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Serendipity can sometimes be an important factor in the energy and resources market, and it is a word that easily describes Frontier Energy’s (ASX:FHE) plans for an upcoming solar farm – which is set to become one of the largest renewable energy projects in Australia at a time when demands is peaking, and other energy providers are coming off the grid.

Last month, Frontier unveiled a definitive feasibility study (DFS) for its Waroona Renewable Energy Project, which showed the latter to have a potential lifespan of 30 years, and a strong financial return – with payback of just under six years, and profit of $68 million per year for the first five years (and $63 million over the first ten).

The project’s initial capital cost totals $304 million.

The strength of the feasibility study means Frontier is now ready to move towards an FID (Financial Investment Decision) by halfway through this year, and a planned first production in 2026 or 2027.

Located 120 kilometres from Perth, the project’s viability is partly built on proximity to the Landwehr Electricity Terminal, which connects to Western Australia’s main electricity network, the South West Interconnected System (SWIS).

But it is also based on the production model itself, which at Stage One is built around a 120-megawatt direct current (MWdc) solar farm with an integrated four-hour 80MW battery storage.

A unique project with strong energy potential for clean energy production

In its first year, Waroona’s solar energy generation forecast is for 258 gigawatt hours (GWh), with 119GWh sold through the battery during peak periods, and 115GWh discharged from direct solar generation (the daytime market) into the WA Wholesale Electricity Market (WEM).

The average energy price forecast over the life of Waroona is $143 per MWh (peak periods) and $80MWh (solar price), in line with 2023 actual prices on the WEM.

Frontier’s CEO Adam Kiley said the study showed the company’s potential as a near-term renewable energy producer for WA, and one of the largest in Australia further into the future.

“Australia has a number of very large-scale projects which are planned in the future, most of them are around a gigawatt. The difference between us and them is that they’re a long way off for actually coming through,” he said.

“Stage one is 120 megawatts, with an 80-megawatt four-hour battery. With the network connections that access two grid connections.”

“We have the potential to put on, at some time in the future, over a gigawatt of renewable energy onto the grid. If you look at just the land we own at the moment, that’s about 400 megawatts of solar.”

Meeting a growing demand

The project could not be coming at a better time, Mr Kiley added, given the increased energy demand in Western Australia – where the top six operational demand peaks ever recorded in the state’s main grid all happened between January 31 and Feb 19 this year.

Not to mention a lack of renewable energy projects in the works, and the state’s plan to close down coal-fired power stations in Collie beginning in 2025, with a complete shutdown by 2029.

“At the moment Collie provides about 25 to 30 percent of our energy, so that’s largely going to be gone over the next number of years, at the same time that the market’s increasing,” Mr Kiley said.

“So there’s a big imbalance which is potentially coming through quite quickly, and that’s the market that we’re really trying to hit at the moment, and that’s how we believe that what we have is really unique, since we can hit that market quite quickly.”

Looking ahead to a financial partnership

Waroona’s readiness is partly down to the fact that work began on the project six years ago, enabling Frontier to secure all the necessary connections, land, permits and approvals.

The next goal is FID (Final Investment Decision), which is expected to be achieved by halfway through 2024. For advice on a potential strategic partner, Frontier has brought on Australian advisory firm Barrenjoey.

“We engaged Barrenjoey because they’re one of the leaders across Australia for these types of transactions specifically in renewable energy,” Mr Kiley said.

“Because we’re going through financing now, we’ve effectively said, if someone is interested coming through as a project partner, put an offer forward, that will be used to reduce our equity contribution through stage one.

“It will also accelerate stage two and three expansions as well. It will give the market a lot of confidence by having a big brother brand coming through at the same time.”

An update on the situation would be provided in the second quarter, he added.

“If terms look like they’re going to be potentially acceptable, we’ll take through a potential short list of parties at that point, and look to finalise something there afterwards,” Mr Kiley said.

Waroona’s moneymaking potential

In terms of profit potential, Waroona a sweet deal for investors and potential business partners, providing a higher internal rate of return (IRR) based around how it adapts to the state’s energy pricing and future demand.

“Renewable energy projects generally have an IRR of 8-11 percent, ours has 15 percent,” Mr Kiley said.

Why were we so much different or better? A large part of that is to do with reserve capacity, because the reserve capacity payment is unique only in Western Australia.

“In Western Australia, the price is capped at about $700 a megawatt. The trade-off for that cap, and to make energy generators whole is the reserve capacity payment. The way it works is that for every megawatt of power you have available, you get paid an amount. The government’s trying to make sure that in those peak periods – like in February – they’ve got energy readily available to go.”

In recent years, the reserve capacity payment had increased, with Frontier expecting it to be around $230 dollars per megawatt in Waroona’s first production year. However, with the market forecast to be in deficit in the future, this would mean a premium would be added to the price.

“That happened last year, it will likely happen again this year, that’s $300,000 dollars per megawatt, times that by 80 megawatts gives you $24 million: that’s for the battery,” Mr Kiley said.

“For intermittent energy, you still get that payment but it’s at a discount because it can’t always be relied upon, because the sun doesn’t always shine. So we’ve forecast that to come through as about a $3 or $4 million payment as well.

“The importance of reserve capacity as well is when you’re a new energy generator, you can lock that in for 5 years, so we can in essence lock in 28 million dollars per year for the first five years of production and that goes a long way to underpinning our debt financing strategy.”

FHE by the numbers
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