AGL says RET, climate policies won’t push decarbonisation

AGL Energy – the biggest operators of coal fired generators in Australia – has given a downbeat forecast on the future of large scale renewable energy investment in Australia, and says that a carbon price of $100 a tonne would be needed to displace coal fired generation.

The forecasts were included in slides accompanying a presentation made to an invitation-only two-day briefing for analysts and institutional investors in the Hunter Valley. There was no accompanying commentary.

The views of AGL Energy are potentially critical, because as one of the big three obligated parties under the renewable energy target, will be critical in writing power purchase agreements needed to secure financing for large scale wind and solar projects.

But as a result, or perhaps despite, the agreed cut in the RET to 33,000GWh from 41,000GWh, and the policy uncertainty that has crippled the industry in the last two years, AGL says that the RET is unlikely to deliver further investment, “due to financing constraints”.

It is not clear whether AGL Energy sees this a view on the overall market or a statement of its own intent. Fears of an effective investment strike by the major retailers are behind the government’s push to cut the target, although it would appear to a significant branding risk for their consumers.

Separately, it suggests that if the small scale target is removed – say in 2016 – then the return on investment to consumers would quickly fall.

AGL Energy says that complimentary policies are required to facilitate “sustainable wholesale market outcomes”, which presumably means policies such as end of life phase out or emission standards that would force coal generators out of the market. Wholesale prices are currently near record lows in the Australian market. This affects earnings from fossil fuel generators, but it might also make it harder for renewable energy projects to get finance.

This particular part of the presentation was made by Tim Nelson, the head of sustainability, who has previously argued that the government should introduce regulation which drives the progressive closure of older, emissions-intensive power stations or retrofitting with CCS technology.

AGL has previously pointed out that Australia has around 9,000MW of excess base load coal generation. But while around 3,000MW of capacity has been mothballed, little has been closed permanently because the rehabilitation costs are more than the marginal cost of generation.

The next graph (above) illustrates that carbon pricing is unlikely to force coal fired generation out of the market, according to AGL Energy, unless it reaches $100/tonne.

That, of course, is unlikely anytime soon. It notes that the emission regulations in the US, which some estimate will force the closure of more than 50GW of coal capacity, and in Canada (the province of Ontario recently closed its last coal fired generator, just 11 years after implementing a scheme in a state that once sourced 25 per cent of its electricity from coal).

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