Renewables investors challenged by ageing infrastructure
Investors in Australia’s highly attractive renewable energy sector may turn elsewhere if challenges are not addressed
Investment into Australia’s renewable sector is at risk due to an ageing national electricity grid that is struggling to keep pace with the additional power load.
Australia’s burgeoning sector attracted a record A$20 billion of foreign and domestic investment in 2018 - more than double the 2017 figure, according to the JLL report Switching to Renewables - Australia's Surging Alternatives Sector. But, the subsequent surge in renewable energy sources entering the grid is putting the ageing system at risk of overload.
Unless grid infrastructure is updated and incorporates efficiencies through machine learning, Australia risks losing out on critical renewable energy investment with investors likely to look elsewhere for risk adjusted returns, says Jordan Berryman, Senior Director, Alternative Investments, JLL.
“The current grid has already caused a delay in connecting renewable energy generators which makes it difficult for investors to get their projects up and running, and ultimately produce income. Eventually we’ll see them depart Australia for markets where certainty is more transparent,” Berryman says.
“As a result we’ll be left with an ill-quipped energy pipeline to fulfil the closure of coal-fired plants,” he adds.
Australia is the fifth most attractive destination for investment in renewables globally, according to an EY index, with the country’s geography and climate particularly well suited to solar and wind energy development, and its transparency, legal system and political stability all serving to attract investors.
Sovereign wealth funds, global asset managers and financial institutions all continue to build ambitious projects across the country. Oil and gas companies are also major investors.
“Firmed renewables (sites that incorporate battery for power distribution) will increasingly become part of the solution for power in Australia, meeting round-the-clock demand, while reducing costs for the end user,” says Berryman. “This will all keep investor appetite strong and create a deeper and more liquid investment market over time once normalised adjusted risk returns are understood.”
With 65 projects - both proposed and committed - potentially adding an additional 40GW of renewable energy to the grid, Australia’s pipeline of renewable projects could extend well into 2030.
But unless investment is made to the current grid’s capacity to absorb additional energy sourced from renewables, many are at risk of not materialising.
Investment opportunities in the renewables sector typically cover three areas: generation, transmission and storage.
Generation projects provide established returns of between seven and 12 percent, or development returns of 12 to 20 percent; transmission projects, including interconnectors, assume regulated returns of 5.7 percent; while storage projects, where the majority of investment decisions are focused, provide long term viable returns of five to eight percent.
Investor interest could be maintained with federal government commitment beyond current targets for renewable energy generation, which expire in 2020, says Berryman. The absence of clear and consistent frameworks has already led to high capital costs that will reflect on investor risk premiums.
This could lead to fewer projects commissioned, increased competition for existing assets, and more expensive procurement costs, all of which add pressure on returns.
“The current favourable economics of renewable energy should counter the lack of a federal policy,” says Berryman. “However, considering Australia is faced with the looming issue of an ageing fleet of coal-powered plants, more urgent action, led by policy certainty, is required for renewables to take on the mantle for distributed capacity.”