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AGL cashes in on coal splurge, renewable investment drought

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AGL Energy, the biggest electricity generator in Australia, is reaping the rewards of its recent multi-billion dollar investment in large coal generators in Victoria, and the recent investment drought in wind and solar farms.

AGL Energy CEO Andy Vesey likes to joke that by the time he had been approached about the job, through to when he turned up to take the reins in 2015, AGL had morphed from what appeared to be a renewables-focused company to a major coal generator, the biggest in the country.

He’s probably thankful it is paying dividends to shareholders.

And how. In the last year, the price AGL received from wholesale markets nearly trebled – from $34/MWh to $83/MWh, according to Morgan Stanley.

That delivered a windfall gain for AGL, because 85 per cent of the electricity it generated came from its huge but ageing brown and black coal generators in Victoria and NSW and its average cost of generation was just $37/MWh.

This cost of $37/MWh was little changed from last year ($35/MWh) which might come as a surprise to all those consumers facing huge lifts in their energy bills because of a so-called surge in the cost of wholesale generation. They might wonder where the pricing regulators are, or have been.

(AGL owns the Loy Yang A brown coal generator in the Latrobe Valley, as well as the Bayswater and Liddell plants in the Hunter Valley. Liddell operated at a capacity factor of just 50 per cent, barely higher than some of the nation’s best wind farms, despite an increase in availability).

AGL Energy’s results came in just above analyst expectations, with underlying profits up 14 per cent to $802 million, and so too did its forecasts for the coming years. It expects a 20 per cent lift to $1 billion this financial year and analysts see a similar jump over the next year.

increase electricity margins.

The other aspects of its accounts illustrate how AGL – like other gen-tailers – are able to profit from the way they influence policy, and can slice and dice earnings to their advantage, a key issue given the soaring consumer bills across the country.

Readers will remember that AGL, like other major retailers, went on an effective capital strike on renewable energy due to “policy uncertainty” as the Abbott government and the fossil fuel lobby sought first to kill and then finally reduce the scale of the renewable energy target.

That lack of investment in new wind and solar farms over three years did not just allow wholesale prices to go higher than they would otherwise be, they also led to a surge in the price of large-scale renewable energy certificates (LGCs).

AGL’s profits from eco-markets more than doubled in the last year, from $69 million to $141 million, reflecting the increased market price for LGCs, and the ability to use stored certificates bought previously at a lower price.

Now that the renewable investment drought is over, and something of a boom in wind and solar plants is finally taking place, AGL expects to the price of LGCs to ease. But it still won’t be able to meet its obligations over the next two years, so will likely have to buy on market.

The main topic of the week, however, has been consumer bills, and once again AGL has shown how it can slice and dice bills to preserve earnings.

It says that 80 per cent of its customers accessed discounts in the last year, but adds that this was “managed” so that its actual profits from sales to consumers increased over the year.

In the consumer division, returns rose to $485 million from $463 million, while the business customers increased from $35 million to $40 million. Overall, its margins per customer increased slightly to $217, although net margins fell because of the costs of investment in new markets such as W.A.

It underlines the fact that the main issue is that electricity prices are still too high, equivalent to relying on a diesel generator in the garage, and while big retailers may offer bigger discounts, their overall revenue from consumers is going up, even as volumes fall.

Vesey was asked if AGL and other utilities saw the industry going the same way as the banking sector, constantly pilloried from accusations of profiteering from consumers.

Vesey argued that the best way of dealing with the problem was to be strong financially.  But he conceded that accusations around making big profits when consumers were being hit with big bills could be problematic, and said the solution lay in correct policy settings.

He said he was hopeful – after the meeting on Wednesday between him and other industry leaders and prime minister Malcolm Turnbull and energy minister Josh Frydenberg – that the government would finally commit to an energy security target.

But he underlined his oft-made point that investment in new coal plants was not economically rational, and neither was investing in existing plants to extend their life-span.

“The challenge is that we are at a point where the lack of certainty around carbon policy is preventing people from investing in the right options, which we thing is wind, solar, and storage,” Vesey said.

The biggest black spot on AGL’s profit accounts was the performance of the gas division, where AGL was hurt by the surging cost of domestic gas supplies.

It is looking to address that by building, ironically, a LNG import plant at the cost of $250 million, and announced that it is looking to site that at Crib Point, near Westernport in Victoria. It is also looking to invest $250 million expanding its Silver Springs gas storage facilities in Queensland.

It expects this new competition will result in Australian domestic gas prices being effectively capped at international prices, rather than being higher than them as they have been in the past year.

This came as rival Origin Energy was forced by falling international prices to announce a massive $1.2 billion write-down in the value of its domestic gas assets, including $815 million from its share of the Australia Pacific LNG (APLNG) project, and $357 million for the Lattice Energy conventional gas assets.

rehab obligations.AGL also announced it had increased its rehabilitation provisions by $69 million to $307 million, reflecting the present value of some $1.7 billion it expects to spend rehabilitating old coal plants and mines, and gas plants and other assets, over the next 60 years.

The biggest cost will be Loy Yang ($261 million for real cash costs) which is less than the $439 million set aside by France’s Engie for just the mine rehabilitation at the now closed Hazelwood power plant.  

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  • Jacob

    “It is looking to address that by building, ironanly, a LNG import plant at the cost of…”

  • Steve159

    LNP shareholders will be pleased with their money-before-planet/people paying off.

  • solarguy

    So as a gentailer cost to produce 3.7c/kwh, pay the network costs and then retail their own power for 55 + c/kwh. NICE LTTLE EARNER. While pensioners and low income earners struggle to pay the bills or can’t. DISGUSTING GREEDY PIGS!

    • MaxG

      Not so loud… 🙂 this is our so-called free market. The system is privatised, hence, open for commercial pillage of the public. They are not a social entity. People seem to forget this…

      • solarguy

        There is such a thing as human decency, compassion though Max. These bastards aren’t just about the money it’s control!

        They all think we have an unlimited capacity to pay.

        • George Darroch

          There’s no such thing as decency in a market. If you want things to get better, pick up the phone and call your local member of Parliament and ask them to regulate.

  • Joe

    I knew I smelt a rat with all those recent full page newspaper ads from AGL telling us all that they were getting out of Fossil Fuel…by 2050. Now we know why it is 2050, need decades to extract value from all this latest FF purchasing.

  • George Darroch

    Hang on, didn’t AGL CEO Andrew Vesey promise us that his company was “getting out of fossil fuels”?

    I seem to remember a television ad from AGL very recently stating exactly that. Does this mean that those statements aren’t true?

    • Chris Fraser

      Maybe he wishes they weren’t true. He’ll have cashed in his chips long before 2050.

    • Miles Harding

      I read they still are, but to do this, they need to take a stick to the government in order to get policy that supports a rational transition.

      I hear that the strange lump in Scott Morrison’s trousers is, in fact, the same lump of coal he paraded around the lower house, inviting all the members to touch and feel.

      As the fools on the hill fiddle, the day these ageing coal plants will die from the effects of fifty years of smoking draws near. We will be closing them in the next few years, either by choice, or by necessity when they fail.

      What is desperately needed is some leadership that makes the transition away from fossil fuels a reality. No sign of that in the COALition.

      • Ren Stimpy

        There will almost certainly be a price on carbon within 10 years. I expect the Coalition to become more rational and accepting of the science – kind of like the British conservatives are now – when Tony Abbott, Barnarby Joyce and Craig Kelly et al are either removed or retire, preferably the former.

    • Ren Stimpy

      Also the big electronics companies have decided to “get out of fax machines” by 2050.

  • Ken Dyer

    Now we can clearly see the effects of neo-liberalism, starting with privatisation of the electricity market years ago (no thanks to Jeff Kennett in Victoria at the time), the removal of the carbon tax by Tony Abbott and Greg Hunt, thus prolonging the economic life of government subsidised fossil fuel generators, and allowing the market to seek its own levels rather than set an energy target as Turnbull and Frydenberg have failed to do. The COALition certainly got all that right!

    And the consumer gets it in the neck, not only with electricity prices but with the highest greenhouse emissions per capita in the world! That’s how you win with neo-capitalism – he who makes the most bucks wins whilst creating the most pollution and the maximum pain for those who have to pay the price – the consumer.

    This has been going on for decades!

    • MaxG

      I hear myself talking 🙂
      What I have been saying for decades… but mostly misunderstood as radical 🙂

  • Kevan Daly

    Remember that windfarm owners will also benefit from the surge in electricity prices. I expect Australia’s largest windfarm operator, Infigen Energy, to report a similar increase in profit at the EBITDA level. You can definitely refer to that as a windfall profit.

    • Ren Stimpy

      Windfarms have to sell their output into the market as it’s generated, unlike the fueled generators who can game the market by withholding supply until the price ramps up, or by piling most of their output into only selected 5-minute intervals within a 30 minute settlement period. Wind power doesn’t push the price up, gas power pushes the price up.

  • Ian

    Comme ci comme ça. What about the poor, it isn’t fair, they’ve had enough , now they want their share, can’t you see, they want to live, but AGL takes more than it gives.

    Australian big business, you can’t trust em, no wonder we prefer Chinese goodies.