AGL Energy Limited Level 22, 120 Spencer T: 02 99212516 ABN: 74 115 061 375 Street101 Miller Street www.agl.com.au North Sydney NSW 2060 27 February 2015 Select Committee on Wind Turbines PO Box 6100 Parliament House Canberra ACT 2600 By email: [email protected] Dear Sir/Madam, AGL submission to Senate Select Committee on Wind Turbines AGL Energy (AGL) welcomes the opportunity to make a submission to the Senate Select Committee on Wind Turbines. As a leading investor in many types of energy production, AGL is well placed to comment on the regulatory and economic factors relevant to wind turbines. AGL operates across the supply chain and has investments in coal-fired, gas-fired, and renewable electricity generation and upstream gas exploration and production projects. AGL is Australia’s largest private owner, operator and developer of renewable generation and is also a significant retailer of energy with over 3.8 million electricity and gas customers in Victoria, New South Wales, South Australia and Queensland. AGL is a relatively unique participant in the Australian renewable energy industry, with interaction spanning three aspects: 1. Liable entity under the Renewable Energy Target (RET) scheme – each year AGL must surrender sufficient numbers of both large- and small- scale renewable energy certificates to meet its obligations under the RET. 2. Small scale renewable energy technology installer – AGL installs a range of small scale renewable energy systems, including solar PV and solar hot water systems. 3. Large scale renewable energy developer and operator – AGL has the largest privately owned/or operated renewable energy portfolio in Australia, having invested over $3 billion in utility scale renewable generation assets over the past decade. AGL’s portfolio includes 1,766 MW of operational wind, hydro, and biofuel electricity generation capacity, with a further 155 MW of large scale solar under construction. AGL recognises that climate change is a very important issue facing the global community, and supports the Commonwealth Government’s commitment to work towards a global agreement to limit global warming to 2 degrees Celsius above pre-industrial levels. The achievement of this goal is likely to require significant decarbonisation of the electricity sector by mid-century and both renewable and lower-emission fossil fuel generation will be an integral part of the energy generation mix. AGL is a strong supporter of renewable energy and supports regulatory and market mechanisms to effectively incentivise: the new investment in low-emissions electricity generation required to effect this market transformation; and the exit of older emissions-intensive power stations. Economics of renewable energy The most critical issue concerning the wind power industry in Australia is the intractability of new investment in large scale renewable energy projects. Until stable and long-term renewable energy policies are established, and the oversupply of generation capacity in wholesale electricity markets is resolved, it is unlikely that any material new wind developments will occur as projects are unlikely to receive sufficient revenue to be economically sustainable. While this situation persists, subsequent 1 questions around the reform of planning policy and other regulation for wind farms may not be relevant. The Renewable Energy Target Australia’s large-scale renewable energy sector is experiencing significant challenges, with a number of issues making additional investment very difficult. The primary policy mechanism to incentivise the development of new renewable energy is the RET. The RET requires electricity retailers to source renewable energy through the annual surrender of large- and small-scale Renewable Energy Certificates (LGCs and STCs, respectively) which are created through the generation of electricity by renewable energy projects. If a retailer fails to surrender its required allocation of certificates, it will incur a penalty charge. Retailers acquire these certificates by sourcing them from the market, via long-term offtake agreements with third party renewable project developers, or through the development of their own projects. Currently, the lowest cost utility scale renewable energy is produced by wind farms. Most large scale projects under the RET to date have been wind farms, and virtually all wind farm development in Australia has occurred as a direct result of this scheme. The cost of the RET scheme is ultimately borne by electricity consumers, as retailers will recover the cost of acquiring renewable energy certificates in a competitive retail market. A recently published academic article by two AGL economists estimates that in 2012/13, the cost of the large-scale RET scheme (LRET) added approximately $27 to the average annual household electricity bill ($4.45 per MWh of consumption), or about 1.6%. This is forecast to increase to $8 per MWh in 2020, or around 3%1. Investment challenges Wind farms operating within wholesale energy markers receive two streams of revenue: the wholesale value of the generated electricity traded in the market, and the value of the LGCs produced by renewable projects as a result of the RET. The convergence of a number of factors has made the development of new projects economically unfeasible, because under current circumstances, the sum of these revenue streams will be insufficient over the project life to justify the capital expenditure. These factors include: Electricity demand in the National Electricity Market (NEM) has declined in recent years due to the closure of some large manufacturing facilities, improvements in energy efficeicy and the uptake of rooftop solar PV; Forecast demand growth for the foreseeable future is low. There is a prevailing substantial oversupply of generation capacity in the NEM. The Australian Energy Market Operator (AEMO) estimates the surplus to be around 9,000 MW, and that no new generation capacity will be required in the next ten years to meet electricity demand. As a result, wholesale electricity prices are well below the level required to incentivise new investment. Despite significant surplus capacity, there appear to be barriers to exiting the market for coal-fired power stations nearing the end of their design lives, such as significant site remediation costs and ongoing uncertainty in relation to climate change, renewable, and broader energy policies2. Uncertainty persists in relation to the RET and other energy policies. There is not a long- term bipartisan approach, which is required to provide certainty for investors seeking to develop long-lived power generation assets. The trading price of LGCs reflects this policy uncertainty3. At current LGC and wholesale electricity market prices, new investments in wind projects and other renewable energy projects cannot be justified economically. Given the market based policy mechanism of the RET and the energy-only market design of the NEM in particular, it is inconceivable that the investment in large scale renewable projects required to meet the RET will be forthcoming without complementary policy being introduced. Given this situation, AGL does not believe the RET is the appropriate mechanism to support investment in renewable energy without complementary policies aimed at resolving wholesale market oversupply to facilitate new renewable energy investment. Community consultation and economic benefits AGL operates seven wind farm projects including the Hallett 1, Hallett 2, Hallett 4, Hallett 5 and Wattle Point Wind Farms in South Australia, and the Oaklands Hill and Macarthur Wind Farms in Victoria. Additionally, AGL has two wind projects under development: the Silverton Wind Farm in 1 See “The Outlook for Residential Electricity Prices in Australia’s National Electricity Market in 2020”, available for download here: http://www.sciencedirect.com/science/article/pii/S1040619013000870 2 See “Energy-only markets and renewable energy targets: complementary policy or policy collision?” available for download here http://aglblog.com.au/2014/08/agl-working-paper-43-available/ for further information. 3 See “An analysis of Australia's large scale renewable energy target: Restoring market confidence” available for download here: http://www.sciencedirect.com/science/article/pii/S0301421513007398 for further information. 2 New South Wales and the Coopers Gap Wind Farm in Queensland (although the development of these projects has slowed significantly due to prevailing economic conditions). AGL is committed to developing and operating its projects in a responsible manner to ensure that they have minimal impacts on the environment, public health, and general amenity, and a positive impact on local communities overall. Economic benefits AGL believes that the wind energy industry is very significant to the economy of Australia, and particularly regional Australia. Wind energy jobs are created through the development, construction and ongoing operation of wind farms, which in turn continue to develop Australia’s clean technology skills base in a competitive global market. The benefits of wind farms to a local region are not confined to the initial investment in the project. They also provide a reliable income stream for landowners, significant increases to rates paid to councils, direct employment opportunities for locals and flow-on employment for local businesses through provision of products and services to the project and its employees. AGL commissioned an independent study in 2010