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Mechanisms made recently to support new large-scale renewable generation through the VIC budget and passing of a legislative package in NSW.
Although 2020 brought its own set of unforeseeable challenges, the NSW and VIC Governments sparked major new energy action. Both governments are proposing to spend an unprecedented $1.7 billion (NSW) and $1.6 billion (VIC) between FY20-21 respectively to accelerate the energy transition to renewable energy.
The focus of this brief is on the mechanisms made recently to support new large-scale renewable generation through the VIC budget and passing of a legislative package in NSW.
NSW and VIC Renewable generation initiatives – How do they differ?
VIC Government budgeted $12.6 million to potentially hold the second round of VRET2 Auction (1st round in 2017) where at least 600 MW of capacity will be bought online to power 100 per cent of the VIC Government facilities with renewable energy.
In contrast, NSW Government as a part of their Electricity Roadmap has legislated to underwrite 12,000 MW of new renewables across 5 NSW renewable energy zones using an options style contract under a long-term energy service agreement.
The key differences between the VIC and NSW approaches are summarised below:
Transmission is critical to achieve renewable energy commitments in both states
Common to both packages is an emphasis on transmission network planning to help with firming of renewables (improving system reliability), aligning the development of generation interest with transmission capacity and improving the efficiency of resource sharing between regions.
In NSW, a REZ transmission development scheme will introduce a Transmission Efficiency Test, to determine an appropriate allowance for the investment. It will de-risk REZ grid investment, by allowing speculative transmission to be built, the cost for will eventually be recovered from connecting generators, but underwritten by NSW consumers.
In contrast, VIC Government is currently producing a REZ development Plan which will map out how alternative patterns of generation might impact the optimal development of transmission in the state – considering network projects that might best support areas of high developer interest. While the exact details including cost recovery have not been publicly announced, VIC’s recently legislated NEVA bill allows for expedition of transmission projects provided the project delivers value for VIC consumers.
Potential implications of super-charging
Both packages have potential to accelerate the economic retirement of coal fired power stations which provides an opportunity for storage including batteries and pumped hydro similar to the Victorian Big Battery. Further, transmission investment will provide opportunities for the development of network support solutions at strategic locations for contestable transmission service providers.
The nature of the financial investments from these state government is moving away from simple grants and offtakes to providing more sophisticated and targeted investment certainty in order for projects to take FIDs. Additionally, high levels of intervention potentially indicate a subtle return to centralised planning of generation. This places a lot of pressure on respective bureaucracies i.e. state governments to make economic decisions in the market.
Yet while the claimed public benefits of both NSW and VIC state policies are to drive wholesale prices down, the impact to network prices is hard to determine. Ultimately both these components get passed on to consumers.
Additionally, given the volume of renewables connecting to the grid and the projected boom in essential infrastructure, the ambitious state targets are likely to drive supply chain capacity constraints, particularly for wind tower manufacturing and the EPC market.
While both states have adopted different mechanisms, the NSW and Victorian Governments have demonstrated their shared commitment to supporting new large-scale renewable generation.
Nipun Arora - Manager, Financial Advisory
Kumar is a Partner in the Financial Advisory practice and is responsible for the Energy and Resources Sector. He specialises in portfolio management, policy advice, commercial and financial analysis, market modelling (electricity, gas and renewable energy), strategic positioning and assisting clients with growth strategies. Kumar helps his clients make future decisions with confidence.
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