Increased Strike Prices in Latest Tender
The most recent data from the NSW state government’s extensive renewable energy tenders reveals escalating costs within the global supply chain – a revelation that surprises few – though consumers will be insulated from any immediate financial impact.
Tender 4 Market Insights
Market insights from Tender 4, the third tender focusing on new wind and solar projects, indicate an elevated average “strike price” of $65/MWh.
This represents a substantial increase from the prices below $35/MWh for solar and below $50/MWh for wind achieved in the initial tender, and also exceeds the less than $55/MWh secured in the subsequent tender.
Projects in Earlier Tenders
The first tender encompassed projects like the partially complete 720 MW New England solar farm, the 400 MW Stubbo solar project, and the 275 MW Coppabella wind project. The second tender included the 350 MW Culcairn solar farm and the 400 MW Uungula wind project.
The latest tender comprised only two projects – the partially complete 140 MW Flyers Creek wind farm and the 172 MW Maryville solar project coupled with a 372 MWh battery project – falling short of the capacity sought.
Factors Behind Rising Costs
Industry insiders attribute this to escalating costs within both the global and local supply chains. Wind turbines, in particular, are experiencing cost hikes due to global supply constraints.
While solar module prices are at record lows, both technologies are grappling with higher labor and civil construction costs.
Understanding Strike Prices and LCOE
It’s crucial to note that the “strike prices” disclosed in the NSW tenders don’t directly reflect the actual cost of energy, known as the LCOE (levelized cost of energy).
Strike prices are not guaranteed payments but rather a form of underwriting agreement ensuring a minimum price over a 20-year period. This facilitates project financing for developers on favorable terms.
Complexity of Strike Price Assessment
Assessing the strike price is intricate, as some projects are nearing completion, and many developers may opt not to exercise the underwriting agreements (LTESAs) in the short term, anticipating higher wholesale prices.
The latest tender is further complicated by the inclusion of a project combining a large solar farm with a substantial battery storage component, essentially a hybrid facility made possible by new regulations streamlining such arrangements.
Balancing Battery Costs and Value
While battery prices are also at record lows, the integration of a battery project with the solar farm likely contributes to higher prices. However, this is offset by improved value due to increased dispatchability.
AEMO Services Market Briefing
AEMO Services explained in a market briefing note that the fixed price for the hybrid project is higher than historical solar-only projects due to the additional capital expenditure for storage.
The hybrid project is expected to be registered as a scheduled generator with AEMO, benefiting the electricity system by dispatching stored energy when solar resources are unavailable.
Benefits for NSW Electricity Consumers
The positive news for consumers is that these underwriting agreements are unlikely to result in significant bill increases. In most cases, developers may waive the LTESA in many years.
When in effect, LTESAs trigger payments only if wholesale prices drop considerably, which would actually be advantageous for consumers.
Clawback Mechanism for High Wholesale Prices
If wholesale prices surge, a “clawback” mechanism allows the state to recover some profits.
These mechanisms are gaining traction and have been employed in various forms, such as the NSW government’s deal with Origin regarding the Eraring coal generator and the federal government’s Capacity Investment Scheme (CIS).
CIS Tender and Future Outlook
The CIS is currently conducting its inaugural major tender, the largest ever in Australia, seeking six gigawatts of new capacity, including a minimum of 2.2 GW in NSW to replace retiring coal-fired generators.
The CIS is also instrumental in ensuring South Australia achieves its ambitious target of 100% net renewables by 2027.
AEMO Services on Awarding Underwriting Agreements
AEMO Services addressed concerns about awarding underwriting agreements to projects already under construction, such as New England and Flyers Creek.
The rationale is to prevent development stalls while project owners await tender results, thereby accelerating investments and accommodating projects at various stages of development.