Having burst out of an investment black hole at warp speed, the renewable energy sector's massive building boom looks likely to hit an uncompromising wall.

Key points: Long-term power purchasing agreements for large-scale renewable generators have fallen 30 per cent in the past five years

Long-term power purchasing agreements for large-scale renewable generators have fallen 30 per cent in the past five years The AEMO has slashed the prices paid to many more remote renewable generators

The AEMO has slashed the prices paid to many more remote renewable generators A wave of new projects, equivalent to two Hazelwood plants, will start in the next two years and cause a large oversupply imbalance

The reckoning is likely to be sooner rather later, as a nasty confluence of factors keeps mounting up.

Long-term contract prices are tumbling, and the market operator has effectively slashed the value of projects operating on the periphery of the network.

On top of that, rooftop solar's rapid uptake is competing directly with utility-scale solar, and coal is still a cheap form of power.

All of this has developers and investors scrambling to see if their numbers still stack up. Many don't.

Almost $25 billion was invested in new large-scale renewable generation last year.

That is an extraordinary turnaround from the building boycott between 2013 and 2015 that coincided with the prime ministership of Tony Abbott, and the less-than-encouraging policy stance outlined in the Warburton review he commissioned.

Since then, there has been a boom. Around 4,700MW (megawatts) of solar and 5,400MW of wind generation has been committed since 2016.

Another 1,240MW of solar and 440MW of wind projects have secured long-term price agreements, but have not so far received final investment approval.

Much of the renewable investment boom is "catch up" from stalled building between 2013 and 2016 ( Source: Dylan McConnell/ Ross Garnaut/ Melbourne University )

Boom may become bust

Green Energy Markets director Tristen Edis said the boom may well become a bust, as supply overwhelms demand and prices fall further.

"We are adding such a huge amount of extra supply — almost two Hazelwoods worth of extra generation — that wholesale power prices will be pushed down to quite low levels consistent with the operating costs of existing coal plants, rather than the much higher costs of gas plants," Mr Edis said.

The benchmark in that price squeeze is coal generation operating comfortably at $40/MWh (megawatt hour).

Investment bank JP Morgan has tracked the long-term contracts won by wind generators, and found prices have fallen 30 per cent over the past five years.

From around $90/MWh in 2014, the latest power purchase agreements (PPAs) — the long-term financial guarantees underpinning the volatile renewable sector — have fallen towards $55MWh at the recently-commissioned $275 million Mortlake South wind farm owned and operated by the Spanish engineering giant Acciona.

Power purchase agreement prices for major wind farms have fallen around 30 per cent in the past five years. ( Source: JP Morgan, Clean Energy Regulator )

JP Morgan energy and utilities analyst Mark Busuttil said returns on a $55/MWh PPA — assuming the project was 80 per cent debt funded — would be around 11 per cent.

"We estimate that a wind farm costing $2,000/kW (kilowatt) with a $55/MWh offtake contract over the first 15 years, then reverting to a merchant power price of $75/MWh for the remaining 10-year life of the plant, would achieve a nominal internal rate of return of five per cent," Mr Busuttil said.

"The risk is that all free cash flows for the initial 15 contracted years would go solely to debt repayment, and equity holders would only generate returns beyond the contracted period."

In other words, equity investors would not see returns for 15 years. Even then, those returns would be highly dependent on volatile power prices which are more than likely tracking down as more supply is added.

"The analysis highlights the risk of wind farm development and justifies the reasons why typical operators of wind farms are moving away from further development," Mr Busuttil said.

"It also suggests that wind farm PPAs cannot decline any further."

The JP Morgan research noted the declines in solar PPAs have been even steeper.

The big publicly-listed wind generator Infigen, for one, can't make PPAs at current prices stack up.

Infigen's chair Len Gill told investors recently the company would be pursuing direct contracts with commercial and industrial customers, rather than recontracting its output under long-term PPAs.

"Recontracting these assets under long-term run of plant supply agreements to energy retailers would result in substantial erosion of security holder value based on current market prices for this product," Mr Gill said.

Coal is still cheap

Clearly a problem for utility-scale renewable growth at these prices is that old, debt-free coal-fired plants operate profitably at $40/MWh.

They also keep churning away when the wind stops blowing and the sun stops shining, a trait retailers are prepared to pay for.

As they say in the industry: "thermal plants burn fossil fuels, renewables burn cash" — at least in their formative years.

"I think you'd be very hard pressed to find a power retailer willing to offer 10 to 15-year PPAs at $55/MWh to either a wind or solar project without policy change, or until another coal-fired power station keels over," Mr Edis said.

Old thermal generators are burning coal, while new renewable projects are still burning cash. ( ABC News: Michael Barnett )

However, Mr Edis said there are plenty of investors prepared to accept low returns, particularly with long-term bond yields bumping along not much above zero.

"From what I hear, both wind and solar need similar PPA prices somewhere in the realm between $45/MWh — at a real stretch and a very good project — to $55/MWh, providing the contract is for 10 years plus and involves a low credit risk offtaker [customer].

"This does entail low equity returns, but it seems there are renewable energy project investors out there willing to accept these low returns if the offtaker is considered to be financially robust," Mr Edis said.

"If $60/MWh was on offer, I suspect you'd be batting away developers with a stick."

Melbourne University Climate and Energy College researcher Dylan McConnell said the global regime of low interest rates is also keeping the costs of developing new projects in check, as are falling technology costs.

Mr McConnell said developers and investors looking at the low PPAs are selling less on long-term agreements and holding on for better prices.

"Around 60 to 70 per cent may be signed away on PPAs. Developers and equity holders are taking a risk on the rest, holding for better value, maybe selling to a big industrial user on better terms," he said.

Remote generator prices slashed

Mr McConnell said the industry is facing even more substantial problems than falling PPAs.

For one thing, the DIY crowd installing rooftop solar is competing directly with utility-scale solar.

Then there is the recent determination from the Australian Energy Market Operator (AEMO) on what generators sell into the market and how much they get back.

The AEMO has rejigged its so-called marginal loss factors (MLF) which underpins the prices generators receive.

The AEMO re-did its sums and found that what many generators may have been producing at their meter was not what was being delivered to the network, and ultimately the customers.

Renewable generators on the periphery of the grid, like the Broken Hill solar farm, have had their prices slashed by the AEMO. ( Supplied: RCR Tomlinson )

The AEMO applies a discount (or premium) to the price generators receive via its MLF multiplier. The lower the MLF is below the magic number of "1", the bigger the discount.

Basically, the more remote the generator, the lower the efficiency as energy is lost down the transmission lines, and the lower the price it can charge.

Wind and solar plants in the more distant corners of New South Wales and Victoria have seen their prices slashed in recent weeks.

Elsewhere, the AEMO noted trends included MLF reductions in central and northern Queensland, central Victoria, Tasmania and the Snowy Mountains sub-region.

By contrast, MLFs rose at connection points in South Australia and the Riverland, making generators there more profitable.

"You can go in expecting a loss factor of 0.95 and in 12 months it gets updated to 0.8," Mr McConnell said.

"That's suddenly a 15 or 20 per cent price cut you weren't expecting."

It has wiped tens of millions of dollars off the value of many projects. It has also left investors out-of-pocket — and furious.

Something's got to give

Following the collapse of the big engineer RCR Tomlinson late last year, construction companies are pushing the risk of meeting grid connection technical standards back onto the project owner.

It is yet another challenge the industry and its backers have to deal with.

Green Energy's Tristan Edis said these challenges are likely to push required PPA prices more towards $55/MWh in time.

Mr Edis said policy needs to support a steady replacement of retiring coal-fired generation. ( Supplied: Green Energy Markets )

"We need to keep in mind that things may be great for a period of time until another coal plant puts up the surrender flag and keels over, " he said.

"At which point, we're back where we were in 2017 when the market was surprised by the Hazelwood closure and prices shot through the roof.

"We can have lower power prices, but for them to be sustained we need a policy framework in place that allows us to steadily build replacement capacity in advance of coal plants retiring."

Right now, something's got to give.

Committed and contracted renewables are expected to contribute an additional 30,000 MWh to the national electricity market by 2021, and at the same time demand is forecast to rise by just 6,000 MWh.

In other words, supply looks likely to outstrip demand by around 24,000 MWh in coming years.

That will keep a lid on prices and make investors increasingly nervous.

Extra committed and contracted renewables by 2020-21 across NEM (MWh)

2018 2020/21 2021 vs 2018 Hydro 16,704 15,000 -1,704 Rooftop solar 8,148 13,419 5,271 Solar farm 2,122 14,486 12,364 Wind farm 14,164 28,869 14,705 Net total extra supply 30,636

Source: Green Energy Markets