Winning in the renewable energy market

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Winning in the renewable energy market
Queensland Power Conference 26 March 2009
Bruce Mountain Director
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Disclaimer   Carbon Market Economics Pty Ltd
(including the directors and employees) makes no
representation or warranty as to the accuracy or
completeness of this presentation. Nor shall
they have any liability (whether arising from
negligence or otherwise) for any representations
(express or implied) or information contained in,
or for any omissions from, the presentation or
any written or oral communications transmitted in
the course of the presentation.
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Contents
What is the renewable energy target ?
Where are we now?
How do we reach the target ?
How do you win ?
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What is the renewable electricity target ?
The spirit of the law

• Labor Party 2020 renewable electricity target
• 45,000 GWh

Estimated Green Power demand in 2020 3,000 GWh
Existing renewable electricity production 1,000
GWh
Additional renewable electricity production by
2020 47,000 GWh
-


The letter of the law

• Exposure draft legislation sets a REC target, not
  a renewable electricity target
• Inclusion of solar water heaters and heat pumps
• Deeming for solar water heaters, heat pumps and
  small generators
• Multiplier for small generating unit RECs

Actual renewable electricity target is highly
uncertain
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Where are we now 2008 snapshot
Electricity production
RECs created
4,500 GWh
7.8 million RECs
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The economics of the renewable electricity
target

• One REC per MWh produced from renewable sources
  (wind, solar thermal, geothermal, wave) to 2030
• RECs for solar water heaters and heat pumps
• Ability to collect all RECs upfront for solar
  water heaters, heat pumps, and small generating
  units
• Unlimited banking
• Limited inter-year borrowing
• Annual targets penalty payable by retailers of
  obligation not met
• GreenPower demand is additional

Two things matter in REC pricing Shortfall
penalty establishes price ceiling if market is
undersupplied and no surplus of banked RECs,
prices in any one year can be expected to rise to
the shortfall penalty If the market is expected
to be undersupplied in the long run, but
over-supplied in the short run, prices can be
expected to rise to the shortfall less the cost
of carry.
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Overview of renewable electricity subsidies

• Expanded Renewable Electricity Target The
  cornerstone subsidy mechanism.
• Will provide 27bn subsidy between 2009 and 2030,
  assuming average REC price of 43.
• 650m in renewable electricity funds 500m in
  Renewable Energy Fund, and 150m in Clean Energy
  Innovation Fund
• Jurisdictional financial support for specific
  projects
• Solar water heater and heat pump capital rebates
• Jurisdictional feed-in tariffs for small
  generating units

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Commercial arrangements for transacting RECs

• Liability for surrendering RECs lies with
  electricity retailers
• Vast bulk of all RECs traded through bi-lateral
  contracts often long term off-take contracts
  with fixed price but variable volume.
• Short term spot market REC trades conducted
  through brokers (NextGen, TFS). AFMA publishes
  prices reported by several brokers. But illiquid
  spot market (volumes not published).
• At present little evidence that spot price used
  as reference price in derivative contracts
  (unlike spot price in electricity contracts)
• Futures market exists, but liquidity doubtful
• Reasonable volume of banked RECs now being used
  up because market is now short.

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Technology summary wind

• Cheapest renewable generating resource
• Capital intensive requires long term off-take
  contract to secure project finance
• Our database has 14,400 MW of existing and
  possible future plant in X different wind farms
  around Australia
• Significant on-going technology improvement
• Steady unit cost reduction over time although
  perturbed by demand spike and supply chain
  blockages (gearboxes)
• Significant environment, local planning and
  transmission access barriers to entry.
• Plenty of developers sitting on their hands
  waiting for more regulatory certainty (and
  project finance!)

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Distribution of existing and all possible future
wind generation capacity (to 2020)
Source CME RE Database
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Technology summary roof-top PV

• Growing very rapidly in Australia (more than 150
  p.a. on average for last three years). More than
  18 MW installed in 2008
• Growing even faster internationally 230 from
  2007 to 2008
• McKinseys forecast global PV installation growth
  rate to be 39 (CAGR) to 2020
• Combination of feed-in tariffs and RECs means it
  is now NPV-positive in many parts of Australia
• Very significant cost reductions are being
  achieved (module production costs broken 1/watt
  in the US)
• Politically very popular (decentralised
  conspicuous environmentalism empowering)
• Currently around 10 times more expensive per MWh
  produced than wind, but gap is closing
• Our modelling suggests that a combination of
  deeming plus the REC multiplier means that RECs
  from PV could crowd-out wind farms if 39 CAGR to
  2020 maintained)
• Substantial scope for cost reduction in Australia
  (installed cost in Australia is currently around
  twice that in Germany)
• Possible to achieve very rapid roll-out (e.g.
  Spain went from 1 MW to 2600 MW p.a. in 3 years
  South Korea grew six-fold between 2007 and 2008)
  

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Technology summary geothermal

• Conventional geothermal is a well established
  technology. Enhanced geothermal systems (a.k.a
  hot fractured rock) is very new. No reasonable
  sized EGS plant exists anywhere yet.
• Big technology risk
• Very capital incentive
• Remote from main load centres will require
  significant network extension
• Been able to attract relatively significant
  amounts of private equity support (Petratherm,
  Geodynamics)
• Government subsidy program to fund drilling
• Unlikely to play a meaningful role in renewable
  generation in Australia by 2020.

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Technology summary high temperature
solar thermal

• Around 350 MW in operation in US and Spain
• Reportedly around 5,000 MW under possible
  developed internationally over the next 5 years
• Very capital intensive long term off-take
  contracts essential to secure project finance
• Potential for significant technology development
  key issue is to develop way to store energy, in
  order to improve capital productivity
• Likely to attract Commonwealth development
  funding
• Maybe most effective usage will be in pre-heating
  in fossil fuel power stations (e.g. Liddel power
  station) remote supply (mine mouth)
• Unlikely to be a significant contributor to
  renewable generation in Australia by 2020

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How do you win ?
Demand side Effective contracting to manage
delivery risk Ability to take-on and manage
long term contract price risks Ensuring diverse
range of suppliers Very high return on
knowledge of technology and costs, REC
supply/demand and electricity/REC market
regulation

• Supply side
• Diversify sources to reduce performance,
  technology and cost risk
• Economies of scale
• Supply-chain relationships (ensuring access to
  key elements on time)
• Route to market retail customer relationship
  will be valuable
• Ability to negotiate long term REC and
  electricity price hedges will be critical for
  wind, geothermal, solar thermal some biomass.
  Less of an issue for PV/SWH
• Very high return on knowledge of technology and
  costs, REC supply/demand and electricity/ REC
  market regulation

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Where are REC prices headed

• Reasons to be bullish
• Global financial crisis capital shortages will
  constraint supply
• Regulatory uncertainty will deter investment
• Transmission network constraints
• Lowish expected emission prices

• Reasons to be bearish
• Apparently huge number of wind projects
• Historic collapse of environmental markets (EUA
  in Europe in 2006/7, NGACs in NSW in 2007/8, RECs
  in 2006)
• Treatment of PV could flood the market to 2015
• Expansion of solar water heaters and heat pumps
• International pressure to make progress on
  renewable energy

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Bruce Mountain bruce.mountain_at_carbonmarkets.com.a
u 0405 505 060 (03) 9607 8371 www.carbonmarkets
.com.au
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The renewable energy generation forecasting
challenge

• Many possible generating units (our RED database
  - 860 existing and prospective generating units)
• Incentive for developers to look on the bright
  side of life how to apply a critical eye ?
• Economics differs considerably for different
  types of REC plant (hydro, SWH, wind, biomass, PV
  etc.)
• Technology risk differs considerably for
  different types of plant
• Big policy uncertainty
• will MRET really be phased-out in 2020 ?
• will it be altered in-between 2020 and now ?
• What about impact of other complementary measures
  feed-in tariffs for small PV, changes to SWH
  requirements ?