Australian power generation will continue to tilt towards renewables as more ageing coal-fired generators are taken offline and consumer and investor demand continues to grow.
This transition presents risks and opportunities for investors, and Australia can learn from other market experiences, according to Octopus Investments.
Speaking at the Fiduciary Investment Symposium, Sam Reynolds, managing director, Octopus Investments, said demand for renewable energy has created its own momentum.
“The Australian government is being ineffective in creating energy policy that supports renewables, but generally in the face of demand, supply will find a way,” Reynolds said.
“Two out of every three dollars of income created in this country by 2030 will come from millennials. Ninety percent of millennials believe in renewable energy. Ninety percent want sustainable investment options as part of their portfolio.”
However, the transition from predominately coal-fired electricity generation to renewable energy will not be orderly, Reynolds said, based on the European experience.
Even as coal-fired plants such as Hazelwood in Victoria and Liddell in NSW go offline, replacement may not be smooth.
“This lack of supply being added back to the system is going to create sustained pressure on the energy price,” he said. “A key aspect of why renewables cannot simply be added at the rate that everybody thinks is because of the grid.
“If you’re investing into renewable energy anywhere, but particularly in Australia, focus on grid. Do not take a developers’ grid due-diligence report; you need to go much deeper. You need to look at engineers’ reports. You need to look at the whole energy map. A coal-fired plant turning off a year earlier could impact your solar site 3,000 kilometres south of that.”
Investors should also analyse the capital-expenditure costs of grid upgrades and upward pressure from rising consumer demand, Reynolds said.
Investors should also evaluate a potential investment for financial stability five and 10 years out, he said, adding “the energy price will settle on the lowest cost of generation. “
But even as the price of solar panels continues to drop, Reynolds said there is still a case for investing now in solar sites. He noted that while the price of solar panels has dropped 80 per cent over the past five years, the panels only constitute around 25 per cent of upfront capital expenditure on a solar site.
“In this country, the other 75 per cent is labour, and that’s going up,” he said. “It’s also steel framing, some of the more technical kit, from Germany, [which] isn’t going down.
“Quite a lot of the time, you’ll have to put in a grid upgrade. The Australian energy system is set up as a big, long extension cord on the eastern seaboard. Getting your energy back from western NSW or western Queensland into the grid is going to cost you, and you need to put it into your upfront capex.”