In this short presentation I’m going to build an argument that everyone is underestimating the pace of what’s happening in the large-scale renewable energy pipeline. We have a lot to do with Green Energy Markets and Bloomberg New Energy Finance, we respect them greatly, but we think everyone is underestimating the pace of the build and the liquidity of LGCs that we will see moving forward.
Firstly, we believe 400 megawatts will reach final investment decision and the target will be exceeded and I’ll explain why that shouldn’t be a concern to you.
Secondly commercial and industrial, two years ago the cumulative capacity from systems between 100 kilowatts and 1 megawatt was around about 10 megawatts, and two years ago I said it was a great business opportunity and I felt this could be really a surprise area in the runway to the target and could be putting on cumulatively a large scale renewable power station every year. What I’m going to build in my argument is this year we are going to see that happen for the first time and this will make a difference to liquidity.
And I’ll pose a couple questions around LGC prices.
Everyone including ourselves called out 2017 as a record year, we said a little while ago it was 1.057 gigawatts of capacity. We have actually just sailed past 1.1 gigawatts in terms of cell capacity based on validated certificates. So the records keep on breaking. I should mention that on our official data the STCs can be created up to 12 months after installation date.
John Grimes said about a month ago that he believed small scale could hit 1.4 gigawatts this year, I think on the early creations that could be an underestimate as well.
So this diagram looks a little bit messy, but I’ll take you through it with a few pointers on the screen.
But firstly, just to give it a background, prior to the RET commencing there was about eight gigawatts, roughly, in round terms of existing capacity, which was mainly hydro. In the first 15 years of the scheme, six gigawatts of new capacity large scale was incentivised and that was nearly all wind – about 96 per cent wind, 4 per cent solar. When the agreement was reached on the revised 2020 target we quantified that we needed around six gigawatts to have a final investment decision and built between 2016 by the end of 2019, and I’ll explain in this chart were we are up to.
So firstly off that six gigawatts, and you’ll see there’s sort of a line - there its 6400, as I’ll show you shortly solar surprised on the upside. When calculating what was needed we estimated probably 75 per cent wind, 25 per cent solar and said it was roughly six gigawatts needed – 6000 megawatts. But in fact solar has surprised so much on the upside, and has a slightly lower capacity factor, and so we’ve revised that saying 6400 megawatts or 6.4 gigawatts is needed. Of that, 1500 megawatts is accredited and generating already.
We currently have applications on hand for a little more than another gigawatt of accreditation. So these are power stations which are very close to the point of first generation.
Then if we add the projects which we believe have reached the final investment decision, financial close and are actually under construction- it actually takes us up to that 6000 or six gigawatt total. And then if we add power purchase agreements we believe there’s about 1500 megawatts of projects with a power purchase agreement between strong counter parties we believe will go into financial close.
Now these numbers do not include the Queensland and Victorian processes. So Victoria have gone to the market with 650 megawatts, Queensland for around about 300 megawatts of renewables and 100 megawatts of storage. So if you add that on top that takes us to probably around about eight and a half gigawatts. Then, I note through intel, there are other announcements that will surprise on the upside that are not in these numbers.
So the target will be well and truly exceeded, we called that out in January and February this year.
So a little bit about the insights, the first six gigawatts installed under the RET large scale was 96 per cent wind, four per cent solar. We are now tracking at around about 48 per cent solar in the pipeline. Single axis tracking has been a big market move, most of the capacity for solar is going single axis tracking. It better matches peak demand early and late in the day, and also increases the capacity factor.
Essentially this is showing: above the line is the accredited capacity, below the line is what we have in our pipeline but in summary the big movers are Queensland, New South Wales and Victoria.
Now this is the one I spoke about before, which is really taking off in the j-shape. Already, the capacity we have in applications on hand for commercial and industrial sized systems, between that 100 kilowatt and one megawatt, is going to smash last year. But at this stage it is looking like it could very well go well over 100 megawatt cumulative capacity this year and probably about 500 applications. Now in the shape of this chart, who knows where this might finish up this year – It may go well beyond that and where might it land next year.
So I think this is going to provide more LGC liquidities that no one is factoring in. These numbers, we add them into our pipeline once they are accredited, but there’s no way we can know in advance what’s coming.
So the question is; How far might this go?
The flat section there on the left hand side of the graph is when the target was reset, the price had run up in the lead up to that timing. But then the market kind of digested it. It’d been concluded that there was going to be scarcity, it would take time for projects to reach a final investment decision, be build and deliver certificates and the price did what it should. It ran up sharply, and that plus the high wholesale prices Tristan mentioned provided a powerful incentive for the build to come on.
However if we drill in a little bit more to the recent time and the yellow line is the calendar 2020 forwards, which trading at relatively thin volumes – you’ll see the spot prices stayed high, probably because the market believes what Tristan said before – that liquidity is going to be tight.
We called out in February that we believe there will be a surplus of at least five million in both 2018 and 2019 and that is certainly well ahead of what Bloomberg and GEM are saying will happen.
Forwards for the CAL20 prices drop off for a few reasons. Firstly there is material shortfall- around 238 million dollars of shortfall in consolidated revenue that can be redeemed under the three year rule. That’s around about 3.66 million certificates. So without going into the individual positions of those who have paid shortfall, if that price stays high – the spot price stays well above the $65 penalty price – we are going to see more shortfall. There’s also a 10 per cent rule, the retailers can surrender less than 10 per cent short in LGCs and carry that forward. So there is some time shifting of demands here that will happen. That will keep liquidity higher, but potentially there’s going to be money stranded in consolidated revenue. The best chance of the industry harvesting that money is the prices would be lower. So I guess we’ve got to see- do we have a smooth landing in LGCs prices coming down or do we see prices stay up, money stranded in consolidated revenue.
Finally we did have that record year for small scale that has been called out and has gone past that 1.1 gigawatt official milestone.
So a couple of conclusions.
We believe all the builds will be happening – more than the builds required- before the end of this year. Which is what we needed to see happen, and built before 2020. More than enough will be done to meet the target.
We think the LGC surplus will remain healthy, but there is some time shifting of demands and an opportunity for that money in consolidated revenue to be redeemed, but we do need more supply. And that time shifting of demand will probably keep prices in 2020 and 2021 better than most people think. But we do expect LGC prices will moderate.
We’ve got a range of resources on our website including that pipeline information – that first graph, all of the data on all the projects, we say there is a transparently there. I’ve given you a bit ahead of the curb because we typically update at the end of the month for around about the middle of the following month.
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