In March PFI held its Australian Clean Energy Financing Roundtable, an event sponsored by ING and SMBC. It was chaired by PFI Australia Editor, Alexandra Dockreay.
Australia has some of the best potential for wind and solar energy globally and, as such, has ambitions to export renewable energy via power cables and in the form of green hydrogen and green ammonia. The country has a well-developed and mature project financing market for wind and solar and is building on that know-how to pave the way to finance new technologies, including standalone utility scale batteries and green hydrogen.
The Australian government has set a target to reach net zero emissions by the year 2050. The Government’s emissions projections figures, released in October 2021, forecast that renewables would account for 45% of electricity generation by 2025 nationally, and 61% by 2030, up from the 21% share registered in 2019. These figures excluded pumped hydro and batteries.
Developers are pushing ever larger projects, including some multi gigawatt projects with wind, solar, batteries and green hydrogen.
Large-scale solar generation is expected to rise from 2 GW of capacity in 2019 to 10 GW by 2030, while wind generation will increase from 7 GW in 2019 to 23 GW by 2030. Battery storage, meanwhile, is projected to rise from less than 1 GW in 2019 to 8 GW by 2030.
PFI’s own data shows that, during 2021, some 27 Australian Renewable Energy Debt Financings reached close, totalling the equivalent of US$5.43bn across wind, solar and battery technology. Fund raising was an enormous 67.9% higher than the total for 2020, although it represented just a 1.7% climb from 2019’s total, reflecting a particularly slow year of activity in 2020.
The 2021 loan value of roughly US$5.43bn was close to the peak lending levels for renewables in 2018 when 36 loans closed worth US$5.94bn. In that year, wind projects dominated lending, attracting 75% of the financing value with the remaining 25% of the total going to solar power projects. Since then, the relative share between the two energy sources has been more equal with PFI data showing the split of finance to be 50.3% solar and 49.4% wind in 2021, and battery technology accounting for a small 0.3% share of lending.
It was against this backdrop that the panel first began to discuss the factors that currently make Australian renewables particularly attractive to lenders and investors.
Steve Symons: Up until recently, the cost of renewable energy projects has been coming down to a level where we are able to complete against conventional generation without the need for subsidies. This has turned around a little bit in the last 12 months with commodity and shipping prices increasing, but it is still competitive.
We’ve also seen, particularly in the last six months, a significant push into the ESG area, which is leading more investors and lenders into the renewables space.
And this is only likely to continue given the expected faster exit from coal in the market, something that has been reinforced by Origin Energy’s planned acceleration from coal-fired power generation and the corporate activity around AGL.
Despite the positive noise, it shouldn’t be thought that developing renewable energy in Australia has been easy. There have been several challenges facing the development of wind and solar projects but the thematics remain strong and positive for investment in renewables.
Andrew Pickering: Interest has certainly been growing and there is huge appetite for renewables from our investors. The likes of Superannuation Funds, for instance, have a requirement to invest in the ESG space, and renewables is clearly an area that fits the bill. They may be closely focussed on the numbers, but they also look beyond just straight returns.
There is obviously a timeline around the demise of coal-fired generation, so everyone has in mind how much capacity needs to be met by renewables in the future, and everyone is very keen to take advantage of that opportunity as quickly as possible.
We have plenty of developers bringing opportunities to us, so our job is one of filtering and ensuring that there aren’t any hidden dangers within a particular investment opportunity.
Size is an issue. We have found it difficult to look at smaller projects – those under 50 MW, as banks aren’t particularly interested in those projects when there are much larger opportunities around. So, I would expect to see more aggregation and larger projects on the block in the future.
Just in the last three months, since the new Commonwealth legislation around offshore renewables has come through, we have seen at least two or three ambitious proposals to locate some very large offshore projects around Australia. It doesn’t take much for a whole new area of activity to emerge in this renewables space.
Adam Pegg: Australia is an attractive market for renewables, typified by the retirement of coal but also the increasing demand for renewables due to the ESG requirements of corporates. We’re also seeing growing demand for electric vehicles (EVs). Hydrogen is a huge step-change. The production of green ammonia and green hydrogen is going to drive ever more demand for solar and wind power. Battery storage and investment in transmission lines are also facilitating more commitment and growth.
At Lightsource bp, we’ve currently got 522 MW of solar power generation in operation or under construction and we’re planning to double that this year. We’re also planning to construct 2 GW of solar generation by 2025, which is part of our global target of achieving 25 GW of power by 2025.
Alexandra: Turning to the lenders. What makes Australia and lending to renewables an attractive option?
Jeremy Hasnip: Low barriers to entry. We’ve got a really good legal framework, a lot of experience, and a very active corporate PPA market - which is providing a lot of the off-takes at the moment.
We’ve got no end of new investors arriving at the beach looking to fund and develop new assets in Australia, such as wind renewables, batteries, and hydrogen. They may be international oil companies, fund managers, or large utilities, for instance, but everyone is trying to get a piece of the action and new players are turning up every week.
Sieuwert de Zwaan: I agree. Over the next 10 years, there will be a massive need to not only replace coal but to support the electricity demand for EVs and renewable hydrogen production.
A lot of our European clients are still looking to enter the Australian market. You just have to be here.
Paul Curnow: I think it’s really useful to remind ourselves of the scale of what is set out in the Integrated System Plan (ISP) from the Australian Energy Market Operator (AEMO) and the hydrogen super-power scenario. What we have to do to decarbonise our electricity system, and then supply that amount of hydrogen in different forms, call for a multi-fold increase in our current renewables generation.
The opportunity is large but there are challenges as to how we seize those opportunities.
Alexandra: What would you say are the fundamental challenges we’re facing? In particular, around project-financed deals and renewables.
Paul Curnow: Well, we have come out of a period where we have seen grid connection delays and costs creeping up on everyone and that hasn’t fully resolved itself.
There are still a lot of additional costs and timing issues around the grid connection process. New South Wales’ attempts to streamline the approach around grid access and obtaining Generator Performance Standard (GPS) is a good sign, but there are still a lot of timing issues.
You are also seeing connection bottlenecks from the addition of another new technology: batteries. There are a lot of batteries being added to the mix.
We need to keep an eye on how liquid the PPA market is. There is a healthy corporate PPA market, but I am still not sure what the retailers are going to do in terms of forward contracting, particularly as we get through the first part of this decade. If you look outside Queensland, with the Government-owned corporations doing a lot of the contracting, we haven’t seen a significant buy-in from retailers. The corporate PPAs are really filing the gap.
Some of the State-led activities will perhaps try to deal with that issue, for example, the New South Wales Long-term Energy Storage Agreements. But we’ve still got a way to go before liquidity comes back into the PPA market in a way that is going to bring a lot of these projects through to the scale we need.
Another challenge is around the financing of the projects. Over the last 10 years, financing has been on a project-by-project basis, but this will likely change. We are going to see more aggregation of projects and, perhaps, the opportunity to look at financing on a multi-project or portfolio basis.
We are seeing that with equity where a number of deals have recently attracted interest from investors wanting to get into portfolios. Adding batteries to the mix is going to require an assessment of their role within a portfolio, as opposed to the project-by-project financing we’ve seen on generation.
Alexandra: Jeremy, as a banker, what is your view on project finance and the challenges facing the market?
Jeremy Hasnip: Paul hit the nail on the head in saying the corporate PPA market must run out of steam at some point; that all the large investment grade corporates will have been to the market and bought what they need for the next 10 to 15 years.
They will come back again once those PPAs expire, presumably with most of them looking for additionality, and may renew with new projects rather than extend contracts with existing projects. That will give further impetuous to the market after a bit of a break.
Changing the fleet for the large generator retailers. The challenge is how to retire existing plants while preserving some value for the current owners, but in a way that allows them to replace lost energy with projects where they can undertake their own generation, where they could build from development of sites they already own. It will ultimately come back to a question of whether it is cheaper to build and generate energy independently or buy it from someone else. And the ‘buy it from someone else’ route always creates an opportunity for project finance and independent producers.
I think we are at the peak in terms of fragmented ownership in the market and we will start to see consolidation as the larger players come into the market (as we are seeing with Shell buying up retail platforms), using that clean generation platform to deliver into a retail book without looking to preserve value on incumbent thermal assets. It will be a very exciting time.
Alexandra: How many years do you think the corporate PPA cycle will be?
Jeremy Hasnip: For some technology companies, with the pace of datacentre development and the large electricity needs they have, we will see further top-up contracts. But the first round of corporate PPAs that satisfy the needs of physical factories and assets that already exist today will renew in 10 to 15 years’ time. At that point, it comes back to whether people are looking for additionality, and if so, do they use their purchasing power to create new renewable generation projects; to become an enabler.
Sieuwert de Zwaan: I have been surprised with the PPA liquidity. Clearly there is still interest in renewable off-take and of ESG considerations potentially out of anticipation that, whilst the Large Scale Renewable Energy Target regime is due to end in 2030, it may be extended.
Everyone wants to be green, and renewables is the way to get there. So, that is providing the momentum for a lot of projects to go ahead – in some case defying economics.
The challenges we have come across with the projects we have been financing has to do with grid availability and marginal loss factors (MLF) not being quite as we expected.
We’ve also seen supply chain issues this year, especially through Covid. It’s harder to get the modules you want at the price you initially thought you could get them.
We address these issues by talking with our clients, structuring sufficient buffering in the financing in terms of construction to cover potential delays, and also during operations potentially not having everything contracted but ensuring the project can financially benefit from, for example, broadly higher large-scale generation certificates (LGC) prices.
The way forward for developers and projects is to look at more portfolio approaches. It makes sense as grid problems are very local, and you can cover one project with another. We have seen something like that already with Lightsource, which recently closed the Woolooga and West Wyalong solar project, one in Queensland and one in New South Wales. These projects can support each other during their operational periods.
Alexandra: Well that’s a good opportunity to turn to Lightsource. Adam, what do you see as the challenges facing the market at the moment?
Adam Pegg: We’ve touched a little bit on the disruption in equipment supply, first of all from Covid but secondly from rising raw material and logistics costs. We have definitely had to manage that over the last 12 to 18 months but being a global player with a big portfolio certainly helps in those situations.
We estimate that the disruptions in the solar panel market and in logistics will work their way through in 2022 and we are fairly optimistic that things will return to normal in 2023. Certainly, with the projects we’re planning to get into construction this year, we are looking at equipment deliveries in the first quarter of 2023.
We have managed the challenges well with support from lenders and off-takers, but it also helps by having a really strong position in the global market. That enables us to push supplies along. That’s an advantage.
I think the industry will consolidate into a number of really big global players with a strong foothold here participating in the Australian market, like us, or like Shell, for instance.
Alexandra: Do you see the challenges continuing around grid constraints?
Adam Pegg: It wouldn’t be Australian renewables if we didn’t have something to manage, whether it is grid or panels, or . . . at least we don’t have to worry about the politics at the State level anymore.
But, yes, grid is the first thing we look at and it is the last thing we do when we are connecting a project. So, we are really cognisant of grid as an issue, and we look for areas in the network that have very strong grid connections. We manage that internally with robust modelling and also with assumptions around other projects in the area, and demand, etc.
We will always have to deal with grid, but I think it has become more transparent over the last two years – less of a black art. And at least we have an expectation on timelines to get a grid connection, to go through a commissioning process, to work with the Network Service Providers (NSP) and AEMO. There is a lot more experience and knowledge from both developers and the network side and that is really helpful in getting these projects connected and running.
Alexandra: We have another developer on the panel. Steve, what is your take on the current challenges to your investment?
Steve Symons: I agree with comments on the corporate PPA market, but I think we are going to see a lot more corporates come to market seeking a firm product rather than run-of-meter, which is what has occurred to date. That will drive consolidation because you need to have a portfolio in order to offer those types of offerings to corporates.
We’ve talked a lot about retailers and what they are doing. There is a significant amount of contracts that roll-off in 2030 as part of that, and it will be interesting to see how that plays through the market.
The amount of build required to meet the roadmap provided by AEMO has been mentioned, and transmission is going to be a critical element to addressing that challenge. But which comes first? Are developers prepared to commit on a promise that the transmission will be there, or do we need the transmission to exist first before developers commit?
I think the final issue is the whole supply chain. There is a significant amount of infrastructure being built in this country and we are seeing a bit of a skills shortage in the labour market and even issues such as whether there are enough cranes need to be addressed. Remember, we are playing in a global market, so whilst we are competing for opportunities here, we are also competing against supply chains at the international level.
Alexandra: And do you see that supply chain situation easing as we get through the pandemic?
Steve Symons: Some aspects will ease but I think, overall, it will remain more of a sellers’ market rather than a buyer’s market. If you look at the ISP, there is a significant amount of development needs to be done, and not just to meet the super-charged target. There is a lot of development that needs to be done in a relatively short period of time. How that plays out will be interesting.
Alexandra: Andrew, in your role as a fund manager, could you give us your view on market challenges?
Andrew Pickering: We are becoming a relatively large player with a large number of assets and large number of PPAs and that brings challenges. I don’t think we are going to vertically integrate to the extent that we become a retailer, but we are going to have to be very good at running a business if we are going to aggregate efficiently. We’ll have to focus on having all our systems and management in place for 20 or 30 different assets and a whole range of PPAs and products that are firm and run-of-meter. And that’s before you get to issues of incorporating development activity into such a portfolio. We have just got to run a decent business with the right people.
To date it has been just single-managed, project-financed assets but I think, as a couple of speakers have said, we are going to need to borrow in a corporate way in the future rather than single asset. We are going to need to sell product from multi-assets available to particular customers. And we may have to deal with lesser credits as customers once the investment grade players have gone.
We have got a business construction challenge in front of us if we are going to be twice as big as we are now and compete with the large gentailers. We hope they will struggle with the capital challenge and that will leave us a way in to play in the market.
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