April 2018

Radical turnaround in utility-scale solar economics in Australia

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The Australian renewables sector is experiencing a remarkable year. A massive spike in project commissioning activity; enough new committed production to meet the Renewable Energy Target (RET); and intense engineering, procurement and construction (EPC) competition are radically reshaping the industry.

We forecast 57 new solar, wind and storage projects will be commissioned in 2018, amounting to 3.8 GWac of total capacity. In addition, enough projects entered construction in the first quarter of this year to suggest that the pace of development will stay high through 2019.

So what does all this new capacity mean for the federal renewable energy target? Based on wind and solar assets that are operating, under construction, or have already reached financial close, we estimate total production of just under 30,000 gigawatt hours (GWh) by 2020. While this is short of the 33,000 GWh target in the RET, we must remember that some production from existing hydroelectric facilities remain eligible for the RET, as do a variety of other LGC creating sectors such as coal mine waste gas and waste to energy. With all relevant sectors taken into account, we are confident that the RET will now be exceeded with currently committed projects.

A key implication of this development is that large-scale generation certificates (LGCs) created by renewable energy plants under the RET will fall in value, reducing the revenue that can be earned from merchant projects selling into the wholesale market. This will force an even stronger focus on fundamental project economics in the post-RET era. The good news is that economics for Australian renewable projects is looking increasingly favourable, especially for utility-scale solar.

Fierce competition in the solar construction industry has seen the price of EPC contracts drop considerably since the beginning of last year, falling from A$1.65 per watt dc (adjusted for operational costs) to around A$1.15 per watt dc today. This has had a dramatic impact on breakeven prices – the average price over the lifetime of the asset that is required to recover all costs and make a commercial rate of return.

Modelling a hypothetical project in New South Wales at different EPC prices, we estimate the breakeven price required to earn a real 10% equity rate of return was about A$96 per MWh in January 2017 (subject to a range of assumptions around additional costs and financing). Using an EPC price representative of recent averages yields a breakeven of A$78 per MWh. In addition, using the bottom end of our range for recent EPC winning bids reduces the breakeven price to around A$70 per MWh for projects starting construction today.

However, there is considerable room for further reductions in breakeven prices, outside of the EPC sector. If we assume a lower rate of return target of 7.5%, we get a breakeven in the low A$60s per MWh. And if we move our hypothetical project into a higher capacity factor region – Queensland, for example – we get to a sub A$60 per MWh breakeven.

This is a remarkable turn-around in economics for utility-scale solar in Australia, as it becomes increasingly clear that projects in high irradiance areas and with a low cost of capital are cheaper than purchasing electricity on the wholesale market.

So while the end of the RET may reduce the incentive for major electricity retailers to procure renewable energy, we expect 2018 to be the year that industrial and commercial users increasingly recognise the benefit of building or procuring renewable energy.