Renewing investment in renewables

Investment in major renewable energy projects has reached a record level. ANZ Research’s Major Projects report looks at all projects worth $A100 million or more that are recently completed, under construction or could soon be constructed. The tally of such projects has reached 120.

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Of the major renewable energy projects, total capital spend in 2018-19 was estimated at $A8.3 billion. The potential pipeline is expected to grow to close to $A10 billion in 2019-20 and 2020-211, up from below $A2 billion in the mid-2010s.

"Australia’s uptake of renewable energy generation has been more pronounced than in much of the rest of the world”

ANZ Research expects renewables investment to grow further based on the current strong pipeline of projects, reflecting pent-up investment appetite, corporate sourcing of renewable energy, ongoing technological improvements including in battery storage, and pro-active government policies.

The planning and construction time for renewable energy projects is short, relative to other forms of energy. Most projects are under construction for months, rather than years, in part owing to their relatively small size compared to major fossil fuel plants. The pipeline for renewables projects is therefore likely to understate the capital expenditure of new projects due for completion within the forecast horizon.

Prior to 2017, the backdrop for large renewables investment was not as supportive as it is now. Demand for electricity was soft and even fell in 2011-12 and 2012-13, following the global financial crisis (GFC) and the fading mining boom.

The monthly Renewable Energy Index, produced by Green Energy Markets, unsurprisingly shows growth in the share taken up by renewables in electricity generated in Australia. That share has grown from just below 19 per cent in July 2017 (when the index started) to 21 per cent in June 2019.

The chart above takes these data back further, on an annual basis, and shows that the rise in the renewables component has been most marked in the last decade. While Australia’s uptake of renewable energy generation has been more pronounced than in much of the rest of the world, the trend is the same. The International Energy Agency forecasts the share of renewables in global electricity supply will grow by one-fifth to reach 12 per cent in 2023.

Hydro continues to be Australia’s largest contributor to renewable generation, with a 36 per cent share in 2017-18. Wind contributed 34 per cent of renewable electricity in 2017-18 and solar 23 per cent. Australia’s only geothermal plant closed in 2016-17.

Lower costs and prices

Technology has clearly played a part in growing renewable energy investment. Like-for-like comparisons of fuel generation costs are imperfect; but work by the Commonwealth Scientific and Industrial Research Organisation (CSIRO) to level them by including operating as well as investment costs shows new wind and solar is now cheaper than new coal generation. This includes renewables backed by storage.

The co-location of wind and solar farms has been significant in lowering average grid connection costs. The 175 megawatt White Rock wind farm includes a 10 megawatt solar farm. A 10 megawatt solar farm is nearing completion at Gunning wind farm in New South Wales. And Queensland’s Kennedy Energy Park, currently under construction, will combine 43 megawatts of wind, 15 megawatts of solar and 2 megawatt per 4 megawatt hours of battery storage.

Recent data show wholesale electricity prices in the National Energy Market (NEM) are falling, albeit from a high base, with additional renewables capacity in the market clearly part of this.

Commonwealth policy

The Commonwealth Government has a number of policies in place to encourage renewable energy investment, including the carbon emissions reduction target agreed at the 2015 Paris Climate Summit. This requires Australia to reduce emissions to 26–28 per cent of 2005 levels by 2030. The Commonwealth was also responsible for Snowy Hydro 2.0.

In 2015, there was a cut to the Commonwealth’s 2020 large-scale Renewable Energy Target (designed to encourage solar, wind and hydro developments) from 41,000 gigawatt hours to 33,000 gigawatt hours. ANZ Research notes, though, that the recent surge in large-scale projects means Australia will easily generate enough energy to meet this target, while also meeting the carbon emissions reduction target.

There remain unresolved issues around retaining enough dispatchable energy and reliability in energy generation. Keeping energy prices low is a focus for the Government.

The states

The state governments have been key to the policy backdrop. All states and territories, other than Western Australia and the Northern Territory, have a ‘net zero emissions’ target for 2050 or earlier. The Australian Capital Territory has already achieved that target.

Renewable energy targets are in place in five states and territories. Nearly 95 per cent of Tasmania’s electricity comes from renewables, almost entirely hydro. South Australia doesn’t have a renewable energy target but has the largest amount of installed wind and solar capacity and is on track for 73 per cent renewable electricity in two years, according to the Climate Council.

Most states, though, as at 2017-18 still produced the majority of their energy from fossil fuels.

Much of the renewable energy investment activity over the forecast horizon is concentrated in New South Wales (underpinned by the Snowy Hydro) but South Australia and Queensland also have particularly strong pipelines.

The future of investment

A couple of proposed mega-projects are on the horizon. One is the proposed $A20 billion, 10 gigawatt solar farm and 20−30 gigawatt storage facility at Tennant Creek in the Northern Territory. Part of the power generated at Tennant Creek would be exported to Singapore via an undersea cable.

Another mega-project is the Asian Renewable Energy Hub, proposed by a consortium, for Western Australia’s Pilbara. That hybrid wind and solar project would generate up to 15 gigawatts. The capital spend is expected to be $A22 billion, invested over a six- to seven-year period from the early to mid-2020s. As well as supplying the local market, the hub would export to South East Asia via sub-sea electrical cables.

These suggest renewables could continue to grow substantially in the mid-2020s.

ANZ Research’s Australian Major Project report looks at current and future spending on major projects in the infrastructure, resources, non-residential construction industries and more. Keep an eye out for future articles detailing these trends on bluenotes.

Cherelle Murphy is Senior Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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