There are a couple of big and exciting things about to happen in Australian energy markets: one is the rollout of battery storage and smart software in households, businesses and networks. Another is the anticipated start of the boom in large-scale solar installations, as envisaged by chief scientist Alan Finkel this week.

Until recently, virtually the only choice available to developers looking to build under the federal government’s renewable energy target was wind energy, much to the displeasure of a bunch of folk, including the former prime minister, treasurer and many backbenchers and ministers in the current Coalition government.

That is now changing. Within a year or two, all things been equal and if the current investment drought ends, it is assumed that large-scale solar farms will be able to compete with wind energy on costs. Which is not to say that wind energy could, or should, be sidelined. It will just offer more choice and diversity.

The Australian Renewable Energy Agency has been conducting its well-publicised tender for $100 million of grant funding, which it says should help about 200MW of large-scale capacity get built.

It has turned into a giant fact-finding mission, with some 77 projects applying for money and 22 making it to the next round, where they will have to get serious and produce detailed plans and the ability to finance the project.

ARENA has now released some of the data on its website, and it reveals some interesting information about capacity factors, capital costs and operating costs of large-scale solar projects in Australia.

It suggests that solar energy could be built at around $110-$120/MWh in Australia, although with cheaper financing this could be lowered by around another $10/MWh.

This is significantly cheaper than the $135/MWh benchmark set by ARENA, although the agency suspected that this might be the result, given the prompting of some competitive bidding. It means that the additional subsidy (ARENA grants) might only amount to between 10 and 20 per cent of project costs.

“(This data) is showing that costs are coming down, and in fact they have come down dramatically, which is where we need to get to wind parity, which is one of our goals,” ARENA CEO Ivor Frischknecht told RenewEconomy.

Frischknecht said while wind is a relatively mature technology in Australia, large-scale solar is not, so there is potential to lower the costs of inputs that can be controlled in Australia – labour, brackets, frames, manufacturing, maintenance, and the cost of capital.

“If we can get the costs down as low as possible – then developers will have a choice. In southern Australia it might be wind, in other areas it could be sun. In some it might be both.”

This means diversity of supply – wind usually produces more during the night, solar PV is definitely a day-time supply.

Large scale solar is a relatively new market, with only a handful of completed projects built to date – the ARENA-funded Nyngan (102MW), Broken Hill 50MW) and Moree (57MW), along with the ACT-government contracted Royalla solar farm (20MW), and the 10MW Greenough River plant in WA.

There are three critical elements to the costs puzzle – the strength of the solar resource and the potential capacity factors of the plant (i.e. how much they can produce), the cost of material supply, labour, construction, frames, and maintenance, and the cost of finance.

On capacity factors (below), there are no real surprises. It shows that Western Australia and Queensland are the best places for large-scale solar in the country, with capacity factors of 28 per cent and 25 per cent respectively (compared to an average of below 23 per cent elsewhere).

Solar plants with tracking technology increased the capacity factor in Queensland to 28 per cent. This high capacity factor may explain why Queensland projects accounted for 47 per cent of the applications, and nearly half of the 22 projects selected to go forward into the next round.

(It is important to note that the WA figure includes plants that were both fixed and tracking)

The next slide presents a bit of a surprise, with NSW showing significantly cheaper capital costs per watt than other states. The folk at ARENA are still scratching their heads about this one, but think it might have something to do with the location of the proposed projects, better supply chain or possibly lower labour costs.

(DC – the blue dots, represents the amount of electricity generated by the plant. AC, the green dots, represents the amount that can be fed into the grid. As a rough guide, a capital cost of around $2.20/watt AC is expected to translate into a levelised cost of generation of around $125/MWh, based on ARENA’s 10 per cent weighted average cost of capital methodology. However, a 1% reduction in the assumed WACC translates to a $7 reduction in the “levelised cost of energy”, so if the borrowing cost can be lowered to around 7 per cent, then the cost of generation will fall to nearly $100/MWh).

The next slide is the comparison of operating costs. No great surprises here, but South Australia and Western Australia were significantly higher than their peers, possibly due to the location and therefore labour costs.

The next round will be the critical one. That is when the 22 projects need to finalise their approvals, their siting, their design and, most critically, their access to finance.

Some projects may benefit from a power purchase agreement (essentially a contract to buy energy) from a retailer, while others will look at the merchant market (selling into spot wholesale prices).

As mentioned above, financing will be critical because a weighted cost of capital of say, around 7 per cent, could mean a difference of $20/MWh with those only able to get capital at 10 per cent.

That could also mean reducing the difference between solar and wind to around $10/MWh, although wind industry folk will point out the recent pricing at both the Coonooer Bridge wind farm and the Hornsdale projects, indicating costs are coming down with the right structures and wind resource, and competitive bidding.

In recent years, that differential might have been considered enough to give the go-ahead, because of the “premium” value of daytime energy, but that premium has been eroded by the proliferation of rooftop solar, now at a capacity of more than 4.5GW across the country.

The key could be in the ability to obtain power purchase agreements. These are typically indexed, suggesting a PPA of around $100/MWh could be good enough for a project with a cost of capital of 8 per cent.

“We don’t know how much costs are going to change – there is a lot of work that is going to happen between the expressions of interest and the final tender,” Frischknecht says. Submissions for the next round are due in June.

The data set can be found here.