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Climate Policies in Coal-Dependent Australia Leading to Surging Wind Development

Australia’s wind development is driven by clean energy mandates, but the Gillard government's carbon tax has rendered building new coal plants non-competitive. Export policies for fossil fuels is beginning to fast-track liquefied natural gas out of the country to supply a very lucrative market in Asia.

The result? According to a Bloomberg report, while a new natural gas plant now costs $116 a megawatt hour, wind can be built at $80 a megawatt hour.

TrustPower Generation General Manager Deion Campbell developed nearly half the wind capacity in New Zealand and is now constructing the second Snowtown wind farm in Australia, at 270 MW. Between the two countries — which combined hold fewer people than California — his team has developed close to $1 billion worth of hydro and wind in the last decade.

Gas Exports Make Wind Power Attractive

Campbell thinks the Bloomberg figure for wind is a bit low; that for NSW or Victoria, it's closer to $100 per MWh. But he sees both the gas exports and the carbon tax as increasing the underlying cost of electricity.

In addition, due to gas exports, the gas price now bounces up and down as a result of what he describes as a “lumpy trend” in supplies, which then makes the fixed price of a power purchase agreement (PPA) more attractive for wind buyers.

“There’s a period of oversupply as the new gas fields are developed, up until the next gas train is ready for production and export, following which gas will be in shorter supply, and the prices go up,” he said. A gas train is the supply chain leading to a liquefaction plant that converts Australia’s gas to liquid natural gas (LNG) for shipping to Asia.

Between the construction of each of the new shipment terminals, Campbell explained that there is a lot of gas exploration, which leads to large amounts of surplus waiting to be comissioned. "Then the cheap gas supply can cause a drop in the price of electricity, which is bad for the wind developer, so a PPA is attractive to the developer to cover downside risk," he said.

According to Monash University Economics Professor Stephen King, Australia’s sparsely populated west coast is the best place to see the result of this effect on wind prices, as that side of the continent has already been shipping out LNG from the North West Shelf for several years, keeping gas prices bouncing at high levels for some time.

Overnight Wind Creating Below Zero Prices 

“In Western Australia the price of gas is going up, and you’re getting lots of new wind generation,” he tells REW. Wind generators earn a renewable energy credit (REC) for every megawatt hour generated, and thus generate regardless of demand overnight. However, coal or gas base load generators are also incentivized to stay on, because it’s more expensive to shut down and start up again in the morning.

The result is that overnight electricity prices for all forms of generation in Western Australia are crashing. “They have set up a balancing market in Western Australia and the prices are now much more transparent. It’s a capacity market, more like the PJM, rather than a spot market,” he says. “Now the overnight price is quite often getting down to negative fifty, sixty, ninety dollars per megawatt hour.”  

Australia’s much more populous east coast is still building its own gas export terminals.

But the state to watch will be South Australia, according to King. While it is not yet affected by exporting gas as Western Australia is, it will be in the future because it’s connected to the east coast gas market. It already has the largest percentage of wind power, so when gas exports make gas more expensive on this grid, South Australia won’t turn back to coal as the coal-rich east coast states might be tempted to, explained King. This is the region that is likely to see a surge in wind power once east coast gas is shipped overseas.

Carbon Tax Helps “A Bit”

King describes Australia’s recent carbon tax as also having “a bit of an effect,” as the newest of Australia’s policy drivers. Signed into law by the ruling labor party Gillard government in July 2012, it raised hackles in Australia’s powerful coal industry, and is likely to be scuttled if the right wing opposition party is elected in September.

Tony Abbott and his opposition party take what King describes as “a very ad hoc type of approach” involving specific industry quotas or subsidies, “not the sort of thing economists like very much. It’s better to use a market-based approach, a carbon tax, a trading approach.”

Even if the Gillard government does survive the election, the carbon tax is likely to be reduced when the Australian carbon market merges with the EU’s in 2015, with its bottomed-out prices. However, while it has had some effect on coal company profitability, the carbon tax has turned out to be a relatively small driver of renewable development in itself, according to both Campbell and King.

“We’ve had the carbon tax for almost a year and no coal-fired plant has shut down,” King points out. “Even the most polluting plant; Hazelwood in Victoria, which burns brown coal, with high carbon emissions — because brown coal has a lot of water which has to be treated to remove the water and that obviously is a carbon intensive process — is still operating.”

But that seems like a lot to expect from the first year of a carbon tax. King suggests that the carbon price could be too low, but perhaps it’s just too early to tell.

Renewable Mandate Is Wind’s Biggest Driver

Both agree that renewable energy certificate (REC) sales are even more of a driver than either the carbon tax or the gas export policy, and these are driven by Australia’s renewable energy target of at least 20 percent renewables (and in some states, more) by 2020, just signed in 2009.

“RECs are worth more than the carbon tax,” King points out. “You’re talking $50 plus for a megawatt hour, rather than $23 a tonne of carbon.” Brown coal-fired power stations in Australia create about 1.2 tonnes of carbon per megawatt hour; so the carbon tax costs coal-fired generators around half the price of RECs.

“The only real reason that anyone’s installing and buying wind energy in Australia is because of the renewable energy target,” Campbell agrees.

Virtually all wind farm developers in Australia sign PPAs with retailers because of the price protection and certainty it offers to each party. They typically sell their RECs within a PPA, getting paid roughly half from the energy price in the contract and half in the renewable energy certificates.

“Most people, because of the investment risk and the bank requirements, they won’t go onto the spot market and say I’ll sell my energy for whatever I can get for it, and I’ll sell my RECs for whatever I can get for them, and hope,” he says. “The banks just won’t let you. So they have to have someone who’ll sign a long term agreement to take both at a fixed price, with some CPI adjustment.”

“The real reason retailers will buy a wind PPA in Australia is to get the RECs so that retailers can meet their obligations under the renewable energy target,” Campbell concludes. “The broader industry definitely is impacted by gas availability and the carbon tax; but for wind farms, you need someone to take your RECs as well.”

Lead image: Wind turbines via Shutterstock

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