Regulatory uncertainty and the state’s role in energy generation and market structure are hindering private investment opportunities in the sector.
THE state government’s inability to define its role in the energy market is stifling private investment in infrastructure and power generation, according to industry players – from both conventional and alternative energy camps – at a recent WA Business News boardroom forum.
Five years after the disaggregation of Western Power and the opening of Western Australia’s wholesale electricity market, uncertainty surrounding the retention of the current market structure and its associated regulatory risk continues to dampen the prospects for private investors, the forum heard.
Economic Regulation Authority chairman Lyndon Rowe said it was his understanding that the government was supposed to be out of the marketplace.
“It seems to me the government has currently got confused about its role as either a regulator in the interest of consumers, or whether it is a shareholder.”
Emphasising his primary concern for the consumer, Mr Rowe stressed the importance of retail contestability as a foundational goal that should drive market structure.
“We still have a significant market power issue in the marketplace, we have two big gorillas in the market place and those issues need to be resolved,” he said, referring to Synergy and Verve.
“We have no commitment from government about when and how you move to retail contestability.”
Mr Rowe said the wholesale electricity market was at a crossroads in its five-year lifespan and the market should be embraced and driven to a more competitive level.
“If I had my druthers I would split Verve and split Synergy and make two ‘gentailers’ and privatise them. I would move towards full retail contestability, I would remove Verve and Synergy’s current restrictions in 2016 and at the same time bring on full retail contestability,” he said.
This was an unlikely scenario, however.
“It is unlikely to happen. First because privatisation appears to be off the agenda, and secondly because there is a risk that any government that was interested in privatisation would want to get the highest price by selling a monopoly,” Mr Rowe said.
Sustainable Energy Association chief executive Ray Wills suggested the government should act as a facilitator to the market structure to encourage private investment.
“That is where the government does have a role, because of the still-developing nature of our infrastructure there certainly is a facilitating role it must play,” Mr Wills said.
“That may involve market intervention at some point to allow it to happen,” he said, referring to the government’s capacity to underwrite certain projects (see Major players' dominance, strategic woes plague the Pilbara).
EMC Solar director Alannah MacTiernan said the issue did not require government generation, but for the government to build the grid to stimulate private investment in generation.
She added that a state government commitment to generating 20 per cent of state energy through renewable forms by 2020 would further incentivise investment.
According to Mid West Energy chief executive Richard Harris, the role of government post-disaggregation was seen as setting the broad framework for people to come and invest, encouraging private sector investment.
To this end, he believes, it has succeeded.
Mr Harris said 2,000MW of private generation have come online since the disaggregation thanks to the supportive market structure, but he raised concerns for how long the rules and structure will remain in place.
One participant with a more upbeat outlook was Investec head of project and infrastructure investment Mark Schneider, who claims his business has its sights set on WA as the most prospective state, alongside South Australia, for energy projects.
Investec was the developer of Collgar Wind Farms, Merredin’s 206-megawatt wind farm that came online earlier this year, and is currently pitching a $200 million, 50MW hybrid diesel and solar photovoltaic power station east of Geraldton through planning approvals.
Mr Schneider said it was the differential in the construction time and cost between WA/SA and NSW/Victoria that makes the former states attractive, along with what he called a low resistance to development in WA.
“There was a level of support here for the Collgar project, in government and particularly local government and among local landholders and the local community; that was an entirely different environment to what we were used to,” he said.
‘Facilitation’ was the term Mr Schneider said best described the optimum government role, although the changing rules around market structure and regulation was the big-ticket issue.
“I am not concerned whether the rules are this or that, what I want to know is that they are certain, that they are here for keeps,” he said, adding that complete deregulation was not necessarily the panacea for Western Australia’s market.
But with the Economic Regulation Authority currently inquiring into the efficiency of Synergy (the dominant electricity retailer with 80 per cent market share), the funding arrangements of Horizon Power (the remote electricity retailer), and Premier Colin Barnett recently referring to the disaggregation of Western Power as a failure and flagging the possible re-merger of Verve (the generating utility) and Synergy, it is no wonder a degree of uncertainty remains.
Money matters
On another level, equity finance players are also touchy in anticipation of the Independent Market Operator’s soon-to-be-released annual review of the maximum price put on the capacity of peaking stations.
The figure determines the maximum a power station built to contribute to energy generation at peak times should receive. Expectations are that the figure this year will be 24 per cent down on last.
Argonaut Capital director corporate advisory Scott Laurance said this figure has spooked the market, which has had a healthy appetite for peaking station projects.
According to Mr Laurance, regulatory risk becomes an imposing factor when attracting investors to these sorts of projects. They require a different strategy to attracting capital investors than base load and other renewable projects, such as Collgar, which generally require take-or-pay off-take agreements that ensure energy generated is bought by a retail client regardless of demand.
“Those [peaking] plants are only going to be turned on in peak times, but you have to somehow incentivise them to be built and that is where capacity payments come in,” Mr Laurance said.
“A lot of these facilities are looking to run only between 2 and 5 per cent of the time on a yearly basis, so a 24 per cent reduction in that maximum reserve price certainly has a large impact on the bottom line of these facilities.
“We are talking about 20- to 30-year life cycle projects. You need to have enough certainty that you are going to get paid back. Debt is a relatively simple thing, when equity investors are looking at these projects we are not looking for exorbitant returns; these are pensions, superannuation funds. These are not people looking for out-of-character returns, but they need to be able to make returns.
“We see regulatory risk in WA as probably the highest risk around.”
Argonaut Capital approached 30 superannuation funds to invest in its recently funded diesel peaking station in Merredin, which was backed solely on the capacity payment revenue stream basis. Of these funds, 27 immediately said no due to the regulatory risk associated with capacity pricing, although one of these ended up signing the dotted line.
“It is about finding people with an appetite for risk and whose view on WA’s state growth profile outweighs the risk associated with pricing,” Argonaut director John Biesse said.
“If the changes are implemented as proposed, there won’t be any more investment, that will be it. The returns on equity will be less than the returns you can get from cash in the bank, so there is no point in doing it.
“People are interested in investing in WA’s power industry because of the growth in the state; the thing that turns most of the funds off is the risk around changes to the capacity pricing.”
Collgar chief executive Alistair Craib said for projects such as wind farms there were several key elements during preconstruction to ensuring the project got off the ground.
“For a project the size of Collgar to get bank funding you need a credit worthy off-taker, and in WA you only have one of those, Synergy,” he said.
“That is where much of the effort was focused upon; and then of course to get the proper funding arrangements to get the bank and equity funders to invest in the project, you need the long term take or pay.
“Obviously you take risk with your project, but you need to have some certainty that there are contracts standing behind it, otherwise the banks and equity won’t touch it.”
Transmission
Lagging network technology was one of the major concerns for solar company Swan Energy’s founder James Rhee, who said WA’s parochial network was causing his company the greatest concern.
He said most of the WA grid was 19th century technology, with one generator delivering to the client. Mr Rhee doubted the grid’s capacity to cope with the generation of renewable energy expected to come online as a result of the federal government’s 20 per cent by 2020 Renewable Energy Target.
“The major hurdle in the future will be grid connectivity,” Mr Rhee said.
“If they (project developers) cannot connect to the grid, they cannot sell their power, or create their projects. We look forward to seeing government investing more money in a smart grid.”
He said an update to the grid to make it digital, bi-directional and able to respond to real-time demand was vital to attract investors.
“There is no long-term plan for implementation. Now Western Power is building a second transmission line to Geraldton. If they build that transmission line the same as the 19th century way, after they complete the transmission line, there will be panic again,” Mr Rhee said.
“Everybody knows Geraldton is the most effective location for wind and solar, so everybody wants to connect there. Whether Western Power can cope is an issue.”
Western Power recently released its five-year, $8.5 billion capital investment plan, which will direct $3.3 billion to building infrastructure to support growth.
In response to Mr Rhee’s statements that the South West Interconnected System is dated, Western Power said: “Western Power agrees the state’s largest grid was built, along with most other grids worldwide, in an era to deliver the one way flow of power from a few major generating sources to customers.”
It added that, since disaggregation, the operator had “substantially increased levels of investment to maintain system security and reliability and accommodate increases in demand for power, increases in generation sources, more distributed generation and greater two-way energy flow in the grid.”
Mr Rhee said Western Power’s planned $13 million spend on smart meter equipment was insignificant in the grand scheme of the company’s investment plan.
Responding to those comments at a later date, Western Power said it has been investing in a smart grid in terms of digital communications network and advanced control and monitoring systems for 20 years.
EMC Solar chief executive John Davidson referred to connectivity delays associated with renewable projects as ‘bureaucratic inertia’ and said it was one of the major issues for EMC, which develops, generates and sells renewable energy.
“It is the typical power authority response of standing behind its two main responsibilities of grid stability and safety,” he said.
“Once they put that ‘batfink’ force-field up there is no way you can penetrate it. There are very brutal negotiations in overcoming the issues of getting connection approvals.”
Western Power said state and population growth had inevitably led to electricity consumption growth.
“Without investment in new infrastructure, the network will run out of capacity to connect new customers, including new sources of renewable generation that require network connection to enable them to deliver power to customers,” Western Power said in a statement to WA Business News.
For Mr Schneider, though, a technical solution to the network woes isn’t clear.
“It is all well and good for us to sit here and say government should be building more intelligence into the network but I am not sure that we actually know what it will cost or what the optimum solution is,” he said.
