Basslink problems: The wind solution?

The Basslink breakdown has come at an opportune time for West Coast Wind, proponent of the 99 MW Granville Harbour wind farm.

Lack of energy security for Tasmania has fortuitously coincided with the project’s lack of security for financiers.

It’s been reported Adam Brooks MP has lobbied the government to get Hydro to offer West Coast Wind a long-term power price agreement similar to alleged 15-year power purchase agreements granted to the Woolnorth Company which owns and operates the 308 MW wind farms at Woolnorth and Musselroe.

Hydro retains a 25% interest after selling 75% of the Company to Shenhua.

West Coast Wind’s project which will supply 3% of Tasmania’s needs is shovel ready, just waiting for the government to instruct Hydro to prop it up.

The major reason wind farms lost their appeal for financiers was the wrecking ball launched by former PM Abbott who at one stage confessed to radio host Alan Jones that his preference was to scrap the renewable energy RET scheme entirely. A reduced RET target was finally agreed but it left proponents battered and bruised and financiers cautious.

Tasmanian Liberals were largely mute when damage to the Tasmanian renewable energy industry occurred with the Abbott assault. Now the government is being asked to offer additional assistance to overcome the legacy of that damage.

The way the RET scheme works is one MWh of generated electricity earns one REC, a renewable energy certificate. All electricity is sold via the national electricity market but large users and retailers separately contract with generators to hedge prices.  RECs are sold in a separate market. Generators earn RECs and sell them to retailers who are required to buy enough to satisfy the requirements of the RET scheme. Once electricity is sold RECs become worthless.

RECs apply to new renewable energy generators which include wind solar and hydro. It only applies to Hydro’s existing hydro electricity generators if production exceeds a baseline figure established when the RET scheme began.

With drought, RECs from older hydro generators are falling. New wind farms are slowly filling the breach. Demand for RECs currently exceeds supply. The price of RECs has risen from about $20 when coal was good for humanity to around $90 today. Retailers pay a shortfall penalty if they haven’t bought enough RECs. Because the penalty is non-deductible for tax purposes, the current penalty of $65 is equivalent to paying $92 for a REC. Hence retailers will pay up to $92 for a REC. 

In each of the last two years Woolnorth Co, has produced 1,000 GWh (or 1 million MWh) of electricity, about 10% of Tasmania’s needs. This implies one million RECs were created each year.  (Note: 1GWh = 1,000 MWh. 1 MWh is the amount of electricity generated by a 1MW generator per hour. 1MWh = 1,000 KWh. KWh is the unit familiar to householders.)

Wind and hydro power by their very nature complement each other as sources of energy.

Wind farms only operate when the wind blows. Former Hydro chairman Crean is on record, at the time of the official opening of the Musselroe wind farm, as saying Tasmanian wind farms operate at a 45% capacity factor. Current Hydro CEO Davy recently said Tasmanian wind farms operated in the low 40’s.

However Woolnorth has only once exceeded 40%. In other years it has averaged 38%. Musselroe’s annual capacity factor is yet to exceed 36%.  By way of comparison Australia wide averages are in the low 30’s, although  a wind farm in SA, the leading state for wind power, has an annual average above 40%.

Woolnorth Co’s financials for the only two full years when both Woolnorth and Musselroe have operated are remarkably similar.

Had Woolnorth Co sold both electricity and RECs on the spot market it would have averaged $67 per MWh in 2013/14 and $72 in 2014/15. Instead it received $86 per MWh, a sure sign that long term purchase agreements exist. The agreements no doubt helped raise the price Shenhua was prepared to pay Hydro for the 75% share. This is a major difference from the West Coast Wind’s request for an agreement.

Woolnorth Co’s cash earnings before tax and interest were $66 million in 2014/15, a 10% return on its asset base. West Coast Wind is one third the size. Assuming the capacity factor is the same, this implies cash earnings of $22 million or 10% on the proposed asset of $200 million.

If long term agreements are being handed out maybe we should have more details?

Today RECs are selling for $90 and electricity for $120, giving total revenue of $210 per MWh. These are spot prices only. The Tasmanian spot electricity price is currently high due to Basslink’s failure. Victorian current prices are around $40, which would give total revenue of $130 per MWh.

In the past year the ACT government agreed to pay first $92 and then $77 per MWh in two 20 year deals for electricity from the new Hornsdale wind farm in South Australia to feed into the ACT grid.

In this light it is not clear why West Coast Wind needs a deal from Hydro? Hydro is a generator. Shouldn’t the deal, if any, be with a retailer, Aurora Energy say?

Which begs the question, exactly who agreed to what when Hydro sold down its wind farm interests? Was it just Hydro? Or was Aurora Energy involved? Who agreed to buy the electricity? The RECs?

If a purchase agreement is simply a de facto feed-in tariff arrangement then shouldn’t the same deal be extended to solar panel owners?

There was a time when renewable fans were bearded boffins in home knitted woollen jumpers and sturdy walking boots. Now there’s across the board interest. Costs, prices, returns and feed-in tariffs are of utmost public concern. It’s not simply a matter of helping one proponent get a new project across the line.

With the fallout from Basslink still unknown transparent public policy needs to take precedence over back room deals.

(Published in The Mercury 17th Feb 2016)