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ACT could make windfall gains from bold 100% renewables target

Who is the smartest energy minister in the country? At the moment, you would have to say it was the ACT’s Simon Corbell, the mastermind behind the territory’s bold 100 per cent renewable energy target, and who is poised to deliver massive savings to consumers in the nation’s capital.

Indeed, if current wholesale electricity prices continue as they are across Australia, the ACT will not just have zero emissions electricity by 2020, it may also be getting most of it for free.

ACT energy minister Simon Corbell at opening of Hornsdale wind farm in South Australia.

This extraordinary situation arises out of the nature of the contracts that the ACT government has written with the project developers who have won its unique reverse auction tenders.

The ACT has locked in fixed prices at between $77/MWh and $92/MWh for a total of 400MW of wind energy capacity so far. If the wholesale price is below those contracts, the ACT government pays the difference. If it is above, the ACT receives the excess.

In the past two months, wholesale prices across Australia have gone through the roof, mostly because of soaring gas prices (at record levels in most states), and supply constraints. Some of these rises have already been passed on to consumers.

The first of the ACT commissioned wind farms, the 19MW Coonooer Bridge project in Victoria, opened earlier this year and gets a guaranteed $81.50/MWh from the ACT. But prices in Victoria have regularly jumped above $100/MWh in the past two months.

In South Australia, the difference is even more marked. Last week, the 100MW first stage of the Hornsdale wind farm near Jamestown was switched on. It will receive a contract of $92/MWh from the ACT, but according to Pitt & Sherry analyst Hugh Saddler, the average wholesale price in that state since its opening has been $247/MWh.

In that instance, the ACT would receive the difference. It would not mean just free electricity, but the ACT would be paid $155/MWh for the output of that wind farm.

(As it is, the contract with the ACT does not start until April next year, so the Hornsdale developers, Neoen and Megawatt Capital, are pocketing the gains in the meantime).

“If prices ever reach $247 /MWh after that date, Hornsdale will pay the ACT $155/MWh generated over the relevant period,” Saddler notes.

“ACT consumers will never pay a wholesale price of more than $92/MWh. By contrast, electricity consumers elsewhere in the NEM will, sooner or later, directly or indirectly, have to pay for the $247 per MWh wholesale price.

“ACT consumers will thus be protected from having to pay for extremely high wholesale prices because of the hedging provided by the renewable electricity contracts for difference.

“By 2020, the ACT government’s policy will mean that electricity prices in the Territory are much more stable and predictable than anywhere else in Australia.”

It’s a strong validation for Corbell, who has been praised by the renewable energy industry for his vision – Victoria is now about to copy his reverse auction plan – but criticised widely by conservatives, who created the usual scare campaign about rising costs and businesses quitting the ACT to seek cheaper electricity elsewhere.

It is now starting to dawn on governments and corporate buyers around the world that renewable energy makes sense – not just because it is cheaper than fossil fuel alternatives in many regions (even without including the environment and climate costs), but because it has no fuel price risk.

This is being borne out in Australia, where the ACT – the government with the most ambitious and daring renewable energy policy – is likely to be rewarded because it will have locked in relatively cheap – and zero emissions – source of electricity for 20 years.

It is also being discovered in other regions in Australia – particularly those in remote and off-grid areas, where the cost of solar, wind and storage is inevitably cheaper than fuels such as diesel and gas.

The ACT government has already signed contracts for around 400MW of wind energy capacity in two auctions, and 40MW of large scale solar, and is about to award contracts to another 200MW of large scale wind and solar projects.

Indeed, the South Australian contracts are looking like an exceptional deal for the ACT government. The second stage of the Hornsdale project, another 100MW, is contracted at just $77/MWh.

Those prices are set to fall further. Corbell has already said that the price offerings for the latest round of tenders are “impressive”, indicating that the ACT can lock in more capacity at even lower prices. And remember, these contracts are fixed and do not even rise for inflation.

Meanwhile, in the rest of Australia, the wholesale markets remain victim of the marginal cost of gas, which is rising because most of it is used to supply the big LNG plants, and the control that the major utilities have over the market.

In the past week, moves to change market rules that consumers and regulators say will make the market more efficient, lower prices and encourage battery storage, have been resisted by the major incumbent generators on the basis that the changes would be too costly and too difficult.

Wholesale prices may also rise as the major coal generators inevitably close, and if a carbon price – which most analysts say is inevitable – is introduced. As it is, the reliance on gas is causing jumps in the wholesale price that far outweigh the cost of the carbon tax.

Source: RenewEconomy

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