- Carnegie Clean Energy (ASX: CCE) is a solar energy, battery storage and wave energy project developer
- We last spoke to CEO Michael Ottaviano in March when the stock was 8 cents; since then it’s fallen by half roughly
- The company recently announced it had signed a deal with the Indigenous Business Australia (IBA) for a 10 MW Northam Solar Farm
Michael Ottaviano is the CEO of Carnegie Clean Energy. We spoke to him in March and the stock was then 8 cents. Since then it’s fallen by half roughly, it’s just above 4 cents now, 4.1 cents and I thought, really, we should go back and find out what’s going on. We’ve had a bit of feedback from subscribers, possibly some who bought shares in the company at the time because Michael was all very excited and it all looked pretty good and since then it hasn’t been good, so it’s time I thought to check back in with him to see what’s going on.
It looks like the reason the share price has halved is because they did not win the tender for the 100-megawatt battery in South Australia that Tesla has now built. With the benefit of hindsight, they were never going to win that because Elon Musk promised it would be built in 100 days or it would be free. How could anyone knock that back? Indeed, South Australia did not knock that back and Carnegie Clean Energy didn’t win that tender. It looks to have been the only really negative piece of news since March, but I thought it was worth going into some detail with Michael on how the projects that they are building, stack up.
In particular, there’s a solar powered farm in Northam and a project on Garden Island where they’re supplying the Navy with power and water from a desalination plant.
Carnegie Clean Energy also announced a few days ago that it had signed a deal with the Indigenous Business Australia (IBA) for a 10 MW Northam Solar Farm. You can read more about this announcement by
clicking here.
Here’s Michael Ottaviano, the CEO of Carnegie Clean Energy.
Michael, when I spoke to you in March, the share price was 8 cents roughly and now it’s half that. I understand you’re playing a long game but I think there’s a bit of disappointment in the sense that it seemed to be quite exciting back then. I mean, you were bidding for the South Australian grid battery tender and talking a lot about the other things you were doing, which all seemed pretty exciting. Why do you think the share price has gone down so much?
You’re dead right, what you said at the start there, we are playing a long game here and when you’re a small aspirational renewable energy company like us, with a bit of positive news your shares can double and with a bit of negative news they can halve. Really, the underlying fundamentals haven’t changed which is that we’re building a business here in probably the best growth market in the country here and in the sense it’s renewable energy, it’s growing very rapidly. We’re just positioning the business to make sure that we’re around for the next 5-10 years and that we can grow the business in line with the market growth.
Have you had any negative news?
Well, you mentioned the South Australian battery process which we were very much a part of, I think, right in the middle. I think it was happening last time we spoke and clearly we didn’t win that particular project, so I think that’s probably about as negative news as we’ve had. You would have no doubt seen that that project’s about to come onstream or if not, already has, which is I think fantastic for the industry because it really shows that these large batteries are very much real and that will be the first of many. We think even though we didn’t win that first one, we think we’re really well positioned for subsequent large scale battery storage solutions.
Your main business is smaller projects obviously and also some wave energy…
Correct.
But, are there any big battery tenders coming up that you know of?
The Queensland government released an EOI just before the election for a large scale battery tender, very similar to the South Australian one. That’s all been deferred/delayed for the moment until things have settled back in Queensland after their election. The Victorian government was also tendering for large scale batteries, that’s been delayed as well. I think what we will be seeing though is more a little bit like what’s happened in the solar space where we’ll now start to see individual proponents develop their own large battery solutions probably mostly in combination with large renewable energy projects, combining battery with solar or battery with wind where you can extract a number of different revenue streams from the batteries.
At the moment, batteries aren’t standalone economic. You really have to work what they call a revenue stack up to make the business case work for large scale batteries. But we’re seeing a lot of those proposals being developed by individuals around the country at the moment. We’re involved with some of those…
Could you explain that, what you mean by a revenue stack?
Sure. It’s not that dissimilar even to a solar project. I’ll give you the analogy we’re working on at the moment in WA. On the grid here, to the east of the city, we’re working on a solar farm at a country town called Northam. Even from that project, which is in a sense a simple project, it’s just 30,000-odd solar panels strung together, connected to the grid. There’s three revenue streams from that particular project. There’s three revenues that we stack up to make the economics of the project.
What are the three?
Energy sales, just selling the electricity. In Western Australia there’s a capacity market, unlike the national electricity market, so you get paid to have capacity on the network, that’s the second one. Then the third one is the sale of the renewable energy certificates, the large generation certificates, the LGCs. That’s a stack of three revenues and that’s pretty well understood across the whole of the country and as a result you can then get finance for those sorts of projects and people understand the market well. On the battery side, because it’s an emerging space still and people don’t quite understand, there’s not that many precedents, you still need to do something similar and stack up multiple revenues to try and make the business case work, it’s just a little bit harder because it’s still an emerging space.
Some of those revenues might be through I think what people naturally assume you’re doing with a battery, which is energy arbitrage. That would be storing the energy in the battery when power is cheap and then discharging that energy back into the market when power is expensive, so you can arbitrage that gap in the market place. That might be one revenue stream, but then there’s a number of other functions that batteries can serve and for example, in South Australia with the Tesla battery, that will be also being made available as a source of backup power, so it can sit there and that particular battery can discharge up to 100 megawatts of energy, effectively instantaneously if the grid operator requires it in an emergency situation.
There’s another revenue stream effectively like a capacity payment, they’ll get paid to make themselves available. Then there’s other revenue streams as well. They can also help stabilise the grid from a frequency and a voltage point of view and there’s an existing market that can reward those sorts of services as well. You’ve really got to work all those revenue streams hard to try and get the economics of a battery storage working in your favour to be able to get the finance.
You mentioned the Northam Solar Power Station project. Could you take us through how that works financially just as a way of everyone understanding how the thing works?
Yeah.
You’ve borrowed $7.5 million I think to build it.
Yeah, a bit more than that. There’s a few elements to that project that are quite innovative as well but from a technical perspective it’s relatively straightforward, as I say. It’s not dissimilar to what a lot of your listeners will have on their roof in terms of solar PV panels, just many of them strung together, 35,000 or so of these panels strung together over about 25 hectares of farmland in Northam. Technically, relatively straightforward.
Who owns the land?
It’s a local farmer.
At the moment, do you just rent the land?
Correct.
Do you pay a fixed rent or does he take a share of the revenue?
There’s different models. In this particular case it’s just a fixed rent. If you’re the farmer he’s basically able to look at some proportion of his property now and say, well I’ve de-risked that for 25 years because I’ve got a fixed revenue stream coming from that paddock if you like, down on the farm. It means he’s not as exposed to the vagaries of weather and the like, for the next 25 years over that particular piece of land. He’s very happy to have done that. From our point of view, we’re able to then take what was a piece of farmland 12 months ago and in 12 months’ time, turn that into an operating power station which is pretty incredible for any power station to go from really greenfields to commissioning within such a short space of time.
From a financial point of view, again there’s a few elements to that. There’s the initial piece of that process I just described which is taking the land and turning it into the solar farm. That is really like any other project development in the sense that it’s really risk capital. There’s no guarantees when you start a project and you find a piece of land that you’re going to be able to get it through the whole development process. There’s a whole any number of hurdles you need to clear through that process like environmental approvals, development approvals, grid application with the local network owner which in Western Australia is Western Power.
That’s a big one. You might have a wonderful piece of land with a great solar resource, but if you’re not well located on the grid where there’s capacity on the line, then that project will never be built. We’ve worked our way through that development process over the last 12 months. We’ll provide an update to the market very soon in fact on where we’re at with that, but we will be moving into construction imminently on that project. For having taken the risk and developed that project from greenfields through to something that is now construction ready, Carnegie who carried the risk and funded that process will take a development fee from the project as well.
The project owes us a fee for having taken the risk and created some value around that. That’s one part of the risk/return for Carnegie in that project. Then you have an investable project, an investment ready project, a construction ready project that has some value. To build this particular project which is a 10-megawatt project is – let’s just talk in round numbers to make it easy, let’s call it $15 million, about $1.5 million dollars a megawatt. Typically speaking, these are very predictable assets from an investment point of view. Debt providers like these assets and we’re seeing on the east coast very large solar farms now being built and a lot of investment capital really looking for these sorts of assets with predictable revenue streams and both on an equity and the debt side.
What we’re doing in Northam and in Western Australia is a little bit different to what’s traditionally done. Typically, with these projects you secure an offtake for your output for the power you sell over a long-term contract, usually with a retailer, who then wants to bundle that up with their other wholesale energy deals and sell it to mums and dads. By securing an offtake, you’re able to then go to the bank and borrow the debt for the project. What we’ve chosen to do in this particular case is to not secure an offtake. We’re doing what’s called a ‘merchant solar project’, which means that basically once the project’s up and operating, we’ll be selling that power into the spot market.
It’s a higher risk model but in our view, a much higher return model. We will crudely get something like twice the power price by playing in the spot market than we would if we signed a long-term offtake. The reason most people don’t do that, and in fact it’s never been done in Western Australia before, and it’s for a very good reason, typically you’re not able to finance a project without the offtake in place. We’ve worked very hard to secure the debt and that’s the $7.5 million number you referred to earlier, Alan. That’s the debt facility we’ve secured for the project, so it makes it about 50% geared.
If we just use round numbers, on a $15 million capex project, $7.5 million of debt, then leaves $7.5 million dollars of equity for the owners of the project to invest. What we’ve chosen to do there is to go 50-50. Carnegie will put in half the $7.5 million and we’ve run a process over the last month and a bit to select a third party equity investor in the project and that’s what we’ll update the market on very soon is on the outcome of that process. But what I can say is we’ll be taking the project forward on a 50-50 ownership basis with an equity partner and we’ll then enter construction imminently and then it’s roughly a nine/ten month construction build and commissioning process.
What’s the internal rate of return on your 50%?
Look we haven’t gone out and disclosed that but these sorts of projects typically would get a low to mid teen levered equity return.
Right. How much of that comes from the renewable energy certificates? Because I was under the impression that we were getting to the point where we don’t need those, the cost of the solar is such that we’re getting to the point where we don’t need the certificates anymore.
Yeah, well again, it kind of depends in a way. For this particular project you could crudely say something like 40% is energy sales, 40% is renewable energy certificates and maybe 20% is the capacity market in Western Australia. For some of the very large-scale projects we’re seeing built particularly again on the East Coast, so remembering this is a 10-megawatt project. This used to be a very large solar project but the market has moved incredibly in the last couple of years in Australia. We’ve now seeing 100 megawatt projects and 200 megawatt projects now being built in Queensland and South Australia in particular. Where you’ve got very large economies of scale which you can capture clearly if you’re building a project of that scale, then your installed cost per megawatt goes from where we’re at, say with Northam, $1.5 million per megawatt, can come right back down to as low as $1.2-1.3 million per megawatt.
If you’re installing your solar project at that level, then clearly your levelized cost of energy coming out of the project is that much lower which means that you can then go and sell that power over a long term contract at a much lower rate. If you can do that, then you can gear the project up initially much higher than 50%. You can gear a project like that if you sign a long term offtake for 13 years or 15 years, you can gear that to 70-80% and your cost of capital obviously comes down proportionally. That’s where we’re at a point where those sorts of projects, very large projects with high debt to equity gearing ratios really start to wash their face without their renewable energy certificates. But you really need energy certificates still working for you for that situation.
You’ve got those things til 2020 anyway.
It’s a 2020 renewable energy target, the certificates continue to have value through to 2030. They will trade beyond 2020 with some value but nobody really knows what that value will be because no-one knows what’s going on with that target beyond 2020, whether it just simply dies, whether it’s replaced by a clean energy target or whether there’s some other mechanism that comes into the market. That’s a bit of an unknown for everyone at the moment.
Yes, it is, that’s right, it certainly is.
[Laughs] I don’t think we’re holding breath for it certainly any time soon.
No, indeed. Well you’ve also got a couple of other things on the go. At Garden Island you’ve got a project which is not only solar, but you’ve got a battery and a desalination plant there.
Yeah, that’s right and that’s really I think where our sweet spot is for Carnegie. We don’t want to be doing 200 megawatt solar farms. There’s really no competitive advantage in that for us. What we really need is some level of complexity or value that we can bring. Northam is a good example, not because it’s particularly technically complex but because of the financing piece is complex and a lot of players couldn’t do the combination of technical and financial there. Garden Island is a great example where it is technically complex, where we are as you just said, integrating two megawatts of solar with a two megawatt, half a megawatt hour battery energy storage system with a 150 kilolitre a day reverse osmosis desalination plant.
But also, that particular project in Garden Island, which is Garden Island in Western Australia which is Australia’s largest naval base, that is actually also connected to the grid still as well. So it both has an additional level of complexity because we can operate that plant in on-grid mode but also in off-grid mode, and that’s really innovative.
But isn’t the Navy going to buy everything from you?
Yes, so the Navy is the off-taker. We’ve signed a long term offtake. Unlike Northam where we’re playing in the spot market, Garden Island we’ve signed a long term offtake with the Department of Defence for both the power and the water for that project. But what we need to be able to do for them is have a system that allows them to continue to take power from the grid back in the West Australian grid for normal operations. But if there is an issue with the grid, let’s say if there’s a blackout in Western Australia, then we need to be able to seamlessly continue to supply them power from our on Island behind the meter solution as well. There’s a process called bumpless transfer, where we’re able to operate on grid or off grid without the client even being aware that something’s happened. That’s really novel and that’s taken a fair bit of engineering nous to be able to deliver, but that’s what we want to be able to design, these bespoke high end technical solutions for very demanding customers like the Department of Defence who really value continuity of operations more than most.
Is part of your future turning this project, this whole thing into a sort of a cookie cutter, well, not a cookie cutter, but a template solution that you would offer to a variety of clients where you provide both power and water?
Yeah, I think what we’ve got to be really clear about is what business we’re in and what business we’re not in. Where we can deliver projects between the $5-20 million project scale in terms of capex that have integration of multiple technologies and/or a level of financing complexity as well, that’s where we’re going to be able to have some real competitive advantage and maintain our margins as a result and the more replicable those projects are, if we are able to create this as a template, a cookie cutter, l then clearly the more profitable those projects will be because we’re not having to reinvent the wheel.
I guess part of the value that we bring here is that these generally always have some level of bespoke design to them because every customer is slightly different. Certainly the available renewable resources at a site will always be slightly different but also the loadprofile of a customer will always be slightly different as well. So you do need to do some bespoke tailoring for each customer but certainly at the high level, integration of multiple technologies bringing some finance into the solution if that’s what the customer wants as well. And keeping between the $5 million to $20-30 million maybe at a stretch, scale project which is big enough to mean that smaller companies without the technical financing capability really can’t compete but some of the larger companies that are happy building 100-200 megawatt projects, it’s too small for them to get out of bed for. We think there’s a real growing sizeable national market in that space that is really under-serviced at the moment and emerging and growing rapidly.
Will these two projects, Garden Island and Northam, get you into the black on a kind of cash flow basis?
No. Not quite, we’ve got…
When are you going to start making money?
That’s the million dollar question isn’t it, Alan [in regards to the EMC business unit]. We’re about 18 months away from that. We haven’t gone out there and put any hard and fast forecasts around that because we are still very much emerging into this space as the market emerges as well. But what we are on is a relatively fast path now to breakeven and profitability. It’s those sorts of projects that will allow us to do that because they do come with a good profit margin because they’re complex.
Have you got a known pathway to breakeven? Can you see it?
Yeah, absolutely, we can see it, yeah. Part of that will be delivering these projects in Western Australia like we have been doing traditionally, but what we do need to do is to grow with the market and clearly a lot of that market is going to be on the East Coast as well, so we will be needing to grow our capability nationally as well to capture that portion of the market over there and if we do that well then our solar battery business, as I say, within that one to two year time frame we’ll be breakeven and into profitability.
Would you have been capable of delivering a 100-megawatt battery in South Australia?
Yeah absolutely. From a technical point of view we have the capability inhouse, we have probably the best batter design capability inhouse, I’d say, in the country. We’ve delivered 20 or 30 battery projects. Now those are much smaller projects than say a 100-megawatt project. But going large from a technical point of view isn’t that much of a challenge. From a construction point of view it’s a big challenge and from a financing point of view it’s a much bigger challenge. But we had some very, very good blue chip partners in our bid. We announced one of our partners being Lend Lease who were our construction partner on that particular project and who indeed are our construction partner for all our solar battery projects across the country.
We also had a large international utility in there that was going to be the financier of that project as well. We felt we had a really compelling proposition there.
You’ll be bidding for Queensland and Victoria when they do it?
Well we’re looking at both those. We don’t just sort of bid for everything that comes along. We only bid on things that we think we’ve got a really good chance of winning because there’s a lot of opportunity out there. We really have to be at a very specific level we do bids and we don’t go out there and publicly say what we’re bidding on and what we’re not bidding on, but we are looking at both those opportunities. But as I say, there’s a lot of other opportunities out there that aren’t quite as public, which can be more attractive than some of those larger ones which become obviously highly competitive.
Everyone’s going to want 100 days or it’s free from now on, aren’t they?
[Laughs] Yeah, there’s been a precedent set, right? No, I think that what you’ll find is most customers would prefer, if they had to choose, they would prefer it to be on time, on budget and working to spec as opposed to maybe some other sort of artificial metric. I think that was absolutely brilliant from Tesla and they’ve delivered from what it appears as well, which is great.
Well that is the point. They have delivered the thing in 100 days and I would have thought that has set a benchmark.
Well I think it’s pretty extraordinary as well. They had a site, and it’s not actually ultimately a Tesla owned project, this is a Neoen owned project, the French company that owns the wind farm at Hornsdale. It’s their project. They actually had a well-advanced site with the grid connection, all good to go effectively. Tesla then were able to do a hell of a scramble to pull in not just their own batteries, but third party batteries as well. It’s been a pretty extraordinary confluence of events that have allowed that to happen. I think that’s pretty rare and unlikely to line up again. I think the real point here is, what’s so incredible is you can build a huge piece of infrastructure like that in an incredibly short period of time. Whether it’s six months, 100 days or whether it’s a year, that is so much faster than what power stations and power infrastructure traditionally have been built. Likewise, with our Northam solar farm. Two years to go from a greenfields piece of farm which had canola and wheat on it to an operating power station was extraordinary. That’s part of the disruption in this industry.
Unfortunately, we haven’t had time to get onto your wave project, but perhaps next time, Michael.
I’ll have to talk about it next time, Alan.
Great to talk to you again, thank you.
My pleasure, thanks very much.
That was Michael Ottaviano, the CEO of Carnegie Clean Energy.
