With a new year comes the opportunity to improve. Recent announcements suggest the new year’s resolutions for Australian large scale solar point to a bright – and low cost – future. The most noteworthy announcements have been the engineering, procurement and construction (EPC) contract awards to Downer and RCR Tomlinson for the Clare and Sun Metals Solar projects respectively. Both projects are in Queensland, and both are large by Australian standards, around the 100MWac mark.
What caught our attention the most is the capital intensities implied by the contract values awarded to these companies.
The FRV Clare contract awarded to Downer is for a headline value of A$190 million. We assume this includes two years of operations and maintenance (O&M), which we value at A$8.4 million. This implies an EPC value, analogous to the project’s capital cost, of A$182 million. While Clare may be expanded to 135MWac, we expect this contract covers the first stage of 100MWac, and as such the implied capital intensity is A$1.8/watt of capacity. As we flagged back in September, this shows current project capital is coming in well below the spending estimates published as part of the recent ARENA large scale solar funding round. In fact, A$1.8/watt is the average capital intensity we use for modelling the latest projects in our analysis.
But there is even more upside potential for Australian solar. The Sun Metals Solar contract awarded by Sun Metals Corporation to RCR Tomlinson is for a value of A$155 million. As far as we know, this is a pure EPC contract, with no O&M component. With an initial stage of 98.5MWac, this suggests a remarkably low capital intensity of A$1.57/watt.Of course, we must be careful when comparing projects; different solar farms have different characteristics that drive variations in cost. Clare, for example, will utilise single axis tracking; Sun Metals Solar will be fixed tilt. Clare requires a new substation, Sun Metals Solar does not. Collectively this amounts to a difference of 15 cents/watt. Nonetheless, it points to how low costs might go in Australia in 2017.
If realised, capital intensity has fallen to almost half the value operating utility solar farms were built for in 2015 and 2016. This is likely to be a result of falling solar module prices, and the experience EPC companies have gained working on earlier projects. If we consider a scenario where a capital intensity of A$1.57/watt is indicative of the likely final capital costs for other forthcoming projects, the value of the Australian solar industry will get a significant boost. Our upside scenarios for capital spend vary by asset, taking in to account the specific details of each project. But the scenarios correspond broadly to a capital intensity of A$1.6/watt. We estimate that if each project that is currently in detailed design phase reaches this level of construction cost, net present value (NPV) for the sector rises by over A$110 million. This is an average increase of A$10 million per project (real terms, 5%).