27 Oct How will the NEG impact on-site solar investments?
Over the past 12 to 18 months we’ve seen electricity prices double for Commercial and Industrial customers while the cost of on-site solar technology continues to fall.
Although we are seeing a softening of wholesale electricity prices at the moment, these are expected to increase again due to the scheduled closure of older coal plants, elevated gas prices and remaining policy uncertainty. The introduction of the National Energy Guarantee is unlikely to take the pressure off electricity prices.
On 17 October 2017, the Australian Government announced the National Energy Guarantee (NEG) which aims to improve the reliability of electricity supply and decrease emissions at lowest overall cost. New obligations will be imposed on energy Retailers – a ‘reliability guarantee’ to deliver the right level of dispatchable energy and an ‘emissions guarantee’ to help meet Australia’s international commitments.
There is limited information available at this stage, resulting in a lot of speculation about the possible implications. However, meeting the dual requirements of reliability and emissions guarantees, will require additional investment in energy security, infrastructure and renewables.
Verdia therefore believes that the NEG will not impact the business case for Australian corporates to invest in on-site solar for four reasons:
- Electricity prices will continue to rise (above and beyond the recent 100% increases) due to the new obligations to guarantee reliability. Retailers will require a higher level of capacity they can dispatch in case it is needed (favouring coal, gas, hydro generation and batteries).The Energy Security Board has announced penalties for the breach of the guarantees as high as $14,200 per MWh, which generators and retailers will need to factor into their risk premiums.
- Projects developed and commissioned before the end of 2020 will continue to earn certificates until 2030. The NEG announcement has not affected Large Generation Certificate (LGC) prices. Forward prices for the coming years have remained stable since the NEG announcement (at around $80 per certificate). The introduction of emission obligations through the NEG should provide a price floor for LGCs or upward pressure on electricity prices to deliver the obligation.
- Australian corporates with a renewables portfolio will have a strong negotiating position with their energy Retailer. There will be Retailer demand for low-emissions electricity generation to meet the new emissions guarantee and on-site solar will reduce their need to procure dispatchable generation (reliability obligation).
- Electricity market disruptions will persist over the next decade as we continue the transition from centralised, legacy coal generation (aged assets) to a modern, more distributed electricity market tilted towards renewables.
WHAT DOES THIS MEAN FOR YOU?
The business case for behind-the-meter renewables remains strong. On-site solar generation will continue to provide energy at a lower cost than electricity from the grid, and provide a hedge against price and energy policy risk going forward.
Verdia works with the largest energy customers to develop and deliver projects that reduce energy costs through integrated energy efficiency and renewable energy solutions. We will continue to do the groundwork to make sure the opportunities we identify and solutions we deliver are robust, independent and tailored to meet your goals/provide long-term value.