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PPAs drive where policy fails to steer – how corporates are driving renewables in Oz

Federal government policy on Australia’s low carbon energy transition is floundering. But Corporate Australia – through companies such as Telstra, Carlton United Breweries, BlueScope and universities – is driving its own transition through power purchase agreements, according to renewable energy guru Tim Buckley.


Australia’s transition to low-carbon energy is being driven by technology and finance, according to Tim Buckley, director of energy finance studies, Institute for Energy Economics and Financial Analysis.

And while it is not an optimal, easy or cheap solution, it is an “acceptable one” in terms of the current federal policy void, he says.

Power Purchase Agreement (PPA) by corporates is one of the factors stimulating growth in large-scale renewable investment and it’s rapidly gaining traction in sectors including the listed property funds, universities and corporates. Big players signing up in recent months include Telstra, Carlton United Breweries, UNSW, Monash and BlueScope.

Those signing on the line to purchase power direct from renewable generators or retailers are motivated by a range of factors including corporate social responsibility, the marketing edge gained through carbon neutrality targets and, above all, cheaper electricity.

Buckley says that a few years ago, the big renewable project developers were relying on a government framework to incentivise and de-risk their investments.

Today, because of the federal government’s “stuffing around” and failure to create a strong forward-looking policy framework, emerging market mechanisms and demand are now laying the right groundwork.

For those such as property funds that are signing up to PPAs, Buckley points out that it is “outside their area of competency” to move into the energy generation space.

But some are going there and finding that a model like a PPA reduces the difficulties. It is possibly a more expensive option than would be available if better policies were in place, but the early adopters are taking up the challenge “despite the procrastination of the government.”

What policy could do is create a framework that made obtaining renewable energy low cost and easy, Buckley says.

“All the Liberals want to do is underwrite multimillion-dollar coal-fired plants.”

One advantage of PPAs is they are reasonably policy-proof. A PPA “can’t be undermined [by policy] any more than it already has been,” Buckley says.

The only major risk is if large scale renewables or PPAs are outlawed in future, but Buckley says that is unlikely to happen.

The banks and other financial institutions are on-board with PPAs as a means of underwriting new large-scale renewable projects.

“A PPA provides a commercial guarantee and certainty.”

The banks are confident the developer will receive financial returns from a reliable source, he says.

Currently, a project can obtain financing with around 70 per cent or more of a project’s future supply committed to a PPA, or other certain purchaser, and the financier will accept that up to 30 per cent will be carried as merchant risk.

Buckley says for the developers, that 30 per cent finds a ready buyer in the National Electricity Market.

It creates a bit of a virtuous cycle. PPAs provide lower cost electricity for the buyer, and investment certainty for the project developer. The increased supply brings prices down further, so then the PPAs gather momentum and their proven investment outcome in the way of returns accelerates the deployment of renewables.

And so it goes – an inevitable transition of the energy market powered by the disruption delivered by finance and technology working hand in hand.

“It is not optimal – but it is acceptable,” Buckley says.

While investor interest has often been driven by policy frameworks and the corresponding certainties they create, Buckley says that at the end of the day, if an investor will see an acceptable rate of return in a timeframe that is also acceptable to them, the prospect is attractive.

PPAs and other solid financial agreements mean developers can eliminate many of the problems caused by policy uncertainty.

Developers from outside Australia are entering the market in droves, because the high retail energy prices caused by the gold-plating of the grid are attractive.

Buckley says that in the past decade, around $40 billion has been spent on the grid, and that a significant part of it is now a “stranded asset” that will need to be written off in the near future.

The grid costs built into energy prices are a large reason for what he calls the “death spiral” affecting the conventional fossil-fuelled grid.

Anyone who can afford it is getting out, he says. High prices have made batteries a more economically viable option, so more people are going off grid.

That means grid costs need to be shared between fewer customers, which drives prices higher, in turn encouraging more customers to go renewable.

“Wait and see [as a policy setting] keeps prices high,” Buckley says.

“At the end of the day, it is not optimal [for people] to go off-grid but in the absence of policy they will do it.”

Another factor behind the high prices experienced by small to medium enterprises and retail customers is the pricing framework that sees the largest energy users paying far less per kilowatt hour than smaller users.

These “sweetheart deals” mean the cost of the grid is being largely borne by SMEs and residential retail customers, who are “massively subsidising” the big corporate and industrial users.

“This hidden subsidy is a design feature [of the national energy market].”

Offshore capital is also keen on investing in large-scale Australian projects. Buckley says this is because Australia has some of the world’s best solar and wind resources, the supply chains are now established, and the banks are now “comfortable” with renewables because the technology is proven.

Australia’s exceptionally high energy prices compared to global averages also play a part.

Over $2.5 trillion is sitting in pension funds, Buckley says, and it is growing at around 9.5 per cent annually because of mandatory contributions from employers.

Renewable energy infrastructure “perfectly aligns” with the desired 15, 20 and 40 years investment timeframes of pension funds – and it offers returns of around seven to eight per cent compared to the three to five per cent returns of other investments.

“There is no better way [than renewable projects] of diversification for a fund to increase its risk return profile.”

Some large energy users are even  becoming the project proponent, such as University of Queensland, which had a $23 million annual energy spend across 25 sites before making the decision earlier this year to build, own and operate its own renewable energy asset – the Warwick Solar Farm.

A spokeswoman for UQ tells The Fifth Estate the solar farm is expected to entirely offset the combined energy use of all of UQ’s sites.

Buckley says the 100 per cent renewables leadership shown by UQ is also delivering a marketing edge, which he says other universities are likely to pursue themselves in a “snowball effect”.

Other recent PPA moves by large users have included Bluescope Steel in Wollongong going for renewable energy, which Buckley points out “blows a hole” in Coalition arguments that heavy industry can’t cope with renewable energy.

This furphy was also disproven by Sanjeev Gupta, who has put South Australia’s Whyalla steelworks on a 100 per cent renewable energy pathway.

Nectar Farms are another examplar, with the CEFC-supported solar PV on the greenhouse roofs and no grid costs. Buckley says that by adding desalination to the picture it becomes entirely possible to put greenhouse-based agricultural enterprises in the desert.

“Agriculture is a perfect example of where you can an align your interests.”

For smaller energy users that can’t provide project underwriting with a their own individual PPA, Buckley says one option is for an aggregator to emerge that can bundle up a number of small PPAs and align them with a renewable development.

Buckley says these kinds of aggregators “will appear” if there is an economic return to be had as market appetite manifests.

In general, one of the advantages solar developers have over the coal-fired folk is the projects can be scaled to match the buyers due to the new modular solar PV technologies.

The developments “don’t have to take years” to be delivered, Buckley says. A smaller project can be built on a roof in just a couple of weeks.

“Commercial solar’s growth is exponential at the moment. Where there is demand, the market will adapt.”

While we “need a forward-looking government”, Buckley says that “one way or the other we will see more PPAs.”

“It is beyond the tipping point.”

Banks, universities and others moving into the space is escalating momentum.

Buckley says that there is also potential for a major game changer should Woolworths or Wesfarmers go down the renewable track in a big way. That would mean gigawatts of new renewable energy.

For example, Wesfarmers’ Bunnings operations could install solar PV awnings nation-wide across all the carparks and offer free EV charging. This would result in an attraction for customers, and create a framework for others to follow that can help transform not just property and electricity but also the EV sector, Buckley says.

“Corporates have the financial capacity to circumvent government policy failure.”

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