Marginal loss factors causing ‘extreme anxiety’ for investors

A series of presentations at a public AEMC hearing in Sydney saw five stakeholders come out strongly against the current MLF regime, with only Infigen Energy defending it.

Australian renewable energy investors have reiterated their concerns over marginal loss factors at a public hearing, with one arguing that the current system feels like “a lottery” and is “failing”.

The investors made their views known at a public hearing in Sydney this week, held by the Australian Energy Market Commission on its draft determination on a request to change the rules on transmission loss factors. The AEMC’s draft ruling, issued last month, said that it preferred to stick with the existing marginal loss factors framework, despite widespread criticism.

Jevon Carding, associate director of Lighthouse Infrastructure, which operates the Lighthouse Solar Fund, said that volatility in MLFs was causing “extreme anxiety about the prospects of contributing further to new supply in the [National Electricity Market]” among its LPs.

Carding added that some of its projects have seen their equity value reduced by a third “more or less overnight” due to changes in MLFs. “In this context, from an investor’s perspective, loss factors have become less of a locational signal and really feel like more of a lottery,” he said.

Lighthouse Infrastructure is a member of the 20-strong Clean Energy Investor Group.

Robert Grant, spokesman for the CEIG and a consultant to CEIG member John Laing, told the hearing that MLF volatility will have to be priced into investment decisions in future if the current framework is retained, which would manifest in a risk premium that increased the cost of equity by around 2 percent.

Grant said that institutional investors could exit the sector in Australia altogether. “We just go and invest in other asset classes and we leave the buildout to the current incumbents and the oligopoly [if nothing changes], and we then revert to a world where the cost of equity is substantially different and higher than what these institutional and pension fund investors have,” he said.

One of the main arguments put forward by the AEMC in defence of the current MLF framework was its ability to provide strong locational signals to the market about the best places to build new generation.

Matthew Dickie of Innogy Renewables Australia, a subsidiary of Innogy SE, disputed this analysis and said his firm’s sole project experience in Australia to date had “not filled our board with confidence” due to MLF changes.

“The 350MW Limondale Solar Farm, which is in south-west New South Wales [and] currently under construction, has seen its business case significantly impacted by MLF movements since making the final investment decision a little over a year ago. We are supporters of robust locational signals, but the most accurate signal of where to build today is of little use to an investor in a 30-year asset if the signal can fluctuate significantly after the investment is made. At that point, the signal is too late,” he said.

‘An unacceptably high level of risk’

A further submission from Mitesh Kushwaha, manager for global infrastructure at QIC, said that the “unprecedented variability” in MLFs had created an environment with “an unacceptably high level of risk”.

“Putting aside all the political uncertainty, which has also had an adverse impact in relation to the availability of capital and also the cost of capital in the energy sector, there have been significant developments in the regulatory environment which, in our view, have increased investor uncertainty, and therefore reduced both access to capital and increased the cost of capital for the Australian energy sector,” he said.

QIC is an 80 percent shareholder in the Powering Australia Renewables Fund, a A$1 billion ($685 million; €617 million) fund launched in partnership with AGL Energy in 2016 to invest in Australian renewables. PARF is also a member of the CEIG.

Kushwaha argued that adopting an alternative framework, such as average loss factors that CEIG have advocated for, would help restore investor confidence. “A high degree of certainty will allow equity investors to target lower returns, which will translate to lower electricity prices for consumers,” he said.

Joel Gilmore, regulatory affairs manager for Infigen Energy, was the only person to speak in favour of the draft determination at the hearing and said that Australia’s National Electricity Market was “still investable”.

“MLFs are clearly a part of our decision [on projects], but it’s only a part, and it’s certainly not the biggest challenge that we see to investment,” he said, citing connection delays, system security and unplanned government interventions as bigger concerns.

“We need to accept both the upside and the downside risks and let the market operate for a while so we can have those clear signals [for investment],” he said. “Infigen absolutely supports the AEMC’s draft determination. We think that the AEMC has fairly considered the risks and trade-offs between spot market efficiency on one hand and the contract investment market.”