Investors flag ‘major slowdown’ in Australian renewables over regulatory changes

After losing the battle over marginal loss factors, the Clean Energy Investor Group has argued that its proposed replacement will make projects even more uncertain.

A group of investors in Australian renewable energy assets has warned that proposed changes to the country’s National Electricity Market will increase the cost of capital and put projects at risk.

In the latest sign of continuing investor concern over energy policy and regulation, the Clean Energy Investor Group said this week that the Australian Energy Market Commission should revisit its proposals to solve grid congestion and a lack of investment in transmission infrastructure.

CEIG is a group of 15 institutional investors that includes BayWa, John Laing, Lighthouse Infrastructure, Macquarie Capital, RWE Renewables and Windlab, the renewables company owned by Squadron Energy and Federation Asset Management.

The AEMC is conducting a review into the co-ordination of generation and transmission investment, known as COGATI. Its interim report published in August highlighted the need for reforms to transmission access arrangements and proposed introducing locational marginal pricing, a spot price for generators that will vary by location and is based on supply and demand conditions. This would replace the existing system of marginal loss factors, which has long been criticised by investors.

In its latest submission to the review, the CEIG said it “firmly believes that the AEMC’s COGATI proposal is not required now as it does not address the current issues around lack of transmission capacity and congestion”.

“In fact, the introduction of COGATI would jeopardise the transition to a clean energy system by increasing the cost of capital, triggering negative flow-on impacts on the level of investment in clean energy and wholesale electricity prices ultimately paid by consumers,” the group said.

CEIG said that the cost of capital would increase under the proposals because investors would be forced to purchase new financial instruments to regain revenue lost from the introduction of LMP, and avoid exposure to revenues that will be less certain and more difficult to forecast. The financial instruments as currently designed under the proposals would not provide sufficient revenue certainty, CEIG said.

To substantiate its claims, CEIG has commissioned Baringa Partners, a consultancy, to carry out modelling that demonstrated that an increased cost of capital would lead to an increase in a given project’s long-run marginal cost, and that this would ultimately lead to higher prices for customers.

“This is detrimental to both clean energy generators and energy consumers and highlights why the AEMC must revisit its proposed grid access proposals,” new CEIG chair Simon Corbell said in a statement.

The model projected that 3GW of new renewable energy projects would be deferred due to COGATI.

“There will be a major slowdown in new renewable energy development across the National Electricity Market due to these market rule change proposals. This means thermal generation stays in the market for longer and overall greenhouse gas emissions in the NEM will be 18 percent higher compared to the status quo,” Corbell said.

“This is a perverse outcome for investors and consumers, and quite frankly it is difficult to understand why the AEMC is persisting with this proposal.”

CEIG instead advocated for a greater focus on the development of Renewable Energy Zones. The Energy Security Board, a body established in 2017 to implement reforms proposed by Australia’s chief scientist Alan Finkel, is developing interim arrangements for access to Renewable Energy Zones and creating special planning arrangements for these priority zones.

Submissions to the COGATI review have now closed and the AEMC is preparing its final report, which is expected to be completed by 31 December 2020.