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Australia Carbon Tax Rekindles Wind Momentum

01 Feb

Key Takeaway: effective July 1 2012, the new scheme will impose a fixed carbon tax of A$23/ton on the country’s top 500 polluters, which will then be supplanted by a market-based cap and trade mechanism from July 2015 onward.

Australia’s parliament recently enacted landmark Clean Energy Act legislation designed to set a price on carbon emissions.

Australia boasts the most emissions-intensive developed economy, but sources less than 10% of electricity generation from renewables.

The legislation favors wind investments above all, as wind offers the most direct path to carbon abatement in Australia’s power sector.

To date, Renewable Energy Certificate (REC) oversupply, low wholesale power prices, and carbon pricing uncertainty have constrained substantive RE adoption. Over the next several years, however, the government anticipates a 50% escalation in wholesale electricity prices (to A$45/MWh) and up to a 60% rebound in REC prices (to A$55−65/MWh).

Coupled with the carbon tax value (equivalent to roughly A$23/MWh), this will move renewable ventures into a more profitable realm. The Clean Energy Act also calls for an A$10 billion fund to facilitate utility-scale RE project execution from 2013–2014 onward. These combined elements strengthen the business case for RE investment.

Proposed Carbon Tax

  • To start on 1 July 2012
  • 500 companies affected
  • Agriculture, forestry and land are exempt
  • Compensation for polluters
  • Market-based trading scheme kicks in from 2015
  • Target to cut 159m tonnes of CO2 by 2020
  • That said, low power purchase agreement prices (falling below A$100/MWh) have recently frozen wind pipelines of leading IPPs (i.e. Acciona, Infigen). While utilities/retailers are currently better-positioned to capture Australian wind market share, few are able or willing to leverage balance sheet financing.

    These trends suggest that prior to a REC price rebound and Clean Energy Fund disbursement (2013-2014), balance sheet/joint financing should drive most investment.

    Industry Overview: Following roughly a decade of debate, on 7 November 2011, Australia’s parliament enacted landmark Clean Energy Act legislation designed to set a price on carbon emissions. Effective 1 July 2012, the new scheme will impose a fixed carbon tax of A$23/ton on the country’s top 500 polluters, which will then be supplanted by a market-based cap and trade mechanism from July 2015 onward.

    Read BBC Report

    Australia boasts the most emissions-intensive developed economy, but sources less than 10% of electricity generation from renewables. In an effort to shift investment away from coal, its new carbon tax will implicate power generators (producing over 25,000 tons of carbon per year), with an initial priceper-ton set nearly three times above EU levels. The country’s renewable energy targets previously implicated electricity retailers alone. Under present conditions, such legislation will see Australia join both the EU and New Zealand in endorsing national emissions trading programs in the near term.

    This legislation favors wind investments above all, as wind offers the most direct path to carbon abatement in Australia’s power sector. The country’s installed wind base exceeded solar fivefold by yearend 2011 (2.5 GW vs. <500 MW) and yields up to 15% higher average capacity factors.

    E E R  I N S I G H T S

    Rising power generation costs, targeted subsidies to bolster RE project economics. To date, Renewable Energy Certificate (REC) oversupply, low wholesale power prices, and carbon pricing uncertainty have constrained substantive RE adoption. Over the next several years, however, the government anticipates a 50% escalation in wholesale electricity prices (to A$45/MWh) and up to a 60% rebound in REC prices (to A$55−65/MWh).

    Coupled with the carbon tax value (equivalent to roughly A$23/MWh), this will move renewable ventures into a more profitable realm. The Clean Energy Act also calls for an A$10 billion fund to facilitate utility-scale RE project execution from 2013–2014 onward. These combined elements strengthen the business case for RE investment.

    Select PPAs denote sustainable wind role. Of note is the Origin Energy−Acciona contract inked in November 2011, covering the 46.5 MW Gunning wind farm. This constitutes Origin’s first power purchase agreement (PPA) in three years, signaling an uptick in negotiations between retailers and wind developers/IPPs. Under this agreement, Acciona will deliver Large-scale Generation Certificates (LGCs) for two years, followed by power and LGCs for eight years. This deal appears, however, as an opportunistic move by Origin, with sub-optimal terms for Acciona. Having already satisfied its retail obligations through 2014 (via A$550 million in REC purchases in FY2010-2011), the project (operational, with 42% capacity factor) embodies a low-risk, predictable investment for Origin. Looking toward REC price normalization post-2013, demand for wind PPAs should increase exponentially.

    Near-term wind deal flow likely driven by wellcapitalized players. Low PPA prices (falling below A$100/MWh) have recently frozen wind pipelines of leading IPPs (i.e. Acciona, Infigen). While utilities/retailers are currently better-positioned to capture Australian wind market share, few are able or willing to leverage balance sheet financing. Hydro Tasmania is unique in launching its A$400 million Musselroe project (168 MW) entirely on balance sheet in December 2011 (on hold since April). This was partially enabled by equity investment in its 139.75 MW Woolnorth wind farm by China’s Guohua New Energy Investment Co. (Guohua) last month, as well as Guohua’s interest in a Musselroe stake. Prior to a REC price rebound and Clean Energy Fund disbursement (2013-2014), balance sheet/joint financing should drive most investment.

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