AUSTRALIAN
COMMUNITY
RENEWABLE
ENERGY
2
Contents
Executive Summary 3
Community Renewable Energy 4
Background 5
Why Community Renewable Energy? 6
Australian Community Renewable Energy (ACRE) 8 Community Renewable Energy Fund (CREF) 10
Outcomes 12
Role of Government 16
Case Study: Hepburn Wind 17
CRE Project Pipeline 18
Future Projects 19
Appendix One: Modelling 21
Appendix Two: Endorsements 42
2
Executive Summary
Australia is moving towards a lower carbon emission future. While the CPRS is aimed at creating the required market mechanisms to motivate this transition, there is little that operates at the community level for individuals to identify with.
An opportunity exists to engage individuals through community renewable energy (CRE) projects that deliver a range of valuable outcomes:
• enhancing local skills, creating long-term local jobs, and stimulating regional economies
• overcoming objections to the development of renewable energy alternatives
• delivering substantial benefits to the grid through distributed generation
• harnessing a low-cost source of patient investment funds
• providing a platform for innovation in renewable energy.
There are encouraging signs that a CRE sector is emerging in Australia, however it’s future is far from secure unless certain market failures are addressed including:
• Communities are keen to provide low cost funds, however these funds are under-employed as institutional co- investors are not yet participating in the sector.
• Community groups are reinventing the wheel for every project, imposing inefficiencies that effectively price projects out of the market.
This paper proposes the establishment of a CRE project funding and support entity – Australian Community Renewable Energy (ACRE) – that will overcome these barriers and create a self-sustaining CRE industry.
Our modelling demonstrates that over ten years ACRE has the potential to leverage a $99.5m investment by government into 100 CRE projects worth over $769m. The 100 projects modelled will have a combined capacity of 224 MW, generating over 760 GWh annually by 2020, and will create over 850 jobs, 117 of which will be direct, permanent jobs in regional Australia.
One such CRE project, Hepburn Wind, in central Victoria, is now ‘shovel ready’. The project is at a critical stage and requires modest financial support to begin construction. If funding is received, turbines could be operational by Q1 2010. Hepburn Wind’s success will establish ACRE as the driving force behind future projects.
Specifically, we are requesting:
• Commitment to establish ACRE by providing $99.5m of funding over ten years to build 100 CRE projects and in the process develop a sustainable CRE industry.
• Commitment by the end of June 2009 to provide $2.2m to Hepburn Wind by September 2009 to be matched at least 3:1 with private and community investment.
The newly announced body Renewables Australia may provide an appropriate framework within which to construct these initiatives. Funding would initially be sourced from government, with the aim of becoming self-funding within ten years through the application of dividends from operational CRE projects and membership income.
Towards industry sustainability
The CRE sector requires direct support while the foundations of a sustainable industry are laid. Due to the immaturity of the sector in Australia, existing CRE projects are each expending significant resources
‘pathfinding’. Great inefficiencies arise as each project starts from scratch. Furthermore, normal capital structures are not currently available to CRE projects.
With ACRE’s support, the industry will deliver a series of successful projects, and thereby mitigate these issues.
Once the above issues have been addressed, CRE projects will be able to compete on a level playing field with
Community Renewable Energy
In this paper, community renewable energy (CRE) projects are:
• initiated by the local community
• predominantly funded and owned by the community
• financial benefits remain in the local community
• welcomed within the community
• accountable to their host community
• built and managed creating as many local jobs as possible
• scaled to the community’s own energy requirements
4
Background
The Rudd Government is pursuing a pragmatic policy response to climate change, balancing investment in new and proven energy sources, and crafting a mix of initiatives that operate at different levels through the energy supply chain, from major utilities to individuals.
While macro policy planks such as the expanded RET and the CPRS are fundamental, and a range of abatement incentives are available at the individual level, there is currently a significant gap – and opportunity – in between these two ends of the policy spectrum. We see particular scope for targeted government support at the community level to unlock substantial benefits not only in carbon abatement but ancillary social, political, community and economic benefits.
Renewable energy initiatives are frequently locally driven. The growing number of climate action groups (CAGs) around Australia demonstrates this, along with the grassroots leadership being provided in this area by many municipal councils, schools, community and local environment groups. However, the ability of community groups to make a direct contribution towards carbon abatement by investing in Community Renewable Energy (CRE) projects is heavily constrained. Presently, of over 150 climate action groups around Australia only one has a project that is ‘shovel-ready’. Notwithstanding high levels of local support, the passion of committed individuals and promising business models, the majority of CRE initiatives still fail to advance as far as robust feasibility testing. Inherent complexity, a lack of specialist skills and resources and the recent credit crunch have combined to frustrate most efforts in this nascent sector.
One exception is the Hepburn Wind project, in the Central Highlands of Victoria. Developed by the local CAG based in Daylesford, the project has harnessed the specialist skills of a pioneering CRE developer, as well as the support of Sustainability Victoria (State Government). Even though this project is the most advanced CRE project in Australia, it remains at a critical stage.
The heart of our proposal is a practical intervention by which government can pump-prime the development of a sustainable community renewable energy sector in Australia. Our proposal is designed to speed the development of this sector to play a material role in Australia’s carbon abatement effort, and to ensure it can move rapidly to become a mainstream sector without the need for ongoing government investment.
Practical intervention by government to pump-prime the development of
a sustainable community renewable energy sector in Australia.
6
Why Community Renewable Energy?
Although community ownership and financing of renewable energy projects is a relatively new concept in Australia, it is widespread in several European countries and rapidly developing in the US.
Community ownership has significant benefits. The model:
• improves local economies, provides valuable distributed generation and accelerates the uptake of renewable energy through the power of example
• creates jobs in regional areas
• transforms concerned energy consumers into credible advocates who can attest to the benefits of renewable energy projects first hand, and thus cut through resistance at the local level.
Many more communities will need to embrace renewable energy infrastructure in their back yard over the coming decade for Australia to meet the expanded RET target of a four-fold increase in renewable energy generation.
By way of example, it’s instructive to compare the progress of renewable energy projects in regional Victoria.
Hepburn Wind was community initiated, has met negligible local opposition and is now ‘shovel ready’, having attracted millions of dollars in local subscriptions. In contrast, corporate projects without local ties have faced stiff opposition. Real engagement with the community, by the community, has been the foundation of Hepburn Wind’s success.
We believe that specific initiatives addressing CRE projects would be well received and have impact at both a political and practical level. The significance of the benefits that a community and the nation at large can derive from CRE projects cannot be overstated, and is worth examining in more detail:
Empowers communities to be active in carbon abatement
• Direct ownership changes attitudes at the local level, and unlocks the power of example and advocacy
• Community ownership leverages committed individuals in a community, giving them a positive outlet for action
• Community ownership increases support for additional climate change mitigation measures (the ‘what next’
phenomenon) also improves people’s broader environmental awareness
Delivers regional economic benefits
• CRE projects create jobs in regional areas
• CRE infrastructure generates new income streams for communities and adds depth to local / regional economies
• Project profits largely remain in the community and deliver a ‘felt benefit’
Accelerates renewables industry development and impact
• Small projects lead to large ones. Denmark and Germany provide examples where CRE initiatives have led the way for large scale corporate investment in renewable energy, significantly boosting the sector’s overall capacity
• In the current environment, with external funding sources inaccessible, mid-scale CRE infrastructure is a viable way for a diverse set of industry participants to develop within Australia. A viable industry sector needs an ecology of specialist participants, for example community organisers, engineering consultants, developers, project managers, legal specialists, facilities managers
• With successful local examples, community opposition is reduced, dramatically reducing drag on all CRE projects
Real engagement with the community, by the community, has been the
foundation of Hepburn Wind’s success.
Taps a new funding source – the community investor
• The success of Bendigo and Adelaide Bank’s Community Bank® model is an example of the potential of the
‘community investor’. People who wouldn’t normally invest are prepared to contribute towards community businesses because they trust their neighbours and feel a high personal affinity with the project
• The Hepburn Wind project shows that communities will invest significantly in local projects regardless of institutional investment
• Community ownership encourages greater diversity in the investor base and taps a latent, and lower-cost patient source of capital
• UK experience shows that CRE projects tend to attract ‘serial investors’. Investors in one community’s project are likely to invest in further CRE projects down the track
Delivers broader grid benefits
• CRE infrastructure promotes distributed generation, reducing losses, increasing grid stability and reducing the load on the transmission network, thus improving grid efficiency
• The small size of most CRE projects creates the potential to site projects close to load, reducing transmission costs and/or the need for transmission line augmentation
• CRE projects typically feed into the distribution network, not the transmission network. They are therefore simpler and cheaper to connect to the grid than larger scale projects
Bridges the gap between individual and corporate action
• The average rooftop solar installation delivers 1.5 kW, while a utility scale renewable energy project may deliver in excess of 100 MW. Between these two extremes lies an enormous opportunity for medium scale and CRE to play a part
• CRE projects, typically in the range 1-10 MW, can deliver efficiencies that approach those of utility scale infrastructure without sacrificing the many benefits of small scale initiatives
Provides a platform for innovation
• CRE projects provide appropriately scaled platforms for experimentation and innovation, which can be later applied to utility scale infrastructure
8
Australian Community
Renewable Energy (ACRE)
The Australian CRE sector has great potential and there is growing interest and excitement around community led carbon abatement initiatives. However, the barriers to entry are high and inherent complexity often overwhelms what are initially volunteer efforts. Specialist skills in capital raising, corporate governance, engineering and energy markets are generally not available locally or affordably. Start up costs can be prohibitive, and long delays reflect the fact that each community typically ‘reinvents the wheel’ many times in attempting to advance a CRE project. This increases the cost of projects, and reduces the effectiveness of government assistance.
There is significant potential for compressing CRE project timelines, reducing inefficiencies and boosting uptake through the provision of seed funding and sharing of best practice information, contacts and advice. In addition, and particularly while commercial credit and institutional investment is effectively unavailable to CRE projects, there is a case for direct investment and the making of grants to ensure that viable projects are given the opportunity to succeed.
A national body would be the ideal mechanism to deliver this assistance, and accelerate the growth and impact of the sector. We propose such a body — Australian Community Renewable Energy (ACRE) — be set up with the support of government, possibly as a component of the recently announced body Renewables Australia.
Funding would be disbursed to eligible CRE projects via a Community Renewable Energy Fund (CREF), managed by a specialist Investment Advisory Committee of the ACRE Board.
Proposed role of ACRE
ACRE will support the development of the nascent CRE industry and accelerate the uptake of CRE projects through:
• developing feasibility models
• providing funding assistance (see CREF, below)
• attracting, through the power of precedent and example, institutional investment in CRE
• facilitating knowledge transfer across communities
• creating a network of CRE developers, suppliers, contractors, investors and lenders
• aggregating services and supply to capture economies of scale
• trouble-shooting market failures
• enhancing Australia’s international reputation for action on climate issues.
We are not proposing that ACRE act as a project developer. Each individual project will engage their own development resources.
ACRE will support the development of the nascent CRE industry and accelerate the uptake of CRE projects
Govt Grant
Membership Fees + Dividends
Funding + Support
Project: Wind
Project: Mini Hydro
Project: Solar
Project: Bioenergy ACRE
Proposed structure & governance
Appropriate corporate structure and governance arrangements will be critical to the success of ACRE.
Obviously, Renewables Australia needs to be factored into any proposals around the architecture and governance arrangements of renewable energy bodies. We look forward to further details from the Government, but provide the perspectives below as a contribution to this dialogue.
We have received legal advice from Arnold Bloch Liebler outlining an appropriate model that would provide the necessary transparency, accountability and flexibility for ACRE to be effective and sustainable. In turn, ACRE will develop the appropriate governance structures around the CREF.
Bendigo and Adelaide Bank believes their Community Bank® model could be readily adapted to this purpose, and our due diligence supports this. The Bank’s model enables communities to establish co-operatively spirited but fundamentally commercial enterprises. Community members and other business partners invest directly in the business and receive a reasonable return, with a portion of profits invested back into projects nominated by the local community. The model is proven and effective, and built on the twin principles of commercial return and community benefit. Bendigo and Adelaide Bank has committed to working with ACRE to adapt their model to the CRE sector.
While the details of ACRE’s structure will be shaped by government and stakeholder feedback we suggest a three-tiered structure comprising an independent Board, a specialist Investment Advisory Committee and a small Secretariat. Transparency would be assured through appropriate funding protocols, normal strategic and operational planning processes and corporate communications.
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Community Renewable Energy Fund (CREF)
The CREF would be administered by the specialist Investment Advisory Committee of the ACRE Board and would act as the funding arm of the body. We believe the case for funding is most acute at two key points in a typical CRE project: the initial scoping and feasibility process (grants) and to bridge the funding gaps necessary to attract institutional investors to the sector (investments). As the industry matures and project returns are proven, we envisage the need for this funding will reduce markedly as more private investment becomes available.
The CREF is proposed as a revolving fund, whereby returns on direct investments in projects would be contributed back into the fund to be reinvested into new projects.
We would aim to ensure that the CREF is self-funding within ten years.
Supporting rigorous and efficient feasibility studies
Community groups struggle to raise the funds required to properly resource the feasibility phase. Identifying the appropriate resources to efficiently conduct the studies is difficult.
ACRE will be tasked with developing a feasibility system similar to the one used successfully by Bendigo and Adelaide Bank in support of its Community Bank® model to test the viability of potential community banking services. The CREF would also provide matching seed money to eligible projects to complete a robust and streamlined feasibility study using service providers with CRE expertise to arrive at clear conclusions.
Govt
Grant
Projects CREF
Community
Institutions
Debt
ACRE
Funds
Grant (CREFg) Investment (CREFi)
Dividends
Investment Dividends
Investment Dividends
IP Fees
Loan Interest
Attracting institutions and other private investment
While the CRE industry in Australia is young, virtually all project inputs will come at a premium. Even as the industry matures, it faces some intrinsic hurdles that may result in lower project returns than those achievable through large scale renewable energy projects. These include:
• the need for community consensus may prevent projects being built at optimum scale (e.g. 2 rather than 50 turbines)
• the process begins with a committed community rather than a perfect site, thus many sites may be viable but not ideal for a particular technology
• projects may use technologies that are available but not necessarily least-cost or not yet at the bottom of their cost-curve (e.g. concentrated PV, biomass, wave, tidal).
As a result, early projects will typically yield sub-investment grade returns, the CREF will make grants to these projects to ensure commercially acceptable returns can be delivered. The requirement for these grants will reduce as the CRE industry matures.
We reference both the feasibility grants and the project grants as ‘CREFg’. Projects making use of CREFg will be required to contribute to ACRE once operational.
Managing the transition to sustainability
Even where projects deliver investment grade returns, the reality is that institutional investors (e.g. super funds, venture capital, etc) are highly reluctant to invest given:
• the perceived risk of investing in any community project
• the lack of track record in the sector
• small project size
• inflexible templates set by investment advisors
• the pricing of risk in the current economic climate.
Over time, and with the success of CRE businesses, we believe the perceived risk profile will moderate – along with the pricing of risk more generally – sufficient to attract sustained institutional investment in the sector. With ACRE’s support any inherent inefficiencies of community-scale projects can be mitigated. In the meantime, our challenge is to facilitate successful CRE demonstration projects that prove the model and position the sector to attract institutional investors as economic conditions improve.
The CREF is the ideal vehicle to invest in eligible CRE projects, along with community and other retail subscribers, to ensure these early initiatives can get off the ground. Such investment, referred to as ‘CREFi’, would allow viable projects to proceed to implementation.
As investments, CREFi funded-projects would return dividends to ACRE, supporting the establishment of further CRE projects.
Successful projects are the ultimate solution to the reluctance of institutional investors to participate in the CRE sector. Over time we expect institutional investors to replace CREFi as a funding source.
Investment criteria
To be eligible for funding, projects will need to meet ACRE’s investment criteria. Eligibility criteria will be similar to that of a Bendigo and Adelaide Bank community enterprise, but may include:
• project to be focused on the development of renewable energy
• managed by a community-led organisation
• financial capacity to match funds on a ‘dollar for dollar’ basis
• capability and commitment of community group.
12
Outcomes
McLennan Magasanik Associates (MMA) were engaged to develop an economic model to determine the feasibility and impact of creating 100 CRE projects over the next ten years. See Appendix A for the final report.
The results of the modelling are included below.
Number of projects
The first objective of the modelling was to establish the feasibility of developing 100 renewable energy projects in communities across Australia. Projects were chosen by an optimising algorithm that was constrained to ensure that communities across the country were selected with regards to predicted capabilities required to establish a CRE project. In striking the balance between a meaningful number of projects and cost to the government, a total of 100 projects were modelled.
MMA’s modelling reveals that the 100 selected CRE projects will have a total capacity of 224 MW, generating 764 GWh p.a.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0
5 10 Number 20 of projects
Solar Mini-hydro Biomass 25 Wind
30 45
Diversity across technologies
We envisage that ACRE will be ‘technology agnostic’. ACRE will support whatever mainstream technology best suits the specific community, although this will naturally be tested through the feasibility process. If a technology is proposed that is not least-cost, this will also be highlighted and considered during this process.
For the purposes of our proposal, we have concentrated on a mix of technologies that includes solar photovoltaic, wind, biomass and mini-hydro.
Exposure to renewable energy
The geographic breakdown of projects is based on population densities by state and territory. It is anticipated that 1,000,000 Australians will be exposed to renewable energy in their communities as a result of this initiative.
Solar / PV 33%
Mini-Hydro 11%
Biomass 21%
Wind 35%
Northern Territory 3%
Western Australia 15%
South Australia 7%
Tasmania 9%
Victoria 18%
ACT 4%
NSW 30%
Queensland 14%
14 Local expenditure
The results of MMA’s modelling shows the total capital expenditure spent locally to be $209m over ten years.
Jobs created
In line with the predominant footprint of CRE projects in outer metropolitan and regional areas, the majority of direct jobs they create are in these locations. MMA’s model estimates 879 jobs will be created over the ten year period, 117 of which will be direct, permanent jobs in regional Australia.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0
5 10 15 20 25 30 45
Expenditure $M
Direct employment 0
100 200 300 400 500 600 700 800 900 1000
Indirect employment
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Number of jobs,
full time equivalents
Greenhouse abatement
MMA’s model estimates the level of abatement from 100 CRE projects to total 2.7 million tonnes of CO2 over ten years.
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
Abatement, MT CO2e
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Abatement MT CO2e
16
Role of Government
Recently announced budget measures, including the establishment of Renewables Australia, demonstrate both the Government’s commitment to active policy making around carbon abatement and the rapid evolution of key structures and processes in the field.
In making our proposals, we wish to work in with the government’s plans as closely as possible, and avoid any duplication or unnecessary complexity. Therefore our thoughts on the potential role of government,
set out below, are simply suggestions to facilitate feedback. We look forward to this dialogue.
• Government review and approval of ACRE structures and governance, including CREF investment protocols, as well as any relationship with Renewables Australia and other relevant bodies;
• Government approval of appointments to ACRE Board and the appointment of its Chair. This may be informal and broadly analogous to the relationship with an independent statutory body;
• Annual public reporting via a properly constituted report, posted on the internet and submitted to the government;
• Funding of $99.5m over ten years for ACRE as set out below.
At the end of ten years, ACRE will be receiving dividends of $17m p.a., enabling the creation of an estimated 17 projects annually. However, it is expected that significant private investment will be flowing into the sector by this point, which will positively impact the number of projects.
0 5 10 15 20 25 30 35
Cost, $M
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cost $M
Case Study: Hepburn Wind
We propose that a grant of $2.2m be made to Hepburn Wind — Australia’s most advanced and only
‘shovel ready’ CRE project — to bootstrap the CRE industry, ACRE and the CREF.
Hepburn Community Wind Park Cooperative (Hepburn Wind) is a textbook example of the catalytic role CREF could play, providing the final impetus to get a viable, well-constructed CRE project over the line. Supporting Hepburn Wind would not only bring this flagship project to fruition, but also would officially establish the CRE sector in Australia and prepare it for an independently funded future.
Background
The Hepburn project was established in 2005 to develop a community-owned wind farm that would help meet the electricity needs of the Hepburn Shire.
The wind park will consist of two wind turbines each rated at 2 MW, located on Leonards Hill approximately 10 kilometres south of Daylesford, Victoria. The energy production from the wind park will average over 12,200 MWh of renewable electricity each year, which is enough energy to power over 2,300 homes, offsetting almost the entire residential electricity demand of both Hepburn Springs and Daylesford.
The electricity will be fed directly into the local distribution network.
Project Status
The following milestones have been achieved:
• 80% of total capital already secured or pledged:
- $4.1m from 764 predominantly local investors — 84% investing less than $5,000
- $1.5m investment from a Melbourne based charitable trust, on condition that equivalent matching funds can be sourced
- $975,000 grant from Sustainability Victoria to support feasibility and project development - $2.75m debt facility through Bendigo and Adelaide Bank.
• Contractual rights to the site lease
• VCAT approved planning permit
• Contracted project developer, Future Energy Pty Ltd (on success fee)
• Provisional grid connection agreed
• In-principle Power Purchase Agreement negotiated.
Assuming Hepburn Wind’s remaining funding requirements can be met this financial year, the preferred turbine supplier has committed to completing as early as Q1 2010. The project continues to enjoy strong support from the community and local investors, as well as from key stakeholders including the project developer Future Energy, turbine supplier REpower, lender Bendigo and Adelaide Bank, Hepburn Shire and Sustainability Victoria.
However, Hepburn Wind is at a critical stage and remains $2.2m short of required funding. Exhaustive approaches to institutional investors have been unsuccessful, given the issues previously discussed and the present economic conditions. We believe government participation is warranted as we break new ground in establishing an Australian CRE sector.
Investors committed funds from 25 July 2008. If the remaining funds are not secured soon, the directors feel that they will not be justified in holding on to shareholders’ funds, and the business will be wound up. As a result, the project is under significant time pressure.
Winding up the flagship CRE project in Australia would have a devastating impact on this nascent industry sector.
18
CRE Project Pipeline
There are a number of CRE initiatives at different stages of development around Australia.
A few examples include the following:
Denmark Community Wind Farm, WA
• Proposal for a two turbine, 1.6 MW wind farm
• Permits and approvals secured, feasibility study completed, about to begin capital raising
• Received $1.4m from Renewable Remote Power Generation Program
• Centrepiece of Western Power’s ‘Green Towns Project’
Mt Barker Wind Farm, WA
• Proposal for three 800 kW turbines outside Mt Barker
• Received $4.2m from Renewable Remote Power Generation Program
Solar Farm, Bega NSW
• Proposal for a 1-2MW solar farm
• Managed by a CAG operating in 8 rural shires and 2 Sydney suburbs
• Received $100,000 from Green Precincts to fund feasibility study
• Applied for further Green Precincts funding ($1.4m)
Solar Systems Projects
• Solar Systems have shown strong interest in the ACRE/CREF model and indicated that it is compatible with their plans for regional CPV farms in the vicinity of 5 MW
Waste to Energy Project, Ararat Rural City, Victoria
• Proposed biomass to energy plant for Ararat and Stawell Shires
• Diversion of 8,000 tonnes of Municipal Solid Waste from landfill
• Regional Development Victoria funded preliminary analysis complete, indicating favourable economics
Camperdown Compost Co, Western Victoria
• Proposed 3 MW CHP plant, estimated cost of $6 – 7m
• Biomass resource audit underway
• 9 agricultural processing businesses have expressed interest
Central Highlands Bioenergy, Victoria
• 1 MW pilot plant in Ballarat, expanding to 10 MW
• Regional Development Victoria funded biomass audit underway
• Pine plantation, municipal and farm waste
Future Projects
One of ACRE’s first tasks will be to identify appropriate communities capable of establishing CRE projects.
Significant capability and desire already exist in many communities already. We expect that ACRE will find many ready communities amongst:
• 234 communities that have established a locally owned and operated enterprise to initially operate a Community Bank® franchise with Bendigo and Adelaide Bank, many of which are now looking to support their communities via other community enhancing initiatives
• 150+ communities that host a local climate action group
The map below indicates the widespread potential support for CRE projects across Australia by showing the current locations of climate action groups and Bendigo and Adelaide Bank branches.
Bendigo and Adelaide Bank branches Climate Action Groups
20
Appendix One: Modelling
Appendix Two: Endorsements
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Ref: J1760 Report V1, May 2009 McLennan Magasanik Associates
Project Team Walter Gerardi
Melbourne Office Brisbane Office
242 Ferrars Street GPO Box 2421
South Melbourne Vic 3205 Brisbane Qld 4001 Tel: +61 3 9699 3977 Tel: +61 7 3100 8064 Fax: +61 3 9690 9881 Fax: +61 7 3100 8067
Email:
[email protected] ACN: 004 765 235Website:
www.mmassociates.com.au ABN: 33 579 847 254AUSTRALIAN COMMUNITY RENEWABLE ENERGY
TABLE OF CONTENTS
1 INTRODUCTION__________________________________________________________ 2 2 METHOD AND ASSUMPTIONS ____________________________________________ 3
2.1 Principles ____________________________________________________________ 3
2.2 Model Structure_______________________________________________________ 4
2.3 Assumptions _________________________________________________________ 4
3 FINANCIAL ANALYSIS ___________________________________________________ 113.1 Project development profile ___________________________________________ 11
3.2 Cost ________________________________________________________________ 13
3.3 Revenues ___________________________________________________________ 14
3.4 Investment flows_____________________________________________________ 14
4 ECONOMIC AND SOCIAL IMPACTS ______________________________________ 164.1 Cost to Government __________________________________________________ 16
4.2 Local expenditure ____________________________________________________ 16
4.3 Employment impacts _________________________________________________ 17
4.4 Emission abatement __________________________________________________ 18
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Ref: J1760 Report V1, May 2009 2 McLennan Magasanik Associates
1 INTRODUCTION
Hepburn Wind is a community organisation building one of Australia’s first Community Renewable Energy projects – a 4 MW wind farm near Daylesford in Central Victoria. The project’s stakeholders believe an opportunity exists to extend the model to other communities and has formed an independent steering committee to investigate the feasibility of supporting the development of up to 100 similar community based projects over the coming decade. The intention is to use funds generated from the early projects to provide seed money for the development of other projects. In order to establish the fund, it is hoping to obtain a grant from the federal government to provide an initial source of seed funding. Eventually, the development of community based projects will become self- funding with no need for additional Government financing.
Hepburn Wind has asked MMA to undertake a study of the potential impacts from
developing a community based fund to support renewable energy projects. A model was
developed to determine the uptake for community based renewable energy projects,
which not only provided adequate returns to community investors but also allowed for
sufficient revenue stream to replace the Government grants over time. The beneficial
impacts of the project provide a rationale for the Government support.
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
2 METHOD AND ASSUMPTIONS
The Federal Government is introducing two major policy initiatives that support the development of renewable energy generation. The Federal Government is planning to implement the Renewable Energy Target Scheme (RET), which mandates 45,000 GWh of additional renewable energy generation by 2020. The Government also intends to implement the Carbon Pollution Reduction Scheme (CPRS), which will make renewable energy technologies more competitive with traditional fossil fuel sources. Modelling undertaken for the Federal Treasury indicates that the CPRS will increase the opportunities for renewable generation as permit prices increase over time and conventional fossil fuel generation becomes more expensive. The Government also recently announced $1.36 billion expenditure on large scale solar generation, with the aim of encouraging 1000 MW of new capacity.
The study objective is to predict the uptake and timing of community based renewable energy generation projects to take advantage of the revenue streams provided under the Government programs. Some additional capital in the form of a grant is also being sought from the Federal Government to help establish the investment fund and to assist in the funding of the initial tranche of projects. This funding may be needed to overcome market failures in the provision of capital and the difficulty in establishing small scale generation under the market based framework of the NEM.
The developers intend to fund community based projects from three sources: debt; local community investors and an investment fund (called Community Renewable Energy Fund (CREF)). The developers are seeking some initial funding from the Federal Government to seed the CREF. The CREF will use this money as well as dividends from the local projects and membership fees (in return for developing projects, arranging financing and negotiating off-take arrangements as well as other commercial agreements).
A financial model was constructed. The model is used to determine the timing and type of community based renewable energy projects that enable an adequate return to funds deployed.
2.1 Principles
In constructing the financial model, a number of principles were adopted:
•
The community based projects were defined as small scale renewable energy
generation supplying electricity to nearby towns. The size of the project is therefore
such that there is very little requirement to transport energy beyond the local town.
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Ref: J1760 Report V1, May 2009 4 McLennan Magasanik Associates
better succeed in competing with large scale renewable options. The competition from other large scale renewable options were modelled by setting a Renewable Energy Certificate (REC) price matched to the lowest cost source of large scale renewable generation that could meet the expanded renewable energy target. The level of competition was further enforced by ensuring that the electricity price earnt by each project is no more than what would be earnt by a large scale renewable energy option.
•
Small scale projects as envisaged for this community based fund typically have higher capital and operating cost per unit of output due to the small scale of operation (that is, large scale projects can capture economies of scale). This cost disadvantage is assumed to be compensated by two mechanisms. First, the return to equity is likely to be lower than the return to equity being sought from large scale projects. This implies that community investors and the CREF will demand a rate of return that is lower than equity investors would normally consider. Second, due to their close proximity to local load centres, the community based small scale generation project are likely to have lower loss factors (to cover losses of energy during transmission) and would not require extensive upgrades of the local network.
2.2 Model Structure
A financial model was constructed to determine the costs and returns to ACRE, the manager and administrator of the community based projects and the CREF. The financial model has a linear programming algorithm embedded in the model. The algorithm determined the choice of technology and location as well as timing of commissioning of community based renewable energy projects that minimises the cost of generation. The algorithm was constrained in the selection process to ensuring that adequate returns to capital were achieved to investors and debtors. Some restrictions on location of projects were also imposed based on the prospects for communities to be available in each state to sponsor a renewable energy project. Up to 100 projects could be selected over the period to 2020.
The model calculated expected revenues, costs and returns to investors over the period from 2009/10 to 2039/40. Cash flows to and from ACRE, institutional investors and debtors were also calculated.
2.3 Assumptions
2.3.1 Options for new renewable generation
The model allowed for the selection of projects from the following technology types and
locations. This was based on MMA’s views of the viable technologies likely to be available
in each State or Territory. Twenty-two technology/region combinations were allowed in
the model. The majority of locations were assumed to be grid based, with the exception of
the Northern Territory some large scale remote area power supply systems were allowed
(servicing large towns such as Alice Springs and Tennant Creek).
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Table 2-1: Technology type and location
Wind - NSW Mini Hydro - Queensland
Wind - ACT Mini Hydro - NSW
Wind - Victoria Mini Hydro - Victoria
Wind - Tasmania Mini Hydro - Tasmania
Wind - South Australia Grid Connected PV - Queensland Wind - Western Australia Grid Connected PV - NSW Biomass - Queensland Grid Connected PV - ACT
Biomass - NSW Grid Connected PV - South Australia
Biomass - Victoria Grid Connected PV - Western Australia Biomass - Tasmania Grid Connected PV - Northern Territory Biomass - Western Australia Large Scale Solar/PV RAPS - Northern
Territory
A restriction on the number of projects that could be developed in each year was imposed.
This restriction was imposed as the level of resources available within ACRE would not allow a large number of projects to be developed in any one year.
Figure 2-1: Maximum number of projects to be developed in any year
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Ref: J1760 Report V1, May 2009 6 McLennan Magasanik Associates
•
Wind: 4 MW
•
Biomass: 2 MW
•
Mini-Hydro: 1 MW
•
Solar/PV: 1 MW
2.3.3 Technology assumptions
Key technical and cost assumptions for each technology are shown in the following table.
Data for these costs were sourced from published information and MMA’s data base of renewable energy projects. Fuel costs for biomass assumed that these projects would be confined to sourcing local biomass resources (and therefore with minimal collection and transport costs involved).
Table 2-2: Technical and cost parameters
Capitalcosts Transmission O&M
cost Fuel Ancillary Services MLF
$/kW $/kW $/MWh $/MWh $/MWh
Wind - NSW 2500 50 5 0 10 0.99
Wind - ACT 2500 50 5 0 10 0.99
Wind - Victoria 2500 50 5 0 10 0.99
Wind - Tasmania 2500 50 5 0 10 0.99
Wind - South Australia 2500 50 5 0 10 0.98
Wind - Western Australia 2500 50 5 0 10 0.98
Biomass - Queensland 4000 50 8 15 0 1.00
Biomass - NSW 4000 50 8 15 0 1.00
Biomass - Victoria 4000 50 8 15 0 1.00
Biomass - Tasmania 4000 50 8 15 0 1.00
Biomass - Western Australia 4000 50 8 15 0 1.00
Mini Hydro - Queensland 3400 50 4 0 0 0.95
Mini Hydro - NSW 3400 50 4 0 0 0.97
Mini Hydro - Victoria 3400 50 4 0 0 0.97
Mini Hydro - Tasmania 3400 50 4 0 0 0.96
Grid PV - Queensland 7000 50 5 0 8 0.98
Grid PV - NSW 7000 50 5 0 8 0.98
Grid PV - ACT 7000 50 5 0 8 0.98
Grid PV - South Australia 7000 50 5 0 8 0.98
Grid PV - Western Australia 7000 50 5 0 8 0.98
Grid Connected PV - NT 7000 50 5 0 8 0.98
Large Scale Solar/PV RAPS - NT 8400 50 10 0 8 1.00
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
2.3.4 Revenue assumptions
Electricity prices were sourced from independent analysis undertaken by MMA based on assumptions of medium demand growth rates as published by NEMMCO and the WA IMO. Long term electricity prices were based on the estimates of long run marginal cost of generation used by MMA for Federal Treasury. The prices were adjusted to reflect the impact of the carbon permit prices under the proposed Carbon Pollution Reduction Scheme. The prices are adjusted for the profile of generation for each renewable energy technology. The resulting electricity price in each State and Territory are shown in Figure 2-2 to Figure 2-5.
Renewable Energy Certificate (REC) prices were derived by taking the long marginal cost of the lowest cost alternative for large scale renewable generation and subtracting the weighted average wholesale electricity price. The derived forward price curve for RECs is shown in Figure 2-6.
Figure 2-2: Electricity price assumptions – wind projects
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Ref: J1760 Report V1, May 2009 8 McLennan Magasanik Associates
Figure 2-3: Electricity price assumptions – biomass projects
Figure 2-4: Electricity price assumptions – mini hydro projects
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Figure 2-5: Electricity price assumptions – solar/PV projects
Figure 2-6: REC forward price curve
2.3.5 Required rates of return
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Ref: J1760 Report V1, May 2009 10 McLennan Magasanik Associates
Table 2-3: Rates of return by investment class
Investment option Rate of return
Debt funding proportion 8%
Community investment proportion 10%
REAF Grant proportion 0%
REAF Investment Proportion 10%
Institutional Investors 15%
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
3 FINANCIAL ANALYSIS
Key financial results are presented in this section. A key outcome of this analysis is that in order for the proposed funding model to work would require the rapid development of projects early on in order to generate adequate funds to self fund latter community based projects.
3.1 Project development profile
The model choices the least cost combination of technologies and location that minimises generation costs. Up to 100 projects were selected in the period to 2020.
Around 224 MW of renewable generation could be developed under the proposed model for funding arrangements and project specifications. Developments are spread fairly evenly over the 10 year period.
Figure 3-1: Installed capacity
Wind dominates the mix of technologies chosen, with over 35% of the projects being wind
projects. This should not be surprising given the good wind resources in Australia and the
lower cost of this technology relative to other technologies. Solar/PV was also a major
component of the number of projects chosen, but the smaller size of each PV project meant
that only 40 MW of capacity of this technology was installed by 2020.
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Ref: J1760 Report V1, May 2009 12 McLennan Magasanik Associates
capacity factor available with this technology means that it comprises around 40% of the total generation by 2020. Solar/PV generation contributes only 8% of the total generation.
Figure 3-2: Proportion of total projects chosen by technology
Figure 3-3: Generation by technology type
Generation is concentrated in New South Wales, Victoria and Western Australia due to the
prevalence of good renewable resources and a large number of local communities.
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Figure 3-4: Generation by State and Territory, 2020, GWh
3.2 Cost
The present value of the costs of generation (including capital costs) over the life of the renewable energy projects was estimated to be around $556 million. Around 90% of this cost comprises capital cost (which is why costs fall off after 2020, when project development stops).
Figure 3-5: Annual costs
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Ref: J1760 Report V1, May 2009 14 McLennan Magasanik Associates
3.3 Revenues
Revenue was projected to grow from around $1 million in 2010 to $88 million in 2020, with revenues growing as more projects come onstream and as electricity prices increase. The present value of the revenue stream over the lives of the project was estimated to be $561 million.
Figure 3-6: Revenue streams
3.4 Investment flows
Capital expenditure over the 10 year period to 2020 was estimated to be around $770
million. Funding of this capital expenditure comes mainly from debt and from money
from the CREF fund.
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Figure 3-7: Source of funding of projects, $M and % of total
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Ref: J1760 Report V1, May 2009 16 McLennan Magasanik Associates
4 ECONOMIC AND SOCIAL IMPACTS
4.1 Cost to Government
A tenant of the funding model proposed is that the funding of community based renewable energy projects become self funding, with CREF investment returns replacing grants from the Government as revenue from projects increases. The analysis indicates that around $100 million will be required from the Government to meet the shortfall in funding from traditional debt and institutional sources and the CREF. Government funding is required over the first 6 years of the scheme as it requires a large book build of projects to occur before sufficient revenue can be generated to replace Government grants with money from the CREF.
Figure 4-1: Government grants required
4.2 Local expenditure
Capital expenditure on renewable generation amounts to around $770 million. Not all of
this capital expenditure will be spent in local communities, as much of the capital
expenditure will be spent on imported equipment. Based on published estimates, around
20% to 30% of the capital expenditure is typically spent in local goods and services. Using
these estimates, around $209 million will be spent on local goods and services in the
communities supporting the renewable energy projects.
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Figure 4-2: Local expenditure
4.3 Employment impacts
Around 117 jobs will be created in local communities as a result of the projects developed.
The income earnt with these jobs and the money spent on local goods and services will create further 760 jobs although a large share of these jobs will not be in the local communities.
Figure 4-3: Jobs created
AUSTRALIAN COMMUNITY RENEWABLE ENERGY
Ref: J1760 Report V1, May 2009 18 McLennan Magasanik Associates
These estimates need to be interpreted with care. Because these renewable projects will displace other large scale projects, the jobs gained by the community projects may merely offset jobs lost from not developing large scale projects. As many renewable projects are located in regional areas, there may be no net gain in jobs in regional areas.
4.4 Emission abatement
Around 12.5 million tonnes of greenhouse gases are likely to be abated over the operating life of the selected projects (assuming the generation of these projects displace fossil fuel generation). The level of abatement peaks at just over 0.6 Mt per annum.
Figure 4-4: Abatement
Again, as the community based renewable generation is likely to displace other large scale
renewable generation, then the net gain in abatement is likely to be much smaller than the
estimates presented here. There could be a small net gain to the extent that the community
based projects are closer to local loads thus reducing overall energy losses during
transmission.
Appendix Two: Endorsements
Our ref: 16/16/02
15 April 2009
LETTER OF COMMENDATION
To Whom It May Concern
On behalf of Hepburn Shire Council, I write in support of Hepburn Wind and the objectives and goals of the group.
These objectives are closely aligned with those of our Council, which is proposing to be a carbon neutral organisation by 2013, and a carbon negative community by 2025.
The electricity which would be generated by Hepburn Wind’s turbines, enough to power 2,300 homes, would greatly assist Council in achieving our aims.
Also of note is Hepburn Wind’s commitment to contribute $1 million to community sustainability initiatives during the project’s lifetime. Again, this will assist Council in achieving our goal of carbon neutrality, as well as embedding sustainable practices and behaviours in our community.
Hepburn Shire is home to the largest concentration of Mineral Springs in Australia, and we are proud and protective of our unique environment. As such, Council strives to be proactive in environmental issues, and encourages compatible projects.
Hepburn Wind is one such project, with the vision and planning to become a major player in reducing the carbon footprint of the Hepburn Shire. I commend this group to you.
Yours faithfully
Cr Bill McClenaghan Mayor.
Main office : 76 Vincent St, P.O, Box 21, Daylesford Vic 3460 Telephone (03) 5348 2306 Facsimile (03) 5348 2911 Customer Services Office: Cnr Duke & Albert Streets, Daylesford Vic 3460 Telephone (03) 5348 1577 Facsimile (03) 5348 1304
Service Centre: 68 Albert Street, Creswick Vic 3363 Telephone (03) 5345 8399 Facsimile (03) 5345 8041 Daylesford Regional Visitor Information Centre: Telephone (03) 5321 6123 Facsimile (03) 5321 6193
Website: www.hepburnshire.com.au Email [email protected] ABN: 76 845 763 535
Solar Systems Pty Ltd ABN 43 090 609 868 45 Grosvenor St. Abbotsford Victoria 3067 Australia Telephone +61 03 9413 8000
www.solarsystems.com.au
