Given the Rudd Government’s 2007 diplomatic triumph in signing the Kyoto Protocol (has there ever been such acclaim for someone who signed an agreement late?), the introduction of an increased Renewable Energy Target (RET), the proposed introduction of the Carbon Pollution Reduction Scheme (CPRS), and the stimulus for infrastructure investment, you would think the wind power generation industry – despite the global economic downturn – would be in for great times.

Yet there is a good chance you would be wrong. While the political consensus appears to have shifted to support the industry, other factors have prevented the expected proliferation of wind farms in Australia. The fact is that the construction of wind farms has been slow, and despite an increasing number of wind farm projects approved and/or under development, the prospects of many wind farms being built in the short term has dwindled.

This result will have the anti-wind farm forces gleefully reminding all that will listen that they were or are right. Yet this would be for the wrong reasons.

The nay-sayers are hardly unified, with opposition based on the silly – “They are more suited to the northern hemisphere than the southern hemisphere” with shrill rhetoric as to the prospect of a land covered with turbines (or at least the coast) – to the more reasoned economic and technical – as a power source wind farms are not base load; grid concerns; coal is cheaper; increased retail power prices.

The reality is that the anti-wind farm lobby has had little influence in this matter. Your average taxi driver accepts the science of climate change and the mainstream view is that in the quest for carbon emission reduction, cleaner forms of energy must be pursued.

So why the delay? While it ultimately all revolves around money – as practically every matter does – the explanation is more complex. When one considers the veritable vortex of forces against which the gallant wind farm developer fights, Don Quixote’s historic tilt looks quite rational – and probably more fun.

Consider these intertwined factors:

• Project finance
• Investor reluctance
• Power purchase agreements
• RECs
• Spoiled for choice
• New players
• Grid connection and capacity
• Wind turbine suppliers
• Government policy, legislative action/inaction.

Project finance

Project finance is tight. Although the banks have used the Federal Government’s guarantee with great effect to raise money, in doing so (particularly overseas - and we know they have been) this has not always been a cheap exercise for them.

Their margins having been squeezed and their profitability down, the banks are not lending – or at least not lending on the basis they have done in the past. After a period in the shade, the banks have stepped out. They seek greater influence on matters of turbine pricing, maintenance pricing, equipment warranties and contractual form. Ultimately, the banks want improved risk allocation; that is, greater risk for others.

Ordinarily the banks require a long term power purchase agreement (PPA). The fact PPAs of any kind are hard to obtain, as will be explained below, means that more than ever, finance for wind farms is hard to come by.

PPA difficulties are due in part to the current woeful market price for Renewable Energy Certificates (RECs); without an improvement in the REC price, the prospects of project finance are indeed grim for most projects.

The position is compounded for smaller developers by their lack of a sizeable balance sheet – against which banks take comfort in lending – and their struggle to compete with the much larger new comers.

The reluctance of wind turbine suppliers, fresh from a boom period, to reduce prices and take on greater risk also features as a challenge in procuring finance.

Finally, although the CPRS will have little immediate effect (assuming it becomes law), some financiers would like to see added certainty to their investment following the expiration of the RET. The CPRS is intended to be a driver of investment post RET (if not before), and it is expected that the ‘black price’ of power will enable viability in continued investment and operation for renewable power plant. It follows that the passing of the CPRS may assist.

Investor reluctance

The global economic downturn has no doubt had an effect, not least in the stemming of cash to and for developers to continue their projects. For foreign investors, there are ever more risks to deal with in Australian projects.

In short, combined with the other factors listed in this article, investor confidence has slackened.

Power purchase agreements (PPA)

PPAs – or electricity sales agreements – have been traditionally long term to enable wind farms to attract sufficient investment and finance. No PPA, no project. This still applies. Worse, PPAs are now even harder to get.

The continued southward fall of REC prices in the last months has not assisted here. While some projects have procured a PPA, these have been – whether rumoured or announced – for lower prices and for shorter periods.

The fact that two of the biggest electricity retailers have entered the wind farm development field has not assisted; this has a direct effect on PPA chances.

The challenge for developers is to be innovative in PPA models and discussions. What else can be offered to the retailers? How can risk and reward be shared?

These are obvious questions and challenges, yet they are not insurmountable. Developers are looking to concessions or improvements in other factors to assist, such as turbine model and terms for supply.

RECs

Once the driver of investment in new renewable generation plant, REC prices have quite simply taken a nosedive.

This RET device, intended to fund the difference between the cost of traditional power generation and renewables, is well short of the desired and necessary price.

Domestic and micro generation – and government policies and subsidies in this regard – have substantially contributed to this problem.

‘Phantom RECs’ – or RECs created by the small generation unit/PV multiplier under the RET – enable micro generation devices (such as solar panels on residential rooves, and solar hot water systems) to be deemed to have generated a megawatt-hour (and thus create a REC) when in fact these devices generate power well short of that level.

The purchase and aggregation of these RECs by traders and retailers has meant increased availability and supply of RECs to the detriment of large scale renewable plant developers and their investors.

Spoiled for choice

A few short years ago, a once stagnant policy framework stalled wind farm developments. Then, with political consensus on climate change (and to increase the RET), the Rudd Government’s election, Kyoto and eventual legislative action, wind farm development resumed with gusto.

Nationally, wind farm projects constituting thousands of potential megawatts in capacity are now under development. According to the Victorian Government’s Department of Primary Industries, in Victoria alone there is potentially around 5,000 MW of wind energy capacity at this time – existing wind farms included. Some 1,581 MW is already approved, 1,289 MW subject to approval and the balance pending application and approval.

Some 20 approved projects await construction in Victoria. It is difficult to say how many of these are “ready” to be financed and built, yet it is fair to say that quite a few of them are, or would be if a grid connection offer were received and accepted. Investors, banks and retailers have more project choices than before. Given retailers are not under pressure to commit to PPAs – and are certainly not obliged to enter into long term PPAs – and cheap RECs (and the ability to stockpile them), more project stock is in the system, creating more choice than ever. If suitable PPAs were available, the result would be different, as wind projects would be instantly more attractive as an investment.

This position is compounded by the dominance of the two biggest retailers in PPA offerings, which have also quietly and concurrently, increased their stake in wind farm development and renewable power generation. Declining retailer competition and PPA focus by developer-retailers on their own projects does not assist.

New players

Electricity generator and retailer Origin Energy acquired Wind Power Pty Ltd and its wind farm projects in May 2009. Previously a purchaser of projects, Origin’s entry as an active wind farm developer will have a significant effect (if not already).

AGL Energy has an increasing interest in wind energy and is now linked to a number of wind farm projects. It has been quietly building a profile as a renewable power generator, beyond its traditional coal base, and is now presenting as a renewables player.

These players – with big balance sheets and the ability to deliver PPAs to themselves – significantly impact on the ability of other developers to procure the construction and operation of their own wind farm projects.

AGL and Origin remain target customers for developers, yet are now also competitors with developers. Here lives competitive disadvantage for those seeking to commercialise their projects.

Additionally, there are recent and more sophisticated entrants to the wind farm development market. Union Fenosa, a Spanish-based global player in the power generation and development market, is an example. Chinese players are also showing interest in the development sector. Competition has increased, and with it, so too has the level to which projects are developed before sale. In the quest for sale, financing and construction, developers are going beyond the traditional stage of development approval. The ’package’ for sale may now include executed connection and turbine supply arrangements.

Yet an improved package may still not be enough to procure finance and construction. More sophisticated project offerings (and choice) may only serve to change the mix of projects on offer, nothing more.

Grid connection and capacity

Larger and completed wind farms have overcome grid-related technical issues. However smaller wind farm projects are often reliant on those larger projects for grid connection and this is not always an option for the smaller players.

Moreover, there are parts of the grid which simply do not have the capacity to facilitate more power generation plant, whether wind-powered or other.

This is a fundamental priority that although generally accepted in the generation and transmission sector, seems to be lost on both the government and private sector.

This is impacting on some wind farm developments and is a reason why some wind farms have not been built sooner.

Wind turbine suppliers

Wind turbine suppliers have experienced no less than a global dream run in recent years.

With full order books and recent booming international demand (until the downturn), suppliers have been able to heavily influence the terms on which their turbines are installed, warranted and sold, as well as demanding good prices. Many suppliers – but not all – shied away from engineering, procurement and construction (EPC) contracting, preferring the less risky supply and install approach.

This has now changed – or has it?

Despite investors and banks demanding reduced prices and a return to EPC contracting, international stimulus has been for the investment in renewable plant – as part of the path out of recession. Perhaps turbine supply is the joker in the pack.

Suppliers generally dislike EPC risk and prefer to be clear of responsibility for grid connection works. Longer warranties on plant are emerging as a new demand of project proponents and their financial backers. An impetus towards traditional performance security arrangements is expected, unattractive to suppliers who must shoulder the burden of significant early expenditure to meet project requirements.

These competing circumstances can only lead to friction. Although wind turbine suppliers are keen to achieve sales, it may be that Australian projects will not be a priority.

Government policy, legislative action/inaction

Despite an increased renewable energy target, a draft Carbon Pollution Reduction Scheme, state-based initiatives and much talk around climate change, it is arguable that Australia’s state and federal governments have engaged in more rhetoric than action.

Now and in the past, foreign governments have been far more proactive than the Australian variety, which has meant a higher level of renewable power plant installation overseas.

It may be time for a more proactive approach from government, if wind farms – and indeed other renewable plant – are to be built. Note the recent debate and angst regarding RECs and their low price. Even the conservative side of (Federal) politics is advocating intervention. Suggestions for action include the removal of the solar/PV multiplier and a floor price for RECs (or for wind-based RECs).

In response to industry representations, the Federal Government announced (on 26 February 2010) an Enhanced Renewable Energy Target Scheme, which seeks to resolve the negative effect of small-scale power generation technologies within the RET on REC prices and utility-scale generation projects. At the time of writing, the detail of proposed changes to the RET had not been released, save to say that a Small-scale Renewable Energy Scheme (SRES) is proposed to operate within the RET.

Whether the SRES is to be a fixed portion of the RET was not stated in the announcement. How REC prices will be affected needs be considered once details of the scheme are released. The Federal Government also stated there will be a Large-scale Renewable Energy Target (LRET) for larger projects, such as wind farms. Even less detail was provided here. Is LRET a fixed portion of the RET? Will SRES dominate the RET? Query whether the proposals (assuming they become law) deal with fundamental issues.

The solution?

If one had a renewable-powered fairy godmother the solution would, unfortunately, not be simple. Making the banks Share the Love (read money) at a price acceptable to project proponents may not be enough.

Similarly, casting a spell over power retailers to grant longterm PPAs will be insufficient in the absence of solid pricing for acceptable returns to all around the project table.

Government action – whether federal, state or both – would certainly assist. Despite the Federal Government being a lead advocate of the few proposed national emissions trading schemes around the world, the Federal Government is hardly proactive (or interventionist) in the renewable energy sector when compared to its European and United States counterparts (despite the RET announcement on 26 February 2010).

Investment in the grid – or incentives to do so – could also be a worthwhile exercise for governments.

Alas, much is to be done at one’s own hand if any progress is to be made in the short term.

Innovation may well be the saviour for many. Grid solutions can be found if there is a will for investment. It is possible to build, own and operate non-regulated transmission assets of certain size. Why not then, partner with a player to fund, design, build and operate such assets? This may enable connection, and also another revenue stream.

Similarly, as previous paths to PPAs seem fraught, innovative pricing and options on selling, further developing or linking wind farms internationally (if possible) may be a method toward success.

Usual partners and players – including wind-turbine suppliers – might be challenged to consider new ways of sharing risk and even participating in equity, whether for the short or long term.

So where to from here? It is not all gloomy. Wind power can generate not only electricity but a return for all concerned.

Technology and innovation can play a role. It’s just that like Don Quixote, current developers feel they are only tilting at windmills rather than building them, as the industry and market proceed through a state of difficulty, if not some considerable uncertainty.