Demand driving transition to renewables in AustraliaNovember 5, 2019 / By
Investors have shown increasing interest in renewable energy investments in recent years as the sector has grown while opportunities and yields in core sectors have dwindled. So what are the underlying drivers of supply and demand for renewable projects in Australia?
The National Energy Summit earlier this month highlighted the unprecedented growth in the renewable energy sector, following the reforms to the Renewable Energy Target 2020 (RET) in 2015. However, with targets met, growth in the industry is forecasted to soften significantly.
Since the reforms to the RET, a little over 6GW of new power has been sourced from renewable energy, largely generated from solar and wind energy. The majority of which (73%), was commissioned in 2018 – 3Q19 (Figure 1). The number of projects currently committed is expected to add a further 5.6GW of renewable energy to the market between 4Q19 – 2022. However, the Federal government currently has no plans to replace the 2020 RET. As such, renewable energy projects are currently expected to fall sharply in 2022 once most of the committed pipeline has cleared. This highlights the importance of a Federal level policy in maintaining investor confidence and mitigating risk.
Figure 1: Confirmed renewable energy project pipeline in Australia
by current status and expected completion year*
Source: JLL Research as at August 2019
*Only projects with a capacity of 1MW and above are included
While Federal policy has played a large role in the growth of the sector over the last four years, power purchase agreements (PPA) have increased sharply in 2017 and 2018. The uptake and setting of renewable energy and sustainability targets by Australian businesses has generally lagged compared to global counterparts. However, high energy costs and increased demand from consumers for products and services that are derived from renewable energy, has led to a shift in many organisations’ sustainability targets.
PPAs underpin the viability of renewable projects to reach financial close. So far, at least 33 PPAs have been signed by a wide range of organisations, including states and territories, universities, corporates, banks, manufacturers, local councils, supermarkets and energy providers. PPAs are expected to continue to grow as many of these organisations have signed PPAs for only part of their energy needs and will be looking to sign further PPAs to reach a target of 100% renewably sourced energy. Furthermore, many of them are also the first, or one of few organisations within their respective fields to take action to achieve their targets. As renewable energy becomes the norm, more organisations from each field will follow, which will see an increase in demand for renewable energy across Australia.
While demand for renewable energy may be sustained without a Federal policy, investment in the medium-term will be affected by the lack of a RET beyond 2020 and by a grid that is more suited to conventional energy generators that is causing a delay in connecting renewable energy generators. Hence, some action at a Federal level may be required to resolve these medium-term constraints on investment and supply. Nevertheless, it is apparent that renewables will inevitably be a part of Australia’s energy solution and there will be further significant waves of investment in the sector over many decades.