A report from PwC shows that good intentions at the outset may sometimes obscure a misalignment between the way investors and developers think about clean energy partnerships.
With its predictable sunshine, gusty temperament, cheap land and spindly grid, Australia is attracting plenty of attention from global businesses and investors who want take part in the country’s transition away from coal. What’s interesting about the talent queuing to take part is that renewables players are increasingly being joined in the line by oil and gas companies.
Between 2017 and last year, investment by oil and gas companies in the Australian renewables energy sector increased from 2% of projects to 15%, a report from consultancy PwC notes. This sevenfold surge in interest is happening two ways: with oil and gas players either taking a stake in a developer or participating in projects.
“We saw the trend coming,” says PwC partner integrated infrastructure Danny Touma, who points out that good intentions at the outset may sometimes obscure a misalignment between the way developers think about such partnerships and the way investors think about them. The PwC report, released in August, is an attempt to bridge that gap.
Grab the bull by the horns
As the eastern states move forward with plans to develop Renewable Energy Zones in order to meet ambitious clean energy targets, the sector is getting very busy. In investor lingo, some might even call it a green bubble. “Returns are lower than we’ve ever seen them in renewables,” Touma says.
One way to achieve higher returns is to get involved earlier in the development cycle, which is what the oil and gas companies are doing.
It’s not always a sure thing, of course. Inviting a partner onboard at development stage can slow proceedings and introduce the possibility of cultural conflicts.
Oil and gas companies may be destined for extinction as the world’s governments tilt towards renewables, but they are sophisticated organisations that have been doing it far longer than anyone in the solar or wind sectors. As they seek to diversify away from polluting sources of energy they will either be welcomed with an open mind or viewed with suspicion, no matter how sincere their ambitions. Relationships may be hard to kindle in an industry that is cleaved by ideology but where the end product from all technologies – electricity – is identical.
This time is different
Clean energy companies are traditionally quite small and nimble, Touma says, with around 20 or 30 staff. The CEO and leadership teams will often be the owners, so decisions can be reached with relative ease compared with large listed firms. If a young clean energy company takes on a big incumbent as an equity partner, the dynamism that made the relatively small operation successful may come under threat as strategy is plotted out within a larger organisation.
But there are positives that shouldn’t be overlooked. “You can reach much deeper and have access to more potential customers to buy your power, or more sophisticated and broader-ranging procurement, so you can bring projects to market at lower cost of energy,” Touma says.
As governments, energy retailers and large businesses negotiate offtake agreements for generation from new wind and solar projects, these buyers are very interested to know who the owner of the asset is going to be. “That’s a big driver of this early teaming up,” Touma says. “On the one hand the developer is able to tell their story more clearly and more articulately, and on the other hand the investor comes in earlier and can shape the project a bit more like they want it and in exchange they can get a higher return.”
On the radar
The challenge for large global players entering the Australian market is “getting to scale” quickly, he says, where a typical renewables project worth a couple of million dollars in equity will be compared by global headquarters against, say, an offshore oil rig in another region worth billions. “To replicate that capital and that scale is the challenge for them.”
There is a constant interest among foreign energy and utilities companies and investment funds to enter Australia, he says, while the trend among domestic companies is towards consolidation. “It’s a very interesting dynamic,” Touma says, where buyers inside Australia are building portfolios of generation assets. Gone are the days of one-asset companies.
Foreign utilities view Australia as an opportunity to “put gigawatts on the ground”, he says, whereas oil and gas companies see it as a chance to diversify their generation fleets and set themselves up for energy exports such as subsea cables or hydrogen. (Touma won’t comment on the prospects for subsea cables or hydrogen exports.)
What about falling prices?
Coal is certain to slowly exit the NEM, there is little argument about that. But solar can push daytime prices into negative territory and a huge amount of storage is planned to shift some of that energy into the evening peak. How can anyone be sure of making money selling electricity when the whole game appears to be to push prices lower?
It’s a question Touma has heard before, but he suggests clients put aside price forecasts and all the associated uncertainty and think of projects in the sense of a “merit order”, where those with the lowest levelized cost of energy go to the top of the list.
“If you believe in the energy transition and you believe it’s going to happen, they’re the projects that are going to stand out. Try to look through the volatility and the curves,” he says.
Transmission may be inadequate in parts of the grid that are expected to host vast amounts of new solar and wind generation but governments have heard the call and are slowly taking action. Because plants can have 30-year lifetimes it’s not always necessary that a project with a competitive LCOE be located for convenient connection to existing transmission to look attractive. The energy transition will be a bit clunky, but it will happen.
“It all ties together, really. These are really long-term assets,” he says. “For us it comes down to LCOE, always. Find the best projects that deliver the lowest cost of energy at places in the grid you think will be affective. That can be places with existing transmission or, the medium term, places where you think transmission will go.
“It’s not a one-project story; it’s a 30-year story.”
Storage tipping point
Storage will be an essential ingredient if variable renewables are to replace coal and gas at more meaningful levels. “We’re at the tipping point with storage,” he says. “It’s going from not being economic and having a really challenging revenue model to being accepted by off-takers, governments and asset-owners as a key in the transition.”
Buyers of power from storage are keeping an open mind about contracts and owners of storage are also looking at the market with a bit more scope, he says, about how they interact with the grid and operate as part of a broader portfolio.
“If you have multiple assets, it makes sense to own storage because you can create interesting products and create sophisticated trading strategies using that storage. If you’re a single-asset owner, storage on its own might not make as much economic sense to you.”