AGL’s new CEO Brett Redman has a clear plan, and it should not come as a surprise to anyone: Milk the company’s huge coal assets for everything they are worth, while preparing for the more tricky part of preparing for the inevitable energy transition.
AGL’s half year profits on Thursday shows that the first part of the strategy is going well. Despite all the brou-ha-ha about soaring prices in the wholesale energy market, the allegations of gaming, and the outrageously high consumer bills paid by all, AGL actually managed to increase its underlying profit by 10 per cent over the six months.
That increase came over and above the big increases pocketed by AGL and the three other big gentailers – the government owned Snowy Hydro included – the previous year when the wholesale prices went into orbit, even though the cost of generation barely moved.
In this past six months, the cost of generation did move a little (up $5/MWh according to AGL), but wholesale prices jumped further.
And despite the number of unhappy customers increasing, with more than one quarter jumping ship in search of a better deal (known in the industry as churn), and more discounts offered to consumers, these were more than offset by gains in wholesale profits.
Anyone thinking that banks have a monopoly on greed should check out the energy industry.
AGL’s strategy is made clear in this graph – make the most of existing coal assets, invest in a few more renewables and storage assets to replace those coal assets which have to retire (Liddell), and make ready for the dramatic switch to a largely decentralised grid (Good luck with that).
But even milking coal, the strategy that underpinned the purchase of the big black coal generators in NSW and Loy Yang A in Victoria  has its costs, and will not get any easier.
AGL is about to embark on an upgrade of the Bayswater plant in NSW, and announced new spending ($25 million) on an upgrade to one of the units at Loy Yang A, which it officially says it wants to keep open to 2048.
But even keeping its coal-fleet prepared for this current summer cost it $212 million, although trips and unscheduled outages continued to bedevil it. All told, it expects to spend $374 million this financial year “sustaining” its thermal fleet. Similar costs are expected in the next two fiscal years.
The outages – AGL admits that its unintended outages occurred three times more often than its intended outages – meant that on AGL’s numbers, Liddell had a capacity factor of just 47 per cent – less than some new wind farms – while Bayswater’s was 62 per cent and Loy Yang A 73 per cent.
Still, the company is making so much money from the wholesale markets that these costs are – for the moment – barely a flesh wound.
In the meantime, it is looking at a number of storage assets – such as a new pumped hydro facility in NSW and a big battery at Liddell – but is yet to commit to any of them.
It will want to see the shape of the new government, the fate of the “big stick” intervention proposed by current energy minister, the decision on Snowy 2.0, and the rushed tender for new 24/7 power – and what its competitors have in mind – before committing to those.
Likewise, it won’t make any final investment decision on its proposed gas “import” facility at Cribb Point in Victoria until next year, and then comes the hard part:
How to adjust the business so that it can ween itself off coal (still accounting for more than 80 per cent of generation) and compete with the transition to a customer-focused, decentralised market where battery storage, smart homes and electric vehicles become the norm.
In doing that, they will have to compete not just with the existing gentailers and smaller retailers, but also incursions from the network operators and other service providers, such as Tesla and others looking for other ways to package up energy, storage, and mobility into a single attractive offering.
