ACT Renewable Energy Contract for Difference Costs Drive Substantial Network Tariff Increase
On 1 July 2021, the network tariffs for EvoEnergy will increase on average by approximately 43 per cent. EvoEnergy is the electricity distribution business in the Australian Capital Territory (ACT). The one year increase is unparalleled and equivalent to $1,476 (42 per cent) for a small business customer and $241 (36 per cent) for a residential customer.
The primary driver for the overall increase is a 133 per cent increase in one of EvoEnergy’s costs related to the administration of the ACT Government’s large scale feed-in tariff scheme. The scheme is part of the ACT Government’s 100% renewable energy target.
Under the feed-in tariff scheme, the ACT government ran five reverse auction processes between 2012 and 2020 and awarded 840MW of contracts to the successful generators. These contracts for difference with large-scale wind and solar generators pay the generator for the difference between an agreed fixed price and the prevailing wholesale price of electricity. The payment can be viewed as a ‘top-up’ payment to provide the renewable generators with a predictable level of revenue.
These contracts were entered into at times when wholesale prices were much higher. Given the recent significant reduction in wholesale electricity prices, the payments under these contracts have substantially increased. EvoEnergy’s payments under these contracts have tripled in one year from $42 million to $127 million.
Under the ACT Government’s renewable energy target legislation, EvoEnergy is required to recover these jurisdictional charges from the ACT community. This is achieved by passing the costs through in their network tariffs.
Should wholesale prices increase, the payments under these contracts will decrease, resulting in a reduction in network tariffs.
The ACT Government is not the only jurisdiction to use contracts for difference to drive renewable energy development. These contracts are also used in other jurisdictions.
For example, the New South Wales Government’s Electricity Infrastructure Roadmap released in November 2020 contains an Infrastructure Safeguard scheme that uses contracts for difference, and the net cost of the safeguard will be recovered from distribution businesses in their network tariffs. This mechanism has yet to be fully designed and is only likely to be operational in the next 12 – 24 months.
Victoria also used a form of contract for difference as part of the first round of reverse auctions in its Renewable Energy Target in 2017/18. Government agencies and departments administer this scheme, and any costs or revenues from these contracts are ultimately covered through the Victorian Government’s budget rather than via network charges.
If you have any questions or need advice on the impact of the network tariff increase on your business, please contact your Energy Action account manager directly or contact us on 1300 964 589.
Federal Budget - A focus on emissions reduction, electricity and gas
In May 2021, the Federal Government handed down its 2021-22 budget with $1.8 billion worth of new initiatives, support, and investment in key areas of emissions reduction, electricity and gas. The Government’s perspective is that the budget measures will “provide reliable, secure and affordable energy to all Australians, and increase investment in technology solutions to reduce emissions in a way that supports jobs and economic growth.”
Key investment areas
The budget announcement included several key initiatives that will impact energy market development, help develop new technologies, or assist businesses and large energy users reduce emissions and better manage energy costs.
Investment in emissions reductions initiatives represents $1.2 billion in aggregate. These are designed to stimulate the development of new technologies as well as reduce energy costs for businesses. Examples include:
- $280 million to establish a “below baseline” crediting mechanism to incentivise and reward large industrial facilities for reducing energy consumption and emissions below an agreed baseline or limit.
- $276 million to further accelerate the growth of an export hydrogen industry by establishing four additional clean export hubs.
- $50 million of specific funding for ARENA to invest via venture capital type mechanisms as an alternative to grant funding
- $14.3 million to assist in reducing costs and improving the efficiency of the reporting under the National Greenhouse and Energy Reporting Scheme
- $10.4 million to assist in expanding the range of options available to businesses seeking to reduce emissions through the Climate Active program voluntarily.
There is approximately $215 million investment in electricity-related initiatives designed to maintain security, reliability and competitive pricing. Examples include:
- $76.9 million to assist the Portland aluminium smelter in participating in the Australian Energy Market Operator’s Reliability and Emergency Reserve Trader scheme.
- $34.3 million to continue implementing the energy market reform agenda currently in progress through the Energy Security Board’s post-2025 electricity market review program.
- $30 million to support a grid-scale battery and microgrids in remote indigenous communities in the Northern Territory
- $24.9 million to assist new gas-fired generators to better prepare for hydrogen-based electricity production
- $19.3 million to invest in new renewable energy microgrids in northern Queensland
Approximately $58 million in new gas-related initiatives were also announced to continue the Government’s push towards a gas led recovery. Examples include:
- $38.7 million to support key gas infrastructure projects to assist in alleviating potential supply shortfalls
- $6.2 million to support the continued reform and development of the Wallumbilla Gas Supply Hub in Queensland. That is designed to assist in improving the liquidity and transparency of gas pricing.
- $4.6 million to reforms aimed at assisting large gas businesses to negotiate competitive outcomes in gas supply arrangements better.
There have been mixed reactions from sectors of the energy industry, the opposition and other stakeholders to certain investments outlined in the budget.
However, it is clear that the Government is continuing its focus on technology-related investments to reduce emissions while maintaining reliability, energy security and competitive prices.
If you have any questions or need advice on the impacts and opportunities of the budget on your business, please contact your Energy Action account manager on 1300 964 589 or by clicking here.
You can find out more about the Australian Federal Budget for 2021-22 by clicking here.
Federal Government powers ahead with gas-led recovery
The Australian Government has commissioned a $600 million gas-fired power station in the New South Wales Hunter Valley to fill a 1000 MW gap in generation capacity when the Liddell coal-fired power station closes in two years.
Announcing the go-ahead in May, Prime Minister Scott Morrison said electricity prices could rise by as much as 30% in NSW if the 660 MW open cycle gas turbine didn’t go ahead.
In what is a significant intervention by the Federal Government into the energy market – ordinarily managed by the states – this initiative marks a new development in the provision of energy in Australia.
The government insists that gas is a transition fuel that will support the renewable energy in the system and that without the uplift in capacity this new plant will provide, electricity prices would rise, and the state’s grid would be lacking.
Power shortfall debated
Many in the private sector were not in agreement with the Government, however, arguing that the gap created by the closure of Liddell would be around 200 MW rather than 1000 MW. The Australian Energy Market Operator also leaned into that view, saying that only between 153 MW and 215 MW would be needed.
Others disagree and say the government stepped in where the free market failed to do so and that the new plant will work alongside the 316 MW gas power station EnergyAustralia is building along Lake Illawarra, south of Wollongong.
The Tallawarra B power station will be the country’s first net-zero hybrid plant capable of running on both hydrogen and natural gas and will sit alongside the existing Tallawarra A 435 MW gas plant.
Illawarra hydrogen hub
EnergyAustralia received $83 million from the government towards the power plant expected to be operational by 2023-24 before Liddell closes. Tallawarra is being seen as an essential step towards establishing a hydrogen hub in the Illawarra.
The Tallawarra B plant is the result of an agreement between the private sector and the state and federal governments. Energy Australia plans to offset the plant's carbon emissions over its lifetime through a combination of renewable technologies like green hydrogen and carbon credits.
Tallawarra will be the first dispatchable power station built in NSW in more than 10 years and will set a new benchmark for gas generators, consistent with the state’s emissions plan to be net zero by 2050.
Impact on pricing
Energy Action believes that the ‘quick start’ nature of the proposed gas-fired power station in the Hunter Valley is likely to assist in ‘’firming’’ the intermittency associated with renewable projects. Should the project go ahead and attract new renewables projects to the Hunter Valley region, it is likely to place downward pressure on electricity prices beyond 2024
Regardless of whether it attracts more renewable projects, the plant is expected to limit price-spikes from supply disruptions and provide greater supply reliability.
At this stage, the announcement of the proposal has had practically no impact on 2024 electricity contract prices. Energy Action remains of the view that customers should be seeking to secure fixed-price supply agreements out to 2024/2025.
For more information about the potential future impact on pricing or any enquiries related to your contract, please contact your account manager on 1300 964 989 or click here.