It is a bit surprising to see Australia, a continent covered in desert with the highest level of solar radiation per square metre in the world, arrive late to the game when it comes to solar power. The good news for investors in the renewable sector is that the country may be about to make up for lost time.
“Without a doubt, the big trend is solar,” Benjamin Haan, partner and head of private infrastructure for Asia-Pacific at Partners Group, asserts. “It’s just getting so cheap, so fast.”
Solar is a ray of light in a renewable energy sector that continues to plod forward, held back by a lack of resolve from policymakers and a wait-and-see approach from energy retailers. If Australia is to reach its Renewable Energy Target of 33,000 GW hours by 2020 – an uncertain prospect – it will likely be on the shoulders of large-scale solar development.
As a whole, the sector is falling short of its potential, but still moving forward. On the plus side, Prime Minister Malcolm Turnbull has been a marked improvement over his predecessor, climate sceptic Tony Abbott. This is a low bar. In his two years in office, Abbott did everything possible to paralyse renewables. In 2014, Abbott’s government launched a formal review of the RET, freezing investment. The same year he repealed the carbon tax and threatened to kill two government bodies that support funding of renewables.
In 2016, investment in renewable energy totalled $3.4 billion, according to data from Bloomberg New Energy Finance. Though this was an improvement from just $2.3 billion the previous year, the sector had topped $5 billion annually from 2010 to 2013, reaching $6.2 billion in 2011.
“I think what you’ve seen here in Australia has been a sector that’s had a sort of a stop-start approach,” says Simon La Greca, a principal at Sydney-based AMP Capital’s infrastructure debt team. “The industry was frozen for a number of years while the government decided what it wanted to do with the renewable energy target.”
The revised RET, passed in 2015, calls for 23.5 percent of Australia’s electricity to be derived from renewable sources in 2020, up from 14.7 percent in 2015. While lower than the original target, it beats the uncertainty that preceded its passage.
“That’s very welcome, because it’s been a period of two or three years where we’ve had little idea what was going to come out,” remarks Roger Lloyd, managing director and chief executive of Palisade Investment Partners. “It does create a very good environment between now and 2020 to get some serious investment in the ground.”
The Clean Energy Finance Corporation, a government-owned green bank, has played a role in funding renewable projects. In the year following the RET’s passage, the CEFC invested A$837 million ($630 million; €592 million), a 73-percent increase from the year before.
Last month, the investment firm QIC announced financial close on the A$450 million Silverton Wind Farm in New South Wales. And just days after the new RET was released, Partners Group announced a A$450 million investment in the Ararat Wind Farm, in the state of Victoria. The site, which will have a total capacity of 240MW, went online in August.
“We could see early in 2015 that the political tide was turning,” recalls Haan. He realised more development would be needed to hit the RET. “Fast forward to now, and the sector is really hot.”
Last December, Partners Group invested A$250 million in another wind farm, this time in New South Wales. The Sapphire Wind Farm will have a total generation capacity of 270MW. “Now we’re looking at what’s next,” Haan says. “And for us, it’s probably moving into the solar space.”
SOLAR’S SECOND DAWN
In a past life, Australia was ahead of its time when it came to solar power. In 1982, an Australian solar-powered car drove from Perth to Sydney, the first to make such a cross-continental journey. A year later, Perth hosted the Solar World Congress, which 12 years earlier had been held in Melbourne.
By the Abbott era, even as the technology became increasingly prevalent on other continents, Australia was back in the dark. In 2015, solar energy accounted for 2.4 percent of total electricity generated in Australia, less than half that of wind. Even these numbers fail to tell the full story, as most of this output was the result of small-scale solar installations, such as rooftop panels. Medium and large-scale solar produced less than 1 percent of the country’s clean energy.
Expect those numbers to look very different in five to 10 years. In the past 18 months, the price of solar construction has dropped dramatically and is now catching up to wind, investors say, due in part to technological advances. Given some of the advantages solar has over wind – it takes less time to develop, and produces energy during the day, when it is most needed – the next decade could see solar become Australia’s dominant renewable energy source.
Many in the industry are banking on it. In September, the Australian Renewable Energy Agency, a government agency which has invested $1 billion into renewable projects, announced the construction of 12 new large-scale solar plants across the continent. ARENA says they will triple the country’s large-scale solar capacity to 720MW. ARENA and the CEFC have each contributed funding to the Moree Solar Farm in New South Wales as well as the Barcaldine Solar Farm in Central Queensland. In 2015, the CEFC launched a A$250 million finance programme backing large-scale solar developments.
Palisade, meanwhile, is planning to invest in the A$225 million Ross River Solar Farm in northern Queensland, which will be the country’s largest solar project, according to reports in the Australian press. Lloyd will not comment on the project, but notes the “huge potential” of solar.
“If you’re looking for an ascendency, that’s it,” Lloyd says. “But it’ll take a while to catch up [to wind].”
Renewables may be trending upward, but this has yet to translate to the signing of power purchase agreements. Whether due to a lack of confidence in government resolve, a desire by energy retailers to exercise their market power, or a combination of both, a wave of signed contracts has yet to materialise.
Despite some progress, policy uncertainty remains. One unknown is the future of the large-scale generation certificates issued by the government’s Clean Energy Regulator. Accredited renewable power stations in Australia receive the certificates for each megawatt of power they produce. They can then sell them to electricity retailers, who must surrender a set amount to the regulator each year.
This scheme ends in 2030, which scares off investors looking for long-term certainty.
“Now, by the time a project is constructed and in operation, we’re talking about only 12 years maximum of certainty,” explains Haan. “And that period is getting lower every year. That has also been a disincentive to build more projects.”
The Clean Energy Council, an advocacy group for the industry, puts forward two possible solutions: increasing the target beyond 2020, and extending the scheme past 2030.
Whether the political will exists for these or similar policy changes remains to be seen. Distressingly for those in the industry, renewables continue to play the role of political football. Last September, after a storm in south Australia caused massive blackouts, Turnbull cast some of the blame on the state’s reliance on renewable energy, bewildering experts and exasperating clean energy backers. And Abbott continues to lead the fight against renewable-friendly policies, though now from the sidelines – in a December op-ed, he called on Turnbull to scrap the RET.
Noting that renewables now attract at least a measure of bipartisan support, La Greca thinks 2017 could be a strong year for the sector. “There are projects that have gone through environmental and developmental approvals and now it’s really about achieving financial close on those projects and ultimately starting construction,” he says. “We’ll see a lot of projects commencing construction for 2017, which will be positive for the industry.”
If Australia’s leaders can shed their ambiguity and the industry’s retailers can be budged, sunnier days could indeed be ahead for the sector. Otherwise, 2017 could be another year of unfulfilled promise.