Investors do battle for Australian Renewables

The world has woken up to the opportunities in Australia's booming renewables sector. But to be successful, investors will need to think a little differently. Kate Burgess reports for Inframation News

13 February 2018

When a major Australian university agreed to buy electricity from a solar farm planned for a dusty plain in western New South Wales, it said a lot about how a nascent sector is coming of age.

Struck in December, the deal allowed Australian-Chinese developer Maoneng to fast track an equity injection for its Sunraysia solar farm and lock in project finance in just four months.

All going well, the AUD 275m (USD 216m) project will have gone from concept to completion in under two years.

But it wasn’t always this easy, co-founder and vice president Qiao Nan Han, tells Inframation.

A lot has changed since Maoneng first set its sights on Australia in 2012. It took more than four years to develop the Mugga Lane solar project in the Australian Capital Territory (ACT), even after being awarded a coveted feed-in tariff by the ACT government.

Qiao puts this down to conflicting planning laws and technical rules in the federal region at the time.

Since then, the Renewable Energy Target (RET) has been reviewed, tweaked and is on track to bring forward more than 6,000 megawatts of investment by the time the target deadline is reached in 2020.

Catching up

Solar projects have lagged behind wind. Today, just 538MW of utility sized plants are connected to Australia’s grid compared with 5,346MW of installed wind farms, according to the Clean Energy Regulator.

The boom has not gone unnoticed in other parts of the world. Bankers and lawyers in Sydney and Melbourne say newly arrived developers contact them weekly and outline their ambitions to conquer the Australian market.

Wirsol, the brainchild of former German SAP executive Dietmar Hopp, built 24 solar projects in the UK before deciding in 2017 to expand into Australia, shelving plans to instead target the US, India and Latin America.

Managing director Mark Hogan says the developer picked Australia over other regions because “the scale of deployment is huge. Unlike in the UK, there is a lot of land so you can build much larger projects. The returns are not necessarily rock star, but they are commensurate with the UK and Germany.”

In the space of a few months, Wirsol signed two deals to acquire five projects in development, inked a partnership with RenewEstate to roll out a further 1GW, and is now eyeing a local share market listing.

In March 2017, it borrowed AUD 231m for Whitsunday and Hamilton solar farms in Queensland and Gannawarra in Victoria in what was the country’s biggest-ever solar project financing.

Norton Rose Fulbright global energy head Simon Currie observes developers using what he terms a “far more nuanced approach” to entering the Australian market.

“They are going into partnerships, strategic alliances and signing deals with off takers. Contractors from overseas are coming in to buy, build and sell assets,” he says.

Australia is still viewed as a nascent renewables market, especially in solar, because investment did not take off until after the RET was recast in 2015. This cut the target from 41,000 gigawatt hours to 33,000 gigawatt hours by 2020. But this effectively means the percentage of power that will be renewables by 2020 will rise from 20% to 23.5% because demand for power has fallen.

Rothschild head of utilities, transport and infrastructure Danny Bessell says some have been more successful than others in the race to secure sites, develop projects and then sell them on.

“The significant pickup in activity since the revised target was set has attracted a large number of entrants in to the market and that competition has meant that projects have been shared across the market.”

Those that have also managed to secure feed-in tariffs from state and territory auctions, giving them guaranteed income, have been able to win over banks and investors.

He points to French developer Neoen, which went on to sign a landmark battery storage deal with Tesla and an equity investor in John Laing after winning an ACT contract for its Hornsdale wind farm in South Australia.

Developers who have managed to sign customer contracts with the main three electricity retailers – Origin Energy, AGL Energy and EnergyAustralia – have successfully won over lenders and investors to their projects.

Buying and selling

Within the flurry of development, relatively few operational projects are being bought and sold. Completed projects that changed hands in 2017 included Infrastructure Capital Group’s acquisition of Bald Hills wind farm in Victoria from Mitsui & Co.

Rothschild’s Bessell says the dearth of deals reflects the relative immaturity of the market and observes that developers are mainly focused on having their plants up and running in time to be eligible to earn green certificates under the RET.

“Through 2019 and 2020, we expect the market will refocus back on M&A as some of these projects are sold and there may even be aggregation of portfolios,” he says.

Large energy retailers have looked to offload projects they developed and then held on their balance sheets. “For a long time it was retailers like AGL Energy, and more recently Origin with Cullerin Range, which were developing and then selling projects post completion.

“Retailers are more likely these days to write PPAs and either take no equity or retain just a minority stake,” Bessell adds, pointing to Origin’s sale of the Stockyard Hill wind farm or AGL spinning wind and solar farms into the Powering Australia Renewables Fund.

Against this backdrop of a slow trickle of completed projects coming to market are the hoards of energy companies and institutional investors queuing up to buy them, making for highly competitive auctions and pushing down investor returns.

Most buyers are seeking projects that have been backed with power purchase agreements, making those projects that do come to market even more coveted.

Getting in early

Rather than wait around for completed projects to roll off assembly lines, some investors are buying into projects earlier on in their development. They are providing equity and in return are helping developers negotiate key contracts, including power purchase deals and EPC, and raising project finance.

Palisade Investment Partners struck a deal with British developer ESCO Pacific to develop the Ross River solar farm in Queensland in February 2017, taking 50% of the project’s equity.

Investment director James Hann says some developers have deep pockets and can see their projects through to financial close, but many like to take on investors in the latter stages of development.

“When we become more seriously interested is after some key development milestones are achieved – obtaining a DA and having a viable path to connecting to the grid, and the prospects for an off take agreement.”

After deciding to partner with a developer, Palisade can then spend anywhere from six weeks to three months in exclusive due diligence. “It can then take six to 9 months to bring a project to financial close,” Hann adds.

Hann is expecting other developers to take in investors before financial close, and doubts that many completed projects will come to market as M&A opportunities. He expects to find more competition from overseas capital compared to local investors.

Norton Rose Fulbright’s Currie says many Australian investors soured on renewables after bad experiences with Pacific Hydro and Infigen, which both struggled in the wake of the financial crisis before being turned around under new management.

“We are still seeing a lack of local investment. Australian super funds are hooked on Australian equities, and are not looking at renewable energy. How do we crack that nut to get more local capital into renewables?”

UK-based Foresight Group has made a big splash since arriving in Australia. Within the space of a year it has acquired four solar farms, including the Longreach and Oakey projects from Canadian solar in December 2017.

It now has projects with a combined capacity of 250MW and ambitions to add at least that same amount again for the next two years, partner Carly Magee says.

“Generally our approach is to focus on later stage projects that have secured PPAs. But coming from the UK, we are used to taking some merchant risk because most projects there involve us taking some on.

“We are still seeing a lot of opportunity but the demand for Australian projects has increased as the market has matured. There are a lot more overseas players and domestic players.”