CORRECTED COPY -- RENEWABLE ENERGY FUND:

UNCLAS SECTION 01 OF 02 CANBERRA 000339

SENSITIVE
SIPDIS

STATE FOR EEB MONOSSON, ENERGY FOR EERE WALL, BECKERT

E.O. 12958: N/A
TAGS: ENRG SENV ECON AS
SUBJECT: CORRECTED COPY -- RENEWABLE ENERGY FUND:
GEOTHERMAL LEFT OUT?

REF: A. CANBERRA 268

B. 08 CANBERRA 701

CORRECTED COPY - ADDED SIGNATURE BLOCK


1. (SBU) Summary: The Rudd government's A$435 million (US$305
million) Renewable Energy Demonstration Program (REDP)
provides the best vehicle for companies seeking to
commercialize new renewable energy technologies. The program
is currently taking applications for what will eventually be
8-10 A$50-100 million (US$35.8-$71.7 million) grants to
commercialize new renewable energy generation projects.
However, the scale of the program is modest compared to the
size of Australia's emissions reduction targets, and more
importantly, the focus on commercialization, rather than late
stage research and development, potentially leaves geothermal
energy (one of Australia's leading candidates for
emissions-free baseload power generation) out in the cold .
End Summary.

RENEWABLE ENERGY DEMONSTRATION PROGRAM
--------------


2. (SBU) The Renewable Energy Demonstration Program (ref A)
provides A$435 million (US$305 million) to "accelerate the
commercialization and deployment of new renewable energy
technologies for power generation in Australia." Australian
companies close to commercializing new solar, wind,
geothermal, biomass, hydropower, or ocean energy technologies
are eligible. The grant application period will close on
April 14; the government expects to announce winners sometime
around August of this year, after reviewing all applications.
While Department of Resources, Energy and Tourism (DRET)
officials say there is no technical bias in the program,
mature technologies like current generation wind and solar
will not be funded under this program. Wendy Launder, who
heads the REDP program for DRET, told econoff on April 2 that
the government hopes to fund 8-10 projects, within a range of
A$50-100 million (US$35.8-$71.7 million). She noted that the
government had raised its projected cost range from initial
plans for A$25-50 million (US$17.9-$35.8 million) projects
based on cost growth in ongoing demonstration programs, but
said in her view there might be room for much smaller grants
for some technologies like biomass.


3. (SBU) The emphasis in the program, according to Gary
James, Manager for Technology Policy in the Energy and
Environment Division at DRET, is to take technologies that
have passed the proof-of-concept stage and "jumpstart" the
next step in commercialization. Grantees will be expected to
demonstrate that they can match each GOA dollar with two
private sector investment dollars before they can sign a
grant agreement. This focus on commercialization will result
in rapid power generation from renewable projects, but
creates a problem for many of Australia's most promising but
less-well developed renewable technologies. The leading
example is the geothermal industry. According to Susan
Jeanes, head of the Australian Geothermal Energy Association,
there are 40 companies working in Australia to develop power
generation from both conventional geothermal and enhanced
"hot dry rock" geothermal systems. An analysis of geothermal
potential in Australia shows that it has the potential to
displace a huge chunk of the current brown coal generation
Qdisplace a huge chunk of the current brown coal generation
now powering Australia - providing as much as 10 percent of
Australia's baseload power by 2050. The leading development
company, Brisbane-based Geodynamics, sees the possibility of
generating 500 megawatts of electricity from its Cooper Basin
site alone if transmission and capital challenges can be met
(ref B).

MUST DEMONSTRATE CONCEPT FIRST
--------------


4. (SBU) Geodynamics is also the only geothermal company (so
far) in Australia to meet the government's proof-of-concept
requirement, having announced a successful closed-loop test
on March 31. Jeanes told econoff on March 31 that while this
is good for Geodynamics, the proof-of-concept requirement is
likely bad for the rest of the industry. Jeanes described
the government's focus on commercial demonstration as a

CANBERRA 00000339 002 OF 002


"closed loop" that locks almost all of the geothermal players
working in Australia out of the REDP. Geothermal companies
received more than A$50 million (US$35.8 million) in grants
from the Howard government as part of the initial research
and development process, but the amount of funding for each
project was far below that needed for commercial
demonstration. Petratherm Managing Director Terry Kallis
told econoff on April 3 that the government's requirements,
between proof-of-concept and matching funding, basically
eliminated all other players except Geodynamics and
Petratherm from the program. Without the ability to tap into
the REDP, many of the companies involved will face a tough
challenge generating sufficient private capital to develop
commercial operations, especially under the current global
financial crisis. DRET's James said he expected that many
would fail over the next 12-18 months, with only a few major
players like Geodynamics or Petratherm having sufficient
finances to survive. Kallis said that the proof-of-concept
focus was a concern, but that he expected the government to
look at work done outside Australia (Petratherm is a major
partner in development of geothermal power in Madrid) and so
sees their concept sufficiently demonstrated to qualify. In
Kallis' view, only Geodynamics and Petratherm would be
competitive, but as both were already relatively
well-financed with major joint venture partners, and own
their own drilling equipment, the decision in the end would
be more political than either economic or technical. He said
there was no strong indication that there would be a repeat
or replenishment of the REDP in out years, so this was a
one-time chance. Launder told econoff separately that while
there was no decision at this point on repeating the REDP in
future years, some vehicle to continue to support
commercialization would be needed. She said she expected
something to be done, for example, to replace the Howard
government's much larger Commercial Ready grant program.


5. (SBU) The plight of the geothermal sector highlights a key
challenge for the government in encouraging renewable energy
development - one of its core pledges during the 2007
election. The REDP, and the Mandatory Renewable Energy
Target (MRET) scheme, are designed to force technologies out
of the lab and into generation as quickly as possible.
However, by focusing on technologies close to commercial
deployment, critics charge that the government is hampering
the development of longer-lead time technologies like
geothermal, wave, other systems. Jeanes said her fear was
that the MRET targets, for example, would be met very early
on by wind and solar, where costs are better known and risks
lower, and this would crowd out the longer-term developing
technologies. Kallis said he agreed that was a risk
initially, but that once developed, geothermal and other
technologies would be able to "savagely" undercut wind and
solar on a cost/megawatt basis. This would only happen, he
noted, if the electricity customers like Origin energy and
AGL were willing to buy, and not own as investors, renewable
resources. If they end up being heavy investors in renewable
generation, then they will act to protect those investments
Qgeneration, then they will act to protect those investments
and future technologies could be crowded out.


6. (SBU) Comment: DRET is struggling to define the REDP
program and has had to accelerate their management because of
political pressure on Rudd to get money out the door. While
REDP will be very good for some players, the rapid pace of
the program and the steep requirements being laid on it means
that it is unlikely to receive many high-quality proposals.
If the money is not spent, it is not clear to us or to
interested applicants that it will not disappear into other
programs in what is expected to be a very tough budget year
for the government. End comment.

RICHE