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As AGL digs into coal, has renewable energy lost a friend?

Now that AGL proposes to further increase its leverage to fossil fuels and become the largest coal-fired generator in the country, exactly how supportive of renewable energy will it be?

The utility that once prided itself on being the cleanest in Australia and insisted that the best way to prepare for a clean energy future was to invest in renewables is proposing to dig itself deeper into coal.

As Crikey reported yesterday, AGL Energy has won the bidding for Macquarie Generation — the largest coal generator in New South Wales — for the knock-down price of $1.5 billion. As with its 2012 purchase of Loy Yang A, the biggest brown coal generator in the country, AGL has found itself in the right place at the right time. It’s no doubt terrific news for shareholders; the bigger question is what it means for the future of renewable energy in this country.

AGL has been one utility that has not had an antagonistic attitude towards wind energy and solar. It has supported the Renewable Energy Target, and it chairs the Clean Energy Council, and has been the biggest individual investor in wind and solar farms. Its presentation for the MacGen purchase even begins with a picture of clean running water.

Now, however, if the purchase of the 2.6GW Bayswater and 2GW Liddell coal-fired generators in the Hunter Valley are approved, its leverage to fossil fuel income over renewables will jump from around 7:1 to 12:1, analysts say. The company that once had an emissions intensity (0.36t/MWh) — little more than one-third the country’s average — will now have one of the highest.

The proposed purchase will come under scrutiny from the Australian Competition and Consumer Commission, which has already flagged its concerns about AGL owning more than one-quarter of generation in three key states — NSW, Victoria and South Australia, and being in a position to control market prices.

But there are broader questions for the renewable energy industry in this country is whether AGL will remain as staunch a supporter of green energy and the rapid transition to a low carbon economy as it has been in the past. It is hard to imagine given it is moving quickly in the opposite direction.

AGL wasn’t commenting over and above its media statement. At the time of the Loy Yang A purchase (another knock-down price), CEO Michael Fraser insisted the company had not ”changed its stripes” and it was a good thing that it could use “coal cash” to invest in renewables. But now that it proposes to further increase its leverage to fossil fuels and become the largest coal-fired generator in the country, exactly how supportive of renewable energy will it be?

The real attraction of the purchase is that MacGen can source its coal so cheaply it can get its money back from the purchase in just seven years. Thanks to favourable contracts, the coal it uses (more than 10 million tonnes a year) is literally shovelled on to conveyor belts at an average cost of just $34/tonne — tless than one half of the price that those same mines receive for exported coal.

Even with a predicted 25% increase in those coal contracts in coming years, MacGen will still sit — as Loy Yang A does in Victoria — at the bottom of the “merit order” for thermal generators in the two states. That should mean that AGL is better protected from some of the seismic shifts that are sweeping the electricity industry, which have forced more expensive coal-fired generators such as Tarong, Collinsville, Playford and, imminently, Wallerawang, to be closed or mothballed.

It should be noted that Liddell is old and creaking and will possibly be closed well before its due to retirement date of 2022. Last year, because of “availability issues”, it had a net capacity factor of just 35%. That hardly makes it baseload — most Australian wind farms, including AGL’s, have higher capacity factors.

Still, AGL has now nearly doubled its exposure to the threat of declining demand and the impact of distributed generation — the arrival of rooftop solar and the potential addition of battery storage. Even if the purchase is priced such that it can get its money back quickly, those revenue streams will be worth protecting.

AGL has defended the Renewable Energy Target and lambasted those who sought to pull it down; its chairmanship of the CEC would hardly permit it to do anything else. But its submission to the energy white paper is informative and suggests its priorities are shifting. It argues strongly for policies in the gas market and for deregulation of the retail market, but it does not argue a particular position on the RET.

Instead, AGL adopts the language used by other generators and utilities that argued specifically for the RET to be either dumped altogether or severely diluted. It warns against the decline in demand, worsened by the influx of renewables, that is causing wholesale electricity pool clearing price to be “sub-economic”.

AGL wants the gap between the wholesale price addressed, either through some form of capacity payments to keep plant open, and/or a mechanism that helps ageing and/or inefficient plants to exit the market permanently. At no point does it argue specifically for the RET target to be retained as is.

The renewable energy industry in Australia now finds itself in an absolute pickle: uncertainty about the RET has effectively brought investment to a halt, and its strategy of negotiated compromise and its lack of ambition (can anyone name one renewable energy company that has loudly argued for a 40% target by 2030, for instance) has left it little room to manoeuvre. At best, if faces a significant reduction in the target.

At worst, the industry will simply be brought to a halt. It appears certain that the RET review is to be managed by Prime Minister Tony Abbott’s office and controlled by the hardliners who surround him and don’t even accept the science of climate change, let alone the need for wind and solar; now its most powerful and influential facilitator is buried in the profits of coal generation.

Fraser had spent many years arguing that the best way to prepare for the carbon price was to be in clean energy. (It is sometimes said that many of his fellow company executives did not share his enthusiasm for renewables). After the purchase of Loy Yang A, Fraser said the best way to prepare for the clean energy future was to be the cheapest.

Interestingly, the purchase of MacGen is predicated on there being no carbon price at all or a market carbon price of just $7 a tonne in 2015. The European carbon price, the one that collapsed so spectacularly last year and presented Abbott with a gift horse in the mouth, is now trading at $10/tonne and is certain to go higher.

AGL’s proposal looks a short-term winner for shareholders, which is what counts in the way our financial system rewards our board and executives. Time will tell whether its new strategy of fading to black is a long-term gain.

*This article was originally published at Renew Economy

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  • 1
    Stephen
    Posted Thursday, 13 February 2014 at 12:41 pm | Permalink

    In 2050, the EU Allied Coalition will have to reluctantly invade Australia and bring it under a protectorate, to stop it being the last ‘developed’ nation on earth still digging up bloody coal.

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