Excellent piece of research by the team focusing on Australia\'s MRET scheme

1. 20-20 vision
Investment challenges and opportunities
arising from Australia’s 20% renewable
energy target

2. Contents
Foreword 1
Australia’s renewable energy market 2
Examining the investment drivers and barriers 5
Assessing the states’ investment environment 8
Ernst & Young Renewable Energy Attractiveness Indices 14
Supporting growth in the Cleantech industry 15
Glossary 16
III 20-20 vision

3. Foreword
The Rudd Government came to power with a commitment to double the market share of
renewable energy in Australia’s electricity supply from its current 10% to 20% by 2020.
Achieving this will require an unprecedented increase in Australia’s use of non-hydro
renewable energy technologies such as wind, biomass, geothermal and solar. Currently,
non-hydro renewables represent approximately 2% of Australia’s electricity needs. To
achieve the 20% target, more than half of all new electricity generation capacity installed
in Australia will need to be renewable.
The enlarged renewable energy target, in conjunction with the national emissions trading
regime (Carbon Pollution Reduction Scheme), and possibly other complementary
measures on the demand-side, are likely to herald a substantial restructuring of our
electricity and associated energy supply system. The system will need to accommodate
a more diverse mix of fuels and technologies across geographic locations that are quite
different to what has prevailed in the past. While this represents a substantial challenge,
it is also a significant investment and economic opportunity.
According to modelling undertaken on behalf of the Energy Supply Association of
Australia, achieving substantial greenhouse emission reductions by 2020, in the realm
of 10% below 2000 levels, will require $33 billion of new investment in electricity
generation capacity, of which $23 billion will be in renewable technologies.
To support this major change it will be important for the physical and regulatory features
of Australia’s electricity system and market to adapt. Those regions in Australia able
to create the right investment environment to support the development of renewable
energy projects are likely to capture substantial economic benefits and reduce the cost
of achieving renewable energy and carbon targets.
20-20 vision examines the issues across all Australian states that will influence
investment in large-scale renewable energy projects and achieving the 20% target. It
investigates the investment drivers and barriers, with a view to framing a constructive
discussion among industry and policy makers about creating a positive investment
environment for renewable energy projects. This is based on learnings we have
developed in supporting renewable energy projects in Australia and experience gained
from assessing the investment attractiveness of countries and regions across the world
through our Renewable Energy Attractiveness Indices.
We envisage this publication will stimulate further debate on how best to achieve
a smooth and cost-effective transition towards 20% by 2020 and we welcome any
comments you may have.
Dr Marc Newson
Partner, Oceania Cleantech Leader
November 2008
20-20 vision 1

4. Australia’s renewable
energy market
In reviewing the investment drivers and barriers for renewable
energy in Australia, we need to consider the factors that shape the
electricity markets and government policy.
The key factors that shape the overall • Constraints around eastern and
market for renewable energy are: southern interconnectors
1. Australia is not a single, seamless The eastern and southern states of
electricity market – there are a range Queensland (QLD), New South Wales
of differences in costs, regulations and (NSW), Victoria (VIC), Tasmania
infrastructure quality between states (TAS) and South Australia (SA) are
physically connected through several
2. The primary government driver for
major transmission interconnectors. All
renewable energy investment supports
operate under one market structure,
the lowest cost and most mature
the National Electricity Market (NEM),
renewable energy technologies (e.g.,
with one electricity market operator, the
wind, biomass and solar hot water)
National Electricity Market Management
in the states with the best quality
Company. However, the interconnectors
renewable resources and the highest
are constrained, hence trade between
electricity prices
regions is limited and electricity prices
3. Less mature technologies can take vary across the NEM. The states also
advantage of a range of state and have different operators of transmission
federal government grants, but tend and distribution infrastructure. Plus,
to play a minor role in the Renewable states continue to enforce a range
Energy Certificate (REC) market of their own regulatory structures,
which operate in addition to regulatory
Australia is not a seamless structures that are implemented by
electricity market the NEM. These differences can affect
a state’s attractiveness for renewable
During the past 15 years, Australia’s
energy projects.
national and state governments
have been moving towards a single, • Western Australia (WA) stands alone
national approach for electricity market The Western Australian Electricity Market
operation and regulation. However, (WEM) is not physically connected to the
this continues to be a work in progress other states. It operates under a different
and the ongoing transition reflects a regulatory regime and with a different
legacy of state government-owned and market operator, the Independent Market
operated electricity monopolies with Operator (IMO). This market is confined
limited links to other states. to a grid in the south-west of WA (the
South-West Interconnected System or
SWIS), with much of the state operating
on small isolated grids and stand-alone
power generators.
2 20-20 vision

5. Diagram 1: Renewable Energy Certificates created by
31 December 2007 by fuel/technology source
8,020,419
6,577,793
5,465,187
2,391,665
2,263,501
684,380 786,993
275,684
77,333 54,926 28 118,437 499 8,402 22,428
Source: Office of the Renewable Energy Regulator,
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The primary driver for into account). Thus, retailers have a These RECs can, and are, readily traded
renewable energy major financial incentive to comply with between producers, retailers and market
the scheme. intermediaries.
The federal government supports the
development of renewable energy Compliance with MRET is assessed As shown in Diagram 1, the primary
power plants through a single, national through retailers acquiring Renewable beneficiaries of the MRET (over the
mechanism: the Mandatory Renewable Energy Certificates (RECs) and period 2001-2007) were hydro, wind and
Energy Target (MRET). This mechanism surrendering these to the government solar hot water.
is essential to the financial viability of regulator. One REC is created for
renewable energy projects in Australia. every MWh of electricity generated by
accredited renewable energy generators,
The MRET obligates electricity retailers to
or deemed to be produced or offset by
obtain a target amount of megawatt hours
small-scale renewables, such as solar
(MWh) of electricity from renewable
photovoltaic (PV) and solar hot water.
energy. For every MWh of renewable
The value of RECs creates a premium
electricity they are short from their
above the underlying revenue from
mandated target, retailers face a penalty
electricity generation, allowing renewable
of $40 (grossed-up to $57 once the
energy projects to be financially viable.
non-tax deductible treatment is taken
20-20 vision 3

6. Diagram 2: REC spot price, based on Australian Financial
Markets Association average bid/offer
$/Rec
60
Previous Fed gov’t
announces increase
50
in target
Federal election
– start of the decline
Reality of election sinks in
– desperate sellers
40 Election of new
Fed gov't with
20% target
30
20 Oversupply continues State gov’ts announce
because housing regulations their own targets
support solar hot water sales
Source: Carbon Market Economics (and
Ernst & Young analysis), Monthly REC Review,
10 July 2008, page 22
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MRET (e.g., wind, hydro, biomass and solar hot However, projects using these
The MRET was initially set at reaching water) in the states with the: technologies can take advantage of several
9,500 GWh by 2010, which would be federal and state government grants.
• Best-quality renewable resources that
held constant until 2020. The federal For example, solar PV receives a federal
maximise the electrical output for a
government has committed to increase government means-tested rebate capped
given installed capacity, and
this target to reach 45,000 GWh by 2020, at $8,000 per system as well as funding
• Highest electricity prices, which reduce for installations in schools. There is also
but it has not yet disclosed the targets
the revenue that is required from RECs in the potential for grants of up to 50% of
for the years in between now and 2020.
order for a project to be financially viable the capital cost in off-grid or fringe-of-grid
The government plans to legislate for this
expanded target by early 2009. Diagram 2 illustrates how prices for RECs applications. And, in some states, solar
have changed over time. The volatility PV receives a feed-in premium tariff for
it shows is largely due to government electricity generation (the government
The market for RECs
regulatory uncertainty and change, coupled sets a price that retailers must pay for
Unlike electricity markets, there are no solar generated electricity that is above
with the illiquid nature of the market, due to
constraints to trading between state market rates for conventional electricity).
its small size and number of buyers.
boundaries in RECs. A national market
exists, with one price prevailing across In 2008 the federal government allocated
Australia, and retailers seek to obtain
Other government support for $500 million – over seven years - to
the lowest cost RECs that are available renewable energy a Renewable Energy Fund to support
nationally. This means the scheme tends to The MRET provides limited support for less pre-commercial renewable energy
primarily support investment in the lowest mature renewable energy technologies, technologies and projects.
cost renewable energy technologies such as solar PV, wave, and solar thermal
electricity plants.
4 20-20 vision

7. Examining the investment
drivers and barriers
Key determinants of investment in large Assessing the projects For example, WA has some of the highest
contributing to the 20% target quality renewable energy resources
scale renewable energy projects:
available in the country and also high
This paper identifies the investment
• Quality of renewable energy overall electricity prices, yet it has
drivers important to large-scale renewable
resources (wind speeds, temperature not been a substantial beneficiary of
energy technologies such as wind,
of underground heat sources, solar the initial 9,500 GWh MRET. Industry
biomass and geothermal projects, which
irradiance, biomass supply) feedback indicates this was because the
are expected to make the bulk of the
• Price of underlying electricity previous electricity market regulatory
contribution towards the 20% renewable
environment prevented a wind farm from
• Grid infrastructure and connection energy target. It is heavily focussed on
being established unless the operator
issues wind power because, at present, this
could exactly balance the wind farm’s
represents the most financially viable
• Size of the underlying electricity output with a customer’s demand. In
technology in the near-term under
market and its future growth prospects 2006 substantial regulatory reforms were
the current government regulatory
• Electricity market regulatory implemented and as a result we can expect
framework. Other technologies, such as
environment and market access more investment in WA in the future.
solar PV, will have a different balance of
• Ease, speed and cost of planning drivers shaping their uptake. Another barrier to investment can be seen
process including extent of in the Gippsland region of VIC, where the
From our experience in supporting the
community support quality of the wind resource is excellent,
development of large-scale renewable
yet strong community opposition has
• Availability of state government energy projects, the two most important
inhibited the establishment of wind farms
financial and in-kind support factors determining where projects are
in that region.
likely to be built are the:
1. Quality of the renewable Quality of renewable energy
energy resource resources
2. Price of underlying electricity Renewable energy power projects have
significant upfront capital costs with low
Unless both these elements perform
to very low operating costs. Therefore, a
strongly, investment is unlikely to be
critical element for commercial viability is
viable. There are also other drivers that
maximising the amount of output from a
can undermine investment opportunities.
given amount of megawatts of capacity.
This is primarily dependent on the quality or
intensity of the available renewable energy
resource being exploited (refer to Table 1).
Table 1: Quality of renewable energy resources
Energy type Factors affecting output
Wind Wind speed in metres per second
Geothermal Temperature of the heat bearing rocks
Biogas Flow rate of methane available over the period of the year from
a given source of biomass
Conventional Tonnage, purity and energy content of the biomass available at
combustion a given site and the security of its availability over the period of
biomass the year (this can have seasonal characteristics)
20-20 vision 5

8. For example, if annual mean wind speed geothermal regions is non-existent) and
falls from eight to seven metres per cannot support generator output beyond a
second, this reduces the available wind certain level without expensive upgrades.
energy by one third. Similarly, year-round If a renewable energy plant’s output is
versus seasonal biomass can reduce expected to exceed the capacity of grid
capacity factors from 60-70% to 30-40%. infrastructure then it is likely to have its
output curtailed, effectively reducing its
Price of underlying electricity capacity factor and negatively impacting
Between 40-60% of renewable energy its financial attractiveness.
project’s revenue comes from the As a general rule, electricity generators
electricity they produce, with the do not pay system charges for use
remainder largely delivered from RECs.1 of transmission grid infrastructure
Given electricity prices between states can capacity under the Australian regulatory
differ by more than 25%, this is a critical framework, even though this is a service
determinant for the relative investment of value to generators. Generators need
attractiveness of different states. only pay for infrastructure required to
In evaluating the attractiveness of get a connection to transmission lines,
electricity prices, we need to look beyond with all costs associated with the existing
a single year’s performance. Electricity infrastructure paid for by end-consumers.2
prices can be subject to exceptional However, if a generator wishes to set-
once-off events that are unlikely to be up away from existing transmission
sustained. Thus, this paper is based on a infrastructure, or where the capacity
mix of information surrounding electricity of this transmission is insufficient to
prices, including not only historical market support the amount of the generator’s
data but also estimates of new entrant output, this general rule no longer applies.
costs. We have also considered recent Generators typically find the cost of paying
increases in fuel costs for gas and coal in for substantial additional transmission
some states. infrastructure makes their project
uncompetitive against other existing
Grid infrastructure and generators, that do not have to pay for use
connection issues of transmission capacity.
Grid infrastructure capacity is essential Building transmission infrastructure is a
for renewable energy plants to deliver highly capital intensive, complex and time
their output to major sources of electricity consuming undertaking with multiple
demand. In a number of states across beneficiaries. For example, upgrading
Australia where there are high quality the transmission line from Perth-to-
renewable energy resources, the capacity Geraldton from 132 kV to 330 kV over
available on the existing grid is small 400 kilometres is projected to cost around
(or in the case of highly prospective
1 RECs can be considerably different for landfill gas projects which gain significant revenue from NSW Greenhouse
Gas Abatement Certificates. These abatement certificates will be phased out in 2010 with the introduction of
the national emissions trading regime (Carbon Pollution Reduction Scheme).
2 Australian electricity market regulations specify strict rules that electricity grid infrastructure management
control must be separated from management control of generators to avoid owners of grid infrastructure from
using this as a tool to restrict competition to the advantage of their own generation assets.
6 20-20 vision

9. $300 million 3, which is well beyond the In some states, demand can reach low • Application costs
scope of any individual or a collection of levels of 1,000 MW to 1,500 MW for • The extent of documentation and
renewable energy project developers. some periods of the year. To ensure power studies required
Moreover, this transmission infrastructure quality and reliability, the grid will require
will provide benefits to not only wind farm a minimum level of generation online from • Availability of appeal mechanisms
developers, but also electricity consumers controllable power sources such as gas and • Who can object to a project and their
across the WEM and via economic hydro. This further reduces the available degree of influence over decisions
development opportunities in the mid-west demand for renewable generators.
States and regions within states, often
WA region.
Potential investors need to consider the differ in terms of the degree of local
Upgrading the capacity of grid extent to which a market can absorb new community receptiveness to renewable
infrastructure tends to be prohibitive for capacity without materially depressing energy projects. While high-wind areas of
renewable energy project developers, prices. The lower a market’s electricity SA, north of Adelaide, have encountered
acting as a major constraint on the demand and growth, the more likely a strong local community support,
number of renewable energy projects given amount of new power plant capacity renewable energy developers have found
that a state can support. This can counter will depress electricity prices. the Gippsland area of VIC very challenging.
a state’s high performance in other
These issues can impact on the time,
renewable energy investment drivers. Electricity market regulatory resources and risk associated with
environment and access attempting to develop a renewable energy
Size of the underlying electricity Electricity market design, ease of project, several years before any revnue
market and its growth prospects market entry, regulations and market can be expected.
The bigger the electricity market and concentration can profoundly affect the
the higher its growth, the more new attractiveness of a state for developing State government financial and
power plant capacity it can support renewable energy projects. in-kind support
without depressing electricity prices and
Over the past few years there has been State governments have a wide array of
encountering constraints in demand.
a concerted effort to reform electricity programs to support the development of
To ensure power quality and reliability, markets in both the NEM and WEM, renewable energy.
electricity output needs to precisely match to improve competition and avoid
Some provide direct financial support,
electricity demand at all times. If demand discrimination against new entrants and
while others reduce barriers and costs by
is not available a generator cannot store particular technology types. Nonetheless,
providing free information or supporting
their electricity output for use at a later some states’ markets continue to have
research and feasibility studies. These
time and must curtail its output. This unique features that inhibit access to
schemes are largely focussed on small-
is an important issue for many types of the market by renewable energy project
scale renewables or small pre-commercial
renewable generation (as well as coal and developers, or tend to favour incumbents.
renewable energy projects. Hence, they
nuclear power plants) whose economics
are relatively inconsequential to the
depend on maximising output at all times. Planning processes and financial attractiveness of major renewable
These plants have considerable fixed costs community support energy projects.
with very low operating costs and limited
Planning laws and processes can differ
ability to control the timing of their output. In addition to these programs, a few states
substantially between states and between
Renewable energy generators therefore could benefit from past efforts in initiating
local governments. Features that can
have a strong financial incentive to avoid mandated renewable energy target
vary include:
markets where there is a reasonable schemes. While these state schemes will
probability that demand will reach low • Whether the approval is handled by local now be wrapped up into a single federal
levels that require to be curtailed. government or state government government initiative, they have helped to
improve and sustain investor confidence.
3 Source: Western Power, Submission to the Economic Regulation Authority, Pre-Approval of New Facilities Investment,
330kV Transmission Line and Associated Works in the Mid-West Region of Western Australia, 9 April 2008
20-20 vision 7

10. Assessing the states’
investment environment
Western Australia (WA) – the next to renewable energy generators receiving
boom state for renewable energy higher returns for their underlying
electricity than in other states.
Positives
Investment in upgraded grid capacity
WA has several key elements that make it While WEM’s grid infrastructure
the most attractive state for investment in faces some capacity constraints in
large-scale renewable energy projects in the medium-term, there has been a
the short-term: willingness to support additional capacity
• Excellent wind resources along upgrades where required. Specifically, a
the south-west coastline near commitment to upgrade the transmission
population centres line from Perth-to-Geraldton from 132 kV
to 330kV will provide a substantial boost
• A reasonably good biomass for wind farm development along this high-
resource base wind area of the state.
• High electricity prices due to higher
cost fossil-fuel generation than in the Challenges
NEM states Some potential barriers to investment in
• Recent commitments to invest in WA include:
upgraded grid capacity • Complex market structure unfamiliar to
Excellent wind resources many of the major Australian renewable
Sizable areas of WA’s south west have energy developers
average wind speeds above 8 metres per
• Relatively small and isolated market,
second. This enables the recently built
although countered to some extent by
wind farms, Walkaway and Emu Downs,
its high-level of growth
to achieve capacity factors in the region
of 40%. • A market that has only recently
been liberalised and is still highly
Good biomass resources
concentrated
WA also has several biomass power plants
Complex and unfamiliar market structure
under development, including the 40 MW
WA’s electricity market has two separate
Bridgetown Plant, which is well advanced
markets, one for electrical energy and
with a purchase agreement in place with
another for power plant capacity. Beyond
electricity retailer, Synergy.
being paid for electricity generation,
Attractive electricity prices generators receive a separate payment
The state rates highly because its for simply having plant capacity available
underlying economics for conventional — whether this capacity is used or not
fossil-fuel electricity generation are (referred to as ’capacity credits’). These
substantially higher than in the NEM. capacity credits represent a substantial
Since 2006, the short-term market for proportion of the overall market’s value
electrical energy in the WEM has averaged with payments of $127,500 per MW.
around $40-$50 per MWh. In particular, Wind farm operators receive less capacity
gas prices in the state have increased credits per MW of installed capacity than
substantially over the past two years, conventional generators due to their
due to gas suppliers having access to the output being subject to wind conditions
international market via Liquified Natural which can not be controlled.
Gas (LNG) facilities. This, in conjunction
with higher cost coal generation, translates
8 20-20 vision

11. Diagram 3: Western Australian Electricity Market load duration
curve April 2007 to March 2008
Megawatts
4000
3500
3000
2500
2000
1500
1000
Source: Independent Market Operator of Western
Australia, 2008 Statement of Opportunities
500
Report, July 2008, page 15
0
20% 40% 60% 80% 100%
Duration of the year
Small, isolated but rapidly growing market grid operator to manage. This made it
Another constraint is the WEM is an island impossible for renewables businesses
grid and has a relatively small electricity to establish their own projects without
market. Its annual consumption is 17,000 involving other parties with pre-existing
GWh. As illustrated in Diagram 3, demand thermal power plants.
levels fall below 1,500 MW for around 20%
Market liberalisation has now considerably
of the year, restricting the amount of wind
improved access for new renewable
that can be absorbed without curtailment.
energy market entrants. However, legacy
However, current wind penetration levels
issues remain for project developers
are low at 190 MW, within the SWIS. The
and the market continues to operate
electricity demand is expected to grow by
primarily through bilateral contracts,
40% over the next decade, reaching over
rather than a transparent open pool
24,000 GWh per annum in 2017-18.
market. While WA has an open pool
Market only recently liberalised and still market, the Short-Term Energy Market
highly concentrated (STEM), it is limited to small volumes
Previously, investment in wind farm of electricity traded at the margin of the
projects in WA has been inhibited by bilateral contracts. This leaves a small
the market as it has only recently been and relatively illiquid market available for
opened-up and liberalised. In 2006, the new entrant renewable energy generators
government owned generator, Verve, held to sell their output into, if they can not
90% market share. This is expected to fall obtain a power purchase contract with an
to around 60% by 2009/10. Prior to 2006, existing electricity retailer. Moreover, high
generators were obligated to balance concentration in the retail market limits
their output with their own customers’ the choices available to generators in
demand rather than leaving this to the contracting their output.
20-20 vision 9

12. Victoria (VIC) – the all-round VIC to advanced stages. The state also By contrast, VIC faces less immediate
quality performer elected to modify the design of its scheme constraints. According to the VIC
compared to the federal MRET to improve transmission planner, Vencorp, “with
Positives the degree of support it provided to new the appropriate technical solutions, wind
In spite of a history of low electricity renewable power projects. Now that power generation of approximately 3,000
prices, VIC is likely to be the long-term the federal government has agreed to MW installed capacity (and possibly up to
winner out of the enlarged MRET. Behind significantly expand the national MRET to 4,000 MW depending on where generation
this positive outlook are the following 45,000 GWh, Victorian project developers is located) can be accommodated by the
characteristics: are ready to exploit the opportunity. Victorian transmission network.” 4
• The most active state government in In addition, the state government has Challenges
supporting renewable energy demonstrated a willingness to provide
additional funding for innovative To date, VIC’s biggest barrier to
• An open, liberalised electricity market investment has been its very low
renewable energy projects. For example,
regulatory regime electricity prices and to a lesser extent, the
Solar Systems received $50 million for its
• Good-quality grid infrastructure near 154 MW solar concentrating photovoltaic difficult planning approval environment.
high-quality wind resources project in the north-west of the state. Low electricity prices
While the state has not received as much Large underlying electricity market While VIC’s electricity prices are low, the
investment in new renewables capacity VIC’s electricity market is as large as upcoming emissions trading regime should
over the past few years (compared to SA), SA, WA and TAS combined and has the provide greater uplift in power prices
we expect this is about to dramatically best transmission grid infrastructure because of its higher emissions intensity,
change. While only 134 MW of wind power in Australia, including high-capacity compared to the rest of Australia. VIC
is operational, VIC has approximately interconnectors to other states. This emits 1.3 tonnes CO2-e per MWh, which is
2,000 MW under construction or provides VIC with a major advantage over up to 30% higher than in other states.
development. The enlarged MRET will the other high-wind states. In WA, SA Planning approval challenges
enable a significant amount of it to and TAS, wind output will exceed demand VIC can significantly improve its planning
become operational. and transmission capacity levels when approval process, which currently takes
High-quality wind resources wind installed capacity reaches around significantly longer than other states and
Although not as strong as SA, WA or TAS, 1,000-1,500 MW. This is not an absolute can involve considerable expense and
VIC has a high-quality wind resource, technical limit on wind, but it will start to resources. Some areas of the state have
with large areas achieving wind speeds of impact on the financial returns because also faced challenging public opposition,
around eight metres per second. output is constrained below the levels which has not been as great an issue in
available from prevailing winds. other states.
Supportive state government
The VIC government was the first to
implement its own mandated renewable
energy target, at a time when the previous
federal 9,500 GWh MRET target was fully
subscribed and this will prove to be critical
in attracting strong future prospects.
While the development of renewable
projects in other states stalled, developers
have continued to progress projects in
4 Source: Vencorp, Capacity of the Victorian Electricity Transmission Network to Integrate Wind Power,
December 2007.
10 20-20 vision

13. New South Wales (NSW) – Supportive state government Tasmania (TAS) –
about to bloom The NSW government rates ahead the mighty minnow
of all states, except VIC’s, in terms of
Positives renewables support. NSW was an early Positives
The relatively unexploited nature of the adopter with its own renewable energy TAS has the best wind resources in
wind resource in NSW, coupled with its target scheme. In addition, the state Australia and also some of the highest
large electricity market and available government was the first in the world to electricity prices, which, in spite of its
transmission capacity, make the state introduce a legally mandated emissions small size, makes it one of the better
the next frontier for renewable energy trading scheme, the Greenhouse Gas places for renewable energy projects in the
project investment. Abatement Scheme, which has provided short-term.
significant financial benefits to landfill gas
Under-developed, good-quality renewable World-class renewable energy resources
power plants. Even though these schemes
energy resources TAS is in the middle of some of the
are expected to be folded into a federal
While NSW lacks the quality of wind windiest areas on the planet, with its west-
scheme, they will have ongoing effects
resource possessed by some of the coast facing straight into the southern
through enhanced investment confidence
southern states, it is still comparable with hemisphere’s trade winds (the Roaring
and industry capacity in the state’s clean
many European countries that lead the Forties). Government-sponsored studies
energy sector.
world with their wind power capacity. indicate significant areas with wind speeds
Wind developers have managed to find Challenges above eight metres per second. The
a range of good quality sites around the Woolnorth Wind Farm, on the north-west
Electricity prices low but expected
Great Dividing Range. Although only one coast, achieved capacity factors of around
to improve
of these has proceeded to construction 40% for 2005 and 2006.
NSW’s electricity prices have been
to date, it is expected that many will
depressed over the past few years, In addition, TAS has plans for substantial
become commercially attractive under
due to considerable excess baseload biomass power plants that utilise wood
the enlarged MRET regime. In addition,
capacity. However, rising coal prices, the waste residues.
NSW’s large agricultural and forestry areas
introduction of emissions trading and
provide substantial bioenergy resources Challenges
increasing construction costs for new
that may become commercially attractive
fossil-fuel plants means this will be less The greatest constraint to long-term
once thermal power plant construction
of an impediment in the future. investment in TAS is its relatively small
costs subside from current inflated levels.
Uncertain planning processes and higher electricity demand. Also, the market
Biggest market with minimal constraints application costs has recently undergone micro-economic
NSW is the biggest electricity market NSW could improve its planning regime, reform and is still heavily concentrated,
in Australia with an annual electricity which involves greater application costs with one dominant government-owned
consumption of approximately 75,000 compared to other states and this can generator and one dominant government-
GWh. The high-level of demand and very present a barrier to less established owned retailer.
low non-hydro renewables penetration developers. While the regime is less
levels indicates there is room for several Small electricity market but room for growth
onerous than VIC’s, but some projects in capacity
thousand megawatts of new renewables have encountered difficulties even after
capacity before curtailment might be For most of the year electricity demand
ministerial approval has been granted. is not much more than 1,000 MW, with
necessary. While there may be benefits
from strategic upgrades in transmission current annual electricity consumption
infrastructure in some areas (e.g., the at 11,000 GWh and forecast to grow to
1,000 MW wind farm proposed for Broken 12,600 GWh by 2017.
Hill would exceed transmission capacity) However, there is still room for growth
this is not a significant issue for wind farm in renewable energy capacity before
development over the next few years. the market becomes constrained.
The current wind installed capacity is
20-20 vision 11

14. 139.75 MW and further wind farms that Queensland (QLD) – Industry uncertainty and higher costs
are under consideration include: the surrounding bagasse
unfulfilled potential
138 MW Musselroe project, in the north– Investment in bagasse power projects has
east; and another 360 MW in Robbins Positives been inhibited by fluctuations in global
Island and Jims Plains in the north-west. sugar prices and concerns surrounding
QLD has two primary positive attributes:
Even if all these projects proceed in the sugar industry’s on-going viability.
full, wind would still represent a readily • Very good-quality biomass energy The sugar industry has been subject to
manageable 16 % market share. resources primarily flowing from its volatile and record low prices in the past
substantial sugar industry seven years, combined with encroaching
Considering the availability of 500 MW residential developments and tree
• A large and growing electricity market
(600 MW short-term) export to the VIC plantations onto land previously utilised
market via Basslink, and a large amount High-quality biomass resources
for sugar cane. This has made sugar mills
of highly flexible hydro generation, it The state’s sugar industry provides a
reluctant to make substantial capital
is conceivable that TAS could support considerable base of biomass waste
investments required to upgrade their
further capacity beyond that already material (bagasse) that could support
power plant equipment. In addition, the
under active consideration. several thousand GWh of generation.
cost of construction and equipment for
Analysis commissioned by the federal
Furthermore, TAS’ hydro electric system, the steam-turbine power plants used for
government prior to the start of MRET in
which provides the majority of its bagasse has increased significantly.
2001, suggested QLD’s bagasse resource
electricity, is suffering from a long-term would produce around half of all RECs Absence of wind farm development
decline in water inflows caused by climate created under the scheme. Wind mapping exercises indicate that
change. This may provide scope for QLD has some high quality wind sites in
further growth in generation from other Growing electricity market
selected locations. Thus far interest from
renewable sources. QLD’s electricity market is about to
developers has been limited because
overtake VIC as the country’s second
Barriers to entry other states often have better quality and
largest and is expected to grow much
Perhaps the key question mark for TAS is better understood resources. While the
faster than VIC or NSW over the next
its openness to new entrant generators. 500 MW Coopers Gap Wind Farm proposal
decade. There is little, if any, prospect
Joining the NEM in May 2005 was an is a positive sign, QLD is missing from the
that a new renewable energy plant could
important economic reform that should radar screen of most wind farm developers.
encounter demand constraints, unlike
assist private sector investment. To date states such as SA and WA. Low electricity prices
no business other than the incumbent The QLD market has substantial excess
government-owned generator has Challenges generating capacity and high-quality,
developed a major renewable energy low-cost black coal deposits, leading
Unfortunately, while QLD’s renewable
project in the state. to low prices for electricity generators.
energy resources and sizable electricity
market could support new projects, While prices were quite high over the past
current market conditions are not two years, this is considered a transitory
conducive to this investment in the near phenomenon caused by withdrawing
term. This is due to: significant coal plant capacity due to water
supply rationing as a result of the drought.
• Industry uncertainty and higher costs Also, the emergence of substantial coal-
surrounding bagasse seam methane reserves means it now
• Absence of substantial wind farm has some of the lowest cost gas-fired
development activity electricity generation in the country.
• Low long-term electricity price
fundamentals
12 20-20 vision

15. South Australia (SA) – the king electricity demand. While other states are SA’s electricity consumption is relatively
about to lose its crown also thought to possess substantial deep small at around 14,000 GWh for 2008.
geothermal resources, the vast majority Demand is below 1,500 MW for about half
Positives of the exploration and drilling activity has the year and reaches as low as 1,000 MW
SA has captured the lion’s share of new been concentrated in South Australia. for 2% of the year. Also current projections
renewables investment during the past Good electricity prices
suggest only moderate growth, reaching
seven years since MRET commenced, SA has consistently averaged the highest 15,500 GWh by 2017.
moving from near zero renewables in electricity prices in the NEM since its In December 2007, SA had 780 MW
its electricity supply to 17%. In many inception. These higher prices have been of wind power operational or under
respects, it serves as the MRET success sustained due to a lack of access to low- construction, which is expected to
story and beacon of what’s possible for the cost, high-quality coal resources that exist generate around 2,450 GWh per annum.
rest of Australia. SA has been attractive in VIC, NSW and QLD. Thus, the 780 MW of wind already
for investment in the past largely due to operational and committed has the
A straightforward planning regime
good-quality wind resource and higher potential to reach quite high penetration
Feedback from industry indicates
underlying electricity prices than the levels when low demand levels coincide
wind farm developers have found SA’s
rest of the NEM, plus a reasonably with high wind speeds.
planning approval process reasonably
straightforward planning approval
straightforward. Many high-wind regions Interconnectors to VIC can support a
environment. Looking forward, it also has
of SA are long-term farming communities further 520 MW of export, which will
a rich geothermal resource.
that look favourably on the idea of provide further room for growth. However
High-quality wind resource exploiting a natural resource, welcoming this low-level of demand, in conjunction
SA has large, sparsely populated regions the jobs and leasehold income flowing with relatively weak transmission
of the state exposed to high average from wind farms. infrastructure across many of the best
wind speeds exceeding eight metres per
wind regions of the state, will inhibit
second. According to the South Australian Challenges
the development of wind projects. As
Electricity Supply Industry Planning SA faces two fundamental and inter- wind capacity grows beyond 780 MW,
Council, wind farms being built in that related issues that pose near-term a project’s output is more likely to be
state will achieve outputs three times constraints on its ongoing attractiveness constrained off.
higher than is common in Europe. SA had for renewable energy investment:
more than 300 MW of wind operational While SA has vast geothermal resources,
as at December 2007 and 480 MW under • It is a small electricity market and one most of the development is in the
construction, which is expected to become which is growing slowly remote north-east of the state, around
operational over 2008 and 2009. This • Its transmission infrastructure is already 500 kilometres from major electricity
adds up to a total of 780 MW – equal to encountering capacity constraints in transmission infrastructure. To achieve
around half of all wind power capacity some areas the hundreds of megawatts planned by
installed or under construction around geothermal developers, SA will need
In addition, and partly in response to several hundred million dollars investment
the country. 5
these issues, SA has applied unique in transmission infrastructure.
A promising geothermal resource requirements on operating wind farms
SA also possesses a vast geothermal which increase costs. Additional regulatory requirements for
resource (at three-kilometre plus wind farms
Capacity, demand and infrastructure Regulatory authorities in SA have been
underground), with some of the
constraints
hottest rocks on earth outside volcanic conservative in their approach to granting
While SA has excellent wind resources wind farm generation licences. This has led
regions. The energy contained within
and a large, untapped geothermal to extended delays and additional costly
the geothermal resource in the Cooper
resource, it requires increased operational requirements for SA wind
Basin is estimated at more than 70
transmission infrastructure capacity farms that do not apply in other states.
times Australia’s entire current annual
to be properly exploited.
5 Source: Electricity Supply Industry Planning Council, Planning Council Wind Report to ESCOSA, April 2005.
20-20 vision 13

16. Ernst & Young Renewable
Energy Attractiveness Indices
To help investors compare the global investment environment for renewable energy,
Ernst & Young publishes:
• The Renewable Energy Country • The United States Renewable Energy
Attractiveness Indices – evaluating Attractiveness Indices – evaluating 50
25 countries across the globe states across the US
Download the Country attractiveness Download the United States Renewable
indices 2008 - Q1 & Q2 2008 Energy Attractiveness Indices Q4 2007
(pdf, 1.3mb) (pdf, 216kb)
Alternatively, the global Indices Alternatively, the US Indices
publication can be downloaded from publication can be downloaded from
www.ey.com/renewables www.ey.com/us/utilities
Building on these two publications, an Australian Renewable Energy Attractiveness
Indices publication will be released, which will rate the states across Australia in terms
of their attractiveness for investment in a number of renewable energy technologies
beyond large-scale renewables.
14 20-20 vision

17. Supporting growth in the
Cleantech industry
Ernst & Young supports state and federal governments in improving the environment
for investment in clean technologies and new renewable energy capacity.
In addition, if you are developing a renewable energy project in Australia or
considering other investments into technologies relating to energy efficiency, waste
management, water and other environmental improvements, we can help to assess
project viability, obtain finance and negotiate with market players.
As well as traditional services in accounting and tax, we can also assist you with:
• renewable energy project finance • advisory relating to carbon market
• financial modelling and valuations instruments such as Renewable
Energy Certificates, Energy
• investment due diligence
Efficiency Credit Certificates, and
• mergers and acquisitions the forthcoming Carbon Pollution
• market entry strategy Reduction Scheme.
• government concessions and grants
Contacts
Jon Dobell Dr Marc Newson
Oceania Managing Partner, Partner,
Strategic Growth Markets and Oceania Cleantech Leader
Entrepreneur of the Year Tel: +61 2 9248 5659
Tel: +61 2 8295 6949 marc.newson@au.ey.com
jon.dobell@au.ey.com
Tristan Edis
Associate Director,
Cleantech and carbon markets
Tel: +61 3 9288 8026
tristan.edis@au.ey.com
20-20 vision 15

18. Glossary
CO2-e Carbon Dioxide equivalent
GWh gigawatt hours
IMO Independent Market Operator
kW kilowatt
kWh kilowatt hour
LNG Liquified Natural Gas
MW megawatt
MWh megawatt hour
MRET Mandatory Renewable Energy Target
NEM National Electricity Market
NEMMCO National Electricity Market Management Company
REC Renewable Energy Certificates
solar PV solar photovoltaic
STEM Short-Term Energy Market
SWIS South-West Interconnected System
WEM Western Australian Electricity Market
16 20-20 vision

19. 20-20 Vision Investment challanges and opportunities

20. Ernst & Young
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About Ernst & Young
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