Project financing - Australia's problems stay despite price rise

AUSTRALIA: A lack of power purchase agreements (PPAs) in the Australian wind market continues to hold back the sector, despite changes to the renewable energy target (RET) which has lifted renewable energy certificate (REC) prices.

PPAs in the Australian market are drawn up in conjunction with forward pricing agreements on RECs, which adds support for financing. For each electricity purchase made by a liable party - usually an energy retailer - RECs must be purchased and surrendered to the national renewable energy regulator to cover the liability. One REC equals one megawatt hour (MWh) of electricity.

Project financing and PPAs have been depressed in the Australian market since 2006, after the goals of the previous federal RET scheme were reached four years early.

The expanded statutory federal RET passed in August requires 20% of electricity to be produced by renewable sources by 2020, which encouraged a substantial increase in pipeline announcements last year.

However, optimism faded as REC prices slumped from a high of dollars A50 earlier in 2009 to around half that level. This was blamed on certificates from rooftop solar systems, which were favoured under the RET. Wind developers put some projects on hold as a result.

REC prices recovered after the government announced dual renewable energy targets for smalland large-scale technology and fixed REC prices for the former. Australian-New Zealand energy retailers AGL Energy-Meridian revived a 350MW project in Victoria, shelved in 2009 because of the weak REC price outlook.

Peter Dreher, a wind energy specialist and partner at Rigby Cooke Lawyers, believes that the pending corrections to the RET should enable some projects to be viable, but this is not confirmed. "PPAs, which are, with few exceptions, the precondition to financing, are still exceedingly difficult to obtain on terms which make projects bankable," he says, adding that banks want less risk and are pressing for better contract terms in respect of risk, including warranties.

Last year's REC glut has also undermined the PPA regime as retailers bought up certificates, Dreher says, adding: "At the moment the biggest Australian energy retailers, which happen to be generators too, have enough RECs to discharge their current and short-term statutory obligations under the RET and are in a position to accumulate more RECs for the short term, as there is still an oversupply."