AGL says 9GW of baseload fossil fuels no longer needed

AGL Energy, one of the big three power utilities in Australia, says that 9,000MW of fossil-fuel baseload capacity needs to be taken out of the national electricity market (NEM) to bring it back into balance.

The claim was made by managing director Michael Fraser, on Wednesday, at the announcement that AGL Energy had secured extra financing for its 155MW solar PV project in western NSW – the first solar project of its scale to be built in Australia.

To agree to proceed, however, Fraser said AGL Energy sought extra funding from the Australian Renewable Energy Agency to make up for equivalent estimated falls in wholesale electricity prices.

“We have got an oversupplied wholesale market,” Fraser told RenewEconomy on the sidelines of the announcement.

“There is too much baseload relative to where demand has got to, and rooftop solar has impacted on demand … and that has impacted on the economics of coal-fired generators.

“We guess there is around 9,000MW of oversupply in the market. That’s not helpful, either for existing assets or for trying to get new projects off the ground.”

That assessment of 9,000MW equates to nearly one-third of the country’s baseload generation – a sure sign that renewables, and in particularly rooftop solar, are changing the dynamics of the market. And it also suggests that some state governments built more generators than was necessary, as they have done more recently with poles and wires.

This table, below, illustrates the problem. It was presented by AGL economists Paul Simshauser and Tim Nelson last week, in conversations about the state of the market and the need to move away from simple energy-only markets, to markets that incorporate capacity or “capability” factors, a subject we have looked at in detail here, here and here .

Before markets can be redesigned, however, the big question is how, and under what conditions, that excess capacity should be retired. Fraser noted that some generators, such as Alinta’s Northern power station (in winter), and some of the Queensland generators, had taken themselves out of the market.

But there is also renewed discussion about the idea of “contracts for closure” – i.e. payments made to coal-fired generators to close down “early”.

The federal government did have a “contracts for closure” program for retiring up to 2,000MW, but pulled it because the generators were reportedly asking for too much money.

The idea that some generators could be escorted out of the market in a sedan chair with balloon payments in their pockets for compensation will not be welcomed by many.

But Fraser suggested that framing compensation in terms of the costs associated with the physical closure – dealing with asbestos and other environmental issues – could be one that is welcomed by the general population.

“Maybe society would be prepared to pay,” Fraser said. “You could get an improvement in the local environment as well as lowering the carbon footprint.”

The revival of the contracts for closure concept, and its apparent support among some renewable energy developers (particularly in the wind energy space), suggests that there might be some unspoken pact about maintaining the renewable energy target in exchange for a payout to some coal generators.

However, it is also a likely reflection that generators realise that the growing attraction of solar PV will continue to impact on demand and, as Fraser suggested, the economics of coal-fired generators.

Fraser’s deal with ARENA delivered added protection for AGL Energy and its solar project if wholesale electricity prices continue to fall, but means that if prices rebound (if excess capacity is removed from the market), then ARENA will get their money back.

As for the closure mechanics, Fraser says it is an “interesting” question – not just for the legacy fossil fuel assets out there, but also for new renewable projects.

“Ideally, we will get those old plants taken out,” he said.

AGL Energy is unlikely to be a participant in that process, because the Loy Yang A brown coal generator in Victoria – despite being the biggest single emitter in the country – is also one of the most efficient and cost effective. But it would still benefit from any closure of other plants,  sponsored or otherwise, because wholesale prices would be higher than otherwise.

Australia is not the only market facing such dilemmas. Germany, much further advanced than Australia on its renewables path, is witnessing the forced closure of fossil fuel assets as the market dynamics change – and despite the withdrawal of nuclear capacity. The issue of carbon budgets is also overshadowing global energy markets, with recent reports suggesting that two-thirds of the coal capacity in the US would need to be shut down. AGL has also been a supporter of a carbon budget for Australia, which would also suggest limitations on fossil fuel generation, over and above a carbon price.

AGL Energy has been a strong supporter of the renewable energy target, and once again took issue with those rival companies who have actively campaigned against the RET, accusing them of “trying to protect the value of the assets that they bought or built.”  He said opponents had greatly inflated the cost of renewables.

He didn’t mention names, but AGL Energy’s two biggest rivals – Origin Energy and EnergyAustralia – are campaigning heavily for the RET to be severely diluted, or even abandoned. Both companies have recently invested heavily in NSW coal-fired assets.

Now, another one of those assets is up for sale: Macquarie Generation, which includes the Liddell and Bayswater power stations. The price that is paid is likely to be heavily dependent on estimates of the deployment of large-scale renewables and the fate of the RET, the rate of deployment of rooftop solar, the future of the carbon price, and the likelihood of excess capacity being removed.

All else being equal, they are probably not worth anywhere near what the NSW government would be hoping to obtain. Even the Queensland government-owned Stanwell Corp last year noted that its 4,700MW of mostly coal-fired generation was surplus to requirements.