News of the week
Plenty of focus on the AGL result. There were many points arising from what was an uncontroversial result. Above all else we’d note that AGL is doing a good job on cost control.
- Provides early FY18 guidance roughly in line with market consensus of $940-$1040 m midpoint $990 m up 23% on FY17
- Firms up investment plans in
- $900 m, 433 MW Coopers Gap Wind farm, likely through PARF. AGL has $200 m committed to PARF and its cash commitment to this farm will be small in the AGL scheme of things.
- $250 m Silver Springs gas storage 100 TJ per day
- $250 m Crib Point Vic LNG import facility 100 PJ per year, landed cost at current rates around A$8-A$10 GJ
- $295 m South Australia Reciprocated gas engine 210 MW power station.
- Recommits to FY22 closure of 2 GW Liddell power station
- FY18 cash conversion (operating cash flow/ebitda) expected to be 100% or greater as futures guarantees unwind.
- Negative in result was underlying volume trend continues to decline, down 1% on AGL weather adjusted estimate.
So the take on this is that AGL is reemphasising gas and doesn’t, as yet, have a strategy for how to deal with declining competitiveness of grid delivered electricity.
Coopers Gap brings the REC price back into focus
Will the LRET target be met? There is widespread agreement that calendar 2018 will be tight. We don’t have an opinion on 2018 but our numbers suggest that its more likely than not that by 2020 there will be 6 GW of new wind & PV. Our numbers below don’t include any West Australian projects but they do include about 400 MW of output where there will be voluntary surrender of certificates.
To get into those totals the criteria was basically Final Investment Decision [FID] – however, we have also included the Edify Energy, Lincolns’ Gap and the PARF Cooper’s Gap projects.
We are quite confident that Goldwind will do a further 300MW from its Moorabool Victoria project.
If the various Lyons Group projects were to proceed that would push the total over the line.
You can also see from the table that despite the current excitement around PV that wind has about a 60 per cent share of what’s been announced in the past couple of years.
What will happen to the LRET scheme if we move to a CET?
There may not even be a CET, of course, but we are betting there will be one. We don’t know what will happen but we expect that the most likely thing is the two schemes will be rolled into one for administrative simplicity. Notwithstanding that there won’t be double dipping it is possible that this could provide a pathway for projects to get credits beyond 2030 and also deal with the risk of the marginal certificate price falling to zero if the LRET target is exceeded.
The Port Augusta solar thermal project isn’t economic at $78/MWh and $650 m cost
SolarReserve states that this project will produce 495 GWh per year. At a price of $78/MWh that’s around $39 million revenue a year. Comparing that revenue, never mind any opex, that’s a payback of 16 years, which is clearly not commercial.
Opex is probably going to be in the order of $10/MWh. Even that will be a low number in our view. So that pushes the payback to about 18.5 years. We see an IRR (before tax) of 3%. The after tax IRR would be lower. If ebitda s around $36 m and depreciation (over 20 years) $32 m there won’t be much tax anyway.
The project benefits from a $110 concessional equity finance package from the Federal Govt. Exactly what concessional equity finance is I don’t know. But it seems like a good thing to have.
We don’t know what’s going to happen to the REC certificates. It’s not even clear the project will be built in time to get in ahead of the 2020 deadline.
In short its great news for renewable energy and Port Augusta but we’d treat the economics with caution just yet.
Turning to the weekly action
- Volumes:. Were weak down 3% across the NEM and 4% in NSW. Public holidays and warm weather probably impacted.
- Future prices This was a nothing week for futures. Prices didn’t move.
- Spot electricity prices . at say $80-$90 MWh across the NEM were very high compared to last year, well over 100% up, but actually down a bit on last week. Qld remains the lowest.
- REC. Prices were unchanged
Gas prices started to soften. Its clear now that gas prices at over $8 GJ are staying high but there has been no repeat of last year’s extreme pressure and supply shortage. Pelican Point now has gas to operate from both ORG and STO so together with other South Australian initiatives supply security is improving dramatically.
- Utility share prices. In the end AGL shares fell post result as the good news was already in the share price. APA shares have had a soft year down 8% and unusually significantly underperforming the ASX 200. It’s not that APA has done much wrong, but the market doesn’t see the next growth leg to justify the high premium the stock traditionally trades on.
Share Prices
Volumes
Base Load Futures, $/MWH
Gas Prices
David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.
