I INTRODUCTION

Renewable energy projects in Australia range from solar, wind, biomass and hydro to tidal waste to energy, and geothermal. There has been an increasing uptake of hybrid projects, such as solar battery, solar diesel and solar wind projects, to mitigate intermittent renewable generation issues.

Significant renewable projects in Australia are usually developed under an engineering, procurement and construction (EPC) model. An EPC model involves a principal engaging a contractor to design, build and deliver the asset in an operational state. Once commissioning is complete, the project is transferred to either debt or equity investors or the entity taking the electricity generated by the project.

Factors affecting the bankability of a renewable energy project generally include securing an offtaker (i.e., a purchaser of the electricity) or access to the electricity market to sell electricity; procuring access to the electricity network if the project is grid-connected; whether the project involves proven or new technology; the experience and creditworthiness of the parties involved, including the EPC contractor; whether government grants or funding is available; the availability of renewable incentives such as renewable energy certificates; and a stable long-term energy policy.

II THE YEAR IN REVIEW

The past year has seen remarkable growth in the renewable energy industry in Australia. The Clean Energy Council has reported that investment in large-scale clean energy projects doubled to more than A$20 billion in 2018 as 38 projects were completed throughout the year.2 According to Green Energy Markets, renewable energy represented a 20.9 per cent market share of Australia's main east and west coast grid power supplies over January 2019, achieving a share of 21.3 per cent across the combination of Australia's main east and west coast grids. This was a significant increase from 2017's share of 17 per cent.3 It appears that this growth pattern is set to continue, with the Green Energy Markets indicating that more than 3000MW (DC) of utility-scale projects will be commissioned in 2019; however, the level of utility-scale solar photovoltaic (PV) installations is expected to fall in 2020 once the mandated Renewable Energy Target (RET) has been met.4

The increase in solar penetration and intermittent renewable technologies has heightened concerns about energy security and reliability. This is particularly as a result of the widespread blackouts in South Australia during 2017. Renewable technologies in the form of battery storage have been used as a mechanism to combat reliability issues.5 The landmark Tesla lithium battery installed in South Australia has already been used successfully to respond to power failures. It was reported that the battery delivered 100MW into the national energy grid in 140 milliseconds following a power plant trip in Victoria.6 The project has reduced costs associated with stabilising the energy grid by nearly A$40 million.7

Other major renewable energy initiatives have been developed over the past year across other states in Australia. In Western Australian, Synergy, Cbus Super and the Dutch Infrastructure Fund established a renewable energy fund known as Bright Energy Investments (BEI). BEI will finance the A$500 million Warradarge Wind Farm, along with the expansion of Greenough River Solar Farm (which was Australia's first large solar project when built) and the refurbishment of the Albany Grasmere Wind Farm.8

One of Australia's largest wind farms is the Golden Plains Wind Farm in Victoria, with a development cost of A$1.7 billion. Hybrid renewable projects have also been on the rise, with the Queensland government approving the development of the A$1.5 billion Clarke Creek Wind and Solar Farm project, which includes wind, solar and an energy storage facility.

Pumped hydro is also becoming part of the energy mix, as is evident from the proposed expansion of the Snowy Mountains hydro scheme. The proposed expansion would result in the biggest 'battery' in the southern hemisphere and is another good example of the measures being taken to combat the intermittency of renewable energy sources.9

Hydrogen has also the potential to play a pivotal role in the future of renewable energy in Australia. Australia's Chief Scientist, Alan Finkel, recently presented a proposal for a national hydrogen strategy indicating Australia has the capacity to build an export industry worth A$1.7 billion. One of the major drivers for the hydrogen market is expected to be hydrogen-powered fuel cell electric vehicles in densely populated areas. The creation of a Renewable Energy Council in Western Australia is evidence of current opportunities and efforts to transition to a renewable hydrogen future.

The rapid growth in renewable energy projects in Australia has been attributed to the RET, which is expected to be met before it expires in 2020.10 It was proposed that the RET be replaced by the National Energy Guarantee (NEG). However, the NEG was abandoned by the federal government in 2018.

The recently re-elected Coalition government has proposed a Climate Solutions Package, which is the central emissions reduction policy and includes measures such as a climate-solutions fund. The Package is reported to cost A$3.5 billion over 15 years. The Coalition has also committed to emissions reductions in line with the Paris targets.

III THE POLICY AND REGULATORY FRAMEWORK

i The policy background

Australia's RET aims to ensure that by 2020 at least 33,000GWh (or 23.5 per cent) of Australia's total electricity is generated from renewable sources. The RET is an Australian federal government policy that has operated since 2001.11 Various state and territory governments of the Commonwealth of Australia have also implemented their own renewable energy targets.

On 4 April 2019, the Clean Energy Regulator released the 2018 Renewable Energy Target Annual Statement, which confirmed that the Large-scale Renewable Energy Target (LRET) of 33,000GWh will be achieved and is likely to be exceeded by 2020.

The RET is made up of two schemes – the LRET and the Small-scale Renewable Energy Scheme (SRES). The LRET encourages investment in renewable power stations through financial incentives in the form of tradable certificates; the SRES encourages small users to instal small-scale systems. Australian states and territories have also incentivised the uptake of small-scale solar generators by providing feed-in-tariffs.

It is expected that the LRET will deliver the majority of the RET.12 The price of renewable energy generation is becoming increasingly more cost-effective. Additionally, investment in large-scale solar projects has been assisted by the Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation, pushing the prices of these projects down to almost half of what they were.13 For example, in 2015, ARENA committed A$20.90 million in funding for the DeGrussa solar project in Western Australia, which has a total project value of A$39.47 million.14

The Coalition's recently announced Climate Solutions Package builds on existing policies and success in meeting Australia's Kyoto commitments. The existing Emissions Reductions Fund has received further funding and there is significant funding for the Snowy 2.0 giant pumped hydro battery and energy-efficiency and electric-vehicle strategies.

ii The regulatory framework

Network access and market dynamics

The largest electricity market in Australia is the National Electricity Market (NEM), which operates in all states and territories other than Western Australia and the Northern Territory. The NEM is operated by the Australian Energy Market Operator (AEMO), in accordance with the National Electricity Law and the National Electricity Rules.

The NEM includes a 'gross pool' market for electricity, where all transmission-connected generation is dispatched in each five-minute period based on the results of a security and transmission-constrained auction. The auction sets a marginal price for each five-minute period, it has a price cap of A$14,200/MWh, and is adjusted annually for inflation.15 Generation facilities can connect to the network in the NEM on a 'constrained-access' basis – that is, the total amount of generation capacity is not restricted to network capacity, but only the cheapest set of generators are dispatched to meet system requirements.

In the NEM, most renewable generators are considered to be 'semi-scheduled'. These facilities can normally generate unconstrained; however, the AEMO can direct them to operate below certain output limits in certain situations (for example, for system security).

In Western Australia, the Wholesale Electricity Market (WEM) is operated by the AEMO in accordance with the Wholesale Electricity Market Rules and WEM market procedures. The WEM is a gross pool electricity market that includes a mechanism to pay for capacity by low electricity price caps, and a hybrid constrained–unconstrained network access model. A constrained network access model is currently being considered by the Western Australian government.16 The constrained network access model being proposed for the WEM is similar to the model currently used in the NEM.

Western Australia's mechanism to ensure reliability and security of supply, through which scheduled generators and non-scheduled generators (such as wind and solar) can provide capacity when required, is called the Reserve Capacity Mechanism. The Public Utilities Office (PUO) in Western Australia has completed a review on improvements to the Reserve Capacity Mechanism pricing arrangements in the WEM and the suitability of implementing an auction to determine capacity prices and other alternative pricing arrangements. As a result, the PUO has prepared draft amendments to the WEM Rules to incorporate its final recommendations; these changes have yet to be implemented.

RET

The RET is administered by the Clean Energy Regulator (CER) in accordance with the Renewable Energy (Electricity) Act 2000 (Cth) and the Renewable Energy (Electricity) Regulations 2001 (Cth). The CER is Australia's independent statutory authority, established in 2012 by the Clean Energy Regulator Act 2011 (Cth).

The RET operates as a market for tradable certificates for each megawatt of electricity generated from renewable sources. Tradable certificates are created and issued through the REC Registry, which is administered by the CER. 'Liable entities' (electricity retailers and some large users) must source those certificates from persons that generate power from renewable sources to meet their own renewable energy obligations, and then surrender those certificates to the CER in certain percentages (determined under the Renewable Energy (Electricity) Regulations) to meet annual targets for the RET.

The CER also validates tradable certificates and makes recommendations about tradable certificate requirements.

Approvals for renewable energy projects

There are many regulatory approvals required for renewable energy projects, including planning and environmental approval. The type and timing of approval processes will vary from state to state, depending on the scale and type of project. Applications for funding from ARENA typically take 60 days to negotiate (after an initial expression-of-interest phase) and require the applicant to satisfy the relevant merit criteria to a high standard. Project proponents may also be confronted with environmental-noise and visual-impact assessments.

IV RENEWABLE ENERGY PROJECT DEVELOPMENT

i Project finance transaction structures

Current trends in project financing of renewable energy projects in Australia have seen the emergence of the use of 'project' or 'green energy' bonds. Australia's green bond market has doubled in size since 2015, with the big four domestic banks, and international development banks, being the major issuers of bonds.17 Going forward, increased diversity of issuers is predicted as local governments and councils have shown interest in these types of bonds.18 In fact, the Victorian government in 2016 was the first government in Australia to use green bonds.19 Bonds are seen as an attractive method to finance renewable projects given that they are considerably cheaper than financing or refinancing through traditional project finance.20

In terms of bank lending, currently international lenders are very active in the Australian renewables market, as there is an aversion to long maturity loan funding by Australian lenders.21 However, there is some evidence that this trend may be changing with the landmark financing of three large solar farms by Wirsol Energy and Edify Energy in 2017. In this transaction, the Commonwealth Bank of Australia funded a 19-year term loan, the first time a domestic Australian bank has lent to a renewable energy project on such a long-term basis.22 In common with other transactions of this nature, it used a combination of debt finance in conjunction with a grant from the Australian government's Clean Energy Finance Corporation.23

An alternative financing arrangement for renewable projects that is starting to appear is the establishment of 'energy funds'. AGL, and now Synergy, have set up energy funds in partnership with institutional investors. The funds provide the opportunity for investors to finance a portfolio of renewable assets, which diversifies risk and reduces cost. It also reduces the amount of equity that energy providers are required to invest in new projects, as well as assisting the energy providers in meeting their 2020 renewable energy commitments. The arrangement is usually set up so that ownership in the renewable energy certificates generated by the project remains with the energy provider.

Australia also has a market for trading renewable energy certificates between financial institutions, brokers, traders, registered agents and electricity retailers. The highest demand for large-scale certificates comes from electricity retailers who are required to meet Australia's renewable energy target.24 Small-scale system owners and registered agents also have the option to sell small-scale technology certificates through the clearing house or to the electricity provider.25

ii Distributed and residential renewable energy

Australia has the highest penetration of rooftop solar of any country in the world,26 with New South Wales leading the states with concurrent solar and battery installations. By the end of 2018, cumulative installed capacity for PV systems was at 7,982MW, with more than 2 million installations across the nation. This is an increase from 6,580MW and 1.82 million installations at the same time in 2017, indicating the continued strong growth in solar.27

The ownership structure of solar and battery products varies. The Clean Energy Finance Corporation has provided funding for a major retailer to offer power purchase agreements to customers. The arrangement provides that the retailer owns, instals and maintains the systems, giving eligible residential and business customers the opportunity to buy any electricity generated from those systems at a price that is forecast to be lower than the average retail electricity tariff.28 The benefit of this approach is that residential customers avoid paying the upfront costs of installation while still enjoying a lower cost of energy.

In addition to the customer-ownership model, leasing is an alternative arrangement that is offered in Australia to customers. Solar companies design, instal, own, operate and maintain the solar and battery systems and then lease the systems to the customers. The benefit of this approach to customers is that the monthly lease payments are less than the normal monthly power bill.29

Financial institutions have also partnered with the Clean Energy Finance Corporation to provide discounts when financing renewable technologies. For example, Macquarie Leasing currently provides discounted financing for electric vehicles,30 while Westpac also currently offers its customers a discount on renewable energy solutions. Finance options can be in the form of a finance lease, commercial loan or commercial hire purchase agreement.31

iii Blockchain technologies and smart contracts

While not yet commonplace, and with some regulatory hurdles to be overcome, blockchain technologies are emerging in the energy and renewables space. Power Ledger has created a peer-to-peer energy trading application envisaged to be for the benefit of producers and consumers. Its technology aims to enable the sale of surplus renewable energy generated at residential and commercial developments. Power Ledger has most recently partnered with a US-based clean energy company to bring its trading platform to North America.32 From a finance perspective, Australian banks are beginning to invest in blockchain technologies and the Australian Securities Exchange is exploring the viability of applying distributed ledger technology to current clearing and settlement systems.33

The Australian government passed the Anti-Money Laundering and Counter Terrorism Financing Amendment Act 2017 to regulate digital currencies. The purpose of the Act is to ensure that currency exchange platforms are regulated to mitigate against money laundering and terrorism financing risks.34 However, these regulations only extend to participants who exchange digital currencies for money and would not currently appear to extend to the use of blockchain technologies limited to trading in renewable energy products. Other regulatory issues with the technology relate to attributing liability in a decentralised network,35 protection of personal data and privacy issues,36 as well as data security.37

V RENEWABLE ENERGY MANUFACTURING

On a world scale, Australia has a very small renewable energy manufacturing sector.

The manufacture of renewable energy products in Australia is limited to a number of isolated projects and no major renewable energy manufacturing industries exist in the country. Presumably this is due to Australia's relatively high income levels and high energy prices, making manufacturing of such products more suited to other countries with lower input costs.

The majority of Australia's renewable energy 'manufacturing' relates to the development and commercialisation of intellectual property. This is arguably driven by the lack of subsidies available in Australia for renewable energy manufacturing, as well as the Australian government's apparent priority of investing in emerging renewable energy technologies and grants or tax incentives for companies that invest in research and development. For example, the Australian government is responsible for:

  1. the A$2 billion ARENA, a statutory authority charged with co-investing in projects that improve the competitiveness of renewable energy technologies and increase the supply of renewable energy in Australia; and
  2. the Commonwealth Scientific and Industrial Research Organisation's 'Low Emissions Technology Roadmap', which identifies the opportunities for Australia to be part of the future global energy supply chain.

Australia, and Western Australia in particular, is experiencing strong demand for its lithium mineral reserves because of the increase in lithium-ion batteries (used in electric vehicles and other large battery storage). Australia has the third-largest lithium resources in the world (approximately 16 per cent);38 is home to the world's largest and highest-grade spodumene deposit;39 and produced around half of the world's lithium in 2018.40 A number of lithium processing plants are currently being built in Western Australia and the Western Australian government recently announced a task force to explore the potential for Western Australia to also leverage its significant nickel, cobalt, manganese, graphite and copper resources to expand into more of the battery supply chain.41

Australia has free trade agreements with a number of overseas jurisdictions and does not impose any specific tariffs on renewable energy equipment from its trading partners.

VI CONCLUSIONS AND OUTLOOK

We expect that the strong investment in wind and solar projects will continue in the year ahead, although there is uncertainty around the policy framework post-RET, as the NEG is no longer part of the renewable energy conversation. It remains to be seen whether the recently re-elected Coalition government will provide a solid framework on this issue.

We also expect there to be increased investment (including from government-funded organisations) in projects addressing the intermittency caused by renewable generation and demand-profile issues caused by household rooftop solar.

Batteries and electric vehicles are likely to become increasingly more affordable and will play a role in shaping the energy future for consumers.


Footnotes

1 Simon Adams is a partner and Jo Garland is a special counsel at HFW.

5 Harmsen, Nick, 'Tesla's big battery a shining light for SA but storms leave neighbours in the dark', ABC New http://www.abc.net.au/news/2017-12-01/tesla-giant-battery-officially-launched-in-sa/9215318

6 Kimmorley, Sarah, '“That's a record”: Elon Musk's Tesla battery in South Australia responded in just 140 milliseconds after a coal-fired power plant failed' https://www.businessinsider.com.au/elon-musks-
tesla-battery-south-australia-responded-in-record-time-2017-12

8 Gifford, Jonathan 'Cbus Super, Dutch Infrastructure Fund to hold 80.1% in Synergy renewable portfolio' https://www.pv-magazine-australia.com/2018/04/10/cbus-super-dutch-infrastructure-fund-to-hold-
80-1-in-synergy-renewable-portfolio/

9 In the Black, 'Renewable energy gets set to outsmart coal' < https://www.intheblack.com/articles/2018/
03/01/renewable-energy-storage>.

10 Clean Energy Council, 'Reflecting on a record year for renewables' https://www.cleanenergycouncil.org.au/news/2018/February/reflecting-record-year-renewables.html

11 In 2015, the Renewable Energy Target was reviewed and was scaled down from the previously legislated amount of 41,000GWh to the current 33,000GWh.

12 Tomaras, Juli, Parliamentary Library Briefing Book – Key Issues for the 45th Parliament, 'Renewable energy policy: retreat, renewal and revitalisation?', 128 http://parlinfo.aph.gov.au/parlInfo/download/library/prspub/4787355/upload_binary/4787355.pdf;fileType=application/pdf. Clean Energy Regulator, 'How the scheme works' http://www.cleanenergyregulator.gov.au/RET/About-the-Renewable-Energy-Target/How-the-scheme-works

13 See footnote 5 above.

14 Australian Government, Australian Renewable Energy Agency, 'DeGrussa Solar Project' https://arena.gov.au/projects/degrussa-solar-project/

16 Government of Western Australia, Department of Treasury, 'Industry reforms: Electricity sector reform initiatives' https://www.treasury.wa.gov.au/Public-Utilities-Office/Industry-Reform/

17 Oliver Yates, Clean Energy Finance Corporation, 'Australia's budding Green Bond Markethttps://www.cefc.com.au/media/feature-articles/files/australias-budding-green-bond-market.aspx

18 ibid.

19 Victoria Government, 'Victorian Green Bonds an Australian and World First' (media release, 20 July 2016) https://www.premier.vic.gov.au/victorian-green-bonds-an-australian-and-world-first/

20 World Business Council for Sustainable Development, 'Pathways to scale finance for renewable energy' (11 November 2016), 13 https://www.wbcsd.org/Programs/Climate-and-Energy/Climate/Resources/Pathways-to-scale-finance-for-renewable-energy

21 Edify Energy Pty Limited and WeleeAustralia Pty Ltd, 'Whitsunday Solar Farm –Knowledge Sharing Report – Securing Project Financing' (October 2017), 11 http://edifyenergy.com/wp/wp-content/uploads/2017/11/ARENA-Knowledge-sharing-report-Securing-project-finance.pdf

22 ibid., 7.

23 ibid.

24 Australian Government, Clean Energy Regulator, 'Renewable Energy Target – Tracking Towards 2020: Encouraging renewable energy in Australia' (30 March 2017), 22 http://www.cleanenergyregulator.gov.au/
About/Accountability-and-reporting/administrative-reports/tracking-towards-2020-encouraging-
renewable-energy-in-australia

25 ibid., 18.

26 International Energy Agency, 'Renewable Energy: Medium-Term Market Report 2016' (2016), 144 https://www.iea.org/publications/freepublications/publication/MTRMR2016.pdf

28 Clean Energy Finance Corporation, 'CEFC makes solar more accessible for households, businesses' (fact sheet, July 2015) https://www.cefc.com.au/media/107381/cefc-factsheet_origin_lr.pdf

30 Macquarie Group Limited, Macquarie Leasing, 'Energy Efficient Finance'https://www.macquarie.com/au/business-banking/loans-asset-finance/technology-vehicles-and-equipment/

31 Westpac Banking Corporation, 'Westpac supports businesses, CleanTech with energy efficiency financing' https://www.westpac.com.au/about-westpac/media/media-releases/2016/17-May/

32 Power Ledger, 'Power Ledger Partners with Clean Energy Blockchain Network to Bring Distributed Renewable Energy Trading to North America' (press release, 7 February 2018) https://www.powerledger.io/article/power-ledger-partners-with-clean-energy-blockchain-network-to-bring-distributed-renewable-
energy-trading-to-north-america

33 Tranter Wilson, Alice, 'Cracking the code: bringing initial coin offerings and decentralised autonomous organizations within the Australian corporate law framework' (2018), 34(1) Australian Banking & Finance Law Bulletin, 14, 15 < http://lexisweb.lexisnexis.com.au/JournalOverview.aspx?id=201834BLB00100002_00005>.

34 Cheung, Ka-Chi, 'Blockchain: enforcement and regulations' (2018), 20(10) Internet Law Bulletin, 178, 180 http://lexisweb.lexisnexis.com.au/JournalOverview.aspx?id=201820INTLB01000178_00001

35 Tranter Wilson, Alice, 'Cracking the code: bringing initial coin offerings and decentralised autonomous organizations within the Australian corporate law framework' (2018), 34(1) Australian Banking &
Finance Law Bulletin
, 14, 15 http://lexisweb.lexisnexis.com.au/JournalOverview.aspx?id=201834BLB00100002_00005

36 Cheung, Ka-Chi, 'Blockchain: enforcement and regulations' (2018), 20(10) Internet Law Bulletin, 178, 179 http://lexisweb.lexisnexis.com.au/JournalOverview.aspx?id=201820INTLB01000178_00001

37 Tranter Wilson, Alice, 'Cracking the code: bringing initial coin offerings and decentralised autonomous organizations within the Australian corporate law framework' (2018), 34(1) Australian Banking &
Finance Law Bulletin
, 14, 15 http://lexisweb.lexisnexis.com.au/JournalOverview.aspx?id=201834BLB00100002_00005

39 In Greenbushes, Western Australia, approximately 250km south of Perth http://www.ga.gov.au/data-pubs/data-and-publications-search/publications/aimr/lithium