A proposal to reduce the cost of electricity to

Australian electricity users

Discussion document
February 2013

This material is solely for the use of client personnel. No part of it may be circulated, quoted or reproduced for

Port Jackson Partners

distribution outside the client organisation without prior written approval from Port Jackson Partners Limited. This
material was prepared for discussion with the client. It is an incomplete record without the verbal commentary.
We believe it is possible to achieve a large reduction in electricity prices ($1.9-3.2
billion) at a small cost to the Federal Government ($.3-.6 billion)

OVERVIEW OF THIS DOCUMENT

§ Rising electricity prices will be a major flashpoint for many years to come – Renewable Energy
Targets will contribute $3-4 billion to electricity prices by 2020

§ Wind will remain the primary form of renewable energy through to 2020, despite the fact that:

• Wind is an expensive source of energy – triple the cost of coal even before the required
transmission and back up generation costs

• Gas is a much cheaper source of energy – one major gas fired power station could achieve
the emissions reductions of the entire wind industry

§ We have developed a proposal to reduce electricity costs by $1.9-3.2 billion in electricity prices
(impact equivalent to $190-320 per household) at a cost of $.3-.6 million for the federal
Government, whilst maintaining the Coalition emissions reductions targets

• Drop the RET for any future investments – lock in the price of RECs for committed
investments

• Drive the emissions reductions of 25-30 GT of CO2-e through direct action, paid for by the
government

6 February 2012 2

Port Jackson Partners

Rising electricity prices will be one of the key political battleground for many years to
come

CONTEXT FOR THIS WORK

• Electricity prices are expected to continue to increase sharply in the next 5 years
– Increasing cost of renewables
– Introduction of carbon tax/ price
– Shift to export parity pricing for coal and gas
– Rising network investment costs
– Need for growth in generation capacity

• This is already translating into a serious political issue, which will intensify
– Consumer backlash, particularly in marginal seats
– Adds to loss of competitiveness of Australian industry

• A critical component of this is the Renewable Energy Targets, which will be dominated
by wind power in the coming years

8 February 2012 3

Port Jackson Partners

Many factors will drive electricity prices to almost double in the next six years

INCREASE IN RESIDENTIAL ELECTRICITY PRICES

Cents per kWh

78%
36.3

20.4

15.9

2007 2011 2017

Source: PJPL analysis

6 February 2012 4

Port Jackson Partners

We believe it is possible to achieve a large reduction in electricity prices ($1.9-3.2
billion) at a small cost to the Federal Government ($.3-.6 billion)

OVERVIEW OF THIS DOCUMENT

§ Rising electricity prices will be a major flashpoint for many years to come – Renewable Energy
Targets will contribute $3-4 billion to electricity prices by 2020

§ Wind will remain the primary form of renewable energy through to 2020, despite the fact that:

• Wind is an expensive source of energy – triple the cost of coal even before the required
transmission and back up generation costs

• Gas is a much cheaper source of energy – one major gas fired power station could achieve
the emissions reductions of the entire wind industry

§ We have developed a proposal to reduce electricity costs by $1.9-3.2 billion in electricity prices
(impact equivalent to $190-320 per household) at a cost of $.3-.6 million for the federal
Government, whilst maintaining the Coalition emissions reductions targets

• Drop the RET for any future investments – lock in the price of RECs for committed
investments

• Drive the emissions reductions of 25-30 GT of CO2-e through direct action, paid for by the
government

6 February 2012 5

Port Jackson Partners

Wind power is expected to be the dominant contributor to the renewable energy
targets, requiring a six-fold increase in the number of turbines

FORECAST RENEWABLE AND WIND GENERATION

Renewable electricity generation Wind turbines required

GWh
45 8,000
Renewable
Energy Wind - high
40 7,000
Target
35 Wind - high 6,000
Wind - low
30
Wind - low 5,000
25
4,000
20
3,000
15
2,000
10

5 1,000

0 0
2011 2013 2015 2017 2019 2011 2013 2015 2017 2019

Source: PJPL analysis

6 February 2012 6

Port Jackson Partners

There are many ‘mouths to feed’ in the renewable energy value chain, driving
up electricity prices
OVERVIEW OF RENEWABLE ENERGY VALUE CHAIN – TYPICAL WIND PROJECT EXAMPLE

Farmer
Pays Government
Promoter annual
‘Sells’ • Sets renewable energy targets
access access • Create regulatory framework
Identifies and tests site fee
Creates projects
Pulls together proposal for
investor Invests in project

Manages development/
construction Receives fees
Receives shares/ units +
Wind project annual income Investor

1. Pays Receives
Pays for REC Receives
REC’s wholesale electricity
price Pays for electricity
at elevated prices
Receives REC

2. Pays for Sells electricity at Consumer

Trader REC Electricity retailer price = 1. + 2. +
transmission 14 October 2011 7
costs + margin
Port Jackson Partners
The supply of RECs is unlikely to reach the 2020 target, driving prices to the
around $90/ MWh of electricity
FACTORS INHIBITING THE SUPPLY OF RECS

1. State planning legislation is

tightening
– Approval timeframes
lengthening
– Need to address community
concerns (noise, visual
pollution)
Farmer
Government

2. Falling access to capital

4. Excess supply of – Around $20 billion of
solar power investments are required to
induced RECs fund growth to meet targets
Promoter largely absorbed – Valuations of wind
companies have fallen
dramatically
– The appetite to invest in
Wind project Investor
wind power is falling, all
over the world
5. Low wholesale
price of electricity
discouraging
investment 3. Rising transmission and
back up generation costs
– Remote renewable
Trader sources
– Impact of intermittent
generation Consumer
Electricity retailer

14 October 2011 8

Port Jackson Partners

We expect that the subsidy to renewables will reach $3-4 billion by 2020 – an impact
equivalent to $300-400 per household

GOVERNMENT RENEWABLE ENERGY SUBSIDIES

A$ Billions

3.8

3.3 Shortfall charge

1.1
increased to $75/MWh
2.8
0.8
2.4
0.6
1.9 0.5

1.5 0.3
1.3 0.2 Shortfall charge
1.1 2.7
1.0 2.5 remains at $65/MWh
0.8 2.2
1.9
1.6
1.2 1.3
1.0 1.1
0.8

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: PJPL analysis

6 February 2012 9

Port Jackson Partners

Over $20 billion of additional investment is required to meet the RET by 2020

WIND INVESTMENT REQUIRED TO MEET TARGETS

A$ Billions

4.3
3.6
3.0
2.5
2.1
1.7
1.4
1.0 1.2

2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: PJPL analysis

6 February 2012 10

Port Jackson Partners

AGL, Infigen and Hydro Tasmania will own almost half of Australia’s wind power
capacity by 2013

SHARE OF INSTALLED WIND CAPACITY IN AUSTRALIA BY DEVELOPER* – 2013

Percent of capacity

Other
Union Fenosa 7%
TrustPower 3%
3% AGL
22%
Transfield
4%

TRUenergy 4%

UBS IIT/REST 6%

17% Infigen
Meridian Energy 7%

8%
Pacific Hydro
10%
8%
Hydro Tasmania
Acciona

* Includes current operations and assets under construction; JVs assumed to be 50:50 ownership share
Source: Clean Energy Council
14 February 2012 11

Port Jackson Partners

The largest wind power generators are expected to generate huge annual subsidies by
2020, but their returns are poor

MAJOR INVESTORS IN AUSTRALIAN WIND GENERATION

2020 share of
renewable
Share of subsidies*
Developer 2013 capacity Company focus Ownership ($M per annum) 3-year TSR
AGL 22% Integrated Gen/Ret. ASX listed 850 12%
Infigen 17% Wind generation ASX listed 660 (65%)
Hydro Tasmania 10% Integrated Gen/Ret. Tasmanian Govt. 370
Acciona 8% Wind generation IBEX listed 320 (23%)
Pacific Hydro 8% Renewables Private; Industry 310
Funds Managment
Meridian 7% Renewables NZ Govt 250
UBS IIT/REST 6% Infrastructure Fund Private; Super Trust 240
TRUenergy 4% Integrated Gen/Ret. Private; CLP (HKG) 170
Transfield 5% Infrastructure Fund ASX listed 160 22%
TrustPower 3% Integrated Gen/Ret. NZX listed 120 19%
Union Fenosa 3% Integrated Gen/Dist. IBEX listed 110 (9%)

* Assumes wind generation accounts for 75% of 2020 RET; Shortfall charge increases to $75/MWh
Source: PJPL analysis
14 February 2012 12

Port Jackson Partners

Wind is an expensive way to reduce carbon emissions – gas is a much cheaper option

GENERATION COSTS
$/MWh

120

65
50

30

Brown coal Black coal CCGT Wind

Carbon emissions
1.3 1 .4 0
(CO2-e t/MWh)
Required subsidy
for new capacity n/a n/a $45 $80
($/t CO2-e)

Source: PJPL analysis

6 February 2012 13

Port Jackson Partners

Gas (CCGT) is the cheapest means of reducing carbon emissions at a broad range of
carbon prices

COST OF ELECTRICITY GENERATION AT DIFFERENT CARBON PRICES

Real 2010 $/MWh

200

180

160
Black coal • Assumes no baseload
140 idling to support
intermittent supply of
120 wind power
Wind
100 • Doesn’t take account
of any additional
80 Closed circuit gas turbine network costs required
to support wind supply
60

40

20

0
0 10 20 30 40 50 60 70 80 90 100 110 120
Carbon price
$/t
Source: PJPL analysis
14 February 2012 14

Port Jackson Partners

Replacing a coal fired power station with one large gas fired power station could
achieve the same emissions reductions as the whole wind industry

• The entire wind industry in Australia currently produces around 5,000 GWh of electricity

• This has an emissions reduction impact of around 5 gigatonnes of CO2-e per annum,
assuming no baseload “idling”

• Replacing one 1.5 GW coal fired power station with an equivalent base-load gas fired power
station would have the same impact on emissions as the entire wind industry

− Producing for 7,000 hours per year (around 80%) would give over 10 GWh of electricity

− Gas has less than half the emissions of coal (gas = .5 tonnes of CO2-e per MWh)

− 10 GWh of gas fired power would reduce emissions by around 5 Gigatonnes

− The capital cost of such a power station would be around $1.5-2 billion

6 February 2012 15

Port Jackson Partners

Wind generation is volatile, unpredictable and uncorrelated with prices, which means
the true cost of wind to the system is underestimated

GENERATION OF WIND PLANTS

Wind farm generation is Pool price –
Plant load Wind farm typically random and SA
MW generation volatile as generation is $/MWh
90 uncorrelated with dependant on the 120
the spot price weather
80 SA Pool price Hallett Wind Farm
100
70

60 80

50
60
40

30 40

20
Snowtown
20
10
Lake Bonney
0 0
4-Jun-08 4 June 2008 5-Jun-08 5 June 2008 6-Jun-08 6 June 2008

6 February 2012 16

Port Jackson Partners

We believe it is possible to achieve a large reduction in electricity prices ($1.9-3.2
billion) at a small cost to the Federal Government ($.3-.6 billion)

OVERVIEW OF THIS DOCUMENT

§ Rising electricity prices will be a major flashpoint for many years to come – Renewable Energy
Targets will contribute $3-4 billion to electricity prices by 2020

§ Wind will remain the primary form of renewable energy through to 2020, despite the fact that:

• Wind is an expensive source of energy – triple the cost of coal even before the required
transmission and back up generation costs

• Gas is a much cheaper source of energy – one major gas fired power station could achieve
the emissions reductions of the entire wind industry

§ We have developed a proposal to reduce electricity costs by $1.9-3.2 billion in electricity prices
(impact equivalent to $190-320 per household) at a cost of $.3-.6 million for the federal
Government, whilst maintaining the Coalition emissions reductions targets

• Drop the RET for any future investments – lock in the price of RECs for committed
investments

• Drive the emissions reductions of 25-30 GT of CO2-e through direct action, paid for by the
government

6 February 2012 17

Port Jackson Partners

We need to answer four key questions in dropping the RET
CRITICAL QUESTIONS IN DROPPING THE RET
1. If we drop the RET, will we maintain our
commitment to the carbon emission reduction
target?
2. If we are to maintain our commitment to the
targets, how much will it cost to achieve those
targets, and who will pay for it?
3. If we drop the RET, will we continue to
subsidise investment that is complete or
committed?
4. How should the subsidy for past investment
be paid for – out of the electricity price or out
of the budget?
The coalition currently remains committed to the
targets – would be a major shift in policy to
move away from this. This will require additional
emissions reductions of 25-30 GT CO2-e per
annum
Price of abatement likely to be capped by cost
of international credits - $15-25 through to 2020
Likely to need to provide ongoing subsidy for
past investment = $40-60 per MWh to avoid
serious fallout with the investment community
Significant impost on budget
6 February 2012 18
Port Jackson Partners
We have considered three options for dropping the RET – option 2 is preferred

OPTIONS FOR DROPPING THE RET

Option Explanation Impact on Impact on electricity prices per Impact on Comment

CO2-e annum (2020) budget (2020)
emissions
(2020 GT)
1. Drop the RET Past and future +25-30 GT Reduction of $2.7-3.8 billion None Heightened poliltical risk
(including investments impacted (approx) (imapct of $270-380 per concerns relating to past
committed household) investment
investments) and Emission target
reduce emissions maintained
target

2. Drop the RET, Past investment None Reduction of $1.9-3.2 billion $.3-.6 billion in Modest cost for the
protect protected at $40-50 (impact of $190-320 per 2020 Government, but
commitments, RECs household) consumers much better
governments pays ($.1-.3 billion in off
to keep emissions Emissions target 2013)
targets achieved out of budget
at cost of $15-25/
tonne

3. Drop the RET, Past investment None Reduction of $1.3-2.8 billion None Costs of achieving
protect protected at $40-50 (impact of $130-280 per emissions reductions
commitments, RECs household) passed on to government
electricity users
pay to keep Emissions reductions
emissions targets paid via levy on
electricity price

6 February 2012 19

Port Jackson Partners

The preferred option reduces electricity prices by six dollars for every dollar spent by
the Federal Government

STEPS TO REDUCE THE IMPACT OF RENEWABLE SUBSIDIES ON ELECTRICITY PRICES

• Collapse the renewable energy targets

and scheme into the coalition direct action
scheme
Reduction of $1.9-3.2 billion in
• Maintain RECs of $40-50 for past and electricity prices (impact of $190-320
committed investments to avoid a per household)
‘sovereign risk’ event
Every dollar spent by the government
• Maintain the emission reduction will reduce electricity prices by more
commitment than six dollars
–direct action costs of $15-25/ tonne
CO2-e to the government No increase in emissions
–total cost of $100-300 million in 2013
($300-600 million by 2020)

14 October 2011 20

Port Jackson Partners

A backlash against the expense of renewables is emerging in other countries

INTERNATIONAL DEVELOPMENTS – CASE STUDIES

• Spain - the new centre-right Spanish government has acted to temporarily put a halt to
awarding new feed-in tariff (FIT) contracts starting in January 2013. The move is expected to
have immediate impacts on approximately 4,500 MW of wind power projects, 550 MW of solar
PV projects, as well as a number of projects in other technology classes.

• United Kingdom – strong backlash emerging against the expense of renewables.

– The UK government has expressed the view that it needs to cut the costs of renewables to
users. Cabinet Office minister Oliver Letwin has said that dedicated financial support for
renewable energy would be removed by the end of the decade as the cost of clean energy
technologies fall.

– AF Consult, published a report concluding that Britain can hit its pollution reduction
targets for £45 billion less if renewables are ditched. That would mean a
saving of about £725 per person between now and 2020

6 February 2012 21

Port Jackson Partners