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Massive losses hit EnergyAustralia as demand falls, solar soars

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EnergyAustralia, one of the big three utilities in the country, has slumped to a loss of $350 million for calendar 2013 after slashing the value of its Yallourn brown coal generator, as well as some of its gas-fired generation assets.

The write-down came as the company, owned by Hong Kong based CLP Holdings, returned a profit of just $18 million (down from $236 million in 2012) for the year from its portfolio of coal and gas generation and its large retail customer base – a result it blamed mostly on an “unprecedented” fall in demand, and the popularity of solar PV.

EnergyAustralia Yallourn projectEnergyAustralia also chose to write off about $300 million from the value of its ageing Yallourn brown coal generator in Victoria. This was part of a total write-down of $445 million, which even included an $85 million gain from what it called the “bargain basement” purchase of the Mt Piper and Wallerawang coal fired power stations from the NSW Government.

The results put in context the implacable opposition that EnergyAustralia has to the renewable energy target, which it wants halted in its tracks in the current review commissioned by the Abbott government.

And it also highlights the dilemma that the industry, and for that matter the government, finds itself in over soaring gas prices, which are making the gas-fired generators of EnergyAustralia, Origin Energy, AGL Energy and others, such as Stanwell Corp, uneconomic to run because they are priced out of the market. Their ability to compete is made worse by the Abbott government’s decision to try and dump the carbon price.

It also explains why CLP chose to defer, indefinitely, its intended stock market float of EnergyAustralia.

EnergyAustralia says the fall in wholesale electricity prices has been caused, perversely, by higher electricity prices for customers, mostly due to network costs, which is encouraging those consumers to put on more solar panels, and embrace energy efficiency. Those high prices are also contributing to the decisions of some energy-intensive industries to leave Australia. While network costs are moderating, more price rises can be expected because of the gas boom. Gas still supplies around 10 per cent of local generation, and often sets the marginal cost of generation.

The issue of over-supply and falling demand is one of the principal arguments that EnergyAustralia and others are using to argue for either scrapping or diluting the RET. Even AGL Energy, previously the strongest supporter of renewables among the big utilities, is backing away from supporting the current fixed target following its own proposed bargain basement purchase of two NSW coal-fired generators (Bayswater and Liddell).

Mostly, though, these positions are about protecting the short term interests of ageing generators that these companies have been able to buy on the cheap and want to extract maximum value from. They do not reflect some of the fundamental changes that are occurring in the industry, particularly the changes in consumer behaviour that the utilities now recognise themselves.

EnergyAustralia did note some of the major pressures on the Australian electricity market:

– Consumer behaviour and expectations had changed as a result of the sharp spike in retail prices, and the growing uptake of rooftop solar PV and energy efficiency products.

– The uncertainty around carbon pricing and other policies had meant it was impossible to enter long-term hedging contracts, which reduced the ability to manage risk.

– The RET had forced “subsidised” renewable capacity into an over-supplied wholesale market, further dampening wholesale prices.

– Domestic gas prices were pushing gas-fired generators out of the market, and the pursuit of more “unconventional” gas to meet LNG export demand was also adding pressure to gas prices.

– Coal supply has become more challenging as costs increase and legacy contracts roll-off, particularly in NSW.  This would add costs and prices to coal-fired generators.

CEO Richard Lancaster said older and less competitive generators would soon be forced out of the market. It has already closed one of two units at Wallerawang and the second unit will be closed next month. Yallourn this year was hit by damage and outages caused by the flooding of the adjacent mine by the Morwell River.

The write-down of the gas-fired generators was taken after the company noted that even in the extreme heatwaves in Victoria and South Australia in January, wholesale prices remained relatively low despite very high demand. Because the cost of gas generation is soaring as gas prices approach export parity, thanks to the LNG export boom, it had no choice but to declare the value of its gas-fired generators to be impaired.

EnergyAustralia said the overcapacity had been created because demand had fallen by 6% since 2007 (against all expectations of an increase), while generation capacity had jumped by a net 13%, or 5,5000MW – courtesy of new thermal generation and the RET. This situation had been exacerbated by a near doubling in output from hydro electric generators.

“The over-supply of electricity generation, aggravated by a rush to build renewable energy projects to meet Australia’s Renewable Energy Target, is an industry-wide issue.” Lancaster said in a statement. “It may take some years for the supply and demand situation to return to balance and this will require the closure of older, less competitive generation facilities.”

Still, despite the write-downs, plunging operating profits and bottom line losses, there was none of the recent talk about the risk of blackouts that EnergyAustralia has deployed in the Murdoch press.

“Our generating assets are supported by brown coal reserves, black coal supply contracts and development options, long- term gas contracts and gas storage operations,” the company said. “There is considerable strength in our underlying portfolio, which is well diversified by geography, fuel type and operational mode. This allows us to effectively manage opportunities and risks across our portfolio in response to market conditions.”

Interestingly, EnergyAustralia said the purchase of Mount Piper and Wallerawang power stations in Australia had moved the company “further away” from its ambitious targets to reduce its carbon intensity by 2020.

 

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  • Chris Fraser

    “EnergyAustralia says the fall in … prices has been caused (from) encouraging those consumers to put on more solar panels, and embrace energy efficiency”. While i hope this is the right way to quote parts of the article, EnergyAustralia hardly need to be geniuses to work this out.
    How on earth do they think they can control the inexorable outcome – by legislating against PV and efficiency gains ? Umm, no. On the RET… they blame the thing in whose absence wholesale prices go up, giving life back to ageing pollution machines.
    Dare we suggest their problems stem from their intense focus on their economic bottom line rather than their customers, or heaven forbid, climate ?
    Many of their would-be customers made their PV and efficiency plans back in 2008, and have taken a different path. It would have been a gamble for many customers, perhaps taken firstly on concern for environment, and then they happened to collect big in investment returns. Like their customers had to, EnergyAustralia won’t change anything unless it begins to hurt too much.

    • Mick

      Maybe the productivity commission can recommend a fifty percent pay cut to each and every board member as well as every executive employee at Energy Australia for being exceedingly inefficient in their undertaking of business.
      If you can’t turn a quid in a monopoly then you must seriously be inept.

      • wideEyedPupil

        Especially when you’ve had successive State governments in your pocket.

  • Alen

    “Closure of older and less competitive facilities”, correct me if I’m wrong but is that not the way the market is supposed to operate? Newer technologies with greater efficiencies or greater benefits to the customer will and should always win in the market. Fighting the transition and maintaining old and ineffective business models is a waste of effort and money. It seems to me that the way ahead is in new energy models embracing renewables and distributed generation, but hey what do I know I’m not a CEO with a multimillion salary.

    • Paul – Mallee Permaculture

      This is where neo-libs request selective regulation. They realise they have it wrong, so expect the government and taxpayers to pick up the slack.

  • Gina Mckenzie

    As gas production in Australia and exports of gas have grown so the price of gas has risen, pricing gas generation out the market. I propose a levy on gas exports to subsidise electricity prices. If solar electricity generation is 6c/KWH to the household, subsidise dirty coal and gas electricity generation so that the consumer pays 6c or less per KWH. They will naturally not bother with solar panels and the fossil fuel generators can hum along at maximum capacity!.

    • wideEyedPupil

      Genius, Gina. Who do work for?

  • Paul – Mallee Permaculture

    Energy as a product is boring. Efforts should be made to guarantee it, as cheaply and cleanly as possible, so we can concentrate our efforts and buying power elsewhere. Is working to be able to afford the gas bill really a sign of an advanced society?