Renewable energy targets in doubt as expensive wind power runs out of puff 

About $18 billion is needed for wind farm construction in Australia to meet government renewable energy targets.

But weak electricity prices and a troubled subsidy scheme threaten to jeopardise returns on projects.

According to Origin chief executive Grant King, about 7000 megawatts of new wind farm energy capacity will need to be built by 2020 to satisfy the government’s objective to source 20 per cent of the nation’s electricity from renewable means.

That represents a fivefold increase on current capacity levels.

King has plans for about half that himself, but the company appears only willing to proceed with these plans if conditions become more attractive.

The key hurdle is tied to the government’s renewable energy certificate (REC) scheme, which acts like a subsidy, as wind farm operators can sell them to retailers who buy electricity from them. The subsidy is key to the economics of wind projects, and the variability in REC prices since their introduction in 2009 has affected investment time lines for major commercial operators such as Origin and AGL.

Without subsidies, current electricity prices would need to triple to justify new wind capacity, which costs about $2.5 million per megawatt to build.

Some analysts and industry sources say most of the required capacity will not be built in time because an oversupply of certificates will continue to depress prices and mean wind farms remain uneconomic for the next four or five years.

For wind farms to be viable at current electricity prices, certificate prices would need to double from a current price of about $35 per megawatt hour (MWh).

In 2009, the federal government issued the certificates to households for small investments such as solar panels, and the seemingly generous rebates prompted a rush of installations by home owners.

This led to households gaining five times as many certificates as large-scale operators of projects such as wind farms, creating a surfeit of RECs that torpedoed the price. Moves have been made to rectify this, with a new scheme to start from January 1. However, the lasting impact of excess energy certificates continues to dog project economics.

“There is a huge oversupply of RECs because the government started debasing the REC currency by allowing solar to get 5 RECs per megawatt hour, instead of one (per MWh) for wind,” UBS utilities analyst David Leitch says.

“Most people are worried there are still too many RECs floating around the place, so as a result, the REC price is still too low to justify new capacity.”

Yet wind farm operators such as Roaring 40s, Verve Energy and Infigen Energy continue to push ahead on project expansions and new development, albeit at a slower pace and with greater scrutiny on returns.

“We were seeing low REC prices as a result of the flood of those credits from solar hot water and panels in the market, and that meant the price of the underlying REC wasn’t then supporting the required offtake we needed to make the economic return,” Roaring 40s managing director Steve Symons says.

He estimates the long-term average REC price needs to be between $50 and $60 to ensure solid return on capital for projects.

The largest four wind farm owners in Australia are Infigen Energy, Pacific Hydro, Acciona and Roaring 40s, which account for 63 per cent of total operations greater than 10MW.

These companies will end up selling their certificates to major electricity retailers such as Origin and AGL, where it’s hoped demand created from the government’s mandated 20 per cent target will drive up demand and prices.

Industry sources say new wind capacity needs to return $100 to $120/MWh to recoup development and operating costs, compared with industry estimates of $40 to $45 for new coal-fired capacity.

Therefore, to justify the wind spend, the electricity price received, plus the price of an REC, which is for 1MWh, needs to be at least $100. With electricity futures tipping prices of $37/MWh in NSW next year, and a certificate price of $35, wind farms are far from economic.

But electricity futures prices are showing a price increase to $60/MWh in 2014 and if the REC works the way it is supposed to, demand could send prices into the black for wind farm owners.

This would benefit all wind farm owners and those with an eye for new developments.

“AGL would tell you, and I think I would agree with them, that there is not going to be enough (wind capacity) in 2020. But despite this, no one is actually building any more right now because there’s not a clear enough price signal.” Leitch says.

There is also a cap on the REC price, given the government fines retailers who don’t buy certificates.

With a $65 fine per REC, when retailers take into account tax implications, there is no point buying an REC if the price is above $93.

But operating wind farms don’t all work under the same economics. Many have signed sweetened deals, such as AGL’s $200m Oaklands Hill wind farm that will supply Victoria’s $5bn desalination plant.

But the challenges for wind farms are not just on the economic front. Many communities do not want them in their backyards and have opposed the projects on aesthetic, health and environmental grounds.

Symons acknowledges there is sometimes resistance to wind farms.

But he says his company frequently tries to engage with the community and commissions research into the impact of the project on the area.

There are also those pushing for a greater focus on gas over renewables as a way to focus on reducing greenhouse gases.

According to Origin, the cost of reducing carbon through wind is in the order of $40 per tonne more expensive than simply substituting gas for coal.

AGL fast-tracked the $1bn Macarthur wind farm in Victoria in June, straight after the federal government fixed the small REC problem, but there has been little new investment since.

“The electricity market demand growth on the east coast has flattened off since late 2007,” says Ross Gawler, principal consultant on electricity markets at Sinclair Knight Mertz.

“This reflects the effects of the financial crisis.”