Government Uses Fake Gas ‘Crisis’ to Force Suppliers to Guarantee Gas to Costly & Inefficient Peaking Power Generators

AGL shows why power generators shouldn’t be energy retailers
The Australian
Judith Sloan
26 September 2017

Former senior executives of AGL must surely be shaking their heads in dismay. As the oldest listed company in the country, AGL has a tradition of measured and conservative conduct, as would be expected of a utility in the energy space. But these days the company is being run by an import from the US who simply does not do measured and conservative.

Piggybacking on the extremely prescient decisions by the company to purchase the Liddell and Bayswater coal-fired generators from the NSW government (finalised in 2015) as well as taking on full ownership of the Loy Yang A brown coal-fired generator in Victoria, AGL finds itself in an extremely sweet commercial spot. Mind you, many of the executives who executed these transactions have been let go.

The exit of the Northern power station in South Australia and Hazelwood in Victoria has led to a shortage of baseload power, pushing up wholesale electricity prices. For the remaining generators, life doesn’t get much better.

This has allowed the relatively recently appointed chief executive of AGL to launch a kind of fantasy marketing campaign about the company changing and getting out of coal. Sure, in 50 years — perhaps. Actually, the two other large electricity companies — also gentailers, because they operate as both generators and retailers — will get out of coal before AGL, if all goes to plan (a bad one, admittedly).

The burning issue (geddit?) at the moment is whether AGL will stick with its stated intention to close the recently purchased Liddell plant in 2022. It beggars belief that the company can buy a plant and then claim it is in an appalling state of repair unless there is an ulterior motive. Conducting a reverse Soviet-like inspection for journalists, pointing out all the plant’s bad points — the Soviets preferred to gild the lily — only deepens scepticism about the company’s actual objectives.

The plot also thickens when junior executives, the chief finance officer and the company’s chief economist (a strange position for AGL to even have) make comments about the plant’s future and the alternative plans the company has to replace the output of Liddell, in part with highly subsidised renewable energy.

Perhaps its American chief is unaware of corporate protocols here. But in my view it is highly inappropriate in the present circumstances for anyone other than him or the company chairman (who has been strangely quiet in recent times) to talk about company strategy. The board should act on this issue immediately.

It is simply not in the best interests of the company for the chief economist, for instance, to be providing the press with his contentious personal opinions on the future of electricity generation and how the company will react to his assumed trends.

So how should the government react to a company that has clearly walked off the reservation and is acting in a manner inconsistent with the national interest? Readers may make the point that the role of any company is to act in the best interests of its shareholders, and if this involves restricting supply and cashing in on government subsidies, so be it.

But the point is this: under competitive conditions, the conduct of companies will generally lead to outcomes that involve cost-reflective prices and quality service. But where the underlying conditions are not competitive, there is scope for the actions of companies to come at the expense of consumers in the form of excessive prices and poor service.

There is little doubt the electricity market has developed along extremely uncompetitive lines where the three gentailers dominate the market with about 70 per cent of market share. To be sure, the Queensland generators that are still government-owned are also taking full advantage of the bidding process used to establish wholesale prices.

But the overall picture is one of a market in which the actions of individual players, including AGL, can damage consumers, both households and businesses, in the knowledge that there will be few constraints from competitors.

A strong case exists for the government to legislate to break up the gentailers. The companies can be given a choice: be a generator or a retailer, but not both.

The vertical integration of these companies in combination with concentration in the generator space means that there has been a substantial decrease in competition. Smaller retailers real­ly don’t have much scope to prosper and reintroducing retail caps in Victoria will only make it worse for them.

So what should we make of AGL’s hypothetical plans to replace the capacity lost if Liddell is closed? Quite a lot of it sounds like typical greenie guff — more renewable energy in the form of highly subsidised solar and wind farms, in combination with gas peaking plants (not so green) and demand management.

Take it from me, we should all be scared of demand management. The real ambition of companies such as AGL is to use remote power shedding (directed at particular appliances) when the demand for electricity peaks because of the time of day and the weather conditions.

You might have thought that the term smart meter — they have been compulsory in Victoria for some time — meant smart for the consumer. Actually, the real aim is to allow the generators to use information from these smart meters to control the flow of electricity as it suits them.

Rather than make more investments, these companies can selectively reduce power to cus­tomers in ways that advantage the generators.

Another American, the newly appointed head of the Australian Energy Market Operator, an organisation that is clearly struggling, thinks demand manage­ment is the way forward. My advice is to be afraid.

For companies that are instructed to reduce their demand for power at certain times, even if there is monetary compensation, there is a risk the managers may consider a change of location to a country where power is cheap and reliable rather than expensive and intermittent.

The bottom line is that AGL is part of the problem rather than part of the solution. This goes for the other gentailers, too. Their advocacy for a clean energy target is entirely self-serving: it will allow them to walk on both sides of the street by picking up substantial ongoing subsidies for investment in renewable energy while raking in the cash from their legacy baseload assets.

The immediate priority for the Turnbull government is to break up these gentailers in much the same way that US president Teddy Roosevelt broke up the oil monopolies at the beginning of the 20th century. And simply forget the CET.
The Australian

Judith Sloan continues to lead the charge, with insight and superior analysis; analysis not based on woolly-headed rubbish about more renewables being the solution to Australia’s self-inflicted power pricing and supply calamity, but rather on sound engineering and economics.

Over the last few weeks, the media have reached fever pitch about Australia’s purported gas ‘crisis’, which Judith tackles below.

Punish states that lock up gas reserves
The Australian
Judith Sloan
26 September 2017

There is a deep inconsistency in the government’s stated view that to ditch or pause the renewable energy target would introduce an unacceptable element of sovereign risk but to impose restrictions on gas exports is just fine.

In point of fact, the government has this one completely the wrong way around: freezing the RET would affect only future investments in renewable energy, whereas imposing export restrictions affects past investment decisions that were sanctioned by government.

And there is another important point here: the RET specifically excludes gas as a transition fuel. It was hardly surprising that the gas companies would seek alternative markets other than the domestic generation of electricity.

We should take the forecast gaps between supply and demand for gas issued by the Australian Energy Market Operator with a grain of salt. These exercises have a high error rate; that the figures contain a large band of possible shortages is hardly surprising. We also cannot be sure how demand will respond to the much higher prices.

There are two principal reasons that the Prime Minister and Energy Minister are close to panic on this topic. Both of them understand the radical nature of the intervention, particularly for a Coalition government.

The first relates to the pressure higher gas prices and low availability will have on direct users of gas for industrial purposes. Think here large factories, high-paid workers. The second is the impact of gas prices on the wholesale electricity price as gas is increasingly the marginal source of supply.

From about 12 per cent less than three years ago, gas is setting the wholesale price in close to a quarter of cases now. With the exit of so much coal-fired baseload in recent years, the price being paid for intermittent renewable energy is increasingly high-priced gas setting the wholesale electricity price, something that greatly concerns the government.

To be sure, Josh Frydenberg has been blathering on about the states lifting their moratoriums on gas exploration and exploitation. This strategy has been completely ineffective.

It’s time to get tough: use the Commonwealth Grants Commission’s distribution of the GST, for instance, to punish those states that seek to lock up the very substantial gas reserves we have. And in the case of the Northern Territory, there is a possibility that the federal government could directly intervene.

For a country with plentiful supplies of gas, coal and uranium, it simply beggars belief that we have some of the highest electricity prices in the world.
The Australian

A couple of key points need to be spelt out in relation to the so-called ‘gas crisis’.

When the likes of AGL talk about ‘transitioning’ to an all renewable future via gas, they aren’t talking about using the fuel in highly efficient Combined Cycle plants.

Instead, what’s proposed is squandering the supposedly rare commodity in gas-thirsty and highly inefficient Open Cycle plants that emit 3-4 times the CO2 per MWh of a modern coal-fired plant. Although, wind powered South Australia has signed up for 276 MW worth of OCGTs (see below), which it will run on diesel, rather than gas (in dreaded CO2 terms, even ‘dirtier’ still than coal – putting aside particulates and a whole bunch of real nasties).

Open Cycle Gas Turbines (OCGTs) are literally jet engines, run on gas or fuel oil (diesel) or kerosene. The initial capital outlay is low, but their operating costs are exorbitant – depending on the fuel input costs (the gas dispatch price varies with demand, for example) operators need to recoup upwards of $300-400 per MWh before they will even contemplate firing them into action. For a wrap up on “fast-start-peakers” see this paper: Peaker-Case-Histories

As to their inefficiency and insane running cost (relative to coal-fired plant or Combined Cycle Gas Turbines), see this Frontier Economics paper: modelling_wholesale_electricity_costs_april_2013  Note the numbers are based on gas prices in 2012, which have skyrocketed in the last 5 years, making the cost per MWh from OCGTs more expensive, still.

For peaking power operators, like AGL, the inevitable and total collapses in wind power output is where the greatest rort of all time begins.

You see, it’s not really about the costs of running OCGTs (or diesel engined generators) this is all about what the operator can get away with.

And that brings us to Judith’s observation that:

the RET specifically excludes gas as a transition fuel. It was hardly surprising that the gas companies would seek alternative markets other than the domestic generation of electricity.

What the electricity generation sector now wants is for gas suppliers to forego the benefit of having long-term contracts with overseas buyers, in which the terms are fixed over years, the prices set guarantee long-term profits and they are required to deliver pre-determined volumes all day, every day – for years on end.

What AGL and the like are trying to engineer is to have the Federal Government force gas suppliers to make gas available, on call, in a spot market driven by the whims of the weather. What’s dressed up as ‘domestic gas reserve policy’, is really about ensuring that the owners of OCGT peaking plant can get gas whenever the sun goes down and/or the wind stops blowing (or blows too hard) – at prices allowing those operators to make even more obscene profits, than they already do.

When AGL talks about ‘replacing’ its Liddell coal-fired plant with gas and renewables, it’s seeking to get the ludicrously generous subsidies for the power chaotically delivered by its windmills and panels; as well as getting to cash in on the extortionate prices that the owners of peaking plant extract from the grid manager – to prevent the lights going out when wind and solar output collapse on a daily basis: extracting anything from $2,000 per MWh and all the way to the regulated market cap of $14,000 per MWh for the power spun out of their highly inefficient OCGTs.

As Judith points out, why would gas suppliers (currently satisfying customers keen to take their product as fast as they can produce it) be willing to set aside supply to be taken for a few hours every day, according to where the sun sits in the sky and what the wind happens to be doing at the time?

A gas supplier, like any business operator, is out to make a profit. Businesses are at their most profitable when their assets are fully utilised. What AGL & Co are attempting to do is to have the government bully gas suppliers into making gas available as and when they need to run their peaking plant. Most of the gas suppliers aren’t that keen on having under-utilised wells, plant and pipes, just to serve gas up occasionally to the likes of AGL. And most would rather keep satisfying their customers in Japan, South Korea and China, fully utilising their existing assets.

BHP Billiton is, unlike the other gas majors, keen to get in on the peaking power market, and has been pushing the line that gas offers a chance to ‘clean up’ Australia’s power sector. Which is just a little ironic coming from one of Australia’s largest coal exporters.

In the article below, Alan Moran has a crack at BHP’s hypocrisy, but fails to recognise that BHP is merely out to ‘clean up’ in a red-hot domestic gas market, by feeding OCGTs in response to the chaos delivered by the sun and the wind on a daily basis.

BHP is a major gas producer, with a large number of its wells situated offshore from Victoria (Bass Strait and Port Campbell): on the far Southern side of the Continent and a long way from Asian markets, but very close to large numbers of OCGTs, like Origin’s 550 MW peaking plant at Mortlake, which is just down the road from AGL’s Macarthur wind farm.

Call STT cynical if you like, but we suspect BHP’s gas infused ‘greenery’ is all about opportunity knocking on its door.

As former Labor Premier of NSW, Jack Lang pithily put it: ‘Always back the horse named self-interest, son. It’ll be the only one trying’. In this case, the Big Australian is putting the National interest, dead last.

The Big Bad Australian, Battling the Nation’s Interest
Catallaxy Files
Alan Moran
23 September 2017

BHP, the world’s largest mining company, has demonstrated its clout by firing the head of the Minerals Council of Australia, Brendan Pearson. Amongst the most competent and seasoned energy specialists in Australia, Brendan had led the MCA with self-effacing charm.

He had sought to ensure an integrity in the organisation (this being the second most important of BHP’s stated values – clearly trumped by the organisation’s view of it first stated value “sustainability”). MCA commissioned GHD to do the basic research on the costs of new coal in Australian generation; though careful to doff a hat to Political Correctness by measuring only high cost HELE (high efficiency low emissions) plant it estimated the costs at under $50 per MWh, much less than half of the costs of unreliable wind and solar. Such costing confirmed those of my own, which were developed by examining costs of the most recently commissioned Australian generator and estimating cost increases in coal, labour and capital since then.

Perhaps because its executives have caught the greenhouse climate change disease or perhaps because they fear the campaigning left, BHP has been in the forefront of politically correct statements on the issue.

It was a major supporter of the Gillard carbon tax and contributed heavily to funding the ALP taxpayer floated think-tank, the Grattan Institute, for which it also got a free pas from the ALP to pursue its unconsummated takeover of its iron ore rival Rio.

BHP bankrolls organisations like the World Resources Institute to give it a clean bill of health as a greenhouse gas emitter, claiming that its in-house and related emissions have been halved to about 18 million tonnes of CO2. Of course that excludes its sales of the fiendish emitting products which involve some 70 million tonnes of CO2 from coal and maybe half that in terms of gas and petroleum.

Coal and petroleum contribute $3.8 billion and $4.1 billion respectively to gross profits with only iron ore greater at $9.2 billion – though this itself like the other major commodity copper (earning $3.5 billion in gross profits) is valueless without subsequent use of fossil fuels for processing.

The key Australian manager and deliverer of the death blow was Mike Henry who has overseen impressive cost cutting and for this may even be worth his $4.5 million a year remuneration. Henry doubtless believes that the world must move out of carbon fuels but there is no path for the Bad Australian to achieve this. Indeed in a delicious irony, its South Australian smelter lost $138 million as a result of the wind-induced state blackout debacle last year, a coal replacement strategy that the firm has championed.

It may make a deal of sense for BHP to pay greenmail and denigrate the products that create its profits if in doing so they buy peace with the howling green agitators, who are proving their influence in the costly greenfare surrounding the Queensland Adani mine. But any net benefits that BHP shareholders from such strategies are peanuts compared to the damage its agitprop support does to the Australian economy.

p.s. Raider Elliott thinks BHP management have taken their eyes off the ball, as The Australian reports “BHP’s embattled boss has been given six months to save his job”
Catallaxy Files

The ‘crisis’ that never was…

About stopthesethings

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

Comments

  1. Terry Conn says:

    Anyone who has followed this electricity debacle with even a smidgen of thoughtful analysis will know the situation described in this post is correct. Nationalisation of the electricity power system seems inevitable as governments demand both ‘reliable’ electricity supply and insist on the RET and REC system at the same time. What they haven’t worked out yet is that even when the system is nationalised it will still cost an absolute fortune to run intermittent renewables with backup ( regardless of type, up to 100% demand capacity when no wind and no sun) – such a large fortune in fact that the end game of no power will be the result except for the very wealthy (including those who fund their own systems). The lunatic ‘greenies’ will then have achieved their ultimate goal of literally shutting down the nation. Once again, I remind aggrieved parties of their rights embodied in section 7 of National Electricity Law – a collective action in each of the states in the National Electricity Market should front up to their Supreme Court and demand compliance with existing law.

  2. Michael Crawford says:

    Judith Sloan is right about the rip-off artists at AGL, whose CEO apparently believes it is his inalienable right to use every nasty business tactic to maximise company profits (and no doubt his bonus) by screwing electricity consumers in every conceivable way. He gives us another face for the ugly American.

    However, it is impossible to ever fix this through markets. Electricity production and distribution is a natural monopoly or oligopoly in an economy of Australia’s size and can never provide an efficient market.

    Regulators in such situations, of which Australia now has an excess, always become captured by those they are supposed to regulate, and their system of regulation does not provide an efficient market, just a set of rules the companies can game to increase profits at the expense of customers.

    The wholly useless cost of the regulators becomes an additional deadweight cost imposed on consumers.

    If the Commonwealth wants to play with electricity, then it needs to take control of production and distribution, getting rid of the then duplicative activites of states. Alternatively we could abide by our Constitution, get the Commonwealth wholly out of electricity and have states do the job that was once done well by politicians and officials who thought they had a responsibility to provide genuinely affordable and reliable power for their states.

    • We suspect that Australia is closer to Nationalising power generation than Turnbull & Co will admit. There was talk early in the year within the Coalition about taking over Hazlewood for a dollar, assuming all liabilites. That now looks like a very cheap option missed. Summer blackouts, here we come.

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