q&a with miles george

"Q&A: Miles George

* Published 7:33 AM, 28 Feb 2011
* Updated 10:12 AM, 28 Feb 2011

The Infigen Energy CEO tells Climate Spectator editor Giles Parkinson that:

? Australia has a pitiful representation of renewable energy development despite being blessed with some of the best renewable energy resources in the world;

? With some Australian electricity markets at 10-year lows in the last six months, there?s not a sufficient value in the combination of electricity and REC prices to give the right investment signal for renewables, and that?s been the case for quite some time;

? The current REC price in Australia is a long way short of the $100 you?d need for effective and attractive investment;

? The carbon price would have to be at least $30 to bring the total revenue available to renewables from environmental products and electricity up to the $100-$120 range that?s going to make projects effective;

? Even with a carbon price, it?s going to be quite a while before new investment in wind energy becomes attractive;

? Infgen's wind power projects generally have very strong community support and I think that?s true for most places where we have development activity underway of all the renewable technologies;

? In 10 years' time, solar PV is going to be competitive and Infigen would like to get in early;



Giles Parkinson: Can wind farm developers make money, and what needs to happen to them for them to do so?

Miles George: Well, if we?re talking about Australia, in particular, the things that need to be right, the settings that need to be right, are the energy market settings ? both for the electricity price and also the renewable energy certificate (REC) price. If those settings are right and the combined value of those two products, which is what we sell from one of our wind farms, gets to a certain level, that can make our projects economic. And at the moment, in Australia, that price is probably in the sort of $100-$120 range.

GP: And what sort of price are you getting now?

MG: I suppose the spot markets at the moment are indicating a combined price around the $56-$70 mark. That?s just adding in the relevant spot prices in each of the regions, plus a mid $30-ish REC price. That?s obviously a long way short of the $100 you?d need for an efficient, or an effective and attractive investment in the current environment.

GP: Let?s talk specifically about Infigen then. What do you guys need to be able to make a bottom-line profit? Your operating margins do seem to be strong, but I guess you?ve got a lot of depreciation of financing costs to deal with as well.

MG: Yeah. Look, we do. I think that our portfolio of development projects in Australia is particularly good. It?s been built up over a 10-year period and it satisfies the key criteria that we?ve previously identified, being the wind resource close to an effective and efficient grid connection and also having community support. We think our portfolio has a particularly good range of projects in different regions of the national electricity market and in Western Australia that mean that we can deliver projects from that portfolio at that very efficient rate, relative to others. And we?ve done that with a number of locations previously, particularly where we?ve been able to share connection infrastructure of existing projects as we?ve done at Lake Bonny and more recently we?ve done it at Capital wind farm.

GP: I guess what you?re saying is that once you?re able to at all develop that portfolio, then you?ll be a money making machine?

MG: Well if, as I said, the market conditions are right. With electricity markets in NSW and South Australia, as I was saying earlier today, at 10-year lows in the last six months, there?s not a sufficient value in the combination of electricity and REC prices to give the right investment signal for renewables, and that?s been the case for quite some time.

GP: So, let?s say we get a carbon price in by next July, how will that change the game for you?

MG: Well, a carbon price adds to the products that we?re selling, effectively. Because our product has no carbon emission, we should attract an additional premium in the order of the carbon price into the electricity price. If that happens, that might be another factor that brings the total revenue available to us from environmental products and electricity up to the $100-$120 range that?s going to make projects effective. But, that?s not true just for us; it?s true for others as well. It?s just that we think that we?ve got a very efficient portfolio, so we should be at the lower end of the cost spectrum for new wind farm developments.

GP: And what sort of carbon price do you think should be implemented? What?s going to be good for your business in particular then? Is it going to be $20, $25, $30 or does not matter?

MG: I think if you just look at the renewables sector, based on the current differential between spot prices and the sort of contracted prices that you would need to achieve for project viability, then you?re talking at least $30. Now, if REC prices improved, or if the electricity prices improved, the number might be a bit less than that, but it?s of that order.

GP: What is your forecast for the RECs prices? Because AGL and Origin Energy have both revealed this week that they?ve bought, between them, some $400 million worth of RECs in the last six months and they?ve got enough to last them for three years. How do you see the outlook now?

MG: Well that, I?m sure, is true. And we saw some time ago, probably nearly two years ago, the threat to our business from increasing concentration in the retail electricity market. We realised that we were not going to be able to be a highly profitable business if our business depended on securing contracts from an increasingly concentrated market. So, we set up an energy market function both with their systems and processes and people to be able to contract directly with end-use customers, like Sydney Water, so we?re not dependent upon the AGLs or Origins to actually have a market.

Having said all of that, the obligations that AGL and Origin have are huge and yes, they may have satisfied their obligations for the next two or three years ? for their retail customer base I assume, not their total customer base, but they may well have done that. But, if you look at the increases in obligations that they have, particularly post-2014, they are very large. And notwithstanding they?ve bought some cheap RECs, taking advantage of the, you know, frankly the chaos in the RECs scheme in the last six months, they?re still going to have very large demands for RECs post 2014 because of the way the REC market steps up significantly after that time.

GP: And so, what about a timeframe? When do you think RECs might start to be edging back up to where they?re useful?

MG: Well, I guess if you look at the current surplus, the government introduced legislation last June which basically allocated 90 per cent of the RECs to large-scale schemes and at the same time effectively capped the surplus in the system driven by the small-scale solar rooftop systems to 20 million RECs. That surplus is around about 18 months? supply. I guess our view is that it will probably take that long, or at least that long, for that surplus to work through ? 18 months to two years. So, as with any other action from government, i.e. carbon price or anything else, it?s going to be quite a while before new investment in wind energy becomes attractive. So, I think there?s a strong driver for the government. If it?s serious about having a 20 per cent by 2020 target for renewables, to actually do something about that and get some sort of certainty into the legislation.

GP: When the RECs price does recover, there seems to be a lot of development in the pipeline. How will it sort itself out? Who will get to go first?

MG: Well, I suppose if there was a perfect market, the most efficient projects ? in other words, the ones that can generate renewable energy at the least possible cost-price ? should go first. And as I?ve argued to you before, our portfolio is such that we think a lot of our projects would be in that category. But that?s one factor. The other factor is regional issues. So, for example, in South Australia there is a large number of wind farms that have been erected in that state and, as a consequence, there are actually beginning to be some issues in that state around the level of penetration of wind. It?s not true for any other state in Australia, but it is true for South Australia. So, some different factors apply in different regions, but essentially if you?ve got a portfolio of projects that scores very highly on those three key criteria, which we think our portfolio does, then logically you should be able to contract early in the market if you?re in the lowest quartile of cost per megawatt hour for development.

GP: There?s a Senate inquiry going on into wind at the moment. There are a few newspaper articles critical of wind and quoting people who don?t like wind farms. One of the senior executives from Vestas said last month that wind had an image problem. How much of that is a worry for you?

MG: Look, it?s certainly a concern in the industry generally. We?ve said since 1999 that the key criterion for us in any wind farm development is making sure we have community support ? strong community support. And it?s certainly true of all of our existing wind farms in Australia; that we have very strong local community support. And that doesn?t mean that there aren?t one or two people who don?t like them, there are, but the fact is that we generally have very strong support and I think that?s true for most places where we have development activity underway in various states around the country. Victoria is the real issue here. Victoria, having a different demographic from other states ? much smaller, windier regions located near coasts where there are large numbers of lifestyle properties, hobby farmers and so on ? those sorts of communities tend to be more difficult to accommodate wind farms.

And I guess for that reason, we?ve tended to focus on areas where the land traditionally has been used by farmers to generate income, whether that?s from grazing or cropping or whatever else. For communities like that, the notion that a wind farm comes along and provides an additional stream of income from the land is very well understood and also the spin-off benefits from that are also well understood, so not everybody gets wind turbines on their properties, that?s understood, but the local fencing contractor, the local motel, the local milk bar, everybody gets a benefit in the community during the construction phase and in the long-term operation, not just from the people who work there permanently, but from, you know, troops of consultants and contractors and others who visit the wind farm during its operating life. All of those things provide spin-off benefits for the local community and local communities where we operate currently recognise that.

GP: Let?s turn to solar. You have a joint venture with Suntech, an application under the Solar Flagships Program. What happens if you don?t win that, because there?s no other funding available? Would that just be a one off?

MG: If in fact there is no other funding available from other sources, either State or Federal, then yes, you?re correct. So, the reason that that project looks sensible to us is because the level of grant funding that?s proposed to be provided by the Federal Government and the State is at a level that makes that project economic. If you took that away, the project wouldn?t be economic because solar technologies, even though their prices are coming down, they?re still in the order of double the cost of wind. And so, absent a specific subsidy for solar, there won?t be any solar development. It would be all wind because it?s just so much cheaper to develop and on a per megawatt hour of supply of renewable energy.

GP: As a potential solar developer, what sort of incentives would you be looking for then if it?s not the Solar Flagships?

MG: Well, as you know, we?re one of four contenders in the PV category of the Solar Flagships Program. The costs of solar technologies, particularly PV technology is coming down all the time. We recognise that, of all the renewable technologies, in 10 years? time, solar PV is going to be competitive. So, we?d like to get in early. I would hope that if we?re unsuccessful in Solar Flagships, that then there would be some other program, either sponsored by federal or state government, to get the solar industry off the ground in Australia. Because again, it?s a little bit like the wind industry, we?ve got a pitiful representation of renewable energy development in Australia, even though Australia is blessed with some of the best renewable energy resources in the world. You?ve got countries like Germany which is? which doesn?t have much sun or wind and yet it?s got much greater developed industries in those sectors than we have. It?s a great shame, I think, that Australia hasn?t done more to put in place policies that would develop our renewable energy industry, but the government ? now both state and federal ? seems to recognise that solar could be the next big thing, and we certainly want to get in on the ground floor.

GP: There have been some predictions that solar could actually be competitive with wind even within say four, five or six years. Do you share that sort of optimistic outlook?

MG: Personally, I think that?s a relatively low-risk five-year scenario, but it?s also an opportunity for us. We?ve done a lot of work through the Solar Flagships securing sites, much as we did in the early days of the development of the wind sector in Australia. We were a pioneer in the wind sector in Australia. We?ve been the leading player in the industry for quite some time. I think there?s a great opportunity for us to be similarly the leading player in Australia in solar development.

GP: In the meantime, though, you?ve got a struggling share price, as I guess most renewable energy companies do in Australia. Is it too bleak an outlook to say that you?ve sort of got to hang on until you can get that development portfolio up and running? There?s been talk that you might be considering asset sales. Can you give any comment on that?

MG: Sure. Look, since we ran the formal sale processes to sell the US and German businesses that we owned, we?ve made it clear that we would consider unsolicited offers for both of those businesses and we have had unsolicited approaches on both of those businesses. So, we?re still contemplating those things. There?s no particular progress to report in the last six months, but it?s certainly true that we?ve said we?ve got the doors open and we?ve had people coming and looking. Our focus, we?ve said for some time, is on Australia. That?s where we see the best opportunities for growth of the business. In terms of funding that growth, and obviously part of the equation is equity funding and when the share price is as weak as ours has been of late, that?s a difficult task.

I think our share price reflects the general deterioration in sentiment towards renewable energy businesses that we?ve seen globally since the failure of the Copenhagen talks. I think it also reflects the fact that the legislation in Australia has been ineffective in the last 12 months, in particular with REC prices down below $30. It reflects the fact that electricity prices have been weak. It reflects the fact that, we?re a business that does not pay a high yield; it?s essentially a growth stock, and yet clearly we do not have a growth option in a scenario where, as we discussed before, market prices are not at a level that would justify new investment. So, it?s a very difficult position to be in and, also, as we noted today in our result, we?ve had significant FX impacts on our result from the US and German businesses. We?ve also had an interest rate swap called during the period that?s affected the costs of our financing. And it?s this number of factors that all point towards reasons why our share price is weak, but?

GP: What trigger could there be then to restore that?

MG: I think for the industry in general, there needs to be some certainty and an effective renewable energy incentive mechanism in place. The RET was intended to be that mechanism, but since it was put in place in 2001 it?s had cycles where it?s been partly effective, not effective, partly effective, not effective. It?s just been too volatile a measure and over time investors see that and they take into account a level of regulatory risk associated with a business that depends on renewable energy being promoted in Australia. So, I think what?s needed is to make sure that we actually have some active legislation that gives some certainty for the obligated parties under that legislation that are actually going to have to commit this. They are actually going to have to provide 20 per cent renewable energy by 2020. Once they think that, then the contract market will start to revive and that will provide the underpinning for new investment in the sector."