Meeting the Renewable Energy Target

Innovative approaches to financing renewables in Australia

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Now that the Renewable Energy Target (RET) is legislated, with federal bipartisan support, the foundation exists for a supportive environment for long-term investment in Australia’s renewable energy market.

The Clean Energy Regulator Annual Statement suggests that, by 2020, circa 6,000 MW of new large-scale generation capacity will be needed to supply the required large-scale generation certificates (LGCs) to meet both statutory and voluntary sources of demand. This will require the total renewable capacity installed since 2001 to double in the next four and a half years.

The state of renewable energy development in Australia

The bundled price of electricity and LGCs, estimated as the average spot LGC price plus the average wholesale electricity price, across Australia appears to be high enough to make new build financially viable.

The spot LGC price rose strongly before and since the revised target was legislated in mid-2015, reaching a record high of A$85.50 per certificate at the date of this report.

The recent increase in activity at this price level over a sustained period suggests that the market has confidence in the regulatory framework governing the sector.

Market participants believe that if new supply does not come online, liquidity will tighten during 2017 as banked LGCs are used up.

There is no shortage of shovel-ready projects to invest in. Approximately 9,000 MW of new large-scale renewable energy projects have all the necessary development approvals to begin construction. Promising evidence of ‘green shoots’ in the industry have also appeared, including a small number of new projects reaching financial close, Power Purchase Agreements (PPAs) being signed, and a range of financing vehicles being created to underpin new developments.

Despite these promising indicators, the level of firmly committed new build in 2016 is well below the 3,000 MW the Clean Energy Regulator has estimated needs to be financed this year to ensure an adequate level of future supply to the LGC market. Few projects have achieved financial close in the last 12 months. Of those doing so since the bipartisan deal on the RET in May 2015 half (by capacity) are a result of an offtake agreement with government or a state-owned company.

Investment constraints

Overall, market participants consulted as part of this report attribute delayed market activity to challenges stemming from the interaction between project sponsors, debt providers and energy retailers in the renewable energy delivery chain — in the context of a volatile electricity market. These constraints include:

  • A mismatch between different parties’ expectations of the term of offtake agreements and debt
  • Debt sizing requirements of banks
  • Concerns around longevity of the RET and policy stability
  • LGC acquisition strategies of energy retailers–with non-rated retailers largely unable to participate in financing greenfield large-scale renewable energy projects

In response, the market is actively pursuing solutions to overcome these challenges, leading to some positive signs, including:

  • Retailers reiterating their intentions to comply with the RET and notable PPA announcements in 2016
  • The Clean Energy Finance Corporation’s long-term fixed-rate loans for large-scale projects and its Large-Scale Solar program
  • New investment funds emerging to facilitate project finance
  • Non-traditional retail structures providing opportunities for large buyers, grouped buyers and non-rated retailers to directly participate in the financing of projects
  • Numerous state and territory based procurement processes focused on obtaining energy from greenfield renewable energy projects
  • Corporates beginning to consider how they can support renewable developments by directly procuring energy from those developments

These activities have a potential to create confidence in the market’s ability to meet the RET, providing alternative offtake arrangements and increasing liquidity in financing markets.

Potential opportunities and innovations in financing large scale renewable energy projects

A range of opportunities and innovations, commonly used in other jurisdictions, could also facilitate the financing of large-scale renewable energy projects in Australia. These include:

  • Corporate support structures (e.g. purchasing power directly from an off-site project), including aggregated end user procurement models
  • Merchant financing
  • Financial instruments for managing merchant risk (e.g. synthetic PPAs)
  • Structures to address debt volume and term (e.g. hedging instruments and insurance products)
  • New approaches to appraising equity risks (e.g. taking RET risk, or viewing equity risks on a portfolio basis as opposed to specific project basis)

These approaches have already been implemented in international markets and could be instrumental in raising finance for greenfield renewable energy projects in Australia.

Australia has re-gained its place in the top 10 most attractive countries to invest in new renewable projects.

There may be considerable commercial opportunities over the coming year and even potential early mover advantages given the short runway to 2020.