Australia’s renewable energy target at risk

Low wholesale electricity pricing, coupled with the low pricing of Renewable Energy Credits (RECs) places Australia at risk of missing the country’s renewable energy target, according to carbon analytics research firm RepuTex.

Australia’s renewable energy target calls for 20 per cent of the country’s electricity to be generated from renewable sources by the year 2020, however, RepuTex forecasts that the actual figure is likely to be between 16 and 17 per cent.

“Our analysis points to the reality that a number of currently slated projects will be delayed as a result of subdued prices within the Australian renewable energy market,” RepuTex’s executive director Hugh Grossman said.

“Wholesale electricity prices and renewable incentives are presently too low to facilitate the level of investment in the sector needed for Australia to meet the 20 per cent target.”

RepuTex projects pricing will remain at similarly subdued levels over the short- to medium-term, even allowing for the introduction of carbon pricing.

Currently just under 10 per cent of Australia’s electricity demand is met from renewable sources, predominantly wind and hydroelectric generators, although the vast majority of future growth is expected to come from the wind sector.

“With the sluggish domestic economy and cooler summer along the eastern seaboard, electricity demand has remained subdued. Consequently, wind generators have had difficulty in signing Power Purchase Agreements (PPAs) with counterparties,” Mr Grossman said.

“We have recently seen one wind generator sign a PPA as low as $45 per megawatt hour (MWh), well below the $100 per MWh that wind generators need to remain profitable,” he said.

Wind generators create Renewable Energy Credits (RECs) to encourage generation from the sector, but the Office of the Renewable Energy Regulator is forecasting an average 2012 price for RECs of just $35.24 per MWh, significantly lower than in recent years.

“With a forecast price for RECs well below $40 over the short- to medium-term, coupled with subdued electricity demand, wind generators simply won’t be able to secure the sorts of revenues to encourage them to make further investments in the sector,” Mr Grossman said.

“When you consider the long-run marginal cost of operating a wind generator is on average between $100 and $110 per MWh, at present prices investment in wind is just not economically viable.”

This places at risk a large portion of the $20bn worth of investment in wind generation presently in the pipeline, as we have seen with the delay of Hydro Tasmania’s Musselroe and Epuron’s Silverton projects,” Mr Grossman said.

REC prices have been driven lower by an influx of credits into the marketplace, largely as a result of the growth in wind generators to date. The number of RECs registered in Victoria and South Australia alone more than doubled in 2011.

“Electricity futures prices, which indicate medium-term expected demand, are presently at near-historic lows. We believe futures prices would need to at least double to encourage further investment in the wind sector,” he said.

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