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Environment and Communications Legislation Committee
27/02/2017
Estimates
ENVIRONMENT AND ENERGY PORTFOLIO
Australian Renewable Energy Agency

Australian Renewable Energy Agency

[14:08]

CHAIR: I welcome the Australian Renewable Energy Agency. Welcome back, Mr Frischknecht. Would you like to make an opening statement?

Mr Frischknecht : No, thank you.

Senator CHISHOLM: In terms of renewable energy, I am trying to get an understanding of the cost of the various technologies. This might be something that you want to take on notice, but would you be able to provide the best estimates of costs per technology basis?

Mr Frischknecht : The ones that are currently getting built are the ones that we have the best estimates of because we are in the marketplace and we see the wind and the solar projects getting built. To give you a sense, wind projects would be in the high $60 range per megawatt hour and solar would be in the low to high $80 range. That is what we are currently seeing. Other technologies are, of course, not getting built at commercial scale. We would be happy to provide you with estimates on notice if you would like to see, say, wave or geothermal technology estimates.

Senator CHISHOLM: Thanks; that would be great. We saw a recent wind project at Silverton in New South Wales, a contract at $65 per megawatt hour. Is this relatively low cost and how would that compare with new coal or gas technology?

Mr Frischknecht : We are an agency focused on renewable energy, but my understanding is that a new coal fired technology would be more expensive, depending on the assumptions that you use. We heard in the prior session that it goes up from $80 a megawatt hour, but of course the thing to remember with renewable technologies, particularly wind and solar, is that you do need to integrate them into the network, whether it is storage or demand management or something else to support them.

Senator CHISHOLM: In terms of that integration with baseload power, is it easier for renewables to do that with gas compared with coal? Is there any difference in that regard?

Mr Frischknecht : You need some sort of solution to support the variable output of the renewable technologies. The more rapidly it can respond, the better that particular technology is. It depends on what sort of gas technology you have, but certainly gas peaking technology in general is going to be much better than a coal fired power station in general.

Senator CHISHOLM: In terms of the cost of renewables, does the agency have a view as to what will be the cost over time? Is there some sort of projection on what you are expecting into the future?

Mr Frischknecht : We as an agency have not done an official cost forecast, but I can certainly tell you—and there are many analysts out there that have looked at this—that the cost trajectories for both wind and solar are continuing to go down. Certainly Bloomberg is a credible party that has come up with forecasts recently.

The other thing that I would say is that ARENA is investing quite heavily in the next generation of renewables. For example, in relation to solar PV, we are investing in R&D. It is tremendously exciting how much potential there still is to both improve the efficiency of a given area of solar cell and then to simultaneously reduce the cost of that cell as well. We are not going to see any decline in the rate of reduction of costs any time soon.

Senator CHISHOLM: What about a comparison with gas and coal fired plants? Are there comparisons between the two into the future?

Mr Frischknecht : I am not an expert in that area, but my understanding is that there is also some potential, although much more limited, for costs to come down in those areas.

Senator CHISHOLM: In terms of renewables being intermittent, how do you think this problem will be addressed best into the future?

Mr Frischknecht : What is important is that you have an exact match of supply and demand at any given instant. There are a range of different flexible capacity technologies. One of the most important is demand management. So that is both reducing demand when there are fewer renewables available and increasing demand when there are plenty of renewables available. There are actually a lot of electrical loads on our network that can ramp up and down like that. Then there is storage, and there is a variety of different forms of storage. We know about battery storage. That also is coming down in cost quite rapidly. You can do that distributed or centralised. We have heard about pumped hydro storage. There are other forms of storage, some of them a bit more esoteric but very interesting. For example, you can store energy in the form of heat, whether that is part of a solar thermal plant or in the basement of a building to cool it at night, effectively. There is compressed air storage, flywheel storage, very short-acting storage in the form of supercapacitors or much longer-term storage as inter-seasonal storage, which would be water in a dam, for example. Storage is important.

Then you have renewables that can actually flex up and down in terms of their output. Hydro generation is obviously one, but you can think about biofuels plants and solar thermal plants as well. We should not forget fossil fuel plants, because, if you are mostly running on renewables, it would not actually have a huge carbon emission to have some fossil fuel plants, whether they be gas, diesel or, perhaps, even coal, that can ramp up and down quickly during those times—days or weeks—when you have an unlucky spell of weather in terms of renewable generation. But you would not be using them a lot.

Senator CHISHOLM: Would the agency recommend that Australia build new coal power stations?

Mr Frischknecht : Coal is not currently in our mandate, so that is something I am not able to comment. I simply do not know.

Senator DI NATALE: Can just I pick on something you just said. You talked about having some backup generation—fossil fuels. How does coal ramp up and down? Isn't one of the problems that we do not have the capacity to shift it quickly? It is one of the advantages of gas over coal.

Mr Frischknecht : My understanding is—and I am not an expert in this area—is that there are coal plants that could be designed to, effectively, be peaking plants.

Senator DI NATALE: Can just ask you about the first successful large-scale solar round that you embarked on. Can you tell me a little bit about the effect that that has had in terms of the market in Australia and whether it has helped to drive prices down or not.

Mr Frischknecht : Sure, I will ask my colleague Ian Kay to talk about the large-scale solar round, which has had a tremendous impact on costs coming down.

Senator DI NATALE: Can you, perhaps, just talk to that.

Mr Kay : We recognised that there were a lot more players looking to get into the market in Australia but struggling to get a foothold, so we ran an expression of interest process that had about 80 people lodge an EOI. We then shortlisted that to 20 groups to make a full application to a final application. Of those, we selected 12 who were, if you like, preferred tenderers that had an offer of funding from ARENA. There were a couple of groups that were successful with multiple projects. They have now either reached financial close—so five of those projects have reached financial close and given their notice to proceed to construct—or are progressing very close to that point. What that has done is pull new participants. Existing Australian construction companies and a couple of overseas construction companies who have been very active in the Australian market before have come in and really concentrated in the sector. We are now seeing the next wave of projects behind the large-scale solar round starting to come through, which are happening in the market on a competitive basis—

Senator DI NATALE: Without assistance.

Mr Kay : Without assistance.

Senator DI NATALE: Would that have happened without the first round?

Mr Kay : It is hard to test, but there was a lot of support from ARENA, and the CEFC as well offered to provide a debt package together with the ARENA grant money and did it on a reverse auction basis. Our view is that it has been very successful in drawing the new participants in and driving the costs down.

Senator DI NATALE: And given them the confidence to know that this is the regulatory environment they are working in, and I suppose, once they have that confidence and have realised that they can turn a profit, it makes it easier for the next round, too.

Can I ask you, I think when the minister—I think it was Minister Hunt at the time—was talking about one of these solar farms, he talked about a further equivalent round at some point in the future. Are you aware of whether there will be a second solar round?

Mr Frischknecht : That is a matter for the ARENA board to discuss. The ARENA board has not made such a determination. However, our view is—this would be a management view—that in the near term, there would not need to be further support for large-scale solar because—

Senator DI NATALE: Because it is so competitive.

Mr Frischknecht : As Ian said, it is effectively competitive with wind at the moment.

Senator DI NATALE: Can I ask about the $500 million cut to your budget as a result of the Liberal Party and Labor Party agreeing to reduce the budget. What impact has that had on your organisation? Are you aware of any specific areas of investment in cleantech research that are not continuing as a result of that cut?

Mr Frischknecht : Well, of course we could fund more projects if we had more money. Having said that, we were left with $800 million of uncommitted funding to add to our existing funding of more than $1.2 billion, so that is a very substantial amount of funding and we can certainly do a lot of good work with $800 million.

Senator DI NATALE: Has it changed the approach you take? Are you more inclined to invest in smaller, perhaps less risky research now rather than bigger, very jobs-rich projects which potentially might carry more risk and be more expensive to fund?

Mr Frischknecht : Under our act, the minister has always had an approval right for any projects that, as an individual project, are bigger than $50 million. We have only ever had two projects of that scale, and the general view has been that we would tend not to pursue projects that are that big, simply because they have so much risk involved, and it is also not necessary since we are at the innovative end of the market. So, in terms of your question directly, maybe it has made us prioritise a bit more sharply, but I could not speak for any categories or any particular projects that have not been funded as a result.

Senator DI NATALE: Can I ask you a bit about storage, because we have heard a lot about storage. Could you outline whether you have any interesting, innovative storage projects in the pipeline. And when do you think we will start to see this at real scale?

Mr Frischknecht : That is an interesting question. Costs are coming down quite rapidly. Interestingly, a large fraction of the costs are not in the cells themselves but in the balance of system, which is mostly software, and just plugging bits and pieces together.

Senator DI NATALE: Just to understand that, you are saying, if we are talking about batteries, for example, it is not the batteries that are the biggest part of the cost; it is all the other bits and pieces that help make the batteries work with the generation?

Mr Frischknecht : That is right, and also just the installation—which, to me, says we are still pretty early on in the learning curve or the experience curve, and the costs have a lot of potential to come down. So there would definitely be some value in getting some volume out into the market. As we have seen in large-scale solar, once you get some volume through, the costs will come down. So, in terms of interesting projects that we have in this space, we have quite a lot. One of the ones I am quite excited about is the virtual power plant in Adelaide. This is 1,000 behind-the-meter batteries that are providing individual households with the benefits of shifting their solar into the evening, but at the same time they are available to the retailer and the network as one large virtual power plant or one virtual battery. So it can provide grid support; it can be dispatched at peak price events to depress the peak price a little bit. You can imagine if there were a large rollout of residential- or commercial-scale batteries that they could be controlled in such a way. So I think that is pretty interesting. But I have many more to talk about, if you would like to go there.

Senator DI NATALE: I do not think I have time, but, in terms of the virtual, are they still installed in households?

Mr Frischknecht : Yes.

Senator DI NATALE: But they are networked together—

Mr Frischknecht : And controlled as one.

Senator DI NATALE: And they can be controlled as one unit?

Mr Frischknecht : Yes, so very interesting.

Senator DI NATALE: I imagine, as the rollout continues, that is exactly the sort of network that we are trying to create to get some stability and security into the grid?

Mr Frischknecht : That is right. The challenges are more in the regulatory and business model domain.

Senator DI NATALE: Not technological?

Mr Frischknecht : That is right. If the battery were in your home, for example, would you own it? Would the network own it? Would you be provided with incentives to participate? Would participation be voluntary? Would it be required? All of these kinds of questions are unanswered.

Senator DI NATALE: That is very interesting. Can I ask a couple more questions—

CHAIR: Your time is about up, Senator Di Natale, because Senator Xenophon has some questions as well.

Senator DI NATALE: I have two more questions about staffing at ARENA. How many full-time positions have been reduced at ARENA over the last couple of years?

Mr Frischknecht : We are at about the same level of staffing as we have been historically, but it has gone like this a little bit.

Senator DI NATALE: Why is that?

Mr Frischknecht : Because the funding uncertainty around ARENA has caused people to leave, effectively. That is what has occurred.

Senator DI NATALE: So you are losing good people because of the funding uncertainty?

Mr Frischknecht : Not now. I think now we are actually in quite a good place.

Senator DI NATALE: On notice, are you able to provide us with a breakdown of ARENA's operations with full-time equivalent staff, and also the sort of spending you have had to do on external consultants as a result of that uncertainty? Is that something you can do on notice for us?

Mr Frischknecht : I am happy to, though I should say it is not just because of the uncertainty. We have a need for specialist expertise that we need in the form of consultants.

Senator Birmingham: Chair, if I may: Senator, in relation to your question before regarding the solar thermal proposal at Port Augusta, I have some further information. The CEFC are in dialogue with three proponents. They are in dialogue with Vast Solar on a regular basis, but they are not yet in a position to put a detailed capital request to the CEFC; with Solastor, where no direct opportunities are on hand, but we understand they are working on an ARENA grant application; and with Solar Reserve, where no specific capital request has been put to us, although we have been guided on broad parameters needed on a financial model. I understand there is a process in place regarding a possible South Australian government tender to support proposals which, of course, could relate to pricing and other arrangements prior to finalisation of any consideration by ARENA and-or CEFC.

Senator DI NATALE: I am not sure how that matches the promise to help fund construction of Port Augusta solar thermal. I am not sure that there is anything there that indicates a commitment to fund the construction of that plant, unless I have misunderstood.

Senator Birmingham: Clearly, if a final proposal is able to be put together that involves funding from ARENA, that will be a financial contribution towards such an activity. But clearly you have to work through all of the different elements of the proposal to get to that final end point.

Senator DI NATALE: I look forward to it.

Senator Birmingham: Thanks, Senator.

Senator XENOPHON: Further to that, to the minister: does the government stand by its unequivocal, unambiguous commitment just a few weeks before the 2016 federal election in the seat of Grey to fund a solar thermal plant at Port Augusta?

Senator Birmingham: Yes, we stand by our commitment. We have to, of course, have a clear proposal on the table, and—

Senator XENOPHON: What time frame are we looking at?

Senator Birmingham: agencies are in dialogue with the potential components for the development of one.

Senator XENOPHON: I understand there must be due and proper process and due diligence. Are we looking at six months before a decision is made?—nine months?—12 months?

Senator Birmingham: I will have to come back to you on that.

Senator XENOPHON: You cannot tell me if it is in the next 12 months?

Senator Birmingham: I cannot tell you off the top of my head—

Senator XENOPHON: Before the next election?

Senator Birmingham: given that there are also some interplays with the process that the South Australian government may have in place as to exactly when all of those decision will fall into line.

Senator XENOPHON: Can I put this to you, Mr Frischknecht: the latest edition of The Economist—I do not know if you have seen it—is on renewables, and their leader states that:

Paradoxically, that means the more states support renewables, the more they pay for conventional power plants, too, using 'capacity payments' to alleviate intermittency. In effect, politicians rather than markets are once again deciding how to avoid blackouts.

It goes on to say that due to decisions made in Germany, the paradox there is that, despite the huge support for renewables in Germany, their support recently for 'cheap, dirty lignite', as The Economist puts it, caused emissions to rise.

My question to you, and also to the minister, is: ought there to be a premium on baseload renewables—in other words, those renewables that are not intermittent, that can provide a regular supply of power? It seems a great paradox that The Economist describes that you actually end up having higher emissions by virtue of having an intermittent, asynchronous power supply, so should there be a greater loading or priority given to renewables that can provide baseload power?

Senator Birmingham: I am happy to say from the government's perspective that we have been very clear that we have three objectives to be met in relation to energy policy: that energy generation is reliable; that energy is affordable and that policy contributes to the nation, meeting its emission reduction targets.

Senator XENOPHON: Does that mean that—

Senator Birmingham: Obviously, in terms of your question, logically energy that is reliable and can demonstrate it is available at a time when users need it is of higher value than energy that is not meeting that reliability. Regarding how you do that, we have said that as a government we will take a technology agnostic approach, which means that if storage capabilities provide the best way and most efficient way of meeting those three objectives then storage capabilities like pumped hydro or other solutions such as we have heard about could be pursued. Equally, if something else comes forward that is more cost effective in meeting those three objectives, then naturally that would be the preferred model of doing so.

Senator XENOPHON: Does that mean that the government will look at the weightings of renewable energy certificates, for instance?

Senator Birmingham: I do not want to get ahead of the policy outcomes of the Finkel review and the analysis of work to meet our 2030 emissions targets, but I think what you can say—and you heard it from Mr Yates before as well—is that intermittent sources of generation now clearly need to be considered in the context of reliability into the grid, and whether complementary storage costs should be considered alongside them is a factor to be weighed.

Senator XENOPHON: But the logical corollary of that is—

CHAIR: Senator Xenophon, you have gone well over your five minutes. Can you just wrap this up.

Senator XENOPHON: Mr Frischknecht, can you advise me whether ARENA is looking at issues of reliability in the context of renewables?

Mr Frischknecht : Yes, absolutely, in two ways: both the security of the networks—disturbance type support—as well as reliability, in the sense that renewables are not always available. Making a technical comment in terms of your question around base load, it is important to match supply and demand at any given moment. Base load implies that you have very steady supply. That is not the solution. What we actually need is flexible capacity.

Senator BACK: Without subsidies to either form of electricity generation, can you give the committee some understanding as to whether renewables are cheaper than coal or more expensive than coal in terms of generation? Is it possible to answer that?

Mr Frischknecht : Yes. I am happy to give you some numbers, but it is not an easy question to answer because, if you just look at the straight-out generation cost, solar and wind are currently the cheapest forms of generation; but that does not account for the integration cost and the fact that they are not always available. How big that cost is depends on the specific situation and the specific location in the networks. For example, if we are at 10 per cent or even 20 per cent renewables in the overall generation mix there is a very low cost of integration, but once you get up to 40, 50 or 60 per cent renewables there is actually a high cost of integration, and that cost keeps going up as you approach 100 per cent.

CHAIR: Thank you for appearing here today, Mr Frischknecht. I now call officers from the Clean Energy Regulator.