WA and Clean Energy Investor briefings

Sally Torgoman Managing Director #AustraliaMatters Energy sector – volatile with regulatory uncertainty.

Understanding volatility How large customers are billed Decarbonisation - trend towards Big issues in the energy sector green, clean energy

The retirement of coal power plants and Four key components of a large customer Increased focus for economies to Complex policy environment both at a tightening supply of gas are two key electricity bill decarbonise and use green energy to federal level. No local energy policy in factors driving price increases. • Network charges make cities ecologically sustainable. WA. • Wholesale electricity charges As existing fossil fuel plants become older Wind and solar energy generation brings • Environmental charges Customers are sensitive to high power and more expensive to maintain, the intermittency challenges in matching • Retail charges. prices due to recent escalations. generation with demand. These move to more renewable energy sources such as utility scale wind and solar PV is renewable generation sources are Network and wholesale costs form the Strong competition from renewable and increasing. affected by the time of day and wind large bulk of a customers total energy bill. alternative generations is changing the patterns. The 2015 Paris climate agreement energy mix. The CEC found that the average bill for established ambitious goals to combat Market price volatility is expected to WA customers will continue to increase in global warming. Australia has committed Energy market rules require reform to increase in the future while gas continues 2020.1 to a 50% emissions reduction target under deal with this changing energy mix and to be the “balancing commodity”, and, as this agreement. the growth of distributed energy the penetration of renewable energy resources. sources increases.

Population in WA will grow to Net zero carbon emissions Slower growth in rooftop Mining sector is ~30m by 2030 WA’s largest energy user – by 2050 solar in WA increasing the demand for growing in FY17 by compared to rest of electricity Australia 5%

Infrastructure Lead Advisory PwC 3 Trends in the energy market

Our energy markets are in transition with multiple variables at play. The diagram below provides indicative market drivers and implications.

Transition drivers Implications

Markets

Coal fleet New market • Growing market for managing distributed energy resources (DER) and multi-directional power flows; it is highly likely Variable retirements entrants that our current energy only market will need to change to another model during the late 2020’s generation • Increasing penetration of renewables – BNEF estimates 45% of generation by 2030, 74% by 2035 and 92% by 2050 • Increasing need to manage grid volatility and stability, through flexible generation, loads and storage (especially fast- response) Ageing Climate & infrastructure • Increasing trading complexity and opportunities weather Cyber- • Emerging market for ‘smarter’ grids, with greater technology enablement change security • Growing role played by increasingly sophisticated aggregators Changing gas • Growing importance and market grid-scale storage as a strategic asset demand Storage • Growing market for micro-grids and embedded networks Declining mix technology cost of • Emergence of new and expanded markets such as FCAS (Frequency Control & Ancillary Services) & price renewables DER • Increasing technical complexity of the grid. Customers Customer • Customers are demanding more control over energy usage, generation mix, offtake and pricing Declining frustration demand • Growing number of “prosumers” participating in the market with behind-the-meter generation and storage Increasing • Increasing range of new services available (eg energy as a service, tech-enabled energy management, digital platforms, customer Digitisation sophistication VPPs) • Increasing affordability of rooftop solar and behind-the-meter storage Changing Energy consumer affordability • Reducing need for customers to rely solely on the grid expectations & behaviours • Growing number of electric vehicles • Increasing ability to respond to more complex pricing signals from the market.

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Infrastructure Lead Advisory

PwC After 28 years without a prolonged downturn, Australia is complacent

If Australia matters when do we act?

• 2020 is set to test Australia. • Economic growth is slow (2.3%) - persistently lower than at any point in the last two decades. • Market confidence is low. • Productivity is stalling (-$1.3bn in underpayments).

We need business leaders who Business leaders should therefore be asking five key • Upskill their staff questions: • Invest in innovation • Can we drive improved productivity through better use of robotics, • Understand market volatility digitisation, and artificial intelligence (AI), supported by improved • Navigate complex payment systems employee training? • Can we let go of any practices (and even products) that are no longer sustainable in the current climate? • Can we look to faster-growing economies for growth opportunities, and how well equipped we are to invest in new markets? • Is innovation at the core of our business planning? • How should we respond as interest rates continue to be close to zero, or even negative?

Together we can turn the tide and ensure Australia thrives.

We call this the #Together-Effect. 5

Be part of this solution, because Australia matters. Infrastructure Lead Advisory

PwC Energy is providing business leaders with opportunities. #Energy Matters

There is an increased focus for economies to decarbonise, use green construction and energy methods and make cities ecologically sustainable. Transition to the future energy system Energy flows historically moved th one-way from large centralised 20 Century generation sources through transmission and distribution Commercial lines to the demand centres of Hydro cities and towns. Energy flows Industrial are changing to become two-way with new and varied value Residential Transmission Distribution transfers. Fossil fuels network network

New renewable sources of 21st Century energy generation have been added and increasing numbers of customers are generating their own electricity through rooftop Hydro solar panels, which can then be Batteries Commercial Batteries stored using battery systems.

Demand response and smart meters are providing more information regarding Electric Large Industrial consumers’ energy usage. Transmission Distribution vehicles scale wind Consumers are changing the network network way they use electricity and participating in demand response programmes during Large peak periods to help balance the Residential Small scale solar scale solar grid. Fossil fuels Two way information flow

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Infrastructure Lead Advisory PwC Renewables in WA Investors are excited about the renewable story in AU

2015 2019 ARENA funding round invested With 14.8 GW of capacity under $92m in projects, kicking off the construction or financially committed at the 2020 + start of the year, it looks like Australia will utility scale solar market The future looks bright for achieve 50% renewables by 2030 renewables 2017 Cost reductions in renewable • Although there is no direct technology and government policy federal government policy on 14,000 continues to boost investment energy, there is still support for reliability and storage post the 12,000 Projected Investment NEG ($24.5bn total) 10,000 • Retirement of coal-fired power plants leaves capacity for 8,000 renewable energy to fill • Forecast reduction in the cost 6,000 of storage supporting

Total Investment (USD m) (USD Investment Total 4,000 renewable energy penetration • Increased focus and activity in 2,000 the “corporate PPA” market 0 • Universities entering into PPAs 2015 2016 2017 2018 2019 2020 2020 + (UNSW) or purchasing solar Small-scale Investment Large-scale Investment farms (Uni. of Qld.)

Annual Renewable Energy Investment in Australia Source: Bloomberg New Energy Finance; Clean Energy Australia Report 2019

WA and Renewable Energy PPAs November 2019 PwC 8 National electricity market policies

2001 May 2015 Jun 2017 Oct 2017 2020 ‘Finkel’ report Large-scale LRET revised Government Australia’s Chief proposes energy LRET Target renewable energy Scientist) titled policy – the National expiration target (LRET) ‘Blueprint for the established future’ issued on 9th Energy Guarantee

(NEG)

Retail reliability reliability Retail effective obligation 2019 NEGPolicy June 2017 2018

The initial Australian Federal On 8 May 2015, it was Independent report issued to Whilst not pursuing the Clean Energy Target (CET) Government’s Large-scale announced that bipartisan address both energy reliability, (the single recommendation of the Finkel review not Renewable Energy Target agreement had been reached and Australia’s commitment to adopted), the Government proposed a new policy – (LRET) scheme created a to reduce the original target of the Paris Agreement. the National Energy Guarantee (NEG) which sought financial incentive for the 41,000 GWh to a revised The report made 50 to focus on the immediate concern of reliability, whilst development of large-scale target of 33,000 GWh by 2020. recommendations aimed to giving due consideration to Australia’s commitments renewable power stations guide Australia through the under the Paris Agreement. Similarly the NEG was such as wind, solar and many industrial technological not adopted but the reliability element thereof has hydroelectric. and economic changes faced been introduced. by the energy industry of which 49 were adopted.

States going at it alone? • NSW introduced a net zero carbon by 2050 • QLD 50% renewable target • VIC 50% renewablee target by 2050

WA and Renewable Energy PPAs November 2019 PwC 9 WEM offers a number investors a number of attractive market differences. WEM at a glance • The South West Interconnected System (SWIS) incorporates over 7,800 km of transmission lines. • The WEM supplies about 18 terawatt hours of electricity each year. • 95,000 km of distribution and 6,000 km of transmission. • A total of $500 million was transacted in 2014-15. • There are more than one million customers in the WEM. • 5,798MW of registered generation capacity, including 513 MW of non-scheduled generation. • Renewable energy target (not yet)

NEM WEM

Driver for renewable generation Decommissioning coal plants Displacing gas Cheapest form of generation 2018 Cheapest form of generation parity Capacity market Bilateral contracts Challenges for renewables Constraints, MLFs Generator Interim Access Grid access Shift from Physical Firm Access to Cost of transmission Constrained Access. Lack of capacity market/signal (firming renewables) Opportunities for renewables Excellent Resources Excellent Resources Rich pipeline Great sites in development WA and Renewable Energy PPAs November 2019 PwC 10 Major renewable generation assets in WA

There are 2.25 GW of renewable generation assets in operation, under construction and in development in WA

Operational - asset name Generation Equity owner capacity

Collgar Wind Farm 206 MW Retail Employees Type of technology Assets by development status (MW) Super operational and pipeline Badgingarra Wind Farm 130 MW APA Group 22% Alinta (Walkaway) Wind Farm 89.1 MW Infigen 29%

Emu Downs Wind Farm 79.2 MW APA Group 42%

Mumbida Wind Farm 55 MW ICG

Albany Wind Farm 35.4 MW Bright Energy Investments 29% Emu Downs Solar Farm 20 MW APA Group 78% DeGrussa (off-grid 10.6 MW Neon

Greenough River Solar Farm 10 MW Bright Energy Solar Assets Wind Assets Operational Assets Assets in Construction Investments Development Assets Northam Solar Farm 10 MW Carnegie Clean Energy Construction - asset name Generation capacity Equity owner

Development - asset name Generation Equity owner Yandin Wind Farms 300 MW Alinta Energy capacity Warradarge Wind Farm 180 MW Bright Energy Investments Walkaway 2 & 3 Wind Farms 351 MW Infigen Merredin Solar Farm 100 MW Risen Flat Rocks Wind Farm 150 MW Moonies Hill Energy Greenough River Farm 30 MW Bright Energy Waddi Wind Farm 145 MW Tilt Investments

Nilgen Wind Farm 104.5 MW Pacific Hydro Byford Solar Farm 30 MW Westgen Badgingarra Solar Farm 27.5 MW APA Group InfrastructureCunderdin LeadSolar Advisory Farm 100 MW Sun Brilliance Power

Waddi Solar Farm 50 MW Tilt

Walkaway 2 Solar Farm 45 MW Infigen

PwC 11 Recent major renewable energy transactions in WA

Assets

Asset name Generation Transaction % purchased Transaction capacity close Colgar Wind Farms 206 MW UBS to Retail Employees Super Trust 60% (previously June 2019 owned 40%)

Mumbida Wind Farm 55 MW Synergy to ICG 50% (previously December 2016 owned 50%)

Albany Wind Farm 35.4 MW Synergy to Bright Energy Investments 100% January 2019

Yandin Wind Farm 300 MW Alinta to RATCH Australia (subsidiary 70% July 2019 of Alinta)

Warradarge Solar Farm 180 MW Sydney to Bright Energy Investments 100% January 2019

Merredin Solar Farm 100 MW Stellata Energy to Risen Energy 100% October 2018

Greenough River Solar Farm 30 MW Synergy to Bright Energy Investments 100% January 2019 Expansion Northam Solar Farm 10 MW Carnegie Clean Energy to Indigenous 50% September 2018 Business Australia

Companies

Asset name Company Type Transaction % purchased Transaction close Perth Energy Electricity retailer AGL Energy from Infratil Limited 100% August 2019 (largest shareholder) for $53.3 million. Infinte Energy Solar installer and Sumitomo Corporation 100% January 2016 electricity retailer Quadrant Energy Natural gas Acquired by Santos for USD 2.15 100% August 2018 billion through cash and new debt raising

PwC 12 Investors seeking quality developments – flexibility, strong commercials, and reliability.

• GPS modelling • 5.3.4A completed AEMO Registration • 5.3.4B completed

• Bankable Equity Equity PPA • Commercially valuable

• Bankable EPC Contract • Market terms • Competitive price 100% • Competitive price

O&M Contract AEMO Project Offtake

• Special conditions Development • Strong community consultation Consent

• Long option to leases • Bankable leases State and Lease Landowner Western EPC WOM Federal (s) Power Governments • Connection agreements Grid Connection • Address obscure terms EPC Contract O&M Development Lease Grid Agreement Contract consent Connection Agreement

• Sensible market and defendable assumptions Commercials

WA and Renewable Energy PPAs November 2019 PwC 13 Power Purchase Agreements (PPAs) Benefits and structures of corporate PPAs

Corporate PPAs in Australia Typical Corporate PPA structures

Power Purchase Agreements (PPAs) are long dated contracts for the Financial / ‘Virtual’ PPA ‘Sleeved’ PPA procurement of electricity and, in the case of renewable energy generators, Large-scale Generation Certificates (LGCs). A Financial / ‘Virtual’ PPA, is a typical The ‘Sleeved’ PPA integrates the Contract for Difference (CfD) Virtual PPA with an electricity retailer. This has created the opportunity for corporates to contract with arrangement. Under this arrangement, the corporate: renewable energy generators directly. Subsequently, over 3.5GW of • pays the renewable energy project renewable energy capacity has been secured under Corporate PPAs. The ‘Virtual’ PPA provides a financial when output from the project is below hedge against price change of the or matches their demand commodity charge passed on to • sells any surplus energy to demand corporates by retailers under their to the electricity retailer, and typical 1 to 3 year Electricity Supply Cost certainty • buys electricity from their retailer Agreements (ESAs). when demand exceeds what is generated by the project. Retail PPA Others Balance sheet The Retail PPA is a structure that is led Other PPA options may include LGC by the electricity retailer. only PPAs as well as direct investment The buyer pays for the electricity and/or or behind the meter options. Sustainability LGCs generated by a project that holds There is an emerging trend of a PPA with the retailer. increasingly complex Corporate PPA The retailer agrees a fixed rate for structures combining innovative electricity generated with the project as weather derivative products, known as well as a rate with the corporate under Proxy Revenue Swaps, with firm supply Branding opportunities the ESA for the balance of the agreements from either retailers or corporate’s demand. financial services intermediaries.

Overview of the Australian renewable energy sector August 2019 PwC 15 Rise of Corporate PPAs

Typical PPA structure There are various forms of Corporate PPAs that have emerged in the Australian market. Most common is the ‘Virtual’ PPA, a typical contract for difference (CfD) where by the floating payments from the NEM and related LGCs received and created by the renewable energy generator are swapped with the corporate purchaser for a fixed payment.

‘Modified Virtual’ PPA Structure Alternative models known to have been executed in the Australian market are the ‘Modified Virtual’ PPA and the ‘Sleeved’ PPA. Under the ‘Modified Virtual’ PPA, to mitigate their exposure to NEM spot price risk, the corporate pays the NEM spot price received from the generator to their energy retailer under their ESA.

Virtual’ PPA Structure The ‘Virtual’ PPA provides a hedge against price change of the commodity charge passed on to corporates by retailers under 1 to 3 year Electricity Supply Agreements (ESAs), securing a fixed price, typically for a term of between 7 - 15 years.

Overview of the Australian renewable energy sector August 2019 PwC 16 Rise of Corporate PPAs

‘Sleeved’ PPA Structure Proxy Revenue Swap Structure The ‘Sleeved” PPA is a retailer led contractual arrangement where the Unlike a typical PPA, where the counterparty makes a fixed payment project and the retailer enter into the CfD. The retailer receives the per megawatt hour of power generated, the PRS is quoted as a fixed floating price and LGCs from the project in return for a fixed strike dollar payment per year / quarter, backed by high credit security, for a price. The corporate then pays the PPA strike price for the energy and LGCs under their ESA with the retailer. term of up to 10 years. The ‘Proxy Generation’ is determined by a pre agreed formula converting wind resource /irradiance to electricity output from the project in each settlement period (i.e. power that would be produced based on measured wind speeds taking into account pre-agreed and fixed operational inefficiencies, such as availability, performance and electrical losses). In summary, the generator hedges three variables in weather, price and volume whilst retaining availability risk. Settlement under the PRS results in the nett amount between the fixed lump sum and the ‘Proxy Revenue’ paid by the generator when the fixed lump sum exceeds the ‘Proxy Revenue’, or visa versa by the offtaker. Alternative and emerging products As greenfield renewable energy developers and investors come to terms with a lack of traditional or bankable Corporate PPAs, various risk-transfer products have emerged acting as a replacement spot revenue risk mitigating solution for merchant projects. Such a product receiving the most attention in the Australian renewable energy market is the Proxy Revenue Swap (PRS). Initially innovated globally for wind projects back in 2016, as the penetration of solar has increased the PRS has now been marketed to and used by large scale PV solar projects as well.

Overview of the Australian renewable energy sector August 2019 PwC 17 Other renewable energy opportunities The economics of battery storage

Increased Feasible battery Decreasing cost of Various value Innovative funding implementation economics ready for batteries propositions arrangements + opportunities + + = investment

Price arbitrage–charging batteries when prices are low, Smoothing intermittent generation–Providing energy discharging when prices are high; profit from spread. outside of renewable generation times; curtailing lack of supply during high demand periods.

Back-up supply–provide physical energy amidst supply Price feasibility–19% learning rate; every time double interruptions, or supply readily available to hedge option capacity is developed, global cost reduces 19%. positions

Ancillary services–dynamic dispatch reduces reliance on Funding options–power purchase agreements, grants coal-generated baseload supply; provides frequency and and subsidies, or availability payments; various funding voltage control options provide for flexibility.

PwC is uniquely placed with respect to market knowledge of battery storage adoption in Australia having acted as financial and legal advisor to the Government of South Australia (GoSA) on the successful 2017 battery storage tender process, as well as bidding into the Queensland Government’s Renewable 400 tender process for more than 3 parties; a process that involved a storage requirement for all projects.

WA and Renewable Energy PPAs November 2019 PwC 19 Hydrogen: A zero-emissions energy carrier and feedstock

Renewable energy to support green hydrogen What is green hydrogen? production

Hydrogen is an energy carrier and feedstock which can be produced Global renewable energy generation capacity continues to grow from a range of different sources and can be used across a number strongly. The decade-long trend of strong growth in renewable of applications in the energy and transport sector. energy capacity continued in 2018 with global additions of 171 gigawatts (GW) – an annual increase of 7.9% – with solar and wind energy accounting for 84% of the growth. A third of global power capacity is now based on renewable energy. Globally, total renewable energy generation capacity reached 2,351 GW at the end of last year – around a third of total installed electricity capacity. Hydropower accounts for the largest share with an installed capacity of 1 172 GW – around half of the total. Wind and solar energy account for most of the remainder with capacities of 564 GW and 480 GW respectively. The share of renewables in the growth of electricity generation reached 63% in 2018

Currently, most hydrogen is made from steam methane reforming which relies on natural gas as an input and coal gasification. However, demand for hydrogen produced through an electrochemical process using low or zero emissions electricity (such as wind or solar PV generation) – often referred to as ‘green’ or ‘clean’ hydrogen – is expected to grow substantially as countries seek to reduced carbon emissions. Source: CSIRO National Hydrogen Roadmap 2018, International Energy Agency

WA and Renewable Energy PPAs Source: International Renewable Energy Agency November 2019 PwC 20 Japan’s commitment to establishing a 'hydrogen society' is dependent on securing the cost-competitive supply of green hydrogen over the long- term

Securing supply of green hydrogen over the long Japan is committed to a hydrogen society term • Japan is committed to pioneering the world’s first 'hydrogen • International cooperation is crucial for importing nations such as society' with the aim of achieving cost parity of hydrogen with Japan in order to secure a cost-competitive supply of hydrogen competing fuels such as gasoline in transport and Liquified Natural over the long-term Gas (LNG) in power generation • Japan have engaged with Australia, Brunei, Norway and Saudi • Japan’s hydrogen strategy is aimed at decarbonising its transport, Arabia on hydrogen fuel procurement given international power, industry and residential sectors while strengthening energy cooperation is crucial to scale-up industrial developments, improve security, and encompasses the entire hydrogen supply chain. technologies and reducing costs Japan’s strategic road map for hydrogen and fuel cells • Japanese companies are heavily involved in developing the Hydrogen Energy supply Chain (HESC) to efficiently produce and transport clean hydrogen from Australia to Japan • Japan is planning for large-scale hydrogen imports

Source: 'Japan’s Hydrogen Strategy and Its Economic and Geopolitical Implications' Ifri, 2018. Japanese Ministry of Economy, Trade and Industry (METI). Source: Mitsubishi Global Strategic Studies Institute. WA and Renewable Energy PPAs November 2019 PwC 21 The concept of circular economy is gaining global traction

The circular economy envisages maximising the utility of products, components, and materials at all times. This contrasts with the ‘take, make and dispose’ economic model, which relies on plentiful, cheap and easily accessible materials and energy. Several states and territories are examining the value of the concept within their policy frameworks. For example, the Queensland Government’s recent Resource Recovery Industry Development Program is seeking to align the State’s waste approach with the EU’s position that the production of energy from waste is a preferred method of rubbish disposal.

What is a circular economy?

Principle 1

Preserve and enhance natural capital Regenerate Substitute Restore by controlling finite stocks and material balancing renewable resource flows. Farming/ Recycle collection Parts manufacturer

Biochemical Principle 2 feedstock Parts manufacturer Refurbish/ Soil restoration remanufacture Maintain/ Optimise resource yields by circulating prolong Service provider Refurbish/ products, components and materials in redistribute use at the highest utility at all times in Biogas Share both technical and biological cycles. Consumer User Extraction of biochemical Principle 3 feedstock Collection

Foster systematic effectiveness by revealing and designing out negative externalities. Minimise systematic leakage and negative externalities

WA and Renewable Energy PPAs November 2019 PwC 22 Australia is changing its approach to waste management

Investors are becoming increasingly attracted to the waste management sector due to a number of drivers for change

Rethinking of waste initiatives Population growth Changing access to recycling markets Australia’s population is continuing to • China, formerly the principal market for grow disposal of Australia’s plastic recyclate, • Waste generation, particularly of Municipal has restricted Australian waste exports Solid Waste, is closely linked to population size. Other things being equal, more population means more waste

Carbon policy

Carbon policies are changing at a Drivers for national level change of Government waste strategies • Between 2009-10 and 2012-13, landfill Australia’s methane capture grew by 50% from 5.1 to approach Concept of circular economy is 7.6 Mt of carbon dioxide to waste gaining traction • WA and QLD recently released waste policies making this a core concept Access to recycling markets Focus on plastic waste Regional waste solutions are required • States and Territories are also placing a particular focus on plastic waste in their • States and Territories tend to have lower policy drafting. Policy and legislation in this rates of recycling when they have large space will only become stronger, not weaker remote populations or lack ready access to the major markets

WA and Renewable Energy PPAs November 2019 PwC 23 Summary Getting it right for investors – flexibility |innovation | commerciality

Site & Delivery & Grid Access Off take Market Design Success + + Approvals + =

PwC energy team specialises in renewable energy transactions, and we advise clients on a range of buyside or sellside mandates.

WA and Renewable Energy PPAs November 2019 PwC 25 Thank you

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