AGL Energy has reaped the financial rewards of diverting its focus from green energy investments after the massive Loy Yang A brown coal generator it bought last year underwrote a large increase in earnings in the last six months.
The 2,210MW Loy Yang plant – which produces 30 per cent of Victoria’s electricity, and which is the largest single emitter of carbon emissions in the country, although also one of the lowest cost facilities – enabled AGL Energy to treble earnings from its wholesale markets division in the half to $518 million, and lift underlying earnings by more than 20 per cent – a result AGL CEO Michael Fraser chose to describe as “very clean” in a webcast conference call this morning.
AGL Energy already had a near one-third stake in Loy Yang A, but snapped up the outstanding interest after another shareholder, the Fukushima nuclear reactor owner Tepco, fell on hard financial times. The purchase was conditional on receiving compensation from the carbon price – which Loy Yang A did, pocketing $120 million in the latest half alone.
The earnings from the brown coal generator more than offset a 23 per cent decline in earnings from its retail division, where intense competition, falling demand, and the failure to pick up all the carbon costs impacted earnings. All three major generators have reported falling demand from residential users.
Fraser said that while the company’s “merchant growth story” was dominated by the benefits of Loy Yang, it was also balanced by AGL’s renewables portfolio. He said the additions of Loy Yang A and the MacArthur wind farm had led to a doubling in output from AGL’s generation portfolio.
AGL says continued price volatility in Queensland in January will cause a loss of around $10 million in the current half, while the decision to deregulate the South Australian retail market – after AGL rebelled against a proposal to pass on a fall on wholesale spot prices to retail consumers – would cost it around $15 million. That’s because AGL said retail bills would fall by around 5 per cent as a result of the decision – a decision Fraser said the company applauded, and is “absolutely in the long-term interests of the consumers and the markets,” adding that “we can only trust and hope that the governments of NSW and QLD get on with the inevitable move.”
AGL said churn rates actually rose in the half – an increase in call traffic as customers queried higher bills was noted in the press briefing – but it remained well below the industry average of 23.2 per cent with a rate of 18.9 per cent. AGL has posted strong gains in NSW, which is now its largest base, but it has also stopped unannounced door knocking in some states, with Fraser conceding during the conference call that “the reality” had finally dawned on energy companies that “customers don’t like door-knocking.” It says its gross margin per customer is $110.
Despite the purchase of Loy Yang A, AGL Energy remains the only one of the big utilities to support the status quo in the renewable energy target. It is soon to officially commission the 420MW Macarthur wind farm in Victoria – which, it was noted, was completed on time and on budget – which began partial production in September and has already produced 127.7GWh of electricity.
AGL Energy says its wind capacity of 924MW now surpasses its hydro capacity. It says two of its Hallett wind farms are reporting capacity factors of around 44 and 46 per cent.
However, AGL warned that the “unwelcome policy developments from the NSW government” – that is the recent decision to impose arbitrary exclusion zones on coal seam gas projects – could cause it to write down the value of its Camden and Hunter Valley CSG projects, which are worth a combined $325 million.
Fraser warned that any “sterilisation” of NSW’s gas resources could only have one result – to drive up already soaring gas prices. He said the company had expressed its concerns to the NSW premier in a meeting on Tuesday, including the implications for the NSW economy, the sovereign risk issues, and the “arbitrary nature” of a policy which, he said, “ignores any science or evidence.”
“This is a here-and-now issue for NSW,” Fraser said in the conference call. “The worry about higher energy prices is very, very real… and if you go ahead and sterilise the state’s resources there can only be one outcome.”
Asked how the company intended to balance community concerns around CSG mining with its business plans, Fraser responded that “if you’re a member of the public and listen to all the wild, unsubstantiated claims, of course you’d be worried.” But, he added, “we can ultimately develop those resources while addressing community concerns. You really need to b able to address the community concerns and not cut off your nose to spite your face.”
On the subject of gas, and the delicate supply-demand balance, Fraser also made mention of the company’s Newcastle gas storage facility, with its 120TJ a day peaking capacity. Once completed, he said, the facility would prove to be “an incredibly important facility” in terms of security of supply. Completion of the plant remains targeted for 2015.
On the subject of the short-term impact on the company of carbon pricing, AGL said it was going to be “somewhat neutral.” And when asked if, in light of the Coalition’s recent mutterings on further compensation should they get into government, carbon compensation was “a gift that doesn’t stop giving,” Fraser’s response was reserved.
“How the whole carbon price is going to play out is anyone’s guess,” he said. “We need to see, first, who wins government, and who is in the Senate… and if the Greens hold the balance of power.
“The reality is that we have not had any discussion with the Coalition around that question of further compensation. …It would be fair to say that they will remain as vague as they can (in the lead up to the election).”
Questioned about the Victorian and South Australian desalination plants – for which AGL is contracted to supply 100 per cent renewable electricity and associated renewable energy certificates – Fraser noted that the Victorian government had decided not to run the plant during its warranty period – “you can scratch your head on that,” he said – while the South Australian desal plant was “up and running, going to run under a whole range of conditions over the two-year warranty period.”
And on the subject of power purchase agreements (PPAs) for renewable energy projects, Fraser noted that the company had only two, both of which were struck at prices above the wholesale market.
“I would have no confidence that we would get a better outcome this time around,” he said of the PPA process. “But at least directionally, it’s heading in the right direction. There’s still a long way back from where we are to where it needs to be.”
Fraser also made mention of the company’s AGL IQ platform, which was rolled out yesterday to retail consumers and small business – a customer energy management tool the company has described as the country’s “most sophisticated,” and “way ahead of the offerings from our competitors.”