ARENA’s investment focus is on supporting activities that involve the integration of renewable energy with existing supply in remote off-grid areas for:
- industrial end use applications, especially critical mine loads
- remote communities that rely on agreements with an independent power producer (IPP).
ARENA’s analysis of off-grid areas is based on staff analysis, work done to establish the Regional Australia’s Renewables Initiative, and experience with the agency’s significant portfolio of off-grid projects.
Likely scale and potential for growth by 2030-40
ARENA commissioned consultancy group AECOM in 2014 to analyse the potential market for the application of renewable energy in off-grid areas. AECOM found that, in the short to medium term, renewable energy will be applied in low penetration applications with a possible 150 to 200 MW of project opportunities available. This corresponds to approximately $450 million to $600 million in capital value.
Over the longer term, it was estimated that an additional 850 MW of potential high penetration projects could be unlocked as technology costs fall and there is growth in confidence and demand for renewable energy in remote areas. This represents a total of over 1 GW of off-grid renewables at a capital value of over $2 billion.
The majority of electricity supply in off-grid areas is currently provided through gas-fired generation. With increases in gas prices predicted over the long term as a result of increased liquified natural gas exports, there will be opportunities for renewable energy to provide economic benefits to end users through a reduction in exposure to price volatility.
Diesel-fired generation represents the other major source of electricity supply in off-grid areas. Due to oil price reductions, the immediate economic incentive for renewables to offset diesel fired generation has been blunted. However, transportation and storage costs mean diesel generation remains expensive in many areas, and renewables can improve reliability and lower logistical costs.
In addition to fuel price movements, mining investment and commodity prices have softened significantly; particularly the iron ore price. As a result the mining industry is expected to shift its focus from expanding production to maximising operational efficiencies to improve productivity and remain profitable.
The deployment of renewable energy as means of reducing ongoing fuel costs can improve productivity. Demonstrating the viability of renewables in supplying critical mine loads could therefore broaden the energy supply options available to miners.
These economic benefits are also relevant for remote communities, including Indigenous communities, which rely on independent power producers for electricity supply. Application of renewable energy can reduce the cost of providing electricity to these communities and therefore increase their viability.
Renewable energy has not been adopted on a large scale in off-grid areas due to the perceived technical and commercial risks of integrating renewables with existing generation.
In some cases the remaining operating life of a mine is not known when energy investments are made, which may result in a short required payback period for renewable energy investments. There is potential for technical and financing solutions to be developed to respond to this challenge, such as leasing or mobile solutions. Support from ARENA and knowledge sharing can also help to reduce investment risk, demonstrate viability, address reliability and operational risks, and lower cost.
ARENA funded projects could also build the knowledge base and capacity of local industry and contractors to construct, operate and maintain renewable energy systems in remote locations. This would assist in driving down project capital costs, which at present often include risk premiums on construction cost estimates to account for technology and construction uncertainties.
The ultimate outcome of ARENA investment would be to develop sufficient precedents and knowledge to ensure renewable energy projects could be commercially deployed.
Given the amount of energy consumed off-grid by industrial and residential consumers, and the quality of the renewable resource in these areas, Australia could also develop world-leading expertise in the hybridisation of fossil fuel and renewable energy generation in remote locations.
Gap in ARENA portfolio
ARENA currently has a number of projects involving the deployment of renewable energy in remote off-grid locations. These projects have been funded through the Regional Australia’s Renewables (RAR) Initiative.
While a number of RAR projects involve renewable energy in remote communities, the proponent or funding recipient in those cases is a major utility, not an independent power producer (IPP). The potential for further off-grid projects involving IPPs would not only be relevant for community energy but also for mining applications, due to many remote mine operations using an IPP arrangement for power supply.
The mining industry may not perceive the current number of ARENA projects providing energy for critical mine loads as an adequate precedent to ensure ongoing commercial deployment. Anecdotal evidence from previous ARENA consultations puts the number of projects considered by the mining industry to constitute a viable precedent at around five to six. On this basis ARENA remains interested in off-grid projects that serve critical mine loads.
There may also be other opportunities for ARENA to support niche renewable energy projects in off-grid locations to power specific applications. For example, projects using renewable energy for innovative street or residential lighting or mobile electrical device charging applications may be of interest in remote Indigenous communities.
This is also relevant to the developing economies in Asia and Africa, and therefore ARENA support for such projects may provide future export opportunities.