Australia’s lack of clear government policy and poor regulatory framework for renewable energy projects create a major roadblock for some infrastructure investors looking at the sector, an expert has argued.
Despite technological gains that are making renewable energy from solar and wind increasingly competitive with thermal power generation, the lack of clear renewable energy targets and long-term power pricing contracts makes the sector a risky prospect compared with investments overseas, says Isabelle Demir, head of real assets for Frontier Advisors.
Power purchase agreements (PPAs) in Australia usually extend to 2030 and not beyond, which falls far short of the typical useful life of renewable energy assets of 25 to 30 years.
With a contract period of only about 11 years, investors would need to contend with volatile merchant power prices for the remaining life of the asset, Demir explains, introducing too much risk for many to consider.
“For example, average yearly prices in Victoria in the last five years have varied between $30 and $100, so you could have significant volatility at the tail end,” Demir says.
Demir will speak at the Investment Magazine Infrastructure & Real Estate Conference, to be held on February 19-20 at the Crown Towers in Melbourne.
By comparison, in the US and Europe, subsidy-based remuneration has evolved into corporate contracts for the long-term, supported by municipal, federal and state targets for renewable energy.
“In the US, there are contracts with corporates, with municipalities and with power distribution companies that are 20 years in length,” Demir says. “So whilst it’s not a subsidy market, the supportive policies at the state level mean that it’s widely accepted to have 20-year contracts, giving investors comfort for the majority of the life of the asset.”
The cost of producing renewable energy has come down enormously in recent years, with statistics from the US-based Solar Energy Industries Association showing the cost to install solar has dropped by more than 70 per cent since 2010.
Floating solar and wind developments are gaining momentum, as is development in battery storage technology.
However investors looking at the sector need to go beyond the simple question of whether the technologies are proven and look at potential complications. These include estimations of capacity based on the wind conditions of an area, along with grid stability and whether existing transmission and distribution lines – often decades or even centuries old – have the capacity to support these forms of renewable energy.
“It’s not just as simple as sunshine produces electricity and I sell it, or wind blows to produce electricity and I sell it,” Demir says. “There are a number of other technical factors that investors need to take into account. This requires operational experience and industry knowledge of the renewable space.”
The sector is also extremely competitive, leading to tight pricing on investments.
“In Europe, operating assets in countries like Germany that have got long-established renewables markets, the rates of return can be as low as 5-7 per cent, which obviously is very low for an equity investment,” Demir says.