Making good on its pre-election promises to boost renewables (particularly solar) in the Sunshine State, Queensland‘s Labor government has implemented an ambitious program to support large-scale solar projects. The Solar 60 incentive scheme will provide an ongoing production incentive in the form of a contract for difference (CFD), a financial instrument which ensures a steady revenue stream for generators whilst also prudently reigning in programme costs on the part of the government.
As the program’s name suggests, Solar 60 will support a total of 60 megawatts (MW) worth of grid-connected solar projects with a minimum of 5MW generation capacity each. The Queensland government has chosen to work closely with the Australian Renewable Energy Agency (ARENA) to back only 5MW+ projects that are successful under ARENA’s Large Scale PV Competitive Round of the Advancing Renewables Program. The goal of this collaboration would appear to be the pursuit of broader inter-agency synergies and ultimately the advancement of Australia’s large-scale solar industry, which trails far behind many other nations despite abundant solar resources.
What is a contract for difference and how does it work?
CFDs are arrangements commonly used in the finance world to hedge against short and long-term risk, but they can also be implemented as long-term agreements between electricity generators and other parties (often governments) to encourage renewable energy uptake on energy spot markets like Australia’s National Electricity Market (NEM). In the later case, the intention of a CFD is usually to improve the investment environment for renewable energy project developers. The UK government earlier this year introduced a CFD mechanism specifically for this purpose (this appears to be the source of the Queensland government’s inspiration).
A CFD is something akin to any of Australia’s (now defunct) state-based feed-in tariffs with regard to the end result, although the mechanism through with it operates is significantly different. A feed-in tariff guarantees a set, $/kWh (or $/MWh, depending on scale) payout, without the generation plant in question (e.g. a solar farm or wind farm) necessarily having to actively participate on the electricity market as a trader, per se; they are instead paid directly by the government (or through a retailer, as directed by the government) for whatever energy they produce. Feed-in tariffs apply both in cases where all electricity generated is sent into the grid, as well as in cases where a portion of that energy is self-consumed ‘behind the meter’. [N.B. The UK’s program is alternatively referred to as a Feed-in Tariff (FiT) Contract for Difference.]
A CFD arrangement, on the other hand, generally requires the renewable energy generator to first become a participant in the electricity spot market with the assumption (or requirement) that all energy generated will be sold into the grid – just as any other large-scale trader. The energy they sell is subject to all of the same price volatility as any other generator. However, under a CFD (or at least the CFDs in Queensland and the UK), the government will compensate the generator for any instances in which the spot price is below an agreed upon ‘strike price’; should the energy generated be sold on the spot market at a rate higher than the strike price, the generator pays the difference back to the government.
Illustrative graph of how a contract for difference works. (Image via EMRSettlement.co.uk.)
In other words, a CFD guarantees for the generator that, at the end of the day, they will receive total compensation for the electricity they produce at the agreed upon strike price, regardless of whether spot prices were higher or lower. A CFD could therefore mean the difference between bankability and non-bankability for a given renewable energy project.
The upshot of this long-term pricing certainty is this: If spot prices are consistently high for an extended period, the generator who is party to a CFD arrangement could theoretically end up with smaller profits compared to if they had entered the market as ordinary traders without a CFD. (In this case the government would be looking at a net gain.) Given that the intent of CFD programs in the first place is to encourage the uptake of renewables, however, it seems fairly clear that governments implementing them assume that this will not eventuate – and accordingly have budgets set aside to fund them.
Queensland’s Solar 60 CFD
Queensland’s Solar 60 CFD program is virtually certain to help the state to maximise its as-of-yet untapped large-scale solar potential.
The Solar 60 program benefits include:
- Projects pre-selected under Queensland’s Solar 60 program will receive a Letter of Endorsement, which will be sent back to ARENA – essentially prioritising them for potential ARENA funding. (Conversely, only proponents who win ARENA funding will be eligible for the CFD benefit.)
- Indicative CFD price range of $80-$100/MWh (nominal AUD, unescalated price over 20 year period).
- Through the CFD price guarantee, long-term certainty with regard to project revenue.
[N.B. Successful applicants will be required to submit LGCs to the Queensland government; this insulates project developers against dangerously low LGC prices while simultaneously preventing them from reaping windfall profits when the LGC price is high.]
The program eligibility requirements are as follows:
- Projects must be at least 5MW (AC) in capacity and located in Queensland
- Projects must have already applied for funding under ARENA’s Large-scale PV Competitive Round
- Applications for the Solar 60 program must be submitted by 11:59pm on 4 November 2015
[Interestingly, the fact that all applicants are required to have applied for funding under ARENA’s Large-scale PV Competitive Round program means that the Queensland government’s list of criteria does not need to be particularly long – most of the initial screening has already been done by ARENA.]
Further information and resources:
- Queensland government: Solar 60 homepage
- Solar 60 indicative pricing range document
- Solar 60 indicative term sheet
- ARENA: Large-scale PV Competitive Round
- AEMO: Historic average spot prices on the NEM
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