Liddell manoeuvres

In a month in which the editor-in-chief of The Australian Financial Review has declared the “energy crisis” to be “the biggest national and business story of the year,” the speed with which the fate of Liddell power station has gone from being fait accompli in the much-discussed decarbonizing transition of the NEM over the next decade to an overnight cause celebre in the political power game is eye-opening (and pretty depressing).

In the past week’s political and media wildfire, Liddell’s owners, AGL Energy, are being presented as having caught off guard.

Whether this furore should have done so, and the impact of the past few days’ headline-hogging fuss on AGL Energy’s reputation with the community, is a matter for private reflection by the company’s board at some point – but its here-and-now task is how to manage its very public confrontation with the Coalition government leadership. More broadly, the energy supply industry’s task is to campaign against yet more ad hoc policymaking.

In the latter context, I think the most helpful thing politicians and others could do this weekend is to sit down for 15 minutes to watch a televised interview between the ABC’s Elysse Morgan and EnergyAustralia’s energy executive Mark Colette on The Business program. Put to air on Wednesday this week and still readily accessible on the ABC website, it is the most sensible and clear exposition of supply options available, covering not just the Liddell fracas but also the threat via green activism to EnergyAustralia’s 1,400 MW Mt Piper power station in the upper Hunter Valley, a generator of 12,000 gigawatt hours a year — an issue Colette points out for which there is a ready-made technical solution and more urgency for it to be pursued because the plant could be driven to close far sooner than Liddell.

It should be noted that the politically-contrived Liddell “crisis” may not have found AGL as flatfooted as some journalists obviously assume. The reason for saying so lies in the company’s recently-published annual report via opening comments from CEO Andy Vesey.

“We are undertaking a detailed State-by-State assessment, starting with New South Wales and Victoria, of Australia’s potential energy generation supply and capacity requirements from now to 2025,” he wrote. “This will pay particular attention to replacing energy and capacity currently supplied by Liddell, which will reach the end of its life in 2022.”

Vesey added: “Our assessment will inform the nature and scale of AGL’s future investment in low emissions generation and storage technologies. It will also offer insight in to how AGL should make those investments to ensure we deploy shareholders’ capital responsibly in the context of the significant uncertainties we face in both regulation and technology.”

What has also been lost to sight in the past week’s politics/media frenzy is the mindset AGL brought to the purchase of Liddell in the first place. Here is what the chairman, Jerry Maycock, now retiring from the board, told the company AGM in October 2014: “In our (purchase) valuation model, we assumed Liddell would close in 2017 because of the possibility that one of (our) major customers, Tomago aluminium smelter, may close. If the smelter remains open, Liddell will continue to operate.”

Tomago, one of the more cost-efficient smelters around the world, has so far remained open. Aluminium prices are not at the dire levels they were a few years ago – but the very high local wholesale power prices pose an ongoing threat to its viability.

At the AGM in 2015 Maycock directly addressed a point that is now being used by some politicians and some in the media to howl “hypocrite” at his company. “The profits and cash flow from (our) coal-powered generators will enable us to continue to invest in renewable assets if and when the investment climate improves (and) as well (is) funding investment in new digital technology and energy storage products.”

From all this it is not unreasonable to assume that AGL’s board and top management have been walking in the storm-tossed transition woods with their eyes open although perhaps they could not have foreseen themselves in today’s melee, a sudden product of Malcolm Turnbull’s rather desperate political needs.

(Commenting on the situation, EnergyAustralia chairman Graham Bradley says: “The Prime Minister is having to turn over every rock he possibly can to find the best solution to what is a terrible policy mess that has been created by a decade of bad decisions by both State and federal governments.”)

One can also see a certain irony, given current events, in a comment by Maycock to AGL shareholders at last year’s AGM: “It is necessary to ensure that the transition to a low-emissions electricity system occurs in an orderly rather than disorderly way.”

Whatever, as my grandchildren say. AGL’s board and MD now find themselves caught in the horrid glare of media and political attention with a 90-day deadline to come up with a game plan for delivering a path forward on generation capacity that fits with their future planning and their shareholder interests —  and doesn’t leave Turnbull further exposed politically because that will only put the company more in harm’s way.

The company’s preferred approach, as recently again outlined by Vesey before the current game kicked off, is not to go for a new coal plant or baseload gas to replace Liddell “but a mix of energy from wind and solar, along with load shaping and firming capacity from sources including battery storage, pumped hydro, demand response mechanisms and gas peaking plants.”

In this regard, Colette’s lucid explanation in his The Business interview of the wide-ranging options available and being pursued, especially by the big gentailers, is strong reinforcement for a more rational approach to the situation by policymakers.

Pared down, Turnbull’s political need should be to demonstrate that there is a viable plan for the NEM to have available by the decade’s end 8,000 gigawatt hours of dispatchable electricity (Liddell’s annual output) to ensure that the market’s security is not impaired by losing this level of non-intermittent production in addition to the 12,000 GWh foregone when Victoria’s Hazelwood shut in March this year.

(As it happens, AGL has on its files a fully-fledged plan to build a 2,000 megawatt power station on the Bayswater B site, approved by the last NSW Labor government in 2010 for Macquarie Generation, which it then owned, to burn either coal or gas. This project was designed to produce about 20 per cent of the State’s power needs and intended to be in operation by the end of this decade at the latest. In its gas-fired mode, the development would feature five 400 MW units. If coal-fired, it would involve two 1,000 MW units. This project design work, of course, was undertaken well before the current HELE coal technology was in commercial vogue or battery storage possibilities became top of mind.)

Over the early weeks of spring ahead of us the political heat, thanks to the government’s Liddell manoeuvres, seemingly falls on AGL. (“The ball is in their court,” said Josh Frydenberg, an accomplished tennis player, even as his leader was accusing the company of greed in parliamentary question time.)

But other players are jostling to get on the court, not least the Australian Competition & Consumer Commission. Its chairman, Rod Sims, is due to make a speech in the week ahead that is being anticipated in the media as a blast for vertically-integrated supply (generation and retail) and this will be followed by the ACCC’s interim report to the federal government on 27 September on the competitiveness of NEM retail power prices.

From above the arena, however, the most immediate community challenge – even though the one politically for Turnbull is now the self-imposed Liddell problem plus settling the Coalition’s internal shenanigans on energy policy – can be seen to be security and pricing of supply in the NEM this summer, especially in Victoria, NSW and South Australia.

Whatever AGL puts on the table with respect to Liddell (or alternatives to its share of supply) and however Turnbull & Co react to it, the issue with biggest near-term ramifications for consumers, governments, the Australian Energy Market Operator and the generators is how the production and delivery system deals with the inevitable summer heatwaves that lie just ahead.

Postscript: The latest opinion poll in Essential Report shows that 35 per cent of respondents think neither the Coalition nor Labor can deliver lower energy prices – and another 18 per cent don’t know what to think. Only 19 per cent of those polled believe the Turnbull government can provide lower bills – versus 28 per cent for Labor. Alarmingly for the gentailers, 86 per cent of those polled think electricity and gas prices should be regulated. Naively, 56 per cent favor government (which ones?) buying back coal-burning power stations from the private sector and 51 per cent want to “stop coal-fired power stations from closing down” while 81 per cent want to “increase investment in renewable energy and storage.” The degree of community energy illiteracy this represents is quite something, don’t you think — and it feeds in to a political fire that could run out of control in the opening months of 2018.

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