1. 1
A
SOLUTION
TO
THE
LRET
IMPASSE
THAT
DELIVERS
A
REDUCED
WIND
FARM
BUILD
TO
THE
GOVERNMENT
BUT
PROVIDES
STABLE
GROWTH
THAT
THE
WIND
INDUSTRY
CRAVES
By
Simon
Mathis,
MBA,
MA
(Cantab)
Executive
Summary
Concerns
have
been
expressed
by
the
Government
(and
worked
over
by
the
Warburton
Review)
that
lower
than
expected
electricity
demand
in
2020
will
see
renewables,
supported
by
the
RET,
take
an
unacceptable
amount
of
supply
from
existing
non-­‐renewable
generators.
With
the
recommendations
of
the
Warburton
review
largely
discredited
the
potential
has
risen
for
a
middle
ground
solution
to
be
adopted
that
can
satisfy
the
needs
(not
demands)
of
most
stakeholders.
By
delaying
the
delivery
of
the
fixed
target
of
41GWh
to
2023
with
an
associated
limited
extension
of
the
scheme
to
2035
it
is
possible
to
continue
to
support
the
growth
of
the
large-­‐scale
renewable
industry
in
Australia
at
an
acceptable
overall
cost.
Some
basic
context/facts
about
the
workings
of
the
large-­‐scale
renewable
energy
target
(“LRET”)
and
certificate
market.
a) When
the
target
was
expanded
from
9.5TWh
to
45TWh
in
2009/2010
the
scheme
was
also
extended
from
2020
to
2030
providing
a
wind-­‐fall
gain
for
those
existing
accredited
generators
with
long
operating
lives
able
to
create
up
to
another
10
years
of
REC’s/LGC’s.
(Note
wind
turbine
generators
have
a
typical
useful
life
of
only
20
to
25
years).
I
raise
this
point
because
any
changes
to
the
LRET
will
have
effects
on
both
existing
and
proposed
generators
but
some
of
those
generators
will
be
looking
to
secure
support
that
wasn’t
in
existence
when
investment
decisions
were
originally
made.
b) My
forecast
of
the
surplus
of
Large
Generation
Certificates
(“LGC’s”)
post
surrender
in
2014
for
compliance
and
green-­‐power
is
~24.9
million.
Without
any
further
build
beyond
what
is
already
in
the
construction
pipeline
this
surplus
will
not
be
used
up
even
under
the
current
targets
until
sometime
in
2018.
c) The
surplus
acts
to
defer
commitment
to
new
renewable
generation.
The
fixed
end
date
(2030)
of
the
LRET
means
that
the
later
the
date
a
renewable
generator
starts
operating
the
fewer
LGC’s
it
can
create
and
therefore
(all
other
factors
being
equal)
the
higher
the
price
per
LGC
it
must
earn.
If
wind
energy
is
the
LGC
price
barometer
then
any
generator
starting
operations
from
2021
would
require
an
LGC
price
in
excess
of
the
$65
/LGC
penalty
price.
d) The
current
LRET
requires
an
additional
~2,250
MW
of
wind
or
the
equivalent
to
be
operating
by
2018,
~4,100
MW
to
be
operating
by
2019
and
~2,250
MW
to
be
operating
by
2020.
When
compared
with
the
total
installed
base
of
wind
farms
of
3,610
MW
plus
556
MW
under
construction
this
is
a
tall
order
for
an
industry
currently
in
the
doldrums
of
regulatory
uncertainty
and
if
delivered
will
almost
certainly
involve
inefficiencies
and
added
costs.
The
pinch
point
is
not
in
the
development
phases
of
site
identification,
community,
environment
and
planning
approvals
but
in
delivery.
The
wind
industry
will
argue
against
delays
due
to
fears
of
the
coming
of
large-­‐scale
solar
price
competitiveness
and
a
loss
of
share
of
the
LRET
by
wind.
e) The
recommendations
of
the
Warburton
review
are
flawed
not
just
because
they
kill
all
future
large-­‐scale
renewable
energy
development
but
also
because
they
fail
to
deal
at
all
with
the
LGC
surplus
meaning
the
price
of
LGC’s
could
fall
to
zero
necessitating
compensation/market
support.

2. 2
Core
characteristics
of
a
middle
ground
solution
What
could
a
middle
ground
(addresses
conservative
concerns
that
too
much
generation
is
being
forced
into
the
market
to
the
detriment
of
existing
non-­‐renewable
generators
but
supports
the
continued
growth
of
the
renewable
energy
industry)
solution
look
like?
i) Fixed
targets
until
at
least
the
LGC
surplus
is
used
up
(without
the
absolute
certainty
of
the
requirement
for
new
renewable
generation
build
the
price
of
LGC’s
cannot
recover
to
supportive
levels).
ii) Targets
that
support
a
sensible
new
build
program
of
1,000
to
1,500
MW
of
wind
or
equivalent
per
annum.
Such
a
new
build
program
will
be
sufficient
to
attract
efficiencies
across
the
project
life-­‐cycle
meaning
delivery
at
least
cost.
iii) A
scheme
that
rewards
new
projects
with
LGC’s
for
a
minimum
of
15
years
and
preferably
20
years
to
ensure
acceptable
LGC
prices.
iv) A
scheme
that
avoids
the
costs
associated
with
extending
support
beyond
2030
to
existing
renewable
generators.
Solution
1) Adjust
targets
down
from
2018
to
support
a
delayed
build
of
max
1,500
MW
wind
or
equivalent
per
annum.
2) Extend
the
LRET
to
2035
BUT
limit
the
accreditation
of
existing
generators
to
2030
and
adjust
targets
from
2031
to
account
for
lost
existing
generation.
3) Implied
new
target
levels:
2015
2016
2017
2018
2019
2020
2021
2022
2023
2030
2031
2035
Current
41TWh
18.85
21.431
26.031
30.631
35.231
41.850
41
41
41
41
0
0
Delayed
41
TWh
18.85
21.431
26.031
28.351
25.303
29.765
33.374
37.838
41
41
25.47
25.47
Change
0%
0%
0%
-­‐7%
-­‐28%
-­‐29%
-­‐19%
-­‐8%
0%
0%
na
na
4) Expected
LGC
price
path
(assuming
an
underlying
electricity
price
of
real
$40/MWh)
with
prices
falling
due
to
the
scheme
extension
2015
2016
2017
2018
2019
2020
2021
2022
2023
2030
2031
2035
Current
41TWh
$42.0
$45.6
$49.5
$53.8
$58.6
$64.4
$66.3
$68.3
$70.3
$86.5
0
0
Delayed
41
TWh
$33.9
$36.8
$40.0
$43.4
$46.3
$49.3
$53.3
$58.6
$64.4
$79.6
$82.0
$92.3
Change
-­‐19%
-­‐19%
-­‐19%
-­‐19%
-­‐21%
-­‐23%
-­‐20%
-­‐14%
-­‐8%
-­‐8%
na
na
5) Gross
LGC
cost
of
additional
capacity
in
2014
$’s
=
$16.9bn
vs
$15.5bn
with
current
targets.
6) Actual
cost
difference
should
be
lower
due
to
gains
from
avoiding
the
huge
build
in
2019
AND
real
gains
in
efficiency,
costs
over
time,
which
have
not
been
factored
in.
Arguments
against
1) Lower
price
expectations
for
LGC’s
will
impact
existing
renewable
generators
BUT
as
explained
above
some
of
these
generators
have
already
experienced
windfall
gains
from

3. 3
the
extension
in
2009/2010
from
2020
to
2030
and
on
balance
are
probably
still
ahead.
Others
who
have
built
without
the
protection
of
an
off-­‐take
contract
will
be
negatively
impacted.
2) Lower
price
expectations
for
LGC’s
will
impact
on
the
book
value
of
the
surplus
BUT
most
of
that
surplus
is
held
by
retailers
and
banked
against
surrender
for
compliance
or
green-­‐power
and
isn’t
traded
on
market.
3) There
is
an
increase
in
the
gross
real
cost
of
the
scheme
BUT
that
increased
cost
in
real
terms
is
marginal
and
spread
over
more
years
meaning
the
annual
cost
is
lower.
4) These
levels
of
renewable
generation
will
displace
non-­‐renewable
generation
that
is
currently
dispatched
and
may
still
result
in
more
than
20%
of
generation
from
renewable
sources
by
2020
BUT
will
support
the
objectives
of
the
Renewable
Energy
Act,
which
had
bi-­‐partisan
support
until
last
year.
Disclaimer
–
This
analysis
is
a
personal
perspective.