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Australian renewables uptick to continue despite policy uncertainty

Publication Date: 15 Nov 2018 - By ReachX Team By ReachX Team
Actionable
Differentiated

Environmental, Social & Governance Macro Multi Asset Australia & Oceania Energy

Investment in renewable energy in Australia is set to continue over the next few years, supported by state government targets, industry demand for renewable energy as a means to mitigate exposure to climate risk, and the sector's improved economics, according to a leading rating agency. 

In a recent note to clients, Moody’s said signs of improving renewable energy investment remain positive but it also expressed fears about the “lack” of a stable and predictable energy policy.

Nicholas Chapman, a Moody's Vice President and Senior Analyst said:"We expect renewables to comprise a growing share of Australia's electricity generation, with the large utilities driving ongoing demand for renewable energy projects in the longer term.”

However, energy policy varies significantly across the various states and territories, with uncertainty in particular surrounding each government's commitment to achieve a generation mix that balances the need for security of supply, low emissions and cost effectiveness, Chapman added. 

New committed renewable energy projects are mainly situated in Victoria and Queensland, with wind and solar being the respective dominant fuel sources. The committed and proposed development pipeline, however, is larger; more diversified and includes hydro initiatives.

Despite the healthy pipeline, Moody's points out that some investment is being hindered by policy uncertainty, with significant divergence evident across states in renewable electricity targets and associated investment incentives.

As policy changes could affect energy prices, consumers have shown reluctance in entering into the long-term, fixed-price power purchase agreements (PPAs) typically used to fund new projects.

Similarly, the credit profiles of most standalone renewable projects are constrained by their small scale, single-asset nature, and exposure to price and volume risk. The length of any PPAs entered into has a direct bearing on credit risk for such projects, given the potential for cash flow volatility on expiry of the agreement.

Finally, Moody's says gas-fired generators will continue to play an important - although evolving - role in Australia's energy markets.

“While the elevated cost of gas means it will play a smaller role in providing baseload power and will be used more for transition capacity, the operational flexibility of gas-fired generators allows for rapid dispatch to firm the intermittent supply of renewable generation,” the agency concluded.

 

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