Origin Energy CEO Grant King is insisting that the renewable energy target be re-framed as a “true” 20 per cent cent target, and is hopeful of the “right outcome” from the upcoming review announced this week by the Abbott Government.
“We’re happy to think that we will get the right answers if we ask the right questions,” King said of the RET review in an interview with RenewEconomy after the release of the company’s interim results on Thursday.
Those results highlighted a 23 per cent fall in earnings from the company’s energy markets division in the last six months, something the company blamed on a combination of record warm weather, the uptake of solar PV, the proliferation of energy efficient appliances, and the loss of customers in previous years.
These are some of the “winds of change” that many in the industry, both executives, analysts and pundits, expect to trigger a major shift in the way energy markets are structured and business models are framed.
King remains unflustered by such suggestions. “The petrol engine is sill alive and well, and I don’t know how long ago it was pronounced dead,” he said. “There are lots of examples. Technology moves quickly and technology moves slowly.”
In the interim, the renewable energy target remains the key policy question for the industry this year. It seems improbable now that the 41,000GWh target remain as is, at least in the same time frame. The key will be just how far those targets are diluted, or delayed, and what happens to the various components, such as small scale generation.
King remains intransigent about his views on distributed generation, and solar PV in particular. He sees them as “free-riders” on the network and wants network tariffs altered to reflect that.
King is always an interesting interview, but particularly so now because of the great influence he appears to hold over the new government and its policy makers. Here is a (lightly edited) transcript of a phone interview with King on Thursday. Phil Craig, Origin’s head of corporate affairs, also contributes.
RenewEconomy: Thanks for your time, I know it’s a busy schedule for you. Let’s start with the RET. You expressed dissatisfaction with the previous review, are you happy with the terms of reference and the panel members of the forthcoming review?
Grant King: They are what they are. We didn’t write them, I’m not sure I can say whether it makes me happy or not …. Our criticism of the last review was that it didn’t seem to exercise itself with very detailed questions about the cost of interruptible load, the true state of demand on the NEM (National Electricity Market) and a series of other details. The new review will address current demand, they will address costs, and whether the RET is achieving its objectives in terms of emission reductions. So they address the right things, it all depends on how they actually do it.
RE: What outcome will Origin Energy be pushing for? You have talked previously about 25/25, or 30/30, or real 20% targets.
GK: We’ve spent much more time saying what’s not being looked at – we’re happy to think that we will get the right answers if we ask the right questions. The points we have been making are as follows: there are three key ones – the outcome in my view cannot be any less than amount of renewables currently built and committed to. We figure that is around low teens, probably 12-13 per cent. The current target is 27-28%, demand seems to be falling, we haven’t factored Pt Henry smelter into it, but the percentage is not going down, it is going up. So I would have thought the answer was somewhere between those two. The only observation I would make is that it was originally articulated as a true 20%, so to apply logic to the answer rather than analyzing the answer, you would say somewhere around a true 20 per cent. The observation we make, if that is the outcome, then you also need to look at the 2030 date, because the amortisation period is diminishing, and if that is too short, it will further drive up the cost .
RE: I always thought that the RET legislation was expressed as being at least 20% rather than 20% …
GK: Well, it will be at least 20%. I’m still amazed that when you ask people what the RET target is they say 20%. They don’t say 41 terawatt hours, they say 20%.
RE: You said earlier today that if it was a real 20% then not much if anything will get built between now and 2020 apart from other commitments.
GK: That’s because of banking, there is a lot of RCs in the bank, and if the target is changed those RECs get used up more slowly.
RE: Would that be a good thing, to effectively bring development in an industry to a halt. We do have to decarbonise over time, whatever the rate has to be, surely we need an industry that has got things to do and get on with.
GK: What good looks like will mean different things to different people. The objective of having a review, is having a range of people on that review is to have different perspectives. But the reality of the RET scheme, and what we want looked at, is what it is actually displacing. The reality is that it is displacing gas, it is displacing the least carbon intensive fuel, so when you say it is a good thing to do this or to do that, one of the things we have to look at is what is the cost of carbon abatement under the scheme, and at the moment it is very high because it is clearly displacing gas.
RE: Stanwell Corp said last year that it was displacing coal, and that is why they mothballed half of Tarong. Now they are reopening it and closing Swanbank, but that switch is to do with gas prices, quite independent of what is happening in the RET.
GK. Well gas has always been the most expensive of the fuels, whether it was prices three years ago, or prices in three years time. What people will run is partly to reflect their contracted position. That (Stanwell) will not have anything to do with the gas which they would have contracted pre the LNG industry coming along, so they would have had no choice but to run the gas plant. Short term, people keep burning gas because they have take or pay obligations, but it will be gas that will be displaced.
RE: The debate around the RET is pitched about the cost to consumers, but isn’t it really about the revenue impact on incumbent generators?
GK: Let me answer that question backwards. Unless you hold the view that the market will never achieve some balance between supply and demand, then balance will ultimately be restored, and then it is ultimately about cost.
RE: Yes, but some generators will want that it is not their assets that are lost in getting that balance. They don’t want to go out first.
GK: There is no question that gas will come out of the systems. We saw a week ago that we saw that Wallerawang would be taken out. The highest cost plants will be taken out. The first plants to be taken will be gas, because whether it is $3, or $6, or $9, gas is most expensive, and then most expensive will come out. Supply and demand balance will be restored, but the mandatory nature of the RET means that it is getting subsidized at a high cost to consumers. Another way of coming to the same point, a combined cycle gas plant using gas at $4, need $40/MWh to run, a plant at gas price of $8 needs maybe $80/MWh to run, and wind as an absolute minimum needs $80/MWh. Forcing wind into the system when gas would run at $8 at that price is evidence of the point I make. It is not gas being pulled away from generation, it is gas being pushed away from generation because of the mandatory nature of the renewable scheme.
RE: Let’s move on because we don’t have much time. You mentioned in a submission to a Senate inquiry into the emissions reduction fund about the possibility of using it to encourage development of electric vehicles. How important are electric vehicles to the future of network operators and generators in boosting demand, and helping that transition to cleaner energy future?
GK: There is no one single best answer. There is no doubt in our mind that there is a role for electric vehicles, particularly in urban environments. We would be very happy to see that market develop. Having said that, Australia will not develop an electric vehicle market in its own right, it will be part of a global phenomenon, something that manufacturers do globally. It’s not quick, and it doesn’t of itself save anything. We really need everything to work for us.
RE: I suppose electric vehicles goes towards distributed generation, you have solar panels, the role of storage and how that fits into value chain, there have been studies such as the CSIRO suggesting many consumers could go off-grid, and that utilities need to engage with new business models. How much of an impact do you think it will have, and how much demand will be self-satisfied by pro-sumers?
GK: Again, the perspective we would bring is that it is useful to start with underlying economics. And quite often the things that are pushed forward are not put forward from that perspective. The network pricing has to be substantially reformed, there is no question that distributed generation free rides on the network, and those economic distortion need to be corrected before people can make the right long-term decision. To me, the error that is often made is to assume that only one thing is changing, when things need to change in response to other changes. The reason network pricing needs to be looked at is that unless people who want to enjoy the benefits of distributed generation cannot simultaneously enjoy the benefits of the grid, I think is an economic point that needs to be worked through. If those adjustments are made, then the rate at which these things occur will be different. I think that the direction is clear, but the rate of change is not. There is a lot of adjustment to be made in the system, and a lot of sunk costs that are going to be repriced over the medium to long term.
Phil Craig (Origin Energy head of corporate affairs): I’d like to say that picking the winner is virtually impossible. So we are open to all those things. The rate of change in each of those things, how that works, and what the economics look like and how it works for us is yet to be determined. We do what is relevant for the right time, and with EVs, it is a matter of working with manufacturers, there is nothing really coming out anytime soon.
GK: I’d make a further point. There is a key difference here, about whether people get to choose for themselves, or what choices are imposed on people. Above all other things, Origin believes that we should get the economics right and give people choice. Others are saying we want to make the choice for people, and there is a big philosophical debate you can have around that. Origin’s position is that we would support open markets, efficient pricing, making available all the technologies. We would love to to facilitate that, and for consumers to be armed with enough information so that they can make the best choices from their perspective.
If that means that someone is really struggling, then they should be able to choose the cheapest electricity supply. There are others who would like to reduce their footprint and have low carbon energy, and we would like to sell them that. We are very much for choice, and frankly one of the bigger debates is the difference between people being able to choose for themselves or having choice forced upon them. My perspective is that people don’t like choice forced upon them. So when you come back to EVs, to distributed, to solar, we would love those systems and processes that give people more choices, more correctly priced, so they can do what works for them.
GP: You don’t think that the utilities are facing a Kodak moment, or the internet, or what happened to fixed telephony, the industries most often cited when describing what the electricity industry is facing?
GK: The alternative scenario is to say that the petrol engine is sill alive and well, and I don’t know how long ago it was pronounced dead. There are lots of examples. Technology moves quickly and technology moves slowly. I got really excited about fuel cells in the 1980s, it’s been 30 years. Technology evolves and adapts, solar PV is moving towards its day, all it needs is for all of the systems to be correctly priced.
Origin PR: Sorry, we’re out of time.
GK: Let’s take one more question.
GP: OK, a quick final one, there is a lot of discussion about an orderly exit for the generators. Should it be, as AGL suggests, some mechanisms to take care of rehabilitation, which seems to be a bit of a blockage to permanent exits.
GK: The consistent economic point is that it will be fuel and operating costs that determine which plants close first. If, as we believe, that you get market structures right, plants will close, that will be a bruising experience for some, but I don’t believe that people should be subsidized to close perhaps in the way that many believe that businesses should be subsidized to stay open.
GP: Thanks for your time, I hope you enjoyed the change of pace from poring over the financials.
GK. Thanks Giles, I always enjoy our conversations. All the best.
