Wind, solar and storage “price guarantee” key to lower costs for developers and consumers
9 November 2020 –
New wind, solar, and storage projects in New South Wales may be offered electricity price guarantees, including minimum energy prices, under a new investment strategy that the NSW government says is key to delivering lower overall energy prices for consumers.
Underpinning the NSW government’s Electricity Infrastructure Strategy, launched on Monday, is the offer of an ‘investment safeguard’ from the government, which will see price guarantees offered to new clean energy projects that are consistent with the strategy, including up to 3 gigawatts of pumped hydro energy storage capacity.
The NSW government will establish ‘development pathways’ for new generation and storage projects, designed to deliver low-cost and reliable supplies of power. The NSW government will establish a new Consumer Trustee which will oversee competitive rounds for the selection of projects in line with the wider strategy to which will be offered Long Term Energy Services Agreements.
The Long Term Energy Services Agreements will include financial incentives for completing projects on time and could guarantee a minimum price for the electricity they produce, shielding the projects from low electricity prices and lowering the cost of capital, crucial for projects that require significant upfront capital payments.
Projects that fail to come online in a timely manner would at risk of having their agreement terminated.
A new cost-recovery mechanism will be established to manage any potential payments to projects under the price guarantees, which will be recovered through network charges paid by consumers.
Crucially, the NSW government says the price floors will be key to de-risking new projects, which will reduce the cost of financing new projects by reducing the risk profile for investors and will ultimately leave NSW consumers better off through overall lower electricity prices.
“As designed, the Infrastructure Safeguard will provide long term certainty for investors and lower the cost of capital. An optimised portfolio of capital-intensive infrastructure with zero fuel costs and low operating costs (e.g. solar, wind and pumped hydro) will further reduce the cost of capital,” the NSW Electricity Infrastructure Strategy says.
“The electricity price investors need to invest in 2023 is expected to be around 20 per cent lower if they have a Long Term Energy Services Agreement. The Infrastructure Safeguard will allow important factors such as location and community support to be factored into the decision criteria, thus contributing to the NSW Government’s wider policy goals.”
The NSW government commissioned analysis from NAB on the financial impacts of the investment safeguard, finding that the lower cost of finance for projects would substantially reduce the levelised cost of energy for wind, solar and storage projects, compared to projects operating on a merchant basis.
The NSW government has outlined a number of eligibility criteria that along with a number of system planning requirements will see projects need to demonstrate additional flow-on benefits to local communities and a sufficient level of community support and engagement for the development.
Investors welcomed the announcement, with the Investor Group on Climate Change, which represents some of Australia’s largest investment groups, including superannuation and wealth management funds, saying certainty that would be created by the NSW Electricity Infrastructure Strategy, which would help de-risk investments in new projects.
“The NSW Energy Infrastructure Roadmap provides critical market clarity and a long-term framework that will unlock substantial private sector investment in new zero emissions energy projects across the state,” IGCC CEO Emma Herd said.
“IGCC welcomes the clear focus on deploying private investment inherent in the NSW approach, and looks forward to working with the government to ensure the policy details maximise the opportunities created, including through potential future collaboration with other states.”
NSW is not even the first jurisdiction to offer price guarantees for new projects, as it will follow earlier examples from the governments of Queensland, Victoria and the ACT.
The ACT government used fixed-price purchase contracts to transition the entirety of the ACT’s electricity supplies to renewable sources, securing contracts with a number of large-scale solar and wind projects.
The fixed prices have often shielded the ACT from a recent spike in wholesale electricity prices, seeing money flow back to consumers when wholesale electricity prices surged above the prices fixed by the fixed contracts.
The Victorian government has likewise used reverse auctions and price guarantees to secure supplies of renewable electricity from new wind and solar projects for a number of government uses. This included switching all of Melbourne’s trams to run on renewable electricity. Queensland undertook auctions for up to 400MW of new renewable energy capacity, to be managed by the state government-owned CleanCo.
The certainty for investors provided through price guarantees follows a difficult period for wind and solar project investors, who have faced project write-downs and commissioning difficulties caused by a lack of coordinated network investment and fluctuations in wholesale electricity prices.
Chair of the Clean Energy Investor Group, Simon Corbell, which represents some of Australia’s largest investors in clean energy projects and which welcomed the announcement on Monday from the NSW government, saying that it would help provide crucial this certainty for investors.
Corbell was directly involved in the use of reverse auctions and guaranteed prices, having served as the ACT energy minister, and the Victorian renewable energy advocate.
“The commitment today by the NSW Government to provide financial mechanisms to support investor certainty, including through Long Term Energy Service Agreements managed by the Energy Corporation of NSW, is a welcome development that will strengthen investor certainty at a critical time,” Corbell said.
“This focus on reducing the cost of capital for new renewable energy projects, enabled by long term contractual support, is key to enabling investors to deliver the low cost capital required to help NSW achieve the clean energy transition in a cost efficient way which also protects consumers.”