In 2023 we saw a material decrease in investment activity in new large-scale renewable energy generation projects, which reflected a number of challenging project development conditions in Australia’s renewable energy sector. In 2024, we are seeing positive signs of a recovery. The first quarter of 2024 was the best quarter for electricity generation projects achieving financial commitments since the end of 2022, with five projects totalling 895 MW achieving financial commitments, including the 414 MW Uungula Wind Farm and the 254 MW Wambo Wind Farm (Stage 2).

Whilst many of the challenges faced in 2023 continue to hinder Australia’s path to net zero, an increase in energy transition-driven M&A and investment in large-scale energy storage and transmission projects have generated significant activity in 2024. The offshore wind industry welcomed the issue of Australia’s first feasibility licences in Victoria and New South Wales, marking a critical step in the journey towards replacing traditional fossil fuel power generation with gigawatt scale wind projects. The Australian government also made increased financial commitments to bolster investment in onshore renewable energy in the form of the expanded Capacity Investment Scheme (CIS), which has been well received by the market. Finally, governments at both the Commonwealth and State levels are implementing or considering reforms to accelerate the regulatory approvals process in an effort to fast-track approvals for priority renewable energy projects.

Market Challenges

Some of the challenges faced by renewable energy investors in the Australian market are reflective of the global market, which has been affected by increased borrowing, construction, and supply chain costs. Rising construction costs have affected all technologies. Consequently, many developers are seeking to take advantage of economies of scale, by either focusing their efforts on developing gigawatt-scale projects, such as the 923 MW MacIntyre Wind Farm, or developing significant projects in stages. A prominent example of the second approach is the 1,333 MW Golden Plains Wind Farm (Stage 1 and 2), which will be vying for the title of Australia’s largest onshore wind farm, once all stages are complete.

Other challenges are reflective of the unique nature of the Australian market, notably, being geographically large with a relatively small, but concentrated, population. This has made power delivery to population centres in Australia challenging. Availability of transmission capacity is often cited as the most significant obstacle to investment in new generation capacity. The industry continues to be plagued by the speed of delivery of the upgrade and build-out of transmission networks across Australia, which has also been hampered by strong resistance from the community in certain areas. 

Australia has a wholesale electricity pool market which has, in the context of intermittent generation, led to negative pricing challenges that are not necessarily able to be adequately addressed in offtake arrangements. This issue is particularly acute for standalone solar energy projects, where the influx of solar generation capacity in previous years has caused repeatedly low and often negative daytime wholesale prices. In South Australia and Victoria, midday spot prices have fallen, such that they are now, on average, negative.

These negative prices are partially enabled by the Large-scale Renewable Energy Target, under which renewable energy generation gives rise to large-scale generation certificates. These may be purchased to satisfy buyers’ Renewable Energy Target obligations, or self-imposed corporate sustainability targets. Generally, these generate at least AUD40/MWh of revenue, resulting in renewable generators being willing to bid down to negative AUD40/MWh.

Spot price volatility has also been exacerbated by an increase in extreme weather events in Australia. For example, in February 2024, storms damaged transmission towers in Victoria, tripping one of the state’s largest thermal power stations, resulting in wholesale power prices reaching the market cap. More extreme temperatures are also contributing to greater electricity prices, with 26 high price events occurring in the 2023-24 summer – over double the number experienced in the previous year.

As a result, smaller scale standalone variable renewable energy generation projects have become more challenging for investors, and developers have cancelled some previously announced projects, citing increased costs and unfavourable market conditions as the reasons.

M&A and Financing Activity

The M&A activity in the renewable energy sector is driven by the partnerships that market participants require in various stages of the renewable energy project development and investment process. These include:

• founding developers holding land access agreements seeking a development partner with the skills required to take the project through to construction, or the financial capacity to continue development of the project until project financing can be procured; specific partnerships have also been created as a result of developers seeking to bolster their credentials, so as to improve their ability to meet the merit or financial criteria and give their project a better chance of success in the tender process for the CIS, LTESA auctions and REZ access auctions;
• project owners divesting an interest in a project either at or after financial close, to help meet the equity commitment required for construction, or after commercial operations, to capitalise on the value in the project after it is operational and substantially de-risked; and
• investment funds or corporate entities seeking to acquire individual renewable energy projects, a platform of projects to develop or a material interest in a portfolio of existing assets, either to diversify their portfolio or to meet their energy transition targets; the most notable of these transactions this year was the acquisition of a majority stake in Neoen by Brookfield for a reported AUD10.6 billion, which remains subject to regulatory consents. 

The different roles of the market participants, from founding developers to global infrastructure funds, and the constantly shifting relationships involved in the renewable energy sector, have created a new market of energy transition-driven M&A that is likely to continue into the near future.

Another development trend is portfolio financings of mature renewable energy platforms. As renewable energy projects in Australia continue to reach operational stage, renewable energy investors are aggregating their operating projects (in some cases, with a development pipeline) into a single corporate style financing to provide more flexibility in terms and working capital to respond to development opportunities. For example, Squadron Energy, Tilt Renewables, Intera Renewables, Atmos Renewables, Bright Energy Investments, NEOEN and FRV have all recently executed a portfolio financing of their Australian renewables assets. This source of capital is expected to result in developers having more flexibility to invest in their development pipeline. As the size and value of renewable energy portfolios continue to grow, portfolio financing will continue to be an attractive source of capital for investors.

Energy Storage Projects

The greater frequency of negative spot prices and increased spot price volatility creates larger, more frequent arbitrage opportunities for batteries, which are capable of charging at times with relatively lower energy cost, and discharging when prices are high. In response, developers have a significant incentive to add batteries to existing or new renewable energy projects to enable electricity generated at peak supply times to be supplied later in the day, when demand and spot prices are higher.

As a result, investment in new large-scale energy storage projects continues to be strong. The first quarter of 2024 was the fourth consecutive quarter in which energy storage projects secured financial investment commitments of over AUD1 billion, including the 300 MW or 650 MWh Mortlake Power Station Battery, the 250 MW or 500 MWh Swanbank Battery and the Neoen Collie Battery, which is commencing construction of Stage 2 and is set to be the biggest battery in Australia upon completion, with a total capacity of 560 MW or 2,240 MWh. Neoen’s Collie battery marginally exceeds the other big battery being built by Synergy in Collie, the 500 MW or 2,000 MWh Collie Battery Energy Storage System. Together, these two batteries will have the capacity to provide up to 40% of the average demand in the South West Interconnected System in Western Australia, absorbing excess solar during the day and discharging in the evening peaks. This investment is in preparation for the shutdown of Western Australia’s remaining coal-fired power generators and the need to make capacity available for peak times.

Offshore Wind Projects

Since the enactment of the Offshore Electricity Infrastructure Act 2021 (Cth) and clear indications from the Australian government that offshore wind will play a pivotal role in Australia’s clean energy transition, major Australian and international developers have been gearing up to participate in Australia’s offshore wind industry. In 2024, twelve feasibility licences, giving licence holders exclusive rights over designated seabed areas, were granted in respect of the Gippsland zone, off the coast of Victoria and a single preliminary feasibility licence was granted off the coast of Hunter in New South Wales. Proponents are currently awaiting the award of feasibility licences in Portland and Illawarra, which have closed for submissions. Meanwhile, applications are open in the Indian Ocean region off Perth/Bunbury until 6 November 2024. Australia’s final offshore wind zone in the Bass Strait off Northern Tasmania will follow.

Australia’s first feasibility licences were awarded to thirteen proponents including Southerly Ten (backed by Copenhagen Infrastructure Partners), Corio, Iberdrola, Orsted, Parkwind/JERA Nex and RWE. The award of licences indicates a preference for developers with a proven track record of delivering offshore wind projects. Feasibility licence holders are now able to begin detailed site assessments, including environmental studies and approvals, preparation of management plans and consultation with first nations groups and local stakeholders. Once the management plans are approved, the feasibility licence holders may apply for a commercial licence to build the offshore wind farms and generate electricity.

Amidst this backdrop, governments and market participants are exploring ways to deliver the supporting infrastructure required to enable the offshore wind projects, including port infrastructure to facilitate construction of the massive wind turbines and transmission upgrades to the various offshore wind zones. The first offtake auction for offshore wind has also been announced by the Victorian government, as detailed in the Victorian Government's Offshore Wind Implementation Statement 3. The competitive auction process for the support package will include an Expression of Interest phase, targeted to close in Q1 of 2025, followed by a Request for Proposal phase set to close in Q1 of 2026, with contract negotiations and awards expected later in 2026.

Transmission Projects

The transformation of Australia’s energy system is also occurring through the development of Renewable Energy Zones (REZs) by the state governments. REZs are areas within the Australian states that have abundant renewable energy resources and have been designated as appropriate for development from a land use and environmental perspective. The clustering of large-scale renewables within REZs increases economies of scale, but elevates congestion risk, necessitating transmission expansion and upgrades. The federal and state governments are responding to transmission constraints for renewables projects by implementing renewable energy zone transmission projects, to enable secure connection for renewables projects.

The first REZ transmission project to obtain both state and federal planning approval was EnergyCo’s Orana REZ Transmission Project in New South Wales, which has the capacity to deliver approximately 4,500 MW of electricity transmission. This project is expected to reach financial close in 2024. The largest publicly announced (non-REZ) transmission project is TransGrid’s EnergyConnect, which connects New South Wales, Victoria, and South Australia’s energy grids, and could deliver 800 MW. Construction for this project is underway, with the first of its four transmission lines being completed in May of this year.

To meet the projected need for an additional 10,000 km of transmission lines by 2050, Australia’s Energy Market Operator has declared seven newly actionable projects. This includes the Hunter-Central Coast REZ network infrastructure project, and the Mid North South Australia REZ expansion project. The market operator’s roadmap lists eleven more “future” transmission projects, including six REZ-associated ones.

Government support for priority transmission projects continues, with concessional finance earmarked for transmission project infrastructure.

Australian Government Capacity Investment Scheme (CIS)

In 2024, the Australian government commenced the roll-out of the expanded CIS, which is a government initiative that aims to encourage new investment in dispatchable renewable energy generation and storage and create revenue certainty for renewable energy investors. It was developed by the state and federal governments following the widespread rejection of proposed reforms to introduce a capacity market into Australia’s wholesale energy market.

The CIS involves the Australian government seeking competitive tender bids for renewable capacity and clean dispatchable capacity projects by providing revenue underwriting for successful projects.

Initially, the CIS targeted 6 GW of dispatchable capacity. An expansion of the CIS (the “Expanded CIS”) was announced on 23 November 2023 to:

• deliver an additional 32 GW of new capacity by 2030, made up of:
1. 23 GW of renewable capacity (representing AUD52 billion in investment); and
2. 9 GW of clean dispatchable capacity (representing AUD15 billion in investment and an additional 7.9 GW to the 1.1 GW already in progress through the first stage of the CIS);
• fill expected reliability gaps as ageing coal power stations exit; and
• deliver the Australian government’s 82% renewable electricity by 2030 target.

The Australian government has announced that the Expanded CIS will be rolled out from 2024 to 2027, with regular competitive tenders held approximately every six months starting in May 2024.

The Expanded CIS is being implemented as follows:

• 14 GW of the Expanded CIS will be rolled out through a guaranteed national tender, under which long-term government support agreements (CIS Agreements) will be awarded to successful projects (where the Australian government provides revenue support, based on a revenue “floor” and “ceiling”, as agreed between the parties).
• The remaining 18 GW of the Expanded CIS is to be delivered through Renewable Energy Transformation Agreements (RETAs), which are to be negotiated between the Australian federal government and each of the Australian state and territory governments. The rationale of the RETAs is to incentivise the jurisdictions to provide a favourable environment for renewables investment in return for their share of federal CIS funding.

The first pilot CIS tender launched in 2023 was a combined LTESA/CIS Agreement round in New South Wales. This resulted in contracts being awarded to six new battery projects totalling 1,075 MW of capacity in November 2023, including one 4-hour storage capacity battery, two 2-hour storage capacity batteries and three virtual power plants of 2-hour storage capacity.

The second pilot round, launched in February 2024, was the first standalone CIS round for clean dispatchable projects in Victoria and South Australia. This tender resulted in the approval of another six projects totalling 995 MW or 3,626 MWh of dispatchable capacity. A further round for clean dispatchable energy projects in Western Australia has also launched, which is seeking to deliver 500 MW of 4-hour equivalent clean dispatchable electricity, or 2,000 MWh, across the Western Australian Wholesale Electricity Market.

The initial tenders conducted by the Australian government have received an enthusiastic response from the market, with tenders being consistently oversubscribed. The most recent tender in Western Australia received 15 bids totalling 2,502 MW or 13,060 MWh of storage – a more than sixfold oversubscription.

Fast Tracking Approvals

In recent years, the timeline to obtain Australian regulatory approvals has contributed to the delay in developing greenfield renewables projects, as authorities struggle with the sheer volume of greenfield development projects in the pipeline. Approvals reforms have been introduced or are under consideration at both the Commonwealth and State level, with a view to fast-tracking development for renewables, storage, and transmission infrastructure.

At the Commonwealth level, the Australian government has introduced “Major Project Status” designation, which recognises the national significance of a project. Projects that are awarded Major Project Status will receive additional support from the Australian Major Projects Facilitation Agency, including help with co-ordination and facilitation of federal approvals (such as environmental, biosecurity or foreign investment approvals).

A project will need to meet the following criteria to be eligible for Major Project Status:

• the project must be of strategic significance to Australia (and investment must be more than AUD50 million);
• the project is facing complex regulatory approvals challenges with Australian government approvals; and
• the project has sufficient financial resources and is commercially viable.

For example, the Australian Renewable Energy Hub (a proposed renewable power, green hydrogen and green ammonia production project consisting of up to 26,000 MW of onshore wind and solar generation) and the 6,000 MW Murchison Green Hydrogen Project, were recently awarded Major Project Status.

State governments are also proposing reforms to planning approval processes. For example, in April 2024, the Victorian Planning Provisions were amended to provide priority projects with accelerated assessments for planning permit applications. Priority projects include renewable energy facilities, utility installations and associated subdivisions, making them eligible for fast-tracked assessment and decision-making. Projects requiring an Environmental Effects Statement (EES) or other approvals will still be subject to the existing timelines for those processes. Given the lengthy timelines for those processes (particularly an EES), further consideration for fast-tracking renewable energy and transmission projects will be required to meet energy transition and net zero targets. Other states have enacted or are proposing similar reforms.