Power purchase agreements for renewable energy may be blowing in the wind, but Jason Willoughby, managing director of GE Energy Financial Services in Australia and New Zealand, proposes a fresh approach to getting wind-farm projects up and running, and acing Australia’s Renewable Energy Target.
Australia’s Renewable Energy Target, set in June last year, is a huge opportunity to deliver almost a quarter of our power needs, or 33,000 GWh, of renewable energy by 2020 in the lowest-cost, most reliable way.
Now that we have the legislative certainty, one way of really stimulating the growth of the sector is to create a framework for investors to take a little bit more merchant risk.
Traditionally, for an energy project to become financeable or bankable it has required a power-purchase agreement (PPA) to be in place, that is a contract with an electricity retailer to take the power generated at an agreed price.
With the $450 million Ararat project, the first wind farm in Australia to be announced immediately after the setting of the RET, GE and its co-investors challenged the accepted financing model. Instead of having a power purchase agreement for 100% of the offtake, we shaped a project with the lowest possible risk based around having a guaranteed offtake for 40% of the wind farm’s output. As the wind farm is completed over the coming year, we’ll sell the rest of the output into the spot market.
We decided that we can’t just wait for electricity retailers to sign up long-term PPAs; that the industry should actively be trying to grow by taking on a bit more of the uncontracted risk. The way to do that is to make sure each project is as competitive as possible—and that goes to having the right technology fit, and optimal operations and maintenance.
Yes, GE is uniquely placed to assess and make such a financing decision, because we are a manufacturer of renewable technology, with more than 30,000 wind turbines globally producing power. We’re constantly enhancing the efficiency of our turbines, the size of our rotors, the ability of our turbines to work together to best harness wind; and we’ve also been providing financing for renewable-energy projects for decades. Worldwide, we’ve invested more than $10 billion in renewable energy projects, 71% of that in wind farms, which makes us one of the largest investors in the sector.
Navigating merchant wind opportunities
GE has really focused on coming up with technical solutions that make the most of both the wind resource for a particular site, and also conditions development and approval.
The better the wind resource, the more energy will be produced. The more energy produced per turbine means a higher capacity factor, which is fundamental to achieving a competitive price. Australia is really blessed in the sense that we have good wind and solar resources, so we can produce competitively priced renewable energy.
Meeting the conditions of a site can pose hurdles to investors. At Ararat, for example, we had to work within extremely tight noise restrictions. There were times in the constantly revised design of the site when we weren’t getting enough energy out of the proposed farm configuration due to constraints imposed by local authorities. But ever-advancing efficiencies in turbine design overtook us and GE’s 3.2-103 brilliant wind turbine allowed us to combine hushed operation with boosted energy output.
There will be various parameters set by the relevant authorities at any given site. But turbine technology and the efficiencies offered by digital monitoring, analysis and refinement of operations continue to revolutionise what’s possible, enabling developers to get the most efficient technology with the best fit for promising situations.
Wind speed to market need no longer be curtailed
If you’re reliant on getting a PPA from a retailer, then the speed at which you can invest in projects is entirely dictated by their needs or willingness to sign PPAs. Conversely if you decide to do a merchant wind project, you can dictate the roll-out or the construction profile of your project. Retailers have many different drivers, but if you’re efficiently producing renewable energy you can wait for one or more—for a combination of large and smaller retailers—to sign up.
We’ve seen a dramatic reduction in the cost of energy produced by wind farms over the past five years, and we expect that competitive factor to continue, making wind-driven energy ever more sought after in the energy market.
Every investor is looking for a return. They want to invest in projects where they understand the risks that can be satisfactorily priced. We think that there’s an investment opportunity in projects that have larger merchant exposures to power price, provided that every other risk in the profile of a project is the lowest possible.
As a cornerstone investor in renewable-energy infrastructure around the world, GE is putting its money where its mouth is.
Knowledge is power
Confidence in wind technology invites a more flexible approach to capital solutions for the renewables industry. We can make sure that your wind farm is optimally operating on the windiest days, and through digital analysis we can predict when it won’t be producing at peak—an ideal time to schedule maintenance. Similarly, rather than having a flat payment line for infrastructure, GE can sculpt payments so that at times when you’re obviously not making as much money, you’re not paying as much; on the days when you’re making a heap of money, you pay a little bit more.
Financial funds and institutions are increasingly looking to put their money into renewables. There may be a qualitative aspect to it—that they can show their investors they’re investing in “good” projects that benefit communities—but I think even more important is they can see that the power industry globally is changing and there’s an increasing shift away from fossil fuels to more renewable energy sources.
There’s an opportunity to develop a new market model in Australia: increased merchant exposure is viable and GE is well-placed to help foster that growth.