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The decline of base-load: Is solar about to claim biggest victim?

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The decline in demand and wholesale prices, and the rising influence of rooftop solar may be about to claim its biggest base-load victim to date in Australia, with talk that the 980MW Wallerawang coal fired power station in NSW could be closed in 2014.

Some 3,000MW of fossil fuel capacity has been closed or mothballed in the last 12 months. This includes 700MW of capacity at Tarong in Queensland, the Collinsville power station in north Queensland, the Playford and Northern power stations in South Australia, the Munmorah power station in NSW, and units at other generators – including Wallerawang – that have been closed at various periods.

Wallerawang, located near Oberon in NSW, would be the largest victim of the dramatic turn of fortunes for the industry – in both reduced demand and plunging spot prices – since the National Electricity Market was created in 1997.

Talk that Wallerawang could be closed came after a technical notice was posted on the Australian Energy Market Operator’s adequacy planning noticeboard in September, signalling the intended withdrawal of 1,000MW of capacity early next year.

That caused a brief spike in futures prices and energy traders immediately pointed the finger at Wallerewang as it was the only plant to fit that capacity, and – by its owner’s admission – because it is an ageing and comparatively inefficient and high cost generator. One close observer of the National Electricity Market, the WattClarity blog, also suggested Wallerawang as the likely plant.

Wallerawang, along with its larger and more modern neighbouring plant, the 1,400MW Mt Piper power station, was bought by EnergyAustralia for a combined figure of just $160 million in a deal announced in July.

The notice of withdrawal (which, it should be pointed out, is not binding) was posted on the AEMO website on September 10, just says after the completion of the purchase, and just three days after Tony Abbott, who has vowed to remove the carbon price that has plagued black coal generators, won the poll.

A spokesperson for EnergyAustralia on Friday said no decision on the future of Wallerawang had been made, but said that a review of its operations had begun immediately after the purchase.

EnergyAustralia in 2010 bought the rights to manage the output of the Wallerawang and Mt Piper power stations under the so-called “gentrader” contracts. According to one report it paid just $1 million for the output of Wallerawang, although the contract required it to spend $240 million on capital improvements.

That part of the contract was removed with the purchase of the physical plant announced it August. It appears that the notice of potential closure was posted just a week after the purchase was completed. If the closure does go ahead, it will also take place just as the carbon price is removed, if all goes to plan for the new Abbott government.

In announcing the purchase, Energy Australia CEO Richard McIndoe noted that Mt Piper was one of the newest and most efficient black-coal fired power stations in NSW, but Wallerawang had “comparatively lower levels of efficiency and higher fixed costs.”

Previous owner Delta Electricity announced in January that half of Wallerawang’s capacity would be closed for 12 months. It was switched off in January but fired up again in early May. The Greens caused controversy in June when they released a report calling for the closure of Wallerawang by 2017. The plant has previously attracted ire from local farmers and councils about water usage.

McIndoe said at the time of purchase that EnergyAustralia would work to optimise the power station’s operating and capital expenditure strategies once the sale transaction was completed. It is thought that Wallerawang accounted for just a fraction of the $160 million purchase price of the two plants.

Coal fired generators across Australia are feeling the effects of the carbon price, but also from the changing dynamics of the electricity market, where reduced demand and the rapid takeup of rooftop solar is having a dramatic impact on baseload generators.

Earlier this week, the Queensland government owned Stanwell Corp sheeted most of the blame for its operating loss from 4,000MW of coal and gas fired generation onto rooftop solar. It said that Queensland was operating with nearly 60 per cent surplus. Its baseload generators are running at just 63 per cent capacity, even after half of Tarong’s capacity was closed.

citi baseload deline

This is not just an Australian phenomenon. Investment Citi noted that capacity factors in Europe have also fallen dramatically because of the influence of renewables, and in particular rooftop solar. (see graph above)

Origin Energy, which now owns the 2,770MW Eraring power station after previously owning the gentrader rights, noted that its output was equivalent to just 44 per cent of capacity in 2012/13. Part of this was a partical shut-down due to boiler repairs, but black coal fired baseload generators normally expect to run at least 70-80 per cent of the time.

As Hugh Saddler writes in his monthly report today, black coal generation has been the biggest victims in the change in market conditions, which has seen a 7 per cent fall in overall demand in recent years. Brown coal generators have been protected by compensation from the carbon price. The situation in NSW has been worsened by the closure of the Kurri Kurri smelter.

The impact on the generators has been one of the biggest reasons why utilities – both private and state owned – have pushed the Abbott government to have yet another review of the renewable energy target.

That review is due to be held next year, with the Abbott government likely to wait until it can close down the Climate Change Authority so it can hand the brief to another, possibly more sympathetic party to do that review.

However, there is still talk in the air of a compromise deal between the “black” and the “green” energy industries – negotiated by some that straddle both.

This would involve a phased closed down of coal-fired generators, including compensation for the costs of closure and remediation, in return for a redrawing of the RET.

That may include a longer date and nominally higher target – such as a 30/30 target as suggested by Origin Energy, but it would need to be carefully calibrated to ensure that investment in largest scale renewables such as wind farms and solar plants were not just delayed (yet again).

Those considerations are likely to weigh heavily on the final decision that EnergyAustralia makes on Wallerawang.

 

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  • Matthew Wright

    Well done on being on the pulse Giles!

    I think a redraw of the RET with Energy Australia (China Light and Power formerly trading as Truenergy) and Origin would involve a lot of delay (Bjorn Lomborg style) That’s where the watering down will exist. It will be about doing nothing in the near term, so that they can then argue against the RET again when we are scheduled to do something. Just keep on pushing it back. This is a real risk. Meanwhile everyone should get more Solar installed because Solar redraws the energy market!
    More info http://zeroemissions.org.au/

    • suthnsun

      ditto

  • http://gunagulla.com/ Gordon

    >Wallerawang, located near Oberon in NSW

    Giles, Wallerawang is actually part of Greater Lithgow, and much closer to it than to Oberon, although it has in the past (not sure about currently) used a significant proportion of the water from Lake Oberon, which is the Oberon town water supply.

  • Harry00

    Decline in electricity demand is due to large decreases in industrial demand in NSW and some in QLD. Residential demand has declined mainly because of high prices, efficiency and rooftop PV. Solar has had a little affect on total demand. For example Tasmania’s annual demand has declined by a massive 760Gwh in the last 5 years, yet they have a very minimal amount of solar PV.

  • JohnRD

    Abbott and Rudd between them have highlighted the political risk associated with making investments on the basis of both the RET and carbon price. What is needed to drive investment in renewable electricity is a steady stream of long term contracts to supply clean electricity (and/or to provide standby.) Contracts provie the certainity that investors need.

    • Warwick

      So just how would the political risk be any different under a long term contract such as a FiT instead of the RET/carbon price? Just look at Spain for an example… Why do you need contracts for standby?…especially in an oversupplied market!

      • Bob_Wallace

        Spain designed their FiT program poorly. It should have tapered off and ceased based on amount of solar installed.

        FiTs should automatically track with system needs and installed costs. They should be set high enough to create a small profit for the system owner. That motivates the system owner to seek the lowest installed price in order to maximize their profit.

        Add to that the fact that Spain’s economy crashed due to an unsustainable building/financial boom about the same time they had installed enough end-user solar.

        Since then fossil fuel interests have repeatedly tried to blame things like Spain’s economic and employment problems on renewables.

        The fact is, had Spain not installed a lot of renewables before their housing bust they would have had a much harder time recovering. Renewables allowed them to keep their grid going without having to go deeper into debt to purchase fossil fuel.

        • Warwick

          Bob, you’re missing the point. The Spanish government had FiT’s for large scale wind and solar (i.e a long term contract) yet these were wound back. The point is that there’s little evidence to suggest that these “long term contracts” face less political/sovereign risk than a carbon price or renewable target.

          Most credible economists put down much of Spain’s woes due to cheap credit and a subsequent a housing bubble rather than renewables. However, there is little evidence to your suggestion that renewables have helped Spain recover faster and the economy is yet to recover.

          • Bob_Wallace

            No Warwick, I’m not missing the point. You’re dishonestly changing the topic and misrepresenting what I said.

            I did not say that renewables have helped Spain recover faster.

            And I pointed out that the bull about renewables killing jobs which you apparently support when you agree that Spain’s crash was due to a financial/housing bubble and not renewable energy.

            Sorry, Warwick. You’re coming off as a untrustworthy individual.

          • Warwick

            Sorry, but you are missing the point and I’ve not changed anything or been dishonest. I want coherent answers to John’s suggestion that 1) Long term contracts have any less sovereign risk than a RET/Carbon price 2) Why we need contracts for standby in an oversupplied market. To repeat again in my reply…

            1) There is plenty of contradictory evidence to the suggestion that “long term contracts” are less exposed to sovereign risk. Spain with FiT’s is a recent example, NSW and WA attempted to…have a look at some of the PPP contracts…also look at whether some desalination contracts may be re-written in future.

            2) You said “…had Spain not installed a lot of renewables before their housing bust they would have had a much harder time recovering.”…how would anyone not interpret that to say “..renewables have helped Spain recover faster”? Your words not mine.

            3) Please tell me where I have stated anywhere that “renewables kill jobs”..?

      • JohnRD

        Politicians can change RET targets on short notice or suddenly include extras that push down the price of credits. By contrast it is difficult to make unilateral changes to long term contracts that are properly written. Even if governments put in sleazy escape clauses the politics of doing this are unattractive.

        • Warwick

          What evidence do you have that “..it is difficult to make unilateral changes to long term contracts that are properly written.”? What is “properly written” and what are the “sleazy escape clauses” you talk about? Unfortunately, long term contracts as you describe usually put the risk back on the taxpayer. As a particularly relevant example here, many people are arguing that networks should be exposed to sovereign risk by having their asset values arbitrarily written down yet argue that renewable projects should receive a guaranteed return for the life of the asset…both provide a benefit to society yet why should a renewable generator especially rooftop PV which is mostly self consumed be guaranteed whilst a network is not?