The federal government's $1.5 billion Solar Flagships program faces delays, with neither winning consortium likely to meet the mid-December deadline for locking down finance.

Both the $1.2 billion Solar Dawn project, which proposes to build a 250MW solar thermal facility in Queensland, and the $923 million Moree Solar Project, which plans a 150MW solar PV facility in the north of NSW, are having difficulty striking power purchase agreements (PPAs). While both are still hoping to meet the December 15 deadline, this is highly unlikely and it is understood they have won approval from the Department of Resources, Energy and Tourism for an extension.

The progress of the Solar Flagships projects is being keenly watched – both in the context of these projects, and for the rollout of large-scale solar in Australia, which continues to drag behind Spain, the US, the Middle East and north Africa, to the disbelief of international energy companies. The success of these projects also have deep implications for the prospects of a second round of funding in the flagships program, the structure of the Clean Energy Finance Corporation, and the political rhetoric around clean energy, which has become nearly as divisive in Australia and the US as the often confected polemic around climate science.

The delay in financing is not unexpected. The scale of what the two projects are attempting to achieve in this market, already a difficult one for finance, and for PPAs, is extraordinary. They are seeking finance for the two largest renewable energy projects, using technologies that have never been seen at anything approaching this scale. Not only do they need to convince utilities to sign a PPA, something they have been reluctant to do with cheaper wind, they need innovative deals that reflect the value of the energy being provided during the daytime peaks - (say $130-160/MWh, as opposed to $100/MWh for wind) and then need to convince bankers to accept the technology risk.

These were the types of problems anticipated when then Prime Minister Kevin Rudd first announced in 2009, in an act of political vanity, that he wanted to build two large-scale projects of this size, without first taking smaller steps. The government's decision to put all its eggs into one basket has been lamented by the industry, who fear the deployment of large-scale solar is at risk of being retarded, rather than advanced, by the grandiose scale of the venture. And some still wonder why the government did not go with the lower risk option of choosing a technology that is already being rolled out at this scale overseas. These issues are likely to be rectified in round two of the Flagships, where it is now agreed that half a dozen smaller projects should be selected, but there is concern that delays in round one, and budget constraints, could mean that round two would never materialise, and its funds are absorbed into the proposed CEFC.

There are several scenarios being discussed in the solar industry as to what may happen if financing agreements cannot be closed on the current terms – and the losing bidders are keeping their project plans alive, just in case. These include two ventures between First Solar and TRUenergy and AGL, an Infigen/Suntech venture, and in the solar thermal space, the Solar Flare project including Siemens, Parsons Brinckerhoff and John Holland.

The more likely scenario, if financing cannot be sealed, is for the ambition of the projects to be scaled back. In the case of the Moree project – backed by BP Solar, Spanish developer Fotowatio and Australia’s Pacific Hydro – this would be easily achievable. Indeed, its original intention was to roll out the facility progressively, with 20-30MW by 2013 and the rest by 2015. (Read this to be reminded of how BP Solar viewed the funding challenge at the time of the project win). The government may consider applying some of the funding flexibility it has recently granted the Geodynamics geothermal project, allowing it to accelerate the draw-down of some funds for the first stage of the project, and reduce the amount accessible for the second stage.

The Solar Dawn project may also be scaleable, given that it comprises two separate units of 125MW each. But it is also fighting against a global trend that has seen solar thermal projects, even those approved, dumped in favour of solar PV, simply on the basis of cost. Only those solar thermal projects accompanied by storage are going ahead at this scale, because the ability to better match demand load profiles means the value of their output can rise by as much as 50 per cent. In effect, these facilities are acting as peaking plants, a role previously reserved for gas.

Solar Dawn has no storage option (although it does have a gas boosting option, but it is not clear whether this is designed to lift the temperature of the steam to boost efficiency, or to offer a lift over troughs in output). Solar Dawn has been trying to strike a PPA with Ergon Energy, but it would require that utility to sign the largest ever such deal, and it may not be clear how it fits into their portfolio. Still, Solar Dawn does have the advantage of a deep pocketed backer in Areva, the French nuclear giant – which could accept the project risk itself and plough ahead on a merchant basis, as some wind farm developers have been prepared to do.

Of course, some suggest that a delay may suit a government that will find it tough to balance the budget. It has promised $465 million to the Solar Dawn project and $306 million to Moree. (The NSW and Queensland governments are also pitching in funds). Both the Labor government and their coalition predecessors have a history of announcing grants for clean energy projects (often more than once), and then spending little or nothing. Indeed, Labor has little in the way of large projects to show for its policies of the last four years, which is exactly why the CEFC was proposed, to replace the non-commercial nature of the grants system and take the choice of picking winners away from ministers and bureaucrats, and into the hands of markets and financiers.

But if Federal Labor leaders want to be photographed in front of a large-scale solar facility to decorate their Clean Energy Future pitch during the next election campaign, they will either have to catch a plane to visit the WA (conservative) government-sponsored 10MW facility at Geraldton, or cozy up to the chief minister of the ACT, which is much more likely to have projects up and running by 2013.

Next week, the ACT’s proposed large-scale feed-in tariff will be debated in the legislative assembly and, if passed, will likely see several projects amounting to 40MW built in coming years. The ACT government has been quite shrewd in the structure of its tariff. Rather than setting an arbitrary number, it requires a competitive bid from developers, and is structuring it in a way that the cost exposure is capped, and may even be reduced, depending on the performance of the facilities.

Some analysts say this should be the model for such developments on the national scale. Because it is a competitive bid, the winning projects will inevitably be solar PV rather than solar thermal, because of their current cost advantage. At least two projects will be selected, but it is likely there will be a handful, with individual project sizes ranging from 3MW to 15MW.

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