW kilowatt kWh kilowatt hour LNG Liquified Natural Gas MW megawatt MWh megawatt hour MRET Mandatory Renewable Energy Target NEM National Electricity Market NEMMCO National Electricity Market Management Company REC Renewable Energy Certificates solar PV solar photovoltaic STEM Short-Term Energy Market SWIS South-West Interconnected System WEM Western Australian Electricity Market 16 20-20 vision
  19. 19. 20-20 Vision Investment challanges and opportunities
  20. 20. Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com/au/cleantech © 2008 Ernst & Young Australia. SCORE No. XXxxxxxxxxxxxxxxxxxx This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk. Liability limited by a scheme approved under Professional Standards Legislation. Adelaide Gold Coast Perth Ernst & Young Building 12-14 Marine Parade Ernst & Young Building 121 King William Street Southport QLD 4215 11 Mounts Bay Road Adelaide SA 5000 Tel: +61 7 5571 3000 Perth WA 6000 Tel: +61 8 8417 1600 Fax: +61 7 5571 3033 Tel: +61 8 9429 2222 Fax: +61 8 8417 1775 Fax: +61 8 9429 2436 Melbourne Brisbane Ernst & Young Building Sydney 1 Eagle Street 8 Exhibition Street Ernst & Young Centre Brisbane QLD 4000 Melbourne VIC 3000 680 George Street Tel: +61 7 3011 3333 Tel: +61 3 9288 8000 Sydney NSW 2000 Fax: +61 7 3011 3100 Fax: +61 3 8650 7777 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 Canberra Ernst & Young House 51 Allara Street Canberra ACT 2600 Tel: +61 2 6267 3888 Fax: +61 2 6246 1500 S0819147