Flagship renewable energy scheme becalmed as wind woes deepen

Wind project 'drought' puts in doubt Australia's green energy targets When Chris Bowen got up on stage at the International Convention Centre in Sydney in mid 2023, he was determined to make a point. Meeting his government's target for Australia to get 82 per cent of its electricity from renewable sources by 2030, he said, would be a gargantuan effort. Rooftop solar installations would need to double. Storage capacity would have to be added on a vast scale. Crucially, the climate change and energy minister said Australia would need to build wind turbines. Lots and lots of wind turbines. "We need to build around 40 wind turbines a month to get this job done," Bowen told the audience gathered at the Smart Energy Council Conference and Exhibition. On the face of it, things appear to be going reasonably well. Australia has a long pipeline of wind, solar and battery projects notionally waiting to be developed. In its latest outlook for electricity supplies, the Australian Energy Market Operator says the forecast has improved. Releasing the "electricity statement of opportunities", or ESOO, the agency says a "record" level of new generation provides a "clear pathway" to reliable power supplies. 'Out of the money' But more than three years after Chris Bowen made his comments, he would probably rather not imagine how far short the country is falling on one particular count. Australia is enduring something of a new wind farm drought. And it's a shortage that is threatening to undermine the government's renewable energy ambitions. David Dixon, an analyst at global energy consultancy Rystad, says the current problem with wind power is an economic one. He says the turbines simply cost too much to build, at least while wholesale electricity prices are, for the moment, fairly subdued. "You're basically out of the money," Dixon says. The wind industry's woes are also the government's, Dixon notes, given the technology is central to the Commonwealth's flagship renewable energy program. Known as the Capacity Investment Scheme (CIS), the policy is supposed to be the incentive needed to get a tidal wave of wind, solar and battery projects built. It works by underwriting the revenues of projects which successfully "bid" to receive government support, namely by offering their electricity at the lowest viable level. Bids are taken in rounds of auctions, eight of which have been completed starting in late 2024. Crucially, the program limits the support the federal government will provide a project. Dixon says the intent of the scheme is reasonable enough; to help bring online a huge amount of clean energy capacity without costing taxpayers too much money. But he says there's a catch. He says many wind projects in particular offered prices that were simply too low. "The problem is that after they got awarded the CIS and they went to go and build or get finance to build these projects, the costs of building a wind farm had gone up 30 per cent to 40 per cent, even 50 per cent," he says. "And so if you'd only marginally bid a year ago when costs were much less … you're not going to go ahead with your project. "No-one is going to lend money to your project." A zephyr of investment Indeed, most of the wind projects selected through the CIS have failed to win the blessing of banks or other financiers. According to research by Rystad, of the 31 wind projects that have won a guernsey so far, just four have reached "financial close". In other words, just four have been given money by lenders to build the turbines. Dixon says wind projects are being hurt on multiple fronts. Not only are the materials themselves rising in cost; so, too, are labour costs. Paul Simshauser, the head of Spanish renewable energy giant Iberdrola in Australia, says there's another factor. Simshauser says there's a strong link between rising interest rates and wind project costs. Despite these headwinds, Simshauser says the wind industry is not alone. "If interest rates are hitting wind farms, they will be killing a coal plant because they're so capital intensive," he says. Richie Merzian, the boss of the Clean Energy Investor Group, acknowledges the difficulties facing wind. Merzian says investors are keeping their hands in their pockets for a few reasons. Among them is "ambiguity" about the closure of coal plants in Australia. He notes several are supposed to retire in the next few years, including Yallourn in Victoria in 2028 followed by the giant Eraring in New South Wales and Gladstone in Queensland in 2029. But Merzian says the lack of new capacity coming online is causing governments to extend the lives of coal plants, or at least publicly toy with the idea. He says the delays are particularly difficult for wind projects. "The real value of wind is it'll provide that power for the night that's currently being provided by coal," Merzian says. The 'mask' of cheap prices On top of this, Merzian says wind projects are getting bigger, meaning developers have to raise more money to build them. He says this means investors often have to sell existing renewable energy assets to fund new ones. However, he says capital gains tax changes pushed by the federal government had put many investors off selling assets because they would have incurred much higher costs. Last week, Treasurer Jim Chalmers retreated on those changes for renewable energy assets, pushing out their start from 2030 to 2040. Fundamentally, Merzian says the biggest problem with wind projects is simply the gap between the cost of building them and the prices customers are willing to pay. "When you look at market prices now ... they're not lining up with what you need to give wind projects the green light to go ahead," he says. It is a gap, says David Dixon from Rystad, that is best quantified through so-called power purchase agreements (PPAs). These are the deals between buyers of electricity and sellers; agreements which are long-term in nature and provide the revenue needed to get a project over the line. Dixon says the number of deals being signed is critically low. At a time when their number needs to be at record highs, he says they are instead collapsing as buyers baulk at paying more than prevailing market prices. Prices needed to make new wind farms viable exceed $100 per megawatt hour, he says, but buyers appear to be offering barely $60/MWh. "Ominously", according to Dixon, the prevailing low prices are hiding looming problems. Dixon says the three coal plants due to retire in 2028 and 2029, combined, produce 30 terawatt hours of electricity a year, equivalent to twice South Australia's annual generation. He says delays in building the capacity required to replace those coal plants will only lead to greater pain later. "Once they do retire, if we have not built sufficient volume and capacity to replace them, prices will certainly go up," he says. "So we're kind of almost masking a future problem with the current prices that we're seeing in the market today. "And here's the kicker: If we don't build or start building sufficient capacity to replace them, we're going to have to extend them. There won't be much question about that." Central forecasts questioned Dan Lee of energy analysis firm Global Roam says there may be other problems with the CIS. Lee says projects selected through the scheme are being injudiciously counted as certainties in the central reliability forecast. That forecast — AEMO's electricity statement of opportunities — is regarded as one of the most influential planning documents in the energy industry. It is used to identify potential shortfalls in generation capacity and signals where or when new projects might be needed. According to Lee, projects need only meet three of five criteria to be baked into that forecast. These include land, approvals, finance, construction and contracts. Critically, Lee says many projects selected through the CIS appear to be satisfying the contracts criterium even when they do not have backing from lenders. As a result, he says AEMO and everybody else is relying on projects that may never be built. "Much of this capacity is already being counted as though it's coming," Lee says. "[AEMO's] central reliability forecast looks like it will be anticipating about three times more CIS capacity than has actually reached financial close. "For any project to have a reasonable chance of contributing to the 2030 renewable energy target, you'd want shovels in the ground by the end of this year. "This is another data point suggesting that we're a long way off 82 per cent." In response to questions, Chris Bowen said the CIS was succeeding in "de-risking" projects. A spokeswoman for the minister said the program had accelerated early-stage projects and helped unblock renewable energy investments which had "stalled" under the previous government. "We always expected that many CIS projects would be delivered towards the end of the decade," the spokeswoman said. "We never expected linear growth in capacity coming on line." Under a shake-up of the scheme, the government says it has also put more emphasis on the likelihood a project will actually go ahead. Lee argues changes are overdue. For starters, he says project developers should have to stump up bonds to ensure their proposals are serious, increase the transparency of bidders' prices and hold auctions at regular intervals to give greater planning certainty. Importantly, he reckons the government needs to come up with specific solutions for wind projects. Dixon echoes the comments, saying the government must ensure it only selects projects which have a realistic chance of succeeding. Needs must, he says, because time is not on the government's side. "We're going to see the effects of this non-delivery in about two or three years' time from now," Dixon says. "Even if we do play the game that we try and extend the coal plants, we do have to remember that the coal facilities are towards the end of their technical lives."