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How banks are factoring in the Paris Agreement

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David Scrivener
17 October 2018
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Electricity generation accounts for about 32% of all carbon emissions in Australia, as such, reducing the emissions intensity of this sector is essential for Australia to be able to meet its commitments under the Paris Agreement.

Under the Paris Agreement, Australia has committed to reduce greenhouse gas emissions by 26-28% below 2005 levels by 2030 as part of the global goal to hold the average temperature increase to well below 2 degrees Celsius.


And it seems we are now entering a new phase in the investment cycle as commercial-scale renewable energy projects become cost competitive in their own right.


Westpac's commitments

As part of Westpac’s commitment to help Australia transition to a net zero carbon emissions economy, under their Climate Change Position Statement and 2020 Action Plan, Westpac has committed to decarbonising their loan book.

Westpac has set a target to reduce the emissions’ intensity of their lending to the power generation sector from 0.38 tCO2e/MWh in 2016 to 0.30 tCO2e/MWh by 2020 (as compared to an average carbon intensity of the National Electricity Market (NEM) in 2016 of 0.9 tCO2e/MWh).

In addition, Westpac will now only finance new power generation if it reduces the emissions intensity of the grid in which the generator operates. The financing of new, renewable power generation projects is thus essential for Westpac to meet its own target.

In Australia, the renewable energy sector has had a volatile history which has often polarised opinions and political parties. In 2001, the Howard coalition government introduced the Mandatory Renewable Energy Target (MRET) under which a target to achieve penetration of renewable energy to 2% of total consumption was legislated. The need for legislation was dictated by the fact that, at that point in time, the economic cost of generating renewable power was well above the average market price in the NEM. Despite the introduction of the MRET, uncertainty in the sector has prevailed for many years, undermining investment certainty as consecutive governments have instigated multiple reviews of policy – this has led to stop/start investment in projects.

However all this has now seemed to have changed, with a deluge of new projects coming online as renewable energy projects have started to be competitive in their own right and less reliant on policy support.

Wind power has led the revolution in commercialised renewable power generation over the last 20 years as the cost of wind turbines has dropped exponentially at the same time as the efficiency of wind turbines have increased, reducing the Levelised Cost of Energy (LCOE – the breakeven sales price).

Over the last 10 years, we have seen the power price required under power purchase agreements (PPA) to get a wind power project off the ground drop from over $100/MWh to below $60. However, impressive as this is, it has been eclipsed by the developments in the solar PV sector, as the required PPA price has dropped from well above $400/MWh down towards $55.

At the same time, we have seen significant developments in the power market itself. Australia has one of the oldest power generation fleets in the world, as a lack of stable energy policies has resulted in owners of power plants deferring decisions to replace aged facilities. As such, power plants have been kept online that would have ordinarily been retired or replaced in an orderly fashion, as they reached the end of their useful working lives.

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Given the age of these facilities, the capital costs have long since been fully amortised and thus owners have been able to run them in a way that covers their short-term operating costs rather than having a view to the original (or new) cost to build. This has seen prices as low as $29.17/MWh (FY2012), well below the price which would be necessary to cover the operating costs and meet capital costs for a new coal-fired power station, for which Bloomberg New Energy Finance forecasts an LCOE in the c.$80-105/MWh range. The impact of this on the market has been to defer the signal to owners to invest in new plant.

With the recent retirements of some of these older power stations coupled with increased demand post-2016, we have seen power prices rise from recent lows to greater than $80/MWh, which whilst creating short-term shocks does send the appropriate signals to invest. These two factors (falling LCOE and rising power prices) have really seen the investment market for new renewable energy projects take off in the last 24 months, impelled further by state-based renewable energy schemes. At the same time, the increase in power prices has seen companies focus much harder on their own cost of electricity.


Green Energy Markets forecast electricity prices falling to $49/MWh over the next four years as further significant new renewable energy projects come online, exerting increasing downward pressure on market prices.

Westpac has taken a lead in supporting our customers in this sector and over the last 24 months has financed 13 wind and solar farms which when complete, will generate sufficient electricity to power over 1.4 million homes and representing over 2.5GW of new renewable generation capacity – over 1.5x the capacity of the retired Hazelwood power station and meaning we are well on the way to meeting our own decarbonisation goals.



Note: The information provided is factual information only. It is not intended to be, and should not be interpreted as, a recommendation or opinion about the financial products identified.





This article was written by David Scrivener from Westpac. The opinions expressed here are his own and don't necessarily represent AGL Energy's positions, strategies or opinions.