The pipeline of Australian utility scale solar projects is surging, attracting over $15 billion of potential investment. A number of key developments are transforming the industry, write Ben Willacy and Gero Farruggio.
Australia’s portfolio of large-scale solar assets cut a lonely and isolated figure only two years ago. Since then, a surge in activity has delivered a pipeline of assets estimated at over 7.3GW – and growing! At the time of writing, 315MW of generation is operating, 419MW is either under construction or shovel ready and a further 6.6GW of projects are in the early stages. As expected, Queensland and NSW dominate, accounting for 77% of the capacity breakdown by region.
We expect over 20 solar farms will reach financial close before year-end, totalling close to 1GW of capacity and requiring in the region of $2 billion of debt and equity funding. Of these projects, around 200MW will come online this year with the remaining capacity scheduled for next year. Beyond 2018, should all proposed solar farms be commissioned, it will require a further $13 billion in funding over five years.
The transformers driving change
- $540 million of grant funding
- Project capital intensity falls 70% in Australia
- 17 new EPC companies enter the domestic market
- LGC prices up 90% above the long-term average
- PPA/FiT prices down 55%
The early stage project pipeline is growing at an accelerating pace. We estimate the capacity of projects at the concept to detailed design stage has doubled in the past six months. These projects are clearly subject to a variety of uncertainties; the metrics we use to rank risk include development application progress, EPC provider, finance, offtake and grid-connection status. Given the range of risks, not all projects will progress at the same pace and some may not be developed.
The Australian government has invested over $540 million in grants to kick start the domestic large scale solar sector. The return is evident; subsidy-driven growth has delivered a healthy project pipeline, falling costs and increasing domestic proficiency.
Solar photovoltaics is working hard to shrug a legacy of being a high-cost, low-return investment. Much of this is down to the well documented fall in global panel costs, which accounts for the majority of new development costs. Sustainable Energy Resources Analytics (SERA) estimates capital intensity in Australia has fallen by 70% since operating utility solar farms were built. This is a result of softening solar module prices and greater engineering, procurement and construction (EPC) experience.
With an ever-growing solar project pipeline comes increasing EPC competition, and by our count there are now 17 companies active in the solar engineering, procurement and construction space. All are eager to establish themselves and all have ambitious annual utilization targets. Fortunately, there is plenty for them to go after: 85% of future project capacity in our SERA Tracker data analytics tool is yet to find or publicly announce an EPC partner.
As costs have fallen, solar has become an increasingly compelling case for utilities. Contract prices have fallen by around 55% since the ACT feed-in tariff auction award in 2012. This has led to a greater appetite for power purchase agreements (PPAs), spurring on project developments.
While the majority of operating assets in Australia have been developed with a PPA in place, Large-scale Generation Certificate (LGC) prices are proving to be a major catalyst for project development. At 90% above the historic average, LGC prices are close to the scheme cap and likely to remain that way for the medium term. This is very positive for short-term project economics, attracting new projects to target the merchant market. The longer term future for LGCs is uncertain, making for interesting and volatile PPA negotiations.
What does this mean for project economics?
These “transformers” are having an impact on project economics for utility-scale solar, leading to a surge in the commercial viability of solar in Australia. Our preferred metric for evaluating a project is the SERA B1 Breakeven price. This is the real average price required, over the lifetime of an asset, to recover all costs (including financing) and earn a 5% equity internal rate of return. If the B1 is lower than the likely range of future electricity prices, the project will be profitable.
We evaluate the B1 Breakeven for all solar projects in Australia, and have presented a representative sample here to illustrate the recent transformation of the sector.
Solar farm B1 Breakevens vs PPA/FiT 2014-18
As costs have fallen, we would intuitively expect breakevens to have fallen over time. Australia’s earliest utility scale assets had breakevens north of $150/MWh, built with modest subsidies or government-guaranteed feed in tariffs. The second wave of operations, constructed in 2015-16, benefitted from considerably larger grant funding, which slashed their breakeven prices to around $60/MWh.
Most recently, projects currently under construction were awarded significantly smaller grants. And because grant funding has fallen faster than capital costs, assets being built today have higher breakeven prices than over the last two years. We estimate an average breakeven price for projects to start construction this year of $83/MWh.
New generation of projects
But a new generation of projects is on the cards, to be constructed as early as 2018, with no grant support and with breakeven prices competitive on almost any benchmark. With a continuing decline in capital intensity, we estimate breakevens for new projects in high irradiance areas (for example North Queensland) are now breaching $80/MWh, even without government support.
This radical transformation of project economics is driving a renewed interest in the PPA market, which just six months ago sat in a state of depression. While solar PPA prices chased breakevens down the curve, relatively few contracts were struck, as they still appeared expensive relative to alternative fuels.
By contrast, since September 2016, 15 solar PPAs have been signed, totalling a massive 860MW of capacity and more than 220 years of generation. While some contracts have featured operating assets, several have been struck with projects in a relatively early stage of development. This is a strong indicator of the new-found health of Australian solar.
As large-scale solar becomes mainstream in Australia, what will be the next generation of transformers influencing the development of the industry? Storage of course will be a key game changer, allowing solar to be more easily absorbed into the grid in large volumes. Falling battery prices and the ability of battery projects to attract grant funding are already hot topics.
Will Queensland and NSW continue to dominate? As all eyes focus on the solar State of Origin clash, the highest rate of growth is currently in South Australia – coming from the back of the pack to 1GW of capacity, close on the heels of NSW.
With sub-$80/MWh breakevens, solar projects no longer look like an expensive nod towards a RET obligation. Instead they are attractive options for electricity procurement, competitive with other fuels. This transformation will drive the build out of the project pipeline for some time.
Ben Willacy and Gero Farruggio are director and managing director of Sustainable Energy Research Analytics.