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AGL says 9GW of baseload fossil fuels no longer needed

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AGL Energy, one of the big three power utilities in Australia, says that 9,000MW of fossil-fuel baseload capacity needs to be taken out of the national electricity market (NEM) to bring it back into balance.

The claim was made by managing director Michael Fraser, on Wednesday, at the announcement that AGL Energy had secured extra financing for its 155MW solar PV project in western NSW – the first solar project of its scale to be built in Australia.

To agree to proceed, however, Fraser said AGL Energy sought extra funding from the Australian Renewable Energy Agency to make up for equivalent estimated falls in wholesale electricity prices.

“We have got an oversupplied wholesale market,” Fraser told RenewEconomy on the sidelines of the announcement.

“There is too much baseload relative to where demand has got to, and rooftop solar has impacted on demand … and that has impacted on the economics of coal-fired generators.

“We guess there is around 9,000MW of oversupply in the market. That’s not helpful, either for existing assets or for trying to get new projects off the ground.”

That assessment of 9,000MW equates to nearly one-third of the country’s baseload generation – a sure sign that renewables, and in particularly rooftop solar, are changing the dynamics of the market. And it also suggests that some state governments built more generators than was necessary, as they have done more recently with poles and wires.

This table, below, illustrates the problem. It was presented by AGL economists Paul Simshauser and Tim Nelson last week, in conversations about the state of the market and the need to move away from simple energy-only markets, to markets that incorporate capacity or “capability” factors, a subject we have looked at in detail here, here and here . Screen Shot 2013-08-01 at 9.18.48 AM

Before markets can be redesigned, however, the big question is how, and under what conditions, that excess capacity should be retired. Fraser noted that some generators, such as Alinta’s Northern power station (in winter), and some of the Queensland generators, had taken themselves out of the market.

But there is also renewed discussion about the idea of “contracts for closure” – i.e. payments made to coal-fired generators to close down “early”.

The federal government did have a “contracts for closure” program for retiring up to 2,000MW, but pulled it because the generators were reportedly asking for too much money.

The idea that some generators could be escorted out of the market in a sedan chair with balloon payments in their pockets for compensation will not be welcomed by many.

But Fraser suggested that framing compensation in terms of the costs associated with the physical closure – dealing with asbestos and other environmental issues – could be one that is welcomed by the general population.

“Maybe society would be prepared to pay,” Fraser said. “You could get an improvement in the local environment as well as lowering the carbon footprint.”

The revival of the contracts for closure concept, and its apparent support among some renewable energy developers (particularly in the wind energy space), suggests that there might be some unspoken pact about maintaining the renewable energy target in exchange for a payout to some coal generators.

However, it is also a likely reflection that generators realise that the growing attraction of solar PV will continue to impact on demand and, as Fraser suggested, the economics of coal-fired generators.

Fraser’s deal with ARENA delivered added protection for AGL Energy and its solar project if wholesale electricity prices continue to fall, but means that if prices rebound (if excess capacity is removed from the market), then ARENA will get their money back.

As for the closure mechanics, Fraser says it is an “interesting” question – not just for the legacy fossil fuel assets out there, but also for new renewable projects.

“Ideally, we will get those old plants taken out,” he said.

AGL Energy is unlikely to be a participant in that process, because the Loy Yang A brown coal generator in Victoria – despite being the biggest single emitter in the country – is also one of the most efficient and cost effective. But it would still benefit from any closure of other plants,  sponsored or otherwise, because wholesale prices would be higher than otherwise.

Australia is not the only market facing such dilemmas. Germany, much further advanced than Australia on its renewables path, is witnessing the forced closure of fossil fuel assets as the market dynamics change – and despite the withdrawal of nuclear capacity. The issue of carbon budgets is also overshadowing global energy markets, with recent reports suggesting that two-thirds of the coal capacity in the US would need to be shut down. AGL has also been a supporter of a carbon budget for Australia, which would also suggest limitations on fossil fuel generation, over and above a carbon price.

AGL Energy has been a strong supporter of the renewable energy target, and once again took issue with those rival companies who have actively campaigned against the RET, accusing them of “trying to protect the value of the assets that they bought or built.”  He said opponents had greatly inflated the cost of renewables.

He didn’t mention names, but AGL Energy’s two biggest rivals – Origin Energy and EnergyAustralia – are campaigning heavily for the RET to be severely diluted, or even abandoned. Both companies have recently invested heavily in NSW coal-fired assets.

Now, another one of those assets is up for sale: Macquarie Generation, which includes the Liddell and Bayswater power stations. The price that is paid is likely to be heavily dependent on estimates of the deployment of large-scale renewables and the fate of the RET, the rate of deployment of rooftop solar, the future of the carbon price, and the likelihood of excess capacity being removed.

All else being equal, they are probably not worth anywhere near what the NSW government would be hoping to obtain. Even the Queensland government-owned Stanwell Corp last year noted that its 4,700MW of mostly coal-fired generation was surplus to requirements.

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  • suthnsun

    It’s clever rhetoric from AGL. I don’t want to be cynical but positioning his company as
    1. a green energy advocate’s friend
    2. owner of the largest brown coal generation
    3. suggesting the ‘dirty’ competition should be taken out
    4. suggesting the major competitions rhetoric is self-serving

    is all very deft .

    • Ivor O’Connor

      Perhaps AGL has seen the future, realizes it is renewables, and wants to jump into that and monopolize it before anybody else gets a chance? And if they can get government to pay for closing their plants and opening renewable ones all the better. For them. Sounds like they are clever but still out for themselves first and foremost.

  • Roger Brown

    Just let the market decide ? Why should the tax payer prop up Industries that had their heads in the sand hoping solar and wind power would go away. I bought a new car 10yrs ago , should the tax payer “Buy out my car ” so I can buy a more fuel efficient new one ? Who would be stupid enough to buy a polluting old coal-fired power station in today’s world ?( Without sticking their hands in the tax payers pocket.

  • JohnRD

    Have I got it right? The fossil power generators want the government to pay them taxpayers money so that the price tax payers have to pay for their power goes up?
    I do think, however, that the government should consider standby contracts for dirty power as part of an orderly move to 100% renewables. Standby contracts would give dirty power producers the certainty to continue doing major maintenance. It would give the government the power to favour power plants with peaking capacity.
    (In practice, the system would consist of supply contracts that would include a base payment per hour that was paid whether the plant was producing or not plus a payment per kWh. The cost would be paid by power retailers or consumers. Competition for these contracts would probably reduce power costs.)

    • Giles

      John, i think you have got it right. The payment system would be better not as a capacity payment as you suggest but a “capabilities” payment that would reflect a plant’s ability to switch on or off when needed, provide a certain amount of capacity, and take into account its emissions etc.

      • RobS

        Eh I say stuff them, they for years campaigned against support for renewables and told them to survive in the market, I say let them taste their own medicine.

        • Motorshack

          That would be the Golden rule, would it not? Do unto others, etc? Funny in any case.

      • JohnRD

        Giles: One of the big attractions of The “contract to supply” approach is that the tender documents can specify things like general location, technology and time to come on line.

    • Bob_Wallace

      Exactly. Mothball a few fossil fuel plants. Keep a portion ready to come on line in a minimal number of hours and the rest a day or two out.

      That should take care of all the fear that the wind will quit blowing and the Sun won’t rise.

  • dwj

    If the portfolio balance numbers are correct, it looks like there is an opportunity for some baseload coal plants to be converted to gas. There are several different options for doing this and it has been done in many places overseas. It might be possible to achieve efficiency gains and major CO2 reductions as well as better matching the demand.

    • RobS

      They’re surplus plants, why would you spend millions converting them to gas rather then just mothball the oldest least efficient and keep the newest, cleanest and cheapest to run?

      • Bob_Wallace

        If it’s gas capacity that would be handy, why not spend the money on GE’s new turbines that are optimized for use with wind and solar?

        (Could spend the money on storage and skip the fossil fuel stuff.)

        • José DeSouza

          That’s right. It all boils down to a matter of specialization and division of labor among the several types of power plants. No single type of power plant can simultaneously provide energy, capacity and flexibility. Gas turbines such as the ones mentioned above can actually do an excellent job at providing both capacity and flexibility; they might provide energy as well, but at a steep price. Baseload coal, on the other hand, can be adequate for providing energy. Incidentally, windpower can do the same in addition to providing a lot of flexibility – not to mention all of the other attached benefits – when output is needed to be nimbly turned down.

      • dwj

        The report says that there is a deficit of peaking power plant. Other than hydro, this means gas. There is a host of infrastructure associated with coal fired power stations which could be used as part of a gas fired power station for much less cost than building a completely new gas station.
        Anyone in favour of renewables should support having plenty of gas generation on the grid. In lieu of storage, it allows much higher levels of wind and solar to be integrated.

        • Bob_Wallace

          It’s time to lieu up and start installing storage.

          It’s clear where the grid is headed. Why screw around when we could be avoiding more fossil fuel use by building storage?

  • RobS

    Dear god lets make the first 1,600Mw Hazelwood. What a national disgrace that Australia has the OECDs most CO2 intensive power plant at 1.58 tonnes CO2/MWh.

  • Bob_Wallace

    Giles?

    “recent reports suggesting that two-thirds of the coal capacity in the US would need to be shut down”

    Link?

  • Reece Hardy

    The whole reason we privitised the power industry was to bring in free market efficiencies. Now they want to act like a publically owned industry when it comes to liabilities and problems, but remain a privately own company when it comes to taking the money.

    • Bob_Wallace

      They want to privatize the profits and socialize the losses?

      I’m shocked. Shocked….