What the Solar Flagships trouble means for large-scale solar

The Solar Flagships program has been receiving a lot of media attention recently for the failure of the program’s two winning applicants to meet the deadline for funding requirements. The 250MW concentrating solar power (CSP) plant in Chinchilla, Queensland has managed to have this deadline extended, while the Moree Solar Farm, a 150MW solar PV plant in NSW, has been thrown back into the running against its former competitors for the funding, with Federal Resources and Energy Minister Martin Ferguson’s office noting that the Moree project had also been altered significantly from the original plan.

What happened to the Moree Solar Farm?

This hitch in the Solar Flagships application process brings up some important issues regarding how large-scale solar power can be most effectively subsidised. The Solar Flagships program essentially lays out sets of requirements and administrative red tape for applicants to get funding; the theory is that the best suited and most economically viable option will come out on top after all requirements are met and vetting of the candidates and their projects has been completed. Although the size of the figures ($1.5b in grants between the two projects) and objective (subsidising deployment as opposed to R&D), have little precedent, the funding approach for the Solar Flagships program is a relatively conventional in that it is centralised: government sets requirements for application, and then selects applicants to ‘win’ the money.

The problem with the Moree Solar Farm, a solar photovoltaic (PV) installation intended to be 150MW in capacity, is that it did not meet the deadline to secure requisite private funding for the project. The project was only to be partially subsidised, and even then only on the condition that private funding sources are first sourced at a ratio of $3 to every $1 of public (i.e. taxpayers’) money. With the Moree Solar Farm project in limbo for having missed their deadlines for requirements, there was debate as to whether the Resources Minister Martin Ferguson would reopen the tender process to all of the previous applicants, or to simply extend the deadline to the exclusion of the previous, failed applicants. In the end, the former option was chosen.

The purpose of Solar Flagships was to trial the efficacy of solar panel as a source of large-scale power generation; the Solar Flagships Program’s website states that it “supports solar power playing a significant role in Australia’s electricity supply and operating within a competitive electricity market”. Minister Ferguson, in reopening the process to the other shortlisted competitors, with whom the Moree consortium must once again compete, emphasised that taxpayers’ money must be spent prudently in supporting the Renewable Energy Target, and seems set to ensure that the best contender comes out ahead in the process.

Australia’s Energy Infrastructure and Large-scale Solar Power: Gentraders, LGCs, and PPAs

One of the main issues at play here, as Melbourne University Research Fellow Dylan McConnell has pointed out (first in the Conversation then on Climate Spectator) is the nature of the REC market. Under the Enhanced Renewable Energy Target (eRET), electricity generators and other big carbon polluters must periodically purchase a set number of Renewable Energy Certificates (Large-scale Generation Certificates, LGCs and Small-scale Technology Certificates, STCs) A glut of certificates, due in part to the Solar Credits REC multiplier (incidentally set to fall again from July 2012) and in part to retailers’ having stocked up on RECs while they were cheap, has depressed REC prices, disincentivising 3rd parties from installing renewable energy generation systems.

Some ‘gentraders’–hybrid power generators/retailers that both produce and sell the power in a vertically integrated system that does not always foster competition, and whose interests lie in keeping as much of the electricity grid infrastructure under their own control as possible–are now developing their own renewable energy projects, removing the need to enter into PPAs with or purchase LGCs from 3rd parties. By doing so, the gentraders become both the creators and purchasers of certificates. This is all part of the greater trend of vertical integration from electricity production through to retail. Introducing 3rd parties into this means the gentraders have to purchase LGCs take on more risk, and that more of the grid infrastructure is out of their hands. This could partially explain the current Solar Flagships holdup.

Another significant issue is the difficulty in securing Power Purchase Agreements (PPAs) with Australia’s gentraders. PPAs provide a measure of confidence to investors in any energy project, ensuring its long-term commercial viability. The Moree Solar Farm may have run into problems in meeting its fundraising requirements because of its failure to reach a PPA with a retailer–a task the Federal government promises no assistance with.

Robert MacGregor, of Sustainable Energy Constructions Pty Ltd, a Power Station Development firm, commented that the media’s attention the failure of the Moree Solar Farm consortium to secure a PPA is not the only aspect that needs to be considered.

“It’s true that finance is the most essential component of seeing through the development of any large-scale power station–there can’t be a project without it. If a project developer doesn’t know what kind of returns they’ll get (i.e. a PPA), then there can’t be a finance agreement. However, the reality is more complicated than that; seeing through a power station development is a bit like tetris–there is constant negotiating and back-and-forth between all the parties to reach equilibrium–an agreement that everyone is happy with. This includes the varying levels of finance, the energy company purchasing the energy, the developer; which affects negotiations with all the other strategic partners – property owners, contractors, etc. Disagreement at any point with any major party or external affectations such as change in Government policy, litigation or economic circumstances can put a halt to the project. Most major energy developments are approached on a project basis only. We have a partnership approach, in which all the parties work with each other on a number of projects and streamline the the engagement on individual developments, ensuring mutually beneficial outcomes. It doesn’t have to be a series of difficult or adversarial relationships.”

Incentivising Large-scale Solar Power

The predicament with the Solar Flagships process is making headlines in the media, and may become ammunition for opponents of large-scale solar and renewable energy schemes as impractical and idealistic, fraught with insurmountable issues and ultimately doomed to failure. But as Solar Choice has pointed out before, bad policy does not reflect on the nature of the technology. Transitioning from the current status quo of fossil fuel generation to a renewable energy scenario will mean troubleshooting numerous issues as they come up, and there will inevitably be a learning curve.

The Solar Flagships project is an admittedly valiant attempt by the Federal Government to make this learning curve a bit smoother by removing some of the financial risk; but considering the size of the Government financial contribution to these projects, there are inevitably going to be hurdles. Solar Business Services Director Nigel Morris commented: “Getting one of the largest PV projects on the ground in Australia is worthy of enormous merit. However, rolling government into the program brings obligations, conservatism, political concerns, and a dreadfully slow rate of progress that can significantly bog down progress. Governments have traditionally been most comfortable funding R&D projects. The Solar Flagships funding represents a monumental shift in government approach to funding a project; this means that it will be even more conservative and slower to move.”

ACT Large-scale Solar Feed-in Tariff: Leading the way

As Professor Dylan McConnell notes, large-scale and small-scale solar generation have been treated as two separate entities (best exemplified by the eRET, which divides the generation of Renewable Energy Certificates between small- and large-scale schemes). No state or territory in Australia besides the ACT has initiated a Feed-in Tariff incentive scheme for large-scale solar power. The ACT’s scheme is modeled after similar schemes overseas, and as RenewEconomy’s Giles Parkinson points out, the process for the ACT scheme has thus far proceeded much more smoothly than that of Solar Flagships.

That being said, in the ACT the stakes are also comparatively lower for both the government and investors. The first round of projects will have only a combined capacity of 40MW, which while still significant, is dwarfed by the 400MW proposed between the two Solar Flagships finalists. While offering no up-front grants, the ACT government is putting forward a feed-in tariff rate set by a reverse auction process and valid for 20 years. To further bolster investor confidence, the ACT has also worked a “Contract for Difference” (CoD) clause into the scheme (outlined in RenewEconomy). Essentially, this means that the ACT government would pay the difference between prevailing wholesale prices and the feed-in tariff set under the territory’s reverse auction process. The subtlety and economic flexibility of the ACT’s scheme are impressive.

© 2012 Solar Choice Pty Ltd

Solar Choice Commercial manages the tender process for a wide diversity of large-scale solar power projects throughout Australia, including for solar communities, mining companies, restaurant groups, shopping centres, and rural solar farms. A unique Commercial Solar Financing Package, requiring no capital expenditure and other benefits, is also available exclusively through Solar Choice Commercial and partner CAFGA. 

James Martin II