The sun will never go down on large-scale solar as a bankable, reliable, proven source of clean electricity – but that doesn’t mean it won’t take a hammering now and then. In Australia, 2019 has turned out to be one of those years.
Some large-scale solar projects saw their fortunes struck down early in the year as marginal loss factors issued by the Australian Energy Market Operator carved into expected revenue forecasts. Things only got worse as daytime prices in some states started to approach zero towards the end of winter. Then, in Queensland in early September solar plant owners caught a glimpse of hell as prices neared a floor of negative $1,000, when they have to pay to generate. Many of them chose to switch off.
As a consequence of all this agony, investment in large-scale solar in Queensland has collapsed, says Green Energy Markets director analysis and advisory Tristan Edis. And it’s not over yet. “I think that is symptomatic of what we will see in other states,” he says.
Large-scale solar also competes with rooftop solar, where levels of new capacity have been soaring in Queensland this year. The story is the same in NSW and Victoria, and Edis expects additional capacity in those states will flow through to similar impacts experienced by Queensland asset owners this year. “You no longer can shield yourself from that kind of impact.”
In August UK-based infrastructure company John Laing wrote down renewable energy projects under construction in Australia by about $120 million, citing changes in marginal loss factors.
Let’s make a deal
Contenders in large-scale solar must sell as much generation as they can to satisfy lenders, and a project’s success can hinge on securing power purchase agreements up front. As the market absorbs the shocks of 2019, however, energy buyers may become much tougher negotiators. It’s important because banks will expect a certain percentage of generation to be contracted, with the remainder prone to spot market volatility. “With the spot price events it might become harder and harder for straight solar assets to secure these PPAs,” says Rystad Energy senior analyst Australia David Dixon.
The sudden jolt of disappointment experienced by many solar plant owners when AEMO released its revised marginal loss factors in April has been well-reported, but rigorous due diligence would have revealed the risk of connecting to low-voltage lines in areas with very little demand.
The problem is exacerbated by an opaque applications regime, where developers can unknowingly be proposing plants in near proximity. The negative MLF effects of 2019 are a consequence of chasing the best solar resources, to be fair to those putting their money on the line, but in hindsight it shows up a variance of business acumen among developers. The goal is to chase the best commercial outcome.
Transmission upgrades to northwest Victoria and the NSW-South Australia interconnector will bring MLF relief to solar assets in those areas, but it’s a slow process. Affected plants will be stuck with poor loss factors for another few years at least. “For some people it will never be resolved,” Edis says, if those assets are in areas AEMO and transmission companies don’t view as investment priorities. “Some projects will be stuck with low MLFs.”
In its report on the investment outlook for renewables released in September, the Clean Energy Council described a slump in investment from more than 4,500MW of new large-scale renewable generation (wind and solar) reaching financial close in the last quarter of 2018 to less than 800MW in each of the first two quarters of 2019.
“This dramatic fall is largely due to the lack of federal energy policy and a range of regulatory and grid challenges undermining investment confidence,” the report said. “However, now that the [33,000GWh Large-scale Renewable Energy Target] has been met, we are left without a federal energy and climate policy, which is creating an uncertain investment environment.”
Things will pick up
Yes, it hurts to see revenues hit hard. If solar assets struggle in the first few years of a 20-year life they still have plenty of time to make up for it. “The solar farm will be there and working very well for a very long time to come,” Edis says, “and when the transmission upgrades come through, they can fully exploit them.”
No doubt prospective buyers are watching the situation more keenly than anyone, looking for signs of distress. Parties who missed out on the first surge of large-scale solar, feeling at the time that the rewards didn’t match the risks, may be happy to buy in as the market prepares for inevitable improvement on the back of transmission upgrades and coal closures. After all, it’s not as though electricity is going to be replaced by anything.
In the long run, Dixon is upbeat. “In the short term there will always be the solar-coaster with its ups and downs, but the long-term outlook is still very bullish,” he says. Coal plants will be retired over the next 20 years, which will free up spectacular levels of supply, especially in NSW. “That’s a positive for all those that are electrically close to those assets, out west and up north,” he says. Gas is an expensive alternative to renewables, which puts it largely out of the picture beyond peaking services.
Introduction of a five-minute settlement period will inherently favour facilities that can ramp up and down to exploit opportunities in the market. “Solar and batteries win here.”
Some generation around the country has been built in rural areas with weak transmission, far away from load, but Dixon has noticed a shift in interest to locations closer to the state capitals. “There is a key trend as developers start to try and de-risk that MLF story and network congestion,” he says.
The glaring opportunity is for storage to absorb the daytime surplus provided by solar. “Once renewables and storage reach cost parity with gas, it’s going to be a gold rush for putting storage everywhere in the grid.”
In the meantime, the levelized cost of energy for wind and solar will continue to fall as turbines get bigger and manufacturers eke out gains in PV efficiency in a ruthless and fast-growing sector.
Time to reconsider
Power purchase agreements may offer a lifeline to projects but what will happen when they expire? As PPAs fall due for renegotiation all participants by then will know the full extent of network constraint issues, MLF issues and the declining prices of large-scale generation certificates. It will become harder for solar asset owners to negotiate. “That’s when PPAs will be really hard to get,” says Amar Rathore, senior associate at the Market Advisory Group. The biggest problem for renewables is transmission, he says.
The Australian Energy Market Commission’s review on the coordination of generation and transmission investment is expected to be published in December, eventually to make its way to the COAG Energy Council for approval. At AEMO, each clean energy project is assessed on the merits of its impact on the security and reliability of the grid. That shortlist of criteria may have been OK in the days or vastly fewer and much larger plants, but technology has raced ahead since then. The rule-makers must catch up.
Large companies that are not necessarily large energy users will be keen to sign up for PPAs to do the right thing by their customers and the planet, and whether that means they agree to a contracted price above recent pool prices might not be such a big deal for them. Either way it’s cheap electricity, compared with the past few years’ retail contracts. “They’ll be meeting their sustainability goals – and either way it’s a hedge because prices could go up again in a few years’ time if another coal-fired generator closes,” Edis says.
Pain will still be felt for any portion of generation sold on the merchant market. Developers who are currently scouring the market to secure offtake agreements may find it’s a harder sell.
Batteries are still expensive and the outlook for electricity prices is so uncertain that it would take a very brave owner to invest in storage. “You might make some really good money for a period of time but then Snowy 2.0 comes in and destroys it,” Edis says.
Where prices are often set by expensive gas in the lead up to the evening peak, owners of solar plants are left longing for the sun to stay in the sky longer. The ideal location for a solar plant is as far west as you can build it, but the problem is then you get hit by a low MLF. “Broken Hill is probably the best place to put a solar farm in terms of trying to get into that late afternoon [generation], the problem is they’ve got some of the worst transmission problems of any area in the NEM,” Edis says.
Buyers in the wings
As the troubles of 2019 are being digested some developers have stalled in their decision-making and some are rumoured to be considering an exit from the market. For EPCs it’s a case of being selective over which contracts to bid for or biding their time on the sidelines.
It’s perilously difficult to predict what the grid will look like in three years, five years, 10 years’ time. Clean energy plants that felt the brunt of AEMO’s discounting of MLFs, especially around north-west Victoria and south-west NSW, will be experiencing tightened cash flows. Owners may be weighing their options: stay the course or consider selling.
Opportunistic buyers could take the chance to pick up discounted assets, especially if they believe transmission in these blighted areas will be quickly remedied. It takes bravery to buy a solar farm situated far away from load. But then, it must have taken a lot of bravery to have built them in the first place.