Government Brawl with AGL Signals End of Renewable Subsidies

All of a sudden, everybody is interested in electricity. As a result, Australia’s patrician and aloof PM, Malcolm Turnbull has been gifted with any number of self-appointed energy market advisors.

The quality of the advice tends to vary, and the solutions proffered generally have something to do with whether the protagonist is invested in the outcome. Some, like The Australian’s Alan Kohler, continue to embarrass themselves by pushing the line that a few mega-batteries, here and there, will allow Australia to turn its back on coal-fired power and to run merrily on sunshine and breezes, forevermore.

One shouldn’t expect sound engineering from newspaper editors or columnists. However, some of them have at least some kind of grip on the economic damage being done by Australia’s Renewable Energy Target. One of them is the Australian Financial Review’s Jennifer Hewett.

Australia is being force-fed a lesson in Energy Economics 101
Australian Financial Review
Jennifer Hewett
14 September 2017

All those electricity bills lodging in in-boxes and letter boxes create new pressure on the Turnbull government to come up with instant answers to the energy “crisis”.

Unfortunately, none will make much obvious difference to the dollar figures on the bills.

The fact more people may demand discounts – with retailers forced to let customers know – will just match the latest rises, for example. There will be more rises to come.

That’s even assuming the government can finalise its energy plan without triggering the political trap set by Tony Abbott over even a much revised clean energy target. This seems to get harder by the day. It is inevitably going to lead to an internal brawl over deferring Australia’s emissions reductions targets.

But the sense of urgency does mean those years of everyone happily ignoring the contradictions in Australia’s various energy policies are no longer politically affordable. Instead, the country is being force-fed a lesson in Energy Economics 101.

People like and accept the idea of more renewable energy but are more agitated about what this might have to do with power prices and talk of blackouts this summer.

They just want it fixed. So federal MPs are furiously arguing the virtues of base load power from coal and gas versus intermittent power like solar and wind – even if such words never crossed their lips during the last election campaign.

The most bizarre element is that an old coal-fired power plant few people outside the Hunter Valley had ever heard of suddenly becomes the poster child for Australia’s energy choices.

It’s another example of how policy failures over time beget absurd practical results.

AGL is working on a plan due just before Christmas to try to persuade the government it doesn’t need to keep Liddell open – or sell it – to supply the 1500 megawatts of power that would other wise disappear from the system in 2022.

The AGL board is not about to ditch its own long considered strategy on Liddell or ditch its chief executive, Andy Vesey, instead hoping “economic rationality” will prevail. Yet the government does not intend to ditch its own insistence Liddell stay open despite the Prime Minister promising on Wednesday to look at whatever plan the company develops.

Turnbull has already turned this into a spectacularly ferocious “yes/no” argument. Not much room for manoeuvre or nuance here. It’s Liddell or bust. And let’s not forget the building pressure within the Liberals to back coal in general, now Liddell in particular. So the only real alternative to the impasse seems to be for some other “party” – either government or another investor – to put a large amount of money into acquiring Liddell. Any board would have to consider this.

A big sum of money for AGL would still set off another furious debate in Canberra about public interest versus the interests of shareholders. That’s another Christmas present for Energy Minister Josh Frydenberg to open up. Despite stiff competition, he gets the prize for attempting to manage the most fiendishly complicated dilemma in federal politics – likely to be the key issue in the next election.

Try worrying about the interplay between synchronous generation, renewable energy, dispatchable energy, base load power, clean energy targets, forward contracts and complicated comparisons of costs per megawatt hour – including the value of renewable energy certificates.

True, most consumers wouldn’t know – or need to know – about this. As Turnbull declares, they just want the lights to turn on and stay on and to be able to afford to turn them on.

But all of these factors have a huge impact on the type and amount of investment going into the system. It’s not surprising the RET has meant investors rushed into wind farms, for example. The long run marginal cost of providing wind power today – averaged out over the 20-year lifetime of a plant – is about $55 a megawatt hour.

At the moment, the price received for wind power is about $100 a megawatt hour, although this is lower if averaged over periods when there’s a lot of wind.

But add to that the money from large scale generation certificates created by the renewable energy target.

These are currently priced at around $80 a megawatt hour, substantially boosting business cash flow. Such prices go up and down – they were down a few years ago – but there’s a lot of money to be made now, explaining resentment in the Coalition about more subsidies for renewables.

Similarly, coal power currently attracts prices of around $100 a megawatt hour, due to scarcity. Even allowing for maintenance, operating and coal costs, that makes older depreciated plants extremely commercially attractive.

A new plant would be less so – but still profitable in theory as long as there’s not a carbon price or massive changes in the energy market. Oh-oh.

But the common industry belief is that gas plants able to be quickly turned on and off will be better suited to balance a system with a lot of renewable energy – witness AGL. The catch is the price of gas has also escalated dramatically due to a shortage of supply.

Naturally, Labor blames the government for recent price rises.

Naturally, the government blames Labor for reckless pursuit of renewables without planning for back-up and allowing the export of coal seam gas without ensuring domestic supply.

The role of the states, particularly the coalition government in NSW and Labor in Victoria, in blocking development of new gas fields deserves special mention for stupidity.

But it’s the national government that now owns the problem – and must offer solutions.

Christmas can’t come early enough for Frydenberg.
Australian Financial Review

AGL gives thumbs up to Enron Mk II.

 

AGL has earned the tag ‘Australia’s-Greatest-Liars’ by continually bragging about “getting out of coal”, despite earning more than 80% of their profits from the black stuff and having no intention of ditching all of their coal-fired power plants anytime short of 2050.

AGL is operating on the same business plan developed by Enron, when it rorted the Californian power market during the late 90s and early 2000’s (our post here).

Its American born CEO, Andrew Vesey is determined to lock horns with the government over the Renewable Energy Target and AGL’s abuse of market power. Here’s Jennifer Hewett again.

AGL a casualty of energy wars
The Australian Financial Review
Jennifer Hewett
13 September 2017

The chasm between business and politics is spectacularly obvious in the plaintive calls from the power industry for bipartisan energy policy. Chief executives are wasting their time. Not only will bipartisanship not happen, Malcolm Turnbull’s far bigger problem is getting partisan agreement – from his own party.

Some Liberal MPs are going to fight fiercely against any further subsidies to renewables – making them determined to kill any clean energy target (CET), no matter how much it is modified and what it is called. No prizes for guessing who’s going to lead that argument in the party and, if necessary, in public. Tony Abbott gave notice of this in the party room on Tuesday morning.

“If we graft a CET on top of the existing RET [renewable energy target] that will be a difficult position to sustain,” he said pointedly. It’s only an opening shot. Plenty more to come.

And while this may still be a minority view in the party, it’s a powerful one and getting ever more traction as the political focus shifts to cheap, reliable power rather than emissions reduction.

In the Coalition, that suddenly translates into more coal-fired power – both old and new.

The public spat between AGL’s Andy Vesey and the Prime Minister and Energy Minister Josh Frydenberg over the future of the Liddell coal-fired power plant in NSW is just one byproduct of that. But Vesey is the one with his head on a political pole. The energy companies are now rivalling the banks in being depicted as corporate bad guys, with government playing the role of the consumers’ friend and protector.

“They are doing so much damage,” one industry CEO says in tones of incredulity about the government. “They are attacking businesses and the industry and backsliding towards nationalisation.”

Actually, not so much backsliding as marching firmly towards a level of market intervention that would have been considered unthinkable for a Coalition government even a year ago. The government is still likely to impose restrictions on gas exports from next January even though the gas companies have already started to react to the threat by increasing domestic supply.

But the real political heat is coming from coal. Turnbull is determined to get out in front of Abbott as well as Bill Shorten in terms of backing coal as the route to affordable, reliable power for Australian households and businesses .

No apologies, certainly not to “multimillionaire American CEOs” as the PM described Vesey in Parliament. This is hardscrabble politics.

“AGL’s management want to look after their shareholders,” the Prime Minister declared on Tuesday. “For them, scarcity of energy is good, because it enables them to raise prices.

It’s not good for the Australian people. My duty is to look after the Australian people.”

Figuring out the impact of this confrontation is certainly not going to take the 90 days wanted by AGL in order to come up with an alternative plan for the Liddell site using gas and renewables. It’s certainly not about what AGL thinks is economically rational. Vesey has become an early casualty of war.

Turnbull is also using the regulator’s report into the shortage of baseload power like coal and gas to try to persuade voters it’s the Coalition – not Labor – willing to take “prudent” action to ensure blackouts won’t happen.

Turnbull told Parliament the greatest mistake in energy policy had been to replace reliable baseload power with variable renewables with no thought given to necessary back-up and storage.

Nor does he believe AGL has a viable alternative to offer for Liddell.

“If they had a plan, they’d be able to put it on the table now,” he said dismissively.

That is because, according to the PM, the most obvious option on the table – “screamingly obvious, in fact – is to keep it, the station, running for longer”.

Turnbull also argues AGL is making a fortune out of coal and doesn’t want additional competition given it will keep its other two coal-fired power stations operating for decades.

So the fact Liddell will be 50 years old in 2022 and requires extensive, expensive renovation becomes politically irrelevant to a new Canberra dogma demanding another five years. Cost? Priceless, apparently.

If the AGL board dares to agree with its CEO and disagree with the government, it is unlikely to end well for the company under a Coalition government. It’s only Labor that supports (sort of) closing Liddell in favour of Vesey’s preferred alternative for the site.

Turnbull mocked Liddell’s reluctance to sell the plant along with Labor’s disinterest in protecting blue-collar workers, suggesting Shorten is willing to sacrifice them to Labor’s green “ideology” and an unrealistic 50 per cent renewable energy target.

Labor’s retort is to keep asking about power prices going up and link this to the uncertain fate of the clean energy target recommended by the Finkel Review.

Turnbull is cautious about the timing of any decision on the CET, saying it is under active consideration but that it is necessary to “get the energy market right this time”.

“We need to ensure that the energy market design provides a suitable framework for investment that doesn’t simply get new generation, but gets generation of the right kind,” he said. “Because you have to keep the lights on and you have to ensure that people can afford to pay to keep the lights on.”

Just how this can be achieved is much less clear than the black-and-white views being espoused in Canberra. But it has become the one argument the Liberals believe has a chance of winning them the next election – if only they can get the political message right. Market, schmarket.
Australian Finanacial Review

High-handed arrogance and hubris might be welcome in American business circles, but, here, Andrew Vesey is dealing with a different class of customer.

Vesey seems to forget that AGL has just walloped its customers with power bills which are fully 20% higher than this time last year. He seems to forget that AGL purchased the Liddell and Bayswater coal-fired power plants from the NSW government for peanuts back in 2014. He seems to forget that AGL valued those assets at zero on their books and have deliberately run them into the ground over the last three years. He seems to forget that Australians have enjoyed reliable and affordable power for the best part of half a century. He seems to forget that Australians are now aware that his outfit is at the front of the RET queue, that is pocketing $3 billion a year in subsidies to wind and solar, with that sum being tacked on top of their rocketing power bills.

Now, by rejecting Turnbull’s overtures in relation to Liddell, Vesey has called in an airstrike on his own position.

It might not be Malcolm Turnbull that takes the axe to the largest single industry subsidy scheme in the history of the Commonwealth, but the Large-Scale RET – upon which AGL’s business model critically depends – is doomed.

The junior Coalition partner, the National Party has already determined to scrap the LRET and, led by former PM Tony Abbott, there are a growing band of Liberal Party members determined to do the same.

Keep it up Andrew, your arrogance has just guaranteed the end of the greatest economic and environmental fraud in Commonwealth history.

About stopthesethings

We are a group of citizens concerned about the rapid spread of industrial wind power generation installations across Australia.

Comments

  1. I disagree with STT and Hewitt on your assessment. Americans have a long history of playing poker. Australians don’t! A bluff on occasions can be an effective tactic, but it’s only effective when the other players don’t know it’s a bluff. It’s ruinous when the other players correctly identify a bluff. Turnbull is always bluffing. If this game over Liddell, the LRET and the future of Australia’s electricity supplies can be equated to a hand of poker, then all this grand standing from Turnbull might convince the spectators once again, but he’s got nothing and AGL knows it!
    The RET is as good as dead. It’s rapidly becoming obvious to more than a few that it is unworkable. Nor can Turnbull afford to have Liddell close and ration electricity supplies to Sydney. AGL holds all the cards. It’s just a matter now of how much it wants to take Turnbull (or whoever is in Canberra) for.
    Get ready for subsidies (in one form or another) to the coal industry after the next election.

    • Read STT’s comments again. This is not about Liddell, it’s about the LRET. We don’t think Turnbull has any aces, but his backbench, led by Abbott and the Nationals do. The squabble over Liddell has drawn attention to the subsidies pocketed by AGL and others. Turnbull is expendible and knows it. The front page of The Australian carries confirmation, with a story headed ‘Abbott to cross floor on energy’, that details opposition to the CET and the LRET. Now read our comments again.

    • I should apologise for posting twice. Finger trouble. I wrote the first comment, posted it and thought I had refreshed and it was nowhere to be seen and then decided to write a smaller comment thinking that my first one had been rejected because of length. Then I had two similar comments and couldn’t go back.
      The RET can be modified, but how easy is it to legislate its removal in a closely tied political arena? Can AGL be compelled to sell Liddell back to the state? Seems to me the government will be setting a dangerous precedent in doing so if that is the path it chooses. If I was in the AGL chair and Turnbull started trying to bully me into selling Liddell, I’d be putting an outrageous price on it in part to compensate for the punitive actions that the government appears about to take on the renewable sector with the RET.
      The various governments have created a hellhole for investment in power generation. I have no doubt any new coal power station will require government funds to sweeten the deal. In an environment with the RET still in place, no investor in his/her right mind will risk money without guarantees of a long term return within a stable regulatory environment, unless the short term returns are high enough to justify the risk such as with the current situation. The various governments got themselves into this rabbit hole. Yes, AGL may have assisted by showing them the hole and encouraging them to jump in, but they weren’t forced. There are lots of other holes they could have gone down. Surely, it’s not AGL’s responsibility to bail them out.

      • The LRET must go, pure and simple. If the Còalition want to buy Liddell they should offer its book value of $zero and a release on clean up costs. Hard for AGL to claim being hard done by in a forced sale when it says it’s getting out of coal and places no value on the asset and, to the contrary, wants it shut down to inrease the wholesale price for power to make higher profits.

      • Fully agree with you, but is the removal of the LRET such a simple matter? It’s a nice thought to have the government take Liddell off AGL’s hands for nothing, but what an asset is worth to shareholders, the ATO and a potential buyer are three different things. I suspect AGL’s value on Liddell will rise in unison with the government’s level of panic at the possibility of electricity rationing in Sydney as 2022 draws closer. Every time Turnbull tosses AGL under the bus, the price goes up yet again unless a deal has already been made on the QT.

  2. I disagree with both you and Jennifer Hewitt on this matter, I think Vesey’s in the driver’s seat and Turnbull, about three quarters of the way up his own petard and inching ever higher, has decided to appear like he is still in charge and raised the stakes. Turnbull’s advantage is that he has the ear and attention of the media…that’s all. He has lost the support of the electricity generation industry and it seems almost half of his own party.
    Turnbull can’t force AGL to sell Liddell without sending shockwaves throughout the international investment community. Nor can he take it over without an agreement and nor can he afford to have it shut down. In a game of poker, a bluff is only effective if no other player knows you are bluffing. Turnbull might have the spectators convinced he has a strong hand, but AGL sees the game a little differently. Turnbull keeps raising the stakes and AGL is happy to let him go. The public embarrassment to AGL is only short term.
    Turnbull has less than 5 years for a solution to Liddell. His first priority though is to get through the next election as PM. Let him have his Napolean moment by shifting blame to the electricity companies and away from his own government’s incompetence. Assuming he remains in charge, Liddell’s potential closure is not going away. There are long term agreements in place for the renewable energy industry outside the RET. In the time it takes to eliminate the RET junket, most of the wind turbines will be likely time expired and subject to significant tax write-offs anyway. AGL has analysed all the options. The RET is as good as dead. AGL has moved onto the viability and future profitability of coal. Nuclear will probably occur at some stage in the future, but I’m guessing it’s at least 2 decades away.There is a pending electricity shortage now and it’s as a direct consequence of government ineptitude.
    I think AGL is going to get a government pay-off in one form or another for Liddell. The closer it gets to 2022, the higher the pay-off. Any new power station is at least a decade away. Just an environmental impact study will be 5 years in the making and that’s assuming it isn’t hijacked by protesters (who would be funded if necessary and indirectly ironically, by AGL). Subsidy mining has worked brilliantly for Elon Musk with governments that have swapped long term realism and conservative planning for the short term Utopian illusions of the radical greens. Vesey can do it too.

    • Note our response to your other comment. The LRET will go and with it AGL’s business model. Turnbull may need to go first. We expect the commonwealth to nationalise baseload generators. Liddell was in state hands until 2014 and will end up back in state hands as soon as Sydney suffers an SA style blackout.

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