It’s hard to look too far ahead when network constraints and a growing appetite to buy energy directly from generators are two forces pulling the market from opposite directions.

The panel, from left:

  • Anna Freeman, CEC director (moderator)
  • Rob Koh, lead equities research analyst Australian utilities and infrastructure, Morgan Stanley
  • Catriona McLeod, investment director, Esco Pacific
  • Craig Whalen, executive director, Infrastructure Capital Group
  • David Krsevan, general manager commercial development Australia, Canadian Solar

It’s been a record-breaking year for large-scale solar, the RET has been met and large-scale generation certificate prices are falling quickly. That’s all good news, to an extent, but we need to know what comes next. Is it too much, suggested moderator Anna Freeman of the Clean Energy Council, to expect long-term federal policy on energy and climate change?

The Coalition government’s Underwriting New Generation Investments (UNGI) program so far backs pumped hydro storage, gas generation assets and a coal plant upgrade, with a price target of $70/MWh that Morgan Stanley’s Rob Koh sees as encouraging for clean energy projects – especially when AGL estimates it costs about $100MWh to upgrade a coal plant.

“If all of that [the UNGI program] can get done for under $70/MWh then good luck to them but I guess that’s another benchmark [for clean energy developers] to bear in mind,” Koh said.

Yes, supply of energy is increasing, but incumbents are heavily incentivised to restrict supply to protect profits. “Prices could well be higher under a market-based solution, which is effectively what the government is proposing [with UNGI].”

People want to invest

Craig Whalen of Infrastructure Capital Group says investors are keen on green energy. “There is a huge appetite for renewables,” he said. “The desire is there, the funds are there, people do want to invest.” It comes down to project-by-project fundamentals: is there an offtake agreement? who is it with? how long is it for? Long-term PPAs are harder to find; agreements to 2030 are more common, “and that’s not that far away … so really one of the factors you’re looking at is whether you’re prepared to take merchant risk”.

Revenues for some renewables plants were struck down earlier in the year when the Australian Energy Market Operator released marginal loss factors that rewarded owners for far less than boilerplate capacity. “That does cause ramifications from an investment point of view,” Whalen said, pointing out there are some locations that investors are keen to steer clear of.

Make no mistake, MLFs can be downgraded again. For investors, this would mean real pain.

Merchant risk

The corporate PPA market has grown quickly over the past two years but forecasts of energy price falls would see reluctance for business to lock in contracts today. Catriona McLeod from Esco Pacific is keeping an eye on the market.

“I don’t think there’s any reason to think wholesale electricity prices will fall to a lower level in the long term,” she said, but falling LGC prices and rising project costs have seen PPA prices rise – and cost savings to corporates drop to a degree. Nevertheless, those businesses that signed PPAs early, and scored great deals, are the ones who got the market moving. “There are still cost savings to be had, they’re just not as dramatic – and they’re a little more long-term,” McLeod said.

David Krsevan at Canadian Solar explained that interest in PPAs is driven by more than the “green halo effect”, as the CEC’s Freeman put it.

“The sophistication [of PPAs] has increased a lot,” Krsevan said. For a start, PPAs are just one component of a company’s energy sourcing strategy, where decisions are based on diversification, certainty and flexibility. Also, not all firms are big enough to support PPAs. “We need to look at the move to progressive purchasing, to do contracting over medium-term periods rather than only long-term. That will mean increased innovation in terms of the PPA offering.”

From a bankability point of view

The first question you ask a solar developer, Whalen said, is: is there a PPA? Next questions: who’s it with and what’s the price? “That’s really important from a bankability point of view,” he said. “Banks are trying to get their minds around the merchant risk, but let’s face it the banks really do need to have a PPA in place.”

Koh from Morgan Stanley said he expects the rapid growth of large-scale solar to take a pause as localised issues such as system strength are managed. “It’s an unstoppable force but we just need to bide our time and deal with the constraints we have.”

Krsevan from Canadian Solar was more upbeat in some areas. For example, a drooping “duck curve” which threatens a fall in daytime prices as more solar plants are connected to the grid will be moderated in NSW and Victoria, he said, as storage is added by owners of solar PV. “Maybe in other regions it’s more of an issue.”

The storage surge has been long anticipated but is yet to materialise, of course. “At this point most grid-connected batteries need assistance in funding to make them economically viable,” Krsevan said. “There needs to be some sort of market mechanism for revenue streams [from voltage control, fast frequency response, etc] to be realised. Once there is, batteries will become more economical.”