Renewables trapped in the oil wreck

Australia now needs to manage a glut of cheap renewable electricity as oil and power prices plummet.
  1. Contributor: Matthew Warren

    Australia now needs to manage a glut of cheap renewable electricity as oil and power prices plummet.

    Australia has been setting a blistering, world-record pace for building renewables. Now thanks to a global pandemic, brutal oil price wars and accumulating market headwinds, that boom is at risk of becoming a rather sudden and painful bust.

    Five forces are simultaneously decelerating renewables investment: the end of the renewable energy target (RET), growing network constraints, a weaker Australian dollar, renewables cannibalising their value in the market and, most recently, a large and exogenous shock to electricity prices.

    The populist fantasy is renewables are subverting the fossil-fuel industry. Recent events suggest a more beholden relationship still endures.

    Global lockdowns enforced to slow the spread of COVID-19 have stopped billions of people from travelling, cutting global oil consumption by more than 20 per cent, or 20 million barrels per day. New estimates suggest demand has fallen much further – up to double this.

    A new deal by major oil producers to cut production by around 10 per cent (or 10 million bpd) has been hailed as the end of a brutal oil price war between Saudi Arabia and Russia, but it does not address this demand-side collapse. A limp market response suggests this will not be enough to rebalance the market.

    Oil prices have halved since January, dragging gas with them. Like a domino chain, falling gas prices have halved domestic wholesale electricity prices.

    While coal-fired power stations still produce around 73 per cent of our electricity, gas generators are needed to top up supply and so are the main marginal price setters. When gas goes up or down, electricity follows.

    The eroding value of renewables generation will not self-correct.

    Low prices might be good news in the short run for consumers. But they’re not so good, the longer they endure, for Australia’s LNG producers and, perhaps more surprisingly, for Australia’s white-hot renewables industry.

    The renewables market was already expected to decelerate from a record-smashing 2019 in which 6.3 gigawatts of new large and small scale capacity was installed – the fastest per capita build rate in the world.

    This green rush was primed by a combination of factors, led by high wholesale electricity prices and a push to capture the fading financial benefits of the RET subsidies.

    It has resulted in grid congestion to some high renewables regions, triggering a heated debate about what should be built to fix this and who should pay.

    With the RET now delivered, the value of the subsidy scheme is evaporating, as it was designed to. Certificates for producing large-scale wind or solar worth $80 two years ago now fetch $27 and are heading towards zero.

    Wholesale electricity prices have halved to around $40 per megawatt hour, which is at or below break-even for most large-scale projects.

    Most of the recent renewable projects were underwritten by large and small Australian companies as a way of locking in stable electricity costs and managing their carbon risk.

    They are now locked into paying high 2019 prices in a cheap 2020 market. That’s frustrating. It gets more serious if some of these businesses do not survive the lockdown and the offtake contracts they have signed are voided.

    Around 2GW of large-scale renewables are under construction right now, due for completion in the next few months. After this it’s hard to see where demand for new renewable supply will come from, at least until the worst of COVID-19 is behind us and there is less uncertainty about global energy markets.

    Renewables are high capital, low operational expenditure. As most of the key components of renewables projects are imported, a softer Australian dollar will push up the strike price needed to get new projects across the financial line.

    Meanwhile, the value of renewable electricity keeps falling as more projects come on line, as evidenced by canyoning electricity prices in the middle of the day in high solar states like Queensland and South Australia.

    The eroding value of renewables generation will not self-correct. It will require active measures taken to rebalance the intermittent oversupply – like investment in large-scale storage, load shifting capacity or new processes that can soak up the surplus electricity.

    A slowdown in renewable build rates is inevitable and prudent. But an abrupt halt could be much more damaging. While there is a lot of hype about renewables jobs, it is fundamentally a building industry.

    Around 27,000 Australians work in the renewables sector, and almost all of them are installing solar panels or building wind farms. Once complete these technologies are highly automated, low maintenance and fuel free.

    A construction workforce needs new jobs to move to when projects finish. On current planning Australia will need to be building around 2GW of renewables every year until 2040, and then more after that.

    State renewables schemes will already be paying out millions on existing contracts. Funding the gap between soft wholesale prices and their lofty ambitions may be beyond their limited budgets.

    It’s not the fall that kills you. It’s the sudden stop at the end. To avoid yet another renewables boom-bust it might be useful to start thinking about what a managed deceleration might look like. And soon.

    Source: Financial Review