10 October 2016 HAS THE LRET FAILED? Presentation The LRET 2020 and Beyond. Leonard Quong

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1 10 October 2016 HAS THE LRET FAILED? Presentation The LRET 2020 and Beyond. Leonard Quong

2 PRODUCTS TO HELP YOU UNDERSTAND THE FUTURE OF ENERGY Solar Wind Other Renewables Gas Energy Smart Technologies Advanced Transport Carbon & RECs Markets Americas Europe, Middle East & Africa Asia Pacific 1

3 FOUR LEARNINGS FROM THE LRET 1. The LRET will fall short in 2018, but that doesn t mean failure. 2. The current scheme design is problematic. 3. A lower emissions future is inevitable but the methods are unclear. 4. Energy markets need to adapt to more renewables. 2

4 THE LRET IS LIKELY TO FALL INTO DEFICIT IN 2018, TRIGGERING PENALTY PAYMENTS Forecast supply-demand balance in the LRET, by supply source (TWh) Shortfall of 3.2m LGCs Existing + committed Industrial PV New wind New Utility PV New STEG New biomass New landfill gas Banked LGCs Total LGC demand Note: LRET Large-scale Renewable Energy Target. Assumes the LRET is eventually met. For details see: Bloomberg New Energy Finance, Q REC Market Outlook. Source: Bloomberg New Energy Finance 3

5 PENALTY PAYMENTS COULD OCCUR PRE- AND POST-2018 Forecast supply-demand balance in the LRET, by supply source (TWh) Smaller, more exposed liable entities may fall short. Deficit may persist post-2018 if uncertainty freezes the market Existing + committed Industrial PV New wind New Utility PV New STEG New biomass New landfill gas Banked LGCs Total LGC demand Note: LRET Large-scale Renewable Energy Target. Assumes the LRET is eventually met. For details see: Bloomberg New Energy Finance, Q REC Market Outlook. Source: Bloomberg New Energy Finance 4

6 A SHORTFALL DOES MEAN THE LRET HAS FAILED Objects of the Renewable Energy (Electricity) Act 2000: Encourage the additional generation of electricity from renewable sources. Reduce emissions of greenhouse gases in the electricity sector. To ensure that renewable energy sources are ecologically sustainable. Source: Renewable Energy (Electricity) Act

7 SHORTFALL FLEXIBILITY WAS BUILT INTO THE LRET Forecast supply-demand balance in the LRET, by supply source (TWh) Annual LGC supply could exceed the target if entities i) roll liabilities or ii) refund shortfall charges in the allowable 3 year period Existing + committed Industrial PV New wind New Utility PV New STEG New biomass New landfill gas Banked LGCs Total LGC demand Note: LRET Large-scale Renewable Energy Target. Assumes the LRET is eventually met. For details see: Bloomberg New Energy Finance, Q REC Market Outlook. Source: Bloomberg New Energy Finance 6

8 CERTIFICATE PRICES HAVE RISEN BASED ON THE LOOMING SHORTFALL Historical LGC price (AUD) Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Source: Bloomberg New Energy Finance 7

9 PENALTY PAYMENTS ARE LIKELY BUT PRICES POST-2020 REMAIN UNCERTAIN Fundamental price forecast of LGCs (nominal AUD) New supply price LGC prices post 2020 are likely to fluctuate but unlikely to exceed this price for sustained periods if the target is met in Possible price range Current spot price (5 Oct 2016) Tax effective LGC penalty (AUD/MWh) Max. post-2020 LGC value (AUD/MWh) Forecast pre-2020 LGC Price (AUD/MWh) Note: Assumes that projects will continue to be financed and built despite revenue uncertainty post-2020 and the LRET is met by Source: Bloomberg New Energy Finance, ICAP 8

10 THE LRET IS LIKELY TO FALL INTO DEFICIT IN 2018, TRIGGERING PENALTY PAYMENTS Forecast supply-demand balance in the LRET, by supply source (TWh) Existing + committed Industrial PV New wind New Utility PV New STEG New biomass New landfill gas Banked LGCs Total LGC demand Note: LRET Large-scale Renewable Energy Target. Assumes the LRET is eventually met. For details see: Bloomberg New Energy Finance, Q REC Market Outlook. Source: Bloomberg New Energy Finance 9

11 FOUR LEARNINGS FROM THE LRET 1. The LRET will fall short in 2018, but that doesn t mean failure. 2. The current scheme design is problematic. 3. A lower emissions future is inevitable but the methods are unclear. 4. Energy markets need to adapt to more renewables. 10

12 THE DEMAND PARADIGM HAS CHANGED AND OUTLOOKS ARE QUESTIONABLE Electricity demand forecast in the National Electricity Market (TWh) (FY2006-FY2025 ) FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20 FY22 FY24 Note: Central case from NEFR Australian Energy Market Operator Source: Australian Energy Market Operator 11

13 A LACK OF REVENUE CERTAINTY POST-2020 CONTINUES TO MAKE INVESTMENTS DIFFICULT Illustrative cost vs revenue for a wind farm post-2020 Required offtake price For details see: Bloomberg New Energy Finance, Q REC Market Outlook. Source: Bloomberg New Energy Finance, 12

14 A LACK OF REVENUE CERTAINTY POST-2020 CONTINUES TO MAKE INVESTMENTS DIFFICULT Illustrative cost vs revenue for a wind farm post-2020 Required offtake price Wholesale electricity price For details see: Bloomberg New Energy Finance, Q REC Market Outlook. Source: Bloomberg New Energy Finance, 13

15 A LACK OF REVENUE CERTAINTY POST-2020 CONTINUES TO MAKE INVESTMENTS DIFFICULT Illustrative cost vs revenue for a wind farm post-2020 Required offtake price Potential revenue shortfall LGC price Wholesale electricity price For details see: Bloomberg New Energy Finance, Q REC Market Outlook. Source: Bloomberg New Energy Finance, 14

16 A LACK OF REVENUE CERTAINTY POST-2020 CONTINUES TO MAKE INVESTMENTS DIFFICULT Illustrative cost vs revenue for a wind farm post-2020 Required offtake price Future policy? LGC price Wholesale electricity price For details see: Bloomberg New Energy Finance, Q REC Market Outlook. Source: Bloomberg New Energy Finance, 15

17 INVESTMENT STALLED FOLLOWING THE ELECTION OF THE COALITION IN LATE 2013 Total new clean energy investment in Australia (USD m) -52% 6,708 5,442 5,919 5,336 2,555 2,562 2,968 1,415 1,681 1,488 1, For details see: Australian clean energy investment continues to languish Source: Bloomberg New Energy Finance 16

18 LARGE-SCALE RENEWABLE INVESTMENT FROZE Total new large-scale renewables investment in Australia (USD m) -79% 2,565 2, , ,538 1,389 1, , For details see: Australian clean energy investment continues to languish Source: Bloomberg New Energy Finance 17

19 FALLING COST OF RENEWABLES MEANS A FIRST MOVER DISADVANTAGE ONSHORE WIND LEVELISED COST (USD/MWh) SOLAR PV MODULE COST (USD/W) 1, WIND y COSTS = 3,582.42x HAVE FALLEN R² = % SINCE MODULE COSTS HAVE FALLEN 99% SINCE % SINCE H2 H Thailand Learning rate =19% R² = 0.91 Learning rate 19% Germany US Brazil Current 2015 price Short-run marginal cost of existing black coal ,000 10, ,000 1,000, ,000 10, ,000 1,000,000 Cumulative capacity (MW) Source: Bloomberg New Energy Finance. Note: Pricing data has been inflation corrected to We assume the debt ratio of 70%, cost of debt (bps to LIBOR) of 175, cost of equity of 8% Six energy policy issues Australia must address Source: Bloomberg New Energy Finance, Maycock. Note: Prices are in real (2015) USD. Current price is USD 0.61/W 18

20 FOUR LEARNINGS FROM THE LRET 1. The LRET will fall short in 2018, but that doesn t mean failure. 2. The current scheme design is problematic. 3. A lower emissions future is inevitable but the methods are unclear. 4. Energy markets need to adapt to more renewables. 19

21 AUSTRALIA S CURRENT CLIMATE POLICY FRAMEWORK IS INSUFFICIENT Cumulative abatement required relative to government BAU vs projected abatement, (MtCO2e) 2 pathway (63%) 2 pathway (45%) Current target (26-28%) Ozone & HFC measures Tech improvements & other National Energy Productivity Plan Assumed legacy abatement that continues to occur ,247 Government 'Direct Action' plan ,429 BNEF assesment 3,537 2,893 2,095 Note: ERF Emissions Reduction Fund. For details further see: Bloomberg New Energy Finance, H Australia Carbon Deep Dive & The impact of the Paris Agreement on Australia ERF & Safeguard Mechanism BAU improvements (emissions over-estimate) Current policy suite is unlikely to deliver much additional abatement. Majority of reductions are essentially BAU improvements Emissions Reduction Fund (ERF) and the Safeguard Mechanism are likely to achieve only 40% of government estimates Scalability of these mechanisms is questionable. Current policy suite will fall 443Mt short of the current 2030 target, 1,240Mt short of 45% and 1,885Mt short of 63%. Source: Bloomberg New Energy Finance 20

22 AUSTRALIA IS LIKELY TO COME UNDER PRESSURE TO STRENGTHEN ITS TARGET Australia 2030 emissions target and emissions projections, (MtCO2e/year) Govt. BAU emissions projection Historical emissions BNEF BAU emissions estimate 400 Current 2030 target pathway (CCA) Note: CCA Climate Change Authority. Includes LULUCF emissions. For details see: The impact of the Paris Agreement on Australia Source: Bloomberg New Energy Finance, Department of Environment 21

23 COUNTRIES ARE LIKELY TO STRENGTHEN PLEDGES AS CLEAN ENERGY PUSHES BAU EMISSIONS DOWN The carbon-clean energy virtuous circle Clean energy costs fall BAU emissions estimates decrease ,000 10, ,000 1,000,000 Cumulative capacity (MW) Experience curve Historic prices (Maycock) Chinese c-si module prices (BNEF) Clean energy deployment increases Countries make stronger pledges Note: Bottom arrow is depicted in light blue as stronger pledges generally encourage greater investment and deployment (particularly if supportive policies are introduced) but not always. For details see: The impact of the Paris Agreement on Australia Source: Bloomberg New Energy Finance 22

24 STATE AND FEDERAL GOVERNMENT RENEWABLE ENERGY TARGETS 50% by 2030 ~23% by % by % by % by 2020 (ACT) 100% by 2020 Legislated Ambitions 33% by % by % by % by 2025 Source: Bloomberg New Energy Finance 23

25 FOUR LEARNINGS FROM THE LRET 1. The LRET will fall short in 2018, but that doesn t mean failure. 2. The current scheme design is problematic. 3. A lower emissions future is inevitable but the methods are unclear. 4. Energy markets need to adapt to more renewables. 24

26 Delivery RENEWABLES MAKE POWER SYSTEM MANAGEMENT MORE COMPLEX Years Months ahead Days minutes ahead Seconds minutes after I. PLANNING FOR EXTREMES III. CONTROLLING FREQUENCY Demand Variable supply II. CONTINUOUS BALANCING Long-term planning to prepare the power system for extreme events such as peak demand or troughs in supply. Planned actions until right before electricity delivery to ensure supply equals demand. For details see: Bloomberg New Energy Finance, Flexibility series: the problem with wind and solar Instant reactions to remediate frequency deviations caused by forecasting errors and contingency events. Source: Bloomberg New Energy Finance 25

27 RENEWABLES MAKE POWER SYSTEM MANAGEMENT MORE COMPLEX Get used to it. 26

28 RENEWABLES MAKE POWER SYSTEM MANAGEMENT MORE COMPLEX Get used to it. 27

29 RENEWABLES MAKE POWER SYSTEM MANAGEMENT MORE COMPLEX Get used to it. 28

30 AUSTRALIA S EXISTING COAL FLEET IS AGING Coal capacity based on assumed end of technical life (GW) Note: Assumes life extensions of 15 years at end of technical life for plants with different levels of potential for life extension. For details see: When will Australia s coal-fired generators retire? Source: Bloomberg New Energy Finance Six energy policy issues Australia must address 29

31 NEW RENEWABLES ARE ALREADY COST COMPETITIVE WITH NEW FOSSIL FUELS Levelised cost of generation (real 2016 AUD/MWh) Wind New black coal 80 New gas Large-scale PV 20 Short-run marginal cost of existing black coal Note: Assuming 83% capacity factor. Capacity factor of utility-scale PV: 15-22%; wind: 27-45%, New gas (CCGT): 85%. For details see: New Energy Outlook 2016: Australia Seminar Source: Bloomberg New Energy Finance Six energy policy issues Australia must address 30

32 AUSTRALIA S EXISTING COAL FLEET IS AGING BUT WILL BE LONG LIVED Coal capacity and potential life extensions (GW) Low potential for life extension Potential for life extension +5.1 Well placed for life extension No life extensions Note: Assumes life extensions of 15 years at end of technical life for plants with different levels of potential for life extension. For details see: When will Australia s coal-fired generators retire? Source: Bloomberg New Energy Finance Six energy policy issues Australia must address 31

33 OVER TIME RENEWABLES WILL BE COMPETING AGAINST EXISTING AND REFURBISHED COAL Levelised cost of generation (real 2016 AUD/MWh) Wind New black coal 80 New gas Refurbished black coal Large-scale PV 20 Short-run marginal cost of existing black coal Note: assumes coal refurbishment capex is 25% of new build cost. Short-run marginal cost includes fuel, fixed and variable costs, assuming 83% capacity factor. Capacity factor of utility-scale PV: 15-22%; wind: 27-45%, New gas (CCGT): 85%. For details see: New Energy Outlook 2016: Australia Seminar Source: Bloomberg New Energy Finance Six energy policy issues Australia must address 32

34 CONSUMER DEMAND PLACES BEHIND-THE-METER PV AS A SEEMINGLY UNSTOPPABLE FORCE Cumulative small-scale PV and storage diffusion in Australia (GW) 40 PV (total) PV (only) 5 PV (with storage) Source: Bloomberg New Energy Finance Six energy policy issues Australia must address 33

35 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 A LACK OF FLEXIBILITY AND REDUCED UTILISATION WILL EXPOSE BASELOAD PLANTS TO LOSSES Projected generation profiles for a low demand day in summer, National Electricity Market (MW) 30,000 25,000 20,000 Stor FLEX SSPV UPV EFW BMBF WIND 15,000 HYDR O 10,000 5,000 OCGT CCGT CChigh CCmid 0 CClow LIGN Demand Note: Indicative generation profile for the National Electricity Market (NEM). LIGN Lignite, CC Coal, CCGT Combine Cycle Gas Turbine, OCGT Open Cycle Gas Turbine, O Oil, BMBF Biomass/Biofueled, EFW Energy From Waste, SSPV Small-scale PV, UPV Utility PV. For details see: New Energy Outlook 2016: Australia Seminar Source: Bloomberg New Energy Finance 34

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