AGL’s Fraser: We haven’t changed our stripes

The managing director of AGL Energy, Michael Fraser, today defended the purchase of the Loy Yang A, the nation’s biggest brown coal generator, and single biggest emitter, saying it did not represent a change in direction for the company and it remained an advocate of renewable energy and a carbon price.

Fraser spoke to the media on Thursday after the ACCC had approved the purchase of Loy Yang A, and after announcing a $900 million equity issue to reduce the generator’s high debt levels. The purchase will make AGL the equal largest generator of electricity in the country, but after pursuing a strategy of developing the nation’s lowest carbon intensity in its energy assets, this purchase nearly triples its intensity to above the average.

Loy Yang A, despite the introduction of a carbon price, will act as a “cash cow” for the company, particularly after the debt reduction, and Fraser said the company would use the substantial cash flows to help fund its renewables investment, which it estimates at around $4-$5 billion to meet its share of the renewable energy target. It expects to meet 60-80 per cent of that capital cost itself.

“Quite frankly I can’t think of a better owner of the assets than AGL,” Fraser told journalists. “When you think about the transition that Australia wants to make – taking the cash from an older asset like Loy Yang and reinvesting it in renewables with a company like AGL makes an enormous amount of sense.”

AGL has said Loy Yang A will be little affected by the carbon price because it will receive $1.1 billion in compensation – through an upfront cash payment and free permits – and will remain one of the lowest-cost generators in the country. And though Loy Yang A stands to benefit from a repeal of the carbon price by an Abbott-led government, Fraser said he still supported the policy.

“We certainly believe that the least-cost way of getting to the bipartisan (5 per cent emissions reduction target) is an emissions trading scheme,” he said. “We think that the 20 per cent renewables target is the right policy.”

RenewEconomy asked Fraser if the purchase represented a change of strategy. No, said Fraser, noting that it already owned 32.5 per cent of Loy Yang A and had considered buying black coal generation assets from the NSW government. “There is really no change in the strategy,” he said.

RE: Would the purchase dilute AGL’s future advocacy for an ETS and the RET?

MF: “Not at all. That’s the starting point for us. We have fully factored in the price path for carbon as modeled by Federal Treasury, which includes some ambitious targets for emissions reduction. We want to see support for renewables continue and we will continue to advocate for that. “

What about for more ambitious renewables target and carbon reduction schemes, which will be needed in the future?

MF: “In the longer term absolutely. Right now you would recognise that you have got many people out there calling for a reduction or a deferral in the Mandatory Renewable Target. The key issue for investors is that there is no change in the target and that’s were the argument lies right now. In the longer term, I would certainty imagine that when we get out beyond 2020 we would be looking for more ambitious targets, yes.

Is this acquisition sensitive to movements in electricity price, as some analysts have suggested?

MF: “It is always sensitive to where prices turn out. We have got a soft market there at the moment. We have made no heroic assumptions about recovery in wholesale electricity prices. We do expect and we have purchased this on expectations that wholesale prices will remain soft over the next two years.

Are you going to dig up and export the brown coal reserves?

MF: “No, we’re not. We got plenty of others out there who claims to have technologies that can make that it sustainable from an environmental and a commercial point of view. We are yet to be convinced about that. But if people can develop the technology to make it sustainable from an emissions point of view and commercially then that’s something we will look at in the future.

What if the carbon price is repealed?

MF: (from statement) A repeal of the carbon price, or a lowering of the carbon price would increase the economic value of Loy Yang A, although it would decline in event of the carbon price exceeding the prices assumed in the Treasury modelling for a sustained period. (and from presser) “Not having a carbon price is negative to the value of the renewable assets. If you look at AGL as a whole. (The purchase) balances our portfolio, balances our business much more from a carbon perspective.

Is the RET in danger of being repealed or diluted?

MF: “I remain quietly confident that the 20 per cent target will remain in place. You have certainty seen calls from people like the Business Council of Australia and our competitors like Origin Energy calling for changes to it, but certainly the discussions we and the Clean Energy Council have had with the Opposition … and if you look at the history of statements from Tony Abbott about his support for it, I think we are on fairly safe ground. But we should not underestimate the number of people lining up putting a different point of view to the government.”

Does Fraser agree with calls that the RET should be expanded to accommodate projects that could be developed under the proposed Clean Energy Finance Corp?

MF: “That’s an interesting debate …. and I’m not sure how that works. What’s really important is to maintain the integrity of the RET, we’ve already seen that happen with small scale solar and the multiple levels of subsidies that were put there led to changes being need to be made. We need to be careful to avoid that circumstance arising again.”

Fraser confirmed that AGL Actew had submitted one bid for the ACT solar auction (believed to be for a 20MW solar plant, see separate story). He would not comment on the Solar Flagships process, other to confirm that AGL had resubmitted a tender for a 153MW solar PV facility split between two sites at Nyngan and Broken Hill.

Should the solar auction be a success, is that a model that could be put into national scheme?

MF: “That goes to comments I made before about the integrity of the renewable energy scheme. It’s a policy mechanism to allow the market to determine the most effective way of getting to the 20 per cent target. So I think that you need to be careful about those kind of schemes on a national basis, otherwise you might end up back were we were where there had to be changes to the 20% target to preserve its integrity for large-scale projects.”

One final observation. In the list of risks itemised in the equity raising document, one notes that AGL does not have any experience operating a coal-fired power station. So it is going to get the current operator, Tepco, the owner of the Fukushima nuclear power station, to do it for them. AGL bought the power station because Tepco had to sell.