The CEO of Pacific Hydro tells Climate Spectator editor Giles Parkinson that:

– About two thirds of the company's investment over the past five years has been offshore because "the capital tends to flow where the opportunity is greatest";

– Pacific Hydro is very bullish on the prospects for conventional geothermal and the role that it can play in Australia, and solar PV will also have a big role to play;

– The lack of a carbon price in the short term is going to have a major impact on the long-term security of supply for electricity in Australia;

– There are two issues that are further delaying investment in the Australian renewables sector: The sale of the NSW energy retailers; and the possibility of an oversupply of RECs again next year from large amounts of solar being installed this year.

Giles Parkinson: Last week you opened your $800 million hydro investment in Chile. That’s two run-of-river hydro investments there. What’s the significance of that?

Rob Grant: Well, for us it's a very important milestone. It represents the commencement of operation of projects that have been under development and construction for over six years now. It’s probably the largest investment in a renewables project by an Australian company in the last 30 years and is supplying an acute demand for new power in Chile’s electricity grid.

GP: So, you’ve made mention it’s probably the largest investment by an Australian renewables company in the last few decades. Why is it being made overseas and not in Australia?

RG: Well look, Chile and a number of other Latin American countries that we’re looking at, particularly Brazil, have very strong policy support for renewable energy. In addition to that, our projects in Latin America also qualify for earning carbon credits under the Kyoto CDN mechanism, and that is contrasted against 10 years of stop-start policy or for the industry here in Australia. And the capital tends to flow where the opportunity is greatest.

GP: And what’s the percentage of projects that you’ve actually made overseas now? You are the largest renewable energy company, or renewable energy investor, in Australia, but most of your investments have indeed gone overseas to Chile and other places where the renewable energy policies are more beneficial.

RG: Probably two thirds of our investment over the last five years since we’ve been privately owned – we’re owned by Industry Funds Management, which represents about five million Australian superannuants. About two thirds of our investment during that time has been offshore.

GP:  Do you see that changing any time soon? And what will be the factors that make that change?

RG: The demand for new projects in Chile and Brazil is just as strong, if not stronger than it has been over the last five years, so we will probably continue to invest in absolute terms the same sorts of capital that we have over the last five years. But in a relative sense, we hope that the new 20 per cent target here in Australia will mean that we can increase the amount of capital we’re investing in Australia relative to South America, compared with the last five years.

That is yet to actually transpire because of the current soft REC prices, but we do expect the 20 per cent target to drive about $25 billion of new CAPEX into the sector over the next nine or 10 years in Australia.

GP:  When do you expect that to get going? You mention the low REC price. When do expect people to start making commitments to investments?

RG: Well, there are two issues, currently, that are delaying investment in the sector. The first is the sale of the NSW retailers. That is because they are currently uncontracted, or not contracted for their REC obligations. We know that once the privatisation is complete, either successfully or unsuccessfully, that backlog will quickly have to be met and they will have to enter contracts, REC contracts, to satisfy their obligations under the RET.

The second issue is that, in the short term, there’s currently a regulatory gap in the new law which means that there could be an oversupply of RECs again next year from a substantial amount of solar that’s being installed this year, but not being accredited until next year.

GP: So, people are still deferring decisions until that is resolved?

RG: Between those two, yeah. But look, the NSW retailers issue will be, hopefully, resolved within the next month. The bids are due in mid November. The NSW retailers had the largest obligation under the RET, so that will free up a large part of the market. And the short-term issue around the REC oversupply will wash out over the next six to 12 months.

GP:  Because at the moment it’s impossible to get PPAs, isn’t it? And are you hopeful that environment will change and that you’ll be able to get PPAs and be able to get bank funding on board?

RG: The PPAs or the REC contracts are an important component of the overall investment decision. Whether you need banks is sort of a secondary issue. Yes, you do need the funding for the lenders, but from an equity point of view which is, you know, the primary consideration, you need to know that the long-term sustainability of that REC price is going to be higher than it currently is. And whether you do it through a contract, or seeing the spot price stabilise at higher levels, it’s the main reason why it is the main issue that needs to be fixed before we start investing.

GP: And what about the attitude of bankers? You had quite a syndicate of banks in your Chilean project. Is there a different sort of view internationally from banks towards renewable energy projects than there is in Australia? And are those sorts of banks interested in coming here?

RG: I think we’ve been very fortunate to be able to attract debt and equity capital to all of our projects, both pre and during the GFC, and that is a clear indication to me that our industry, and Pacific Hydro and our projects are still well supported by the banks if they’re structured properly and if all of the policy drivers which drive revenue certainty are in place.

Now, the Australian banks are all keen to invest in renewable energy projects. There’s no shortage of interest at this end, but they do want the policy to drive behavioural change in the way that RECs are being contracted at the moment; and then change the prices. And I think once it happens we’ll see the banking industry very keen to start investing more in renewables.

They’ve got to move themselves away from their reliance on lending so much to thermal projects. They’ve obviously got a large part in their portfolios as a result of the legacy lending to the privatisation of the industry in the 1990s, but they do a lot to reduce that exposure over the next 10 or so years.

GP: And how important is a carbon price going to be in all of this?

RG: Well, a carbon price is important for Australia because it will begin the transformation of the economy – right across all sectors, not just electricity. Although, having said that, most of our emissions do come from electricity, so the biggest impact will be in our sector. Whether you’re investing in renewables, gas, or deciding what to do with an old coal-fired power station, you need to have that certainty – and that is really an issue for Australia.

Australia’s energy policy generally is, you know, what sort of capacity is being invested in now as we try to meet the increasing demand for new power that’s happening as a result of our economic growth? We’re going to see, the forecast is for a doubling of electricity demand over the next 30 years. That means over the next 10 years we’re going to have a 30 per cent increase in demand. Most of that will be able to be met from renewables and gas, but when you’re installing new gas, unless you have a carbon price, you don’t know whether to make an investment decision in open cycle which is less efficient, or combined cycle gas.

So, without the certainty on a carbon price, you’re getting inefficient decisions being made today in new capacity and you’re also not beginning the transformation of the economy to a much lower carbon footprint than we’ve currently got.

GP: It’s an interesting point, because in the energy industry it’s generally agreed that those decisions really had to be made by 2012, but it’s not entirely clear that we’ll actually have any certainty or an understanding of what our carbon price options are going to be, or how likely they are to be put into place. What are your concerns on this?

RG: Well, I mean, all investment decisions are long term. We have an ageing fleet of thermal generators in the Latrobe and Hunter Valleys and they will start to need to be retired within the next 10 years. And as we retire those large thermal generators, we’ve got to replace them with, probably, gas and a large proportion of renewables. And in order to make those decisions today that will allow us to keep the lights on in the medium term, we need a clear signal on a carbon price. And without that signal, we’ll end up with a lot of open cycle gas being deployed and that will be a higher cost way to reduce our emissions than if you had a carbon price today and you’re installing combined cycle gas. So, I think the lack of a carbon price in the short term is going to have a major impact on the long-term security of supply for electricity in Australia.

GP: What is the potential role for renewables? I mean how many renewables can we properly accommodate on our grid? What do you see as their potential over the medium-to-long-term? Can it go beyond the 20 per cent that’s targeted?

RG: Well, technically it can. One of our major markets in Latin America is Brazil and they have a grid which is around 80 per cent renewable, so it’s technically not a problem at all. The industry here believes we can meet the objective of having 20 per cent renewables by 2020 and we intend to deliver on that, but that would be, by no stretch, the limit of what we think is possible. You can have a majority of the energy coming from renewables without any technical problems or without any economic problems and that’s clearly demonstrated by what is happening in Brazil.

GP: I guess in Brazil, though, they presumably have a lot of hydro. How would Australia provide that sort of baseload capacity?

RG: They do have a large amount of hydro, that is true, and large baseload hydro. But once you’ve started to put the portfolio effect of wind together with your large-scale geothermal, which we have a lot of capacity for in Central Australia, then you start to look at the same sort of energy matrix as Brazil, but that is a long-term initiative. You’ve got to keep the lights on in the meantime and, you know, with so much gas in Australia as well, you know, we’re well placed to have a much lower carbon footprint from our industry over the long term than we have over the last fifty years.

GP: There’s been a fair amount of controversy in NSW – I know you’re not into selling rooftop solar, at least that I’m aware of, anyway – there’s been a lot of controversy about the dramatic change in the feed-in tariffs. I guess the issue from a renewable energy point of view here is just the sudden swings in policies. That can’t be a good thing for the industry.

RG: It’s not and it’s the subset of what’s been happening for the last 10 years in the industry and, you know, ultimately a carbon price will mitigate the need for so many standalone schemes. At the moment we’ve got, federal schemes, we’ve got state schemes, we’ve got, you know, market-based mechanisms. We’ve got capital subsidy mechanisms. And we need to, through a carbon price, reduce that level of regulation and confusion and that will ultimately lead to greater certainty. I think it’s probably about all I can say on the issue. I feel for the solar people who suffer these ups and downs on a regular basis.

GP: And what about the Pacific Hydro pipeline itself? Are you mostly focused on wind? Is that going to be your focus for the next, sort of, two, three to five years, or what other technologies will you be looking at?

RG: We are technology agnostic, to a large degree, and we believe that the majority of the eRET will be met from wind because of the fact that it’s a market-based mechanism that draws in the lowest cost technology to satisfy the need and therefore most of our new capacity in Australia will be wind. As you rightly imply, there’s not much new hydro here.

In the longer term, we’re very bullish on the prospects for conventional geothermal and the role that it can play in Australia, but it’s subject to resolving the transmission issues into Central Australia. And at a domestic level, we also believe that solar PV will have a role to play, but in a different sort of… well, in the sort of way that it’s currently doing through a separate scheme to the wholesale renewable target that’s in place.

GP: Ok, then. And if you had a wish-list at the moment to be ticked off, what would it include in terms of policy or pricing?

RG: I think it’s just a repeat of what I said earlier. We need a carbon pricing mechanism, which we believe should be an ETS, as the Garnaut Review quite clearly came out and said, and we need to recognise that Australia does have a very good comparative advantage in producing renewables, much in the same way that it does in minerals and agriculture.

And we believe that the creation of an emissions trading scheme here for us to create carbon credits and export them to the other emissions trading markets around the world is a great opportunity that’s currently being overlooked. So, we think that’s another reason why we should have an emissions trading scheme quickly locked down here in Australia.

And the third is, in the shorter-term, the NSW government making a decision on the retail sale in a short space of time, so the eRET market can get kicked off.

GP:  Rob. Thank you very much for that.

RG: Thanks very much.