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Australia Report: The lucky country ups the stakes

Australia has launched a new renewable energy target that should act as a major catalyst to wind development, but there are still grid problems and a credit crunch to overcome.

Australia: advanced windpower projects in April 2009
Australia: advanced windpower projects in April 2009

The Australian government's national 20% renewable energy target (RET) has been hailed by the wind and renewables sector as one of the most significant pieces of environmental legislation in the country's history. The RET increases the previous national renewable energy target fourfold from an output of 9500 GWh a year to 45,000 GWh by 2020. This will require electricity retailers and other large electricity buyers to obtain 20% of their electricity from renewable energy generators by 2020.

The Australian market for wind energy is set to boom, thanks to the new targets. Wind developers are set to add 8-10 GW to Australia's current 1.5 GW capacity over the next ten years. The sector now produces only about 1% of electricity in Australia. Renewables as a whole account for 4% (see graphic, below).

The RET bill, backed by Prime Minister Kevin Rudd's centre-left Labor Party, did not pass smoothly. Politicians on the centre-right opposition finally allowed the bill through parliament on the condition that it would be separated from national emissions trading legislation, which will probably be passed late this year. The rough legislative passage of the fairly moderate RET reinforced the impression that political point scoring has not given way to a broad consensus over renewables and climate change in Australia.

Pricing obstacles

Andrew Brown, head of wind developer Epuron, warned that until - and unless - emissions trading can be installed in Australia, the wind sector will struggle to overcome the obstacle that has compromised its competitiveness - a coal and gas dominated generation market that boasts end-user prices that are half those of wind. Factoring the cost of carbon use into coal power prices via emissions trading would help increase coal prices and bring them more into line with those of wind.

Average capacity of advanced projects by energy source (April 2009)

The general political consensus is also against substantial feed-in tariffs (Fits), despite a Fit bill put forward last year by Green politician Christine Milne. Milne's bill is now languishing in a Senate Standing Committee. The federal minister for energy, Martin Ferguson, warned that Fits are ideologically driven, rather than market driven.

The wind sector in Australia faces immediate and longer-term financing obstacles. And its long-term success will ride on the country improving its stretched transmission grid in the next few years. Yet the sector is very confident about the quality of its Australian generation resources and the lead up to the RET's launch has been marked by the announcement of some large projects.

In April, Australian Bureau of Agricultural and Resource Economics (Abare) listings showed seven of the nine renewables projects in advanced development across Australia are wind plants, which account for 80% of the total new renewables capacity.

Abare also reported 50 less-advanced wind energy projects - totalling 8.2 GW - or around 87% of the proposed addition to renewable energy capacity. Ten of these - 1.9 GW, around a quarter - were added during the previous six months. A substantial number of these assets are only an agreement from landowners to lease their land or a location feasibility studies. Abare will release its next list, covering the April-October 2009 period, later this year. It seems likely that there will be a further jump in pipeline figures as the 30 or so developers in the country seek to bolster their portfolios.

Growing developer interest

Wind is increasingly attracting the interest of the energy companies. Origin Energy, the country's second-largest energy retailer, acquired Melbourne-based company Wind Power and its 1.5 GW wind development pipeline in Victoria in May - including the yet-to-be-developed 484 MW Stockyard Hill project near Ballarat. Origin also started generation from its 30 MW Cullerin Range wind farm, which it has developed itself after buying the rights from Epuron. This is all quite a contrast with 2007, when Origin was contracting only around 180 MW of wind.

The country's largest energy retailer, AGL, has also been investing in wind, most recently in June with the purchase of a 186 MW project at Barn Hill, 140 kilometres north of Adelaide. AGL has another nine wind farms, totalling 1.5 GW, under construction or approved, and four more projects, totalling 720 MW, in the pipeline.

The key issue with the market at the moment is not building up the pipeline, but funding it. Australia has not been hit as badly as many other countries by the financial crisis but, nevertheless, the availability of credit has been reduced. As in the US, a power purchase agreement (PPA) is usually required before lenders will agree to finance a project. "A major bottleneck at the moment is that a lot of developers are having trouble securing good power purchase agreements, especially from some of the larger (energy) retailers," says Mathew Herring, national leader of renewables at KPMG.

John Clarke, managing director of Infrastructure Capital Group, says that the dominance of two energy companies over the Australian market is the root cause of the problem. "The fundamental difficulty is that the electricity retail market is dominated by AGL Energy and Origin Energy, two vertically integrated utilities; and a small number of other utilities, mostly government owned," he says. "Without involvement by one of these parties - in this thin Australian market - any project is not able to be funded."

Deiny Peterson, marketing and sales coordinator for Suzlon in Australia, says the financial crisis has led to several wind farms designed and built by his company being sold on, with the projects financed by the new owner.

Transmission problems

Even if the rocky financing landscape can be ridden out as the financial crisis and world recession abates, transmission problems in Australia still need to be overcome.

Electricity generation by energy source, 2006-2007

Until reforms made in the 1990s, Australia had traditionally been an energy market made up of separate states. "Even if you were to upgrade the grid in South Australia, which has a huge wind potential, there are still pinch points at the borders which need to be addressed," says Andrew Richards from Australian-owned developer Pacific Hydro. Extending the grid would also increase the number of development sites. "We have to make an issue of the grid, but that is helped by the fact that there is a lot going on about other national infrastructure development issues at the moment," Richards says.

There is a lot to be done, but Australia is a market with huge potential, says Herring. "We have world-class wind resources and there is no need to go for expensive offshore wind farms," he adds. "Increasing electricity prices will make Australian energy markets more available (for wind power producers) and the RET legislation is really key in attracting investment and opening up the whole industry. I think there's every reason for optimism."

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