Victoria recently conducted a renewable energy auction with a planned capacity of 650 MW, the largest in Australia so far. However, the number of proposals and their economic prices exceeded expectations, and Victoria will be adding 928 MW of solar and wind power – over 40% more capacity than originally planned. There are six winning projects, where three are wind farms and the other three are solar arrays.
These 928 MW of clean power are a significant contribution towards the Victorian Renewable Energy Target (VRET) of 25% by 2020 and 40% by 2025. Although all Australian states have proposed renewable energy targets, Victoria was the first to convert its target into legislation, in order to make sure it is reached.
The renewable energy auction resulted in a total of 15 proposals, adding up 3,500 MW of clean power capacity, over five times more than the planned capacity of 650 MW. However, since many offers had attractive prices, Victoria decided to move forward with 928 MW.
Most offers avoided central Victoria, since the network operator has warned about possible curtailment due to limited grid capacity. The three winning solar farms will have locations close to Mildura, Echuca and Shepparton; while the three wind farm sites are near Geelong, Warrnambool and Mortlake. The largest winning project is the wind farm near Warrnambool, with a capacity of 336 MW – over one-third of the total.
In addition to the benefit of clean and low-cost electricity, the renewable energy auction will draw an estimated investment of $1.3 billion. The winning projects are expected to create 1,250 temporary jobs during their construction, and 90 permanent jobs after they start operating.
The electricity produced from the winning projects will be sold through a special agreement called a virtual Power Purchase Agreement (PPA). This agreement allows the wind and solar farms to sell energy in a wholesale market with variable price, while getting paid a fixed amount per megawatt-hour.
To illustrate the concept, assume a virtual PPA is signed for $60 per megawatt-hour. If the wholesale price is $70 per MWh, the project owner gets $60/MWh and the government keeps $10/MWh. On the other hand, if the wholesale price drops to $50/MWh, the missing $10/MWh are paid by the government to reach the agreed PPA price.
Investors like PPAs, since they guarantee a fixed income that is independent from the volatility of the wholesale power market. Virtual PPAs are useful for attracting investment in projects that would carry more financial risk if they sold electricity directly in the wholesale market.