Wind and solar de-ratings demonstrate ‘substantial uncertainty’ of Marginal Loss Factors

Year-to-year changes in Marginal Loss Factors are making investment decisions in Australian renewables more difficult, New Energy Solar chief executive John Martin argues, as two of his company’s projects are awarded lower ratings.

The Australian Energy Market Operator has confirmed its Marginal Loss Factors for the financial year 2019-20, with several wind and solar projects seeing their output de-rated.

AEMO, the body responsible for the administration and operation of Australia’s wholesale national electricity market, published the figures on 10 May, after releasing a set of draft figures earlier this year.

MLFs determine how much of an asset’s output will be credited by AEMO, so that a wind farm with an MLF 0.80 will only receive payment for 80 percent of its output. Similarly, a rating above 1.0 will see the asset credited for more than its output.

MLFs effectively represent the percentage of electricity that AEMO predicts will be lost between the generator and the end user, so assets located in remote areas, or in areas with many other generators, often have a lower MLF.

New Energy Solar chief executive John Martin acknowledged to Infrastructure Investor that the process of managing the transition away from fossil fuels to distributed, renewable energy sources in the Australian market was a “complex” one, but argued that the annual change in MLFs adds “substantial uncertainty into a market that is already bereft of long-term policy and guidance”.

“MLFs represent an investment externality that is difficult to predict and is not stable. We have seen examples of projects in this market where MLF determinations have significantly impacted project and investor returns by factors of more than 20 percent. Clearly, such a system is not conducive to investor confidence,“ he said.

One Australian limited partner told Infrastructure Investor prior to the final MLFs being published that the curtailment of MLFs on some projects as proposed in the draft figures was “really raising eyebrows”.

Both of New Energy Solar’s Australian assets, Beryl Solar Farm and Manildra Solar Farm, suffered de-ratings. Beryl’s MLF dropped from 0.9654 to 0.9243, while Manildra’s fell slightly from 0.9905 to 0.9818.

On the changes, Martin said: “The 2019-20 MLF determinations for Manildra and Beryl are as we expected for these projects and accordingly, our project return assumptions are intact.

“It is important to remember that the 2018-19 determination for Beryl was calculated when Beryl was in ramp-up and so its initial 2018-19 MLF was always expected to be higher than we anticipated the determination would be for full production.”

Other high-profile investors to have seen changes to their projects’ MLFs include Partners Group, whose Murra Warra Wind Farm was de-rated by more than 6 percent from 0.9549 in 2018-19 to 0.8852 in 2019-20. In contrast, its Sapphire Wind Farm received a boost as its MLF increased from 0.8821 to 0.9294.

Partners Group did not respond to a request for comment.

Foresight Group saw its Longreach Solar Farm MLF drop from 0.8934 to 0.8729, while its two Oakey Solar Farms saw slight increases. Foresight Group declined to comment.

Year-to-year uncertainty

New Energy Solar’s Martin argued that the year-to-year uncertainty of changing MLFs would put off investors.

“Presently, MLFs are the key area of concern for investors, particularly international investors.  The opacity of their calculation and the fact that they will be recalculated each year, contribute to investor wariness, possibly to a greater extent than their actual impact,” he said.

“Investment projects have to incorporate a broad buffer for risk to ensure the MLF determination, year after year, is accommodated.”

AEMO said in a statement that the location of new generation had a “significant impact” on the size of MLFs and that it was considering publishing more frequent MLF updates as it is committed to providing the market with “as much transparency as possible” about where new generation will connect to the grid.

The Clean Energy Council, the trade body for the clean energy sector in Australia, called in March this year for a “comprehensive review” into MLF arrangements.

CEC chief executive Kane Thornton said: “Predicting MLFs into the future is something no-one has been able to do with any accuracy. Consequently, the current process introduces risks that are virtually impossible to manage after investment decisions have already been made.

“This is a major issue for our industry, and we are interested in working with all stakeholders in good faith to address it as soon as possible.”