Learning from the mistakes of Solar Flagships
It gave me little satisfaction to hear a prediction I made in April 2011 – that the selected Solar Flagship projects would fail to materialise – had proven correct (see page 35 of the Grattan Institute report, Learning the Hard Way – Detailed Analysis). Now all the wrong conclusions are being made about the reasons behind the current predicament, which tragically leaves us on the same path with the Clean Energy Finance Corporation.
Those opposed to action on climate change are crowing about how a lack of backers for the Moree Solar PV Farm and the Queensland Solar Dawn project proves solar technology is a dud. On the other side, the Greens are blaming the people involved, suggesting energy minister Martin Ferguson didn’t want Solar Flagships to succeed.
The reality is completely different. This is not a failure due to the product (solar), nor the people involved. It is due to a poor process. Solar Flagships’ primary problem is that it committed funding to individual projects well in advance of their construction via a tender selection process. Solar Flagships has encountered the same problems that have dogged just about every other emission reduction program that employed grant tendering to allocate funding. The report I co-authored, Learning the Hard Way, explains this sorry history in excruciating detail.
A tender, on face value, seems like a perfectly valid, competitive mechanism for allocating government money. But for funding carbon abatement projects it involves considerable complexity, which regularly means winning bids fail to materialise into operational projects.
This is because it is very difficult for businesses to develop well-informed bids as:
1. Bidders will probably have only done preliminary work in preparing their project. After all you’re not going to spend large sums of money on lawyers, engineers and environmental consultants until you’re confident there’s demand for your product. This demand does not exist for most low carbon electricity projects until they manage to win the tender.
2. Several years are likely to transpire between the time the bid is submitted and the date the project becomes operational. In the meantime there’s significant room for prediction errors across a wide range of important factors influencing costs and revenue, such as the value of the Australian dollar and the price of steel, glass, solar panels and electricity.
3. The selection process run by government is infrequent (once a year at best), not transparent (all bids are confidential) and highly subjective. This makes it difficult to assess how your bid is likely to fare relative to competitors and can tend to encourage over-optimistic bidding.
To top it all off, once the tender process is completed the winning bidders face absolutely no competition to get their project built before anyone else, and no penalty if they fail to deliver. In the case of the Howard government’s Low Emission Technology Demonstration Program, we are still waiting on HRL and Silex Systems to confirm whether they will construct projects selected in a tender round held in 2005. Thankfully Solar Flagships improved on this one aspect by placing a deadline on winning bidders to commit to construction, although this deadline has been extended for Solar Dawn.
There is little reason why government even needs to commit funding to individual projects before they are built. The private sector has shown a ready willingness to finance solar, bioenergy, geothermal and wind projects, in many cases at significant scale, without government providing money upfront. Instead these projects have been built on the basis of government support provided per unit of electricity generated. If they don’t produce electricity they don’t get a cent of support and it’s a matter of first-in best-dressed. This can work through government setting mandated targets for a given quantity of renewable electricity (such as the Australian Renewable Energy Target) or mandated prices (Germany’s feed-in tariffs). Support should ideally be designed using a combination of both price and quantity to prevent boom-bust cycles (as occurs with Germany’s feed-in tariff program).
This leads to my next concern – the Clean Energy Finance Corporation (CEFC). The government has said that the CEFC will use loans and equity investments to support renewable energy. This will encounter exactly the same problems as past grant tendering programs as it involves selecting individual projects and companies to fund, well in advance of them delivering any electricity. That it will employ merchant bankers to allocate the money does nothing to reassure me that the results will be any different to the past.
I will make a bold prediction: of the $5 billion allocated to the CEFC to support renewable energy, very little will lead to any electricity being generated. I am prepared to stand by this prediction no matter what the outcome of the next federal election. A $5 billion injection could do a lot of good for the renewables sector in Australia, but I can’t see this happening based on the current terms of reference for the CEFC.
Comments on this article
Who's Solar Flagship Is It?
Solar PV is the business for Solar companies not the government. There has been a lot of money made by these solar companies and they are the one's selling it to the Mum's and Dad's of the nation. They believe in it and so did the public who invested in a future that was sold on the belief they are making the right choice. Its now time for the solar companies to put their beliefs in their products and technologies and put their money where their mouth is and create the solar flagship themselves and also benefit from their belief's. The government has provided the leg up so capitalise on that and make it happen. Stop whinging and make it your own! Solar PV organisations flagship product is solar PV, so what are you doing?
Pay attention.
I think you are all over complicating 1 simple fact - Government was told from the beginning, by the solar industry, that Flagships could not scale up that industry from rooftop to world's largest in 1 leap.
Government ignored that advice and chose to ask the industry to do something it said it could not do.
If you can't see what this means, you are not paying attention.
Golden Rule ..
When you believe that delivering outcomes starts and ends with process, you obviously never get outcomes. Governments run on process, that why we have such great successes as .. desal plants, PPP tollways, BER, Pink Batts, etc etc. MMMMmmmm feel the process.
The carbon tax was meant to let the market take over. Let it take over!
RE: No wonder it turned out to be another exercise in futility
Proof of the pudding is failure to meet financing deadlines.
Solar is not viable - Nigel Morris
Nigel Morris,
What a brilliant comment. Shows what a bright lad you must be.
By the way, can you show me any large solar generator that is commercially viable?
You might be interested in the costs of renewable energy:
http://bravenewclimate.com/2012/02/09/100-renewable-electricity-for-australia-the-cost/
Do you really expect people to pay these costs? Only rich elitists could advocate that we should accept their beliefs and policy prescriptions, and to hell with what 99% of the world's population wants.
Interesting Links
Sorry about the newspaper link, however it does purport to come from someone noteworthy.
http://www.theaustralian.com.au/news/world/solar-enthusiasm-exceeds-practicality/story-e6frg6ux-1226275140254
http://repec.rwi-essen.de/files/REP_08_040.pdf
http://www.ncpa.org/pdfs/ba679.pdf
RE: No wonder it turned out to be another exercise in futility
The Productivity report is completely discredited as it failed to differentiate the retail and wholesale electricity markets. PV today is competing in the residential retail market. Some how the productivity comission ignorantly (or deliberately) overlooked this.
While Solar at $400 megawatt hour was correct at the time - Today it is more like $350 a megawatt hour. (unsubsidised)
While delivered coal power retailed at the meter will rise to $310MWh next year according to AEMC. Given Solar PV has halved in cost over the past 24 months it will not be long before $310 MWh is more expensive than panels for the third of power we buy that can be substituted by solar panels producing during cloudy and sunny daytime hours.
No wonder it turned out to be another exercise in futility
According to reports in the SMH/Age early in 2011, the Productivity Commission have rated electricity generation: coal power $79, gas $97 wind $150 and solar $400 per megawatt hour.
One wonders what the blunder will cost taxpayers this time around..
FiTs
Flow-on questions around FiTs are: the level of the tariff needed to secure the investment; and the process by which this charge is set.
RE: Structure is as important as process MOE RE Stuart Allinson
Stuart,
By shifting to Feed-in-Tariffs the off take is guaranteed through the Feed-in-Tariff therefore there is no conflict between the depressed wholesale price and renewable deployment as revenue is guaranteed via FiT payment per unit generated and delivered.
Structure is as important as process
Yes there are obvious process flaws - but the structural challenges can not be ignored. If one accepts that there are merit order effects resulting from renewables projects (ie depressed wholesale energy prices), then it follows that there may be a conflict between securing long term contracts for RECs and power - on which funding depends - and the potential adverse consequences of merit order effects on those same counterparties.
re solar is not viable
Peter
Excellent comment; well thought through, completely up to date and in line with the massive growth in solar around the world and the fact that of course, no other energy industry onthe world ever got a cent of support.
I have arranged for an extra bucket of sand to be sent over so you can bury your head even deeper.
Is a dynamic Government process a pardox?
Tristen
You are on the money; except that I don't know that it's possible for our government to be anything but pardoxical not matter what process is employed.
While ever we have dividends flowing back to Government (through ownership or quasi ownership) in utilties, coal assets and other parts of the value chain, decisions will be skewed. At a minimum, they are beholden to utilties who yeild massive power over simply keeping the lights on.
The key, so succesfully demonstrated elswhere is a highly dynamic process that rapidly and intelligently adjusts to changing market forces and ideally, one that is distinct from the pressures of political whim.
We cant change the fact we need Government support and intervention; we remain reliant on it. But a non politically biased, highly dynamic, National approach to enrgy market reform managed by Government? That is a paradox.
Issue is solar is not viable and never will be
The real issue is that solar is not viable and never will be. The sooner we stop wasting the country's wealth subsidising it the better.
Price (feed-in tariff) or quantity (MRET)?
Feed-in tariff has the benefit of letting the project proponent do all the thinking and planning, and allows for optimal outcomes through unanticipated technological improvements (serendipity).
ie feed-in tariff is the evolutionary mechanism, MRET is the centralised planning (sclerotic) mechanism.
Need to focus on revenue and market gaps
Two points made in this article - that funding mechanisms based on output (and, better yet, time-of-day value of output) make a great deal of economic sense for Government and for solar project developers, and that large scale Government grant programs rarely deliver projected results - are well made and important.
However the major issue, and the real constraint affecting the Solar Flagships projects, is the absence from Australia's electricity markets of mechanisms providing long-term revenue security against which project finance can be raised. There is no functioning power purchase agreement market in Australia, the LRET (for reasons of historic oversupply of RECs) is not functioning to support new projects, and there are no incentives or mechanisms to encourage energy financial market innovation to fill the gaps.
The 'bold prediction' of the article's author is unhelpful and narrow. The CEFC can and must address revenue-side issues; the mechanisms needed (such as contracts for difference, options and swaptions) are familiar financial products in energy, debt and commodities markets that would fit well in the CEFC's investment portfolio. They would support and build on energy market capacity and accelerate pull-through of private sector innovation in energy markets and investment in clean energy .
If the CEFC does not address the market failures thwarting access to reliable revenue streams for clean energy projects, no amount of grant funds, equity investment or improved tender processes will matter, because projects will still be unable to secure a revenue stream against which finance can be raised.
Need to focus on revenue and market gaps
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Learning from mistakes of Solar Flagships
Too negative ... for as long as renewables cannot compete on level terms with existing and planned non-renewable generation whether the reason is market structure favouring the status quo, hidden subsidies or technology maturity ... Government will have to shift the risk profile of renewable projects by making pre-construction commitments otherwise nothing will be built ... the trick is to craft these commitments to retain to competitve tension until after final invesment decsions are made i.e. just before construction starts not after operations commence which for most project proponents would present an unacceptable regulatory risk.
Leave it to the Private Sector
Governments and their instrumentalities cannot organise a booze-up in a brewery let alone strategic solar projects. The role of givernments should be to set sensible, secure long-term feed-in tariffs for all renewables and then let the private sector bring projects to the market. I can see hundreds of millions if not billions being wasted on reports, consultants and administration if the government continues on its current path.
Agree on CEFC projection however disagree on Germany
Tristan,
The German Feed-in-Tariff has been progressively rejigged to make sure support is removed as the cost of technology and deployment comes down. The German Feed-in-Tariff has not suffered boom bust. They got 7,500MW deployed and target was 3,500. There is an expectation that support will keep getting reeled in until they're back on target. It looks like the new iteration of the legislation is to have the regression at 2% per month or 24% a year.
This is a pure success. Showing that a policy framework can get a technology weened off incentive measures so fast.
Please show me an example of a better scheme.
With RET the price of projects is expected to rise not fall as we get closer to the 20% target. This is not the case with German style Feed-in-Tariffs which always lower their support level.
Re link to Learning the Hard Way
Need to take of "%20" to this link and it will work.