The Rise and Riches of the Rentrepreneurs

CWP Renewables Pty Ltd presents as a story of successful entrepreneurship for which its owners have been rewarded with fantastic profits. But that outcome has been accompanied by a huge cost to the community.

The company, established in 2007, has been mainly involved in wind farm developments with giant Swiss holding company Partners Group, which also contributed a chunk of equity capital. Aside from some potential ‘blue sky‘ projects involving solar, wind and batteries, CWP’s main assets were five windfarms with 257 turbines erected between 2016 and 2020 at a cost of $1.72 billion. The turbines were financed by the Commonwealth’s CEFC green energy bank ($233 million), and Partners Group ($250 million). With other funding, borrowings totalled $983 million and equity was $740 million.

The outfit was acquired in December last year for $4.1 billion by Squadron, a private company owned by Andrew ‘Twiggy’ Forrest (above). For CWP’s shareholders this was a great return: $740 in equity became 5.5 times more valuable. While Andrew Forrest is a climate fanatic, he is no idiot. There were rival bidders for CWP and his outlay represented good value to Squadron.

To grasp CWP’s appeal, begin with the main assets – those 257 wind turbines – and their two streams of revenue. The first is the return from the electricity market, almost always forward-contracted in power purchasing agreements. The second is the subsidy that wind farms receive as a result of energy retailers’ obligation to incorporate renewable energy in their total electricity supplies by purchasing Large-scale Generation Certificates (LGCs). This was billed as a temporary measure when introduced in 2002, the rationale being to give renewables a short-term fillip while they evolved to fulfil their anticipated (and ever-receding) destiny of being cheaper than fossil-fuel power.

When CWP was planning its windfarms, between 2015 and 2018, the expected energy price would have been, rule of thumb for the three-year period, about $70 per MWh. The expected price of the LGCs would have been expected to follow a downward trajectory, averaging around $30 per MWh, reflecting the assumption that the “temporary” scheme would be winding down. This combined revenue stream would offer a prospect of decent profits.

Fast forward to December 2022, by which time such price assumptions had been shown as far too conservative. The assault on coal, the predominant source of electricity, is preventing new investment and causing closures, the shuttering of the Liddell power station being the latest. The closures have been exacerbated by downtime in other stations due to stinting on maintenance as a result of the subsidised wind and solar competition driving down their profitability.

The future wholesale price is forever being forecast to fall by politicians and regulators enthralled by their love-affair with renewables. The fact of the matter is that it has zig-zaggedly increased from around $40 per MWh in 2015, prior to the closure of coal-powered stations, to its present level of $177 per MWh — an increase Prime Minister Anthony Albanese ludicrously tried to blame on the war in Ukraine.

Hard-nosed bidders for the CWP assets in December 2022 would likely have seen the wholesale price as remaining at some $150 per MWh well into the future. They would also be further encouraged by the subsidies allocated to transmission, big batteries and pumped hydro by state and federal governments.

With regard to those LGCs, subsidy seekers, who mournfully anticipated a fall in the price, have been happily surprised to see prices holding up. The current price has been given a shot in the arm by the Safeguard Mechanism forcing major outfits to increase the share of renewable energy within their electricity supplies. And there is a strong prospect of a further upward price bump resulting from an increase in general requirements for renewable energy to lift its market share from the current 30 per cent to 82 per cent of supplies by 2030 in line with the Labor government’s pledge.

All in all, Squadron would have assembled its bid on the expectation of increased revenues from these factors. Compared to the $100 per MWh expected ($70 and $30 per MWh respectively from the wholesale and subsidy streams), by December 2022 expectations would have been some $200 per MWh ($150 per MWh from a market distorted by subsidies and $50 from the subsidies themselves). 

Hence, despite some political risks and the distant prospect the wind turbines will incur disposal and remediation costs, CWP Renewables’ revenue has doubled with no increase in finance and operating costs. The tragedy of all this is that the benefit to the entrepreneurs is also a cost imposed on the economy due to energy users being forced by regulation to pay around three times the underlying wholesale price for energy.

Yesteryears’ entrepreneurs profited by searching out needs and value-adding. Today’s energy entrepreneurs seek out opportunities created by government regulation, which causes higher prices and advantages particular energy sources. Those profits come at the expense of consumers landed with an inferior product at a much greater price. Put bluntly, this trend cannot co-exist with increased living standards. 

Alan Moran, of Regulation Economics, wrote the chapter “Current trends and perspectives in Australia” in Local Energy Markets edited by Tiago Pinto et al and published in 2022 by Elsevier