Federal government intervention to prop up ageing coal power generation, and underwrite the development of new coal capacity over and above renewables and storage, could have dire consequences for the credit quality of the Australian energy sector, a new report has warned.
The report, from financial markets analyst S&P Global Ratings, is the latest in a series of reports calling for an end to Australia’s continued federal energy policy vacuum, and for the reintroduction of emissions goals as a critical ingredient for planning the future grid.
It says that the policy uncertainty that appears to have returned with a vengeance with the ousting of Malcolm Turnbull, and the dumping of the NEG, is delaying planned investment in new, quick dispatchable generation capacity across the NEM.
And just to be clear, they’re not talking about coal.
“We believe private investment in large-scale coal-fired plants is highly unlikely because investment returns may not be sufficient,” the report says.
“We do not expect investments to occur for new large-scale coal-fired generation in the foreseeable future unless the government underwrites the costs.
“The high capital cost of investments and lead-time of about four years mean a coal-fired plant may struggle to meet investor’s investment criteria against other forms of generation.
“The current high cost of gas may raise the same question on returns; however …pumped storage and gas-fired generation… are likely to bridge this gap until other forms of generation such as large-scale renewables or renewables together with storage capabilities such as batteries become more established.”
S&P Global also points to the demise of the federal government’s National Energy Guarantee (NEG) policy – and the lack of any emissions goal beyond 2020 – as potentially detrimental to the long-term development of renewable energy and supporting technologies.
“The generation output of renewables has not been adequate to offset the loss of generation from retired coal-fired plants, due to their much lower generation capacity,” the report says.
“This deficit is despite the relentless growth in renewables over the past few years.”
Ultimately, it says, the lack of a flexible policy that encourages investment in a mix of appropriate assets and technology will fail the energy market in all the key areas the NEG sought to address: reliability, affordability and the transition to low-carbon generation.
“Striking a balance between emission goals and building reliable energy sources is critical for system operators when planning efficient investment in generation and networks,” the report says.
“In addition, better coordination of policies at the federal and state levels could reduce uncertainty and create a pathway for the system operator to manage the scheduled retirement of old coal-fired plants.”
But the report is also careful to note the fine line where effective policy ends, and market damaging interference begins.
“Potential regulatory intervention could limit incentives for market participants and negatively affect the sector’s credit quality over the longer term, despite alleviating some price pressures on consumers in the short term,” the S&P says.
It points, in particular, to some of the recommendations of the Australian Competition and Consumer Commission, as a result of its review into the nation’s overpriced and malfunctioning energy market.
Those recommendations, which ACCC boss Rod Sims has said should be adopted as a package, included the early wind-up of the federal small-scale renewable energy scheme, or SRES, which effectively creates an upfront subsidy for rooftop solar.
They also included a call for new dispatchable generation capacity to be underwritten by the federal government – a recommendation the Coalition and others took to mean ‘pay for new coal plant to be built.’
There has also been the suggestion, arising out of the ACCC review, that the government should step in and prevent certain energy companies from closing their ageing coal plants, to keep more “baseload” generation capacity in the system.
But according to S&P, such regulatory measures, while aimed at reducing energy prices to end consumers, could wind up being “credit negative” for the sector, by reducing market incentives for other investments.
“Although the measures may offer some short-term reprieve to end consumers, they could hurt the profitability of market participants, and subsequently may price out some of the smaller players, thereby reducing overall competition,” the report says.
“All the major incumbents, except for Snowy Hydro, have exposure to aging coal-fired plants with high carbon footprint and maintenance spending levels,” the report continues.
“Consequently, the direction of federal policies, and if and how recommendations from the Australian Competition and Consumer Commission (ACCC) are adopted, can have an important bearing on the operating and credit profiles of rated entities, depending on the timing and magnitude of any action.
“In our view, there is a probable risk of the thermal fleet becoming sub-economic for significant periods of time during the day in the coming decades,” the report says.
“This threat is also evident against the backdrop of aging coal-fired plants across the NEM, their high maintenance costs, varying reliability levels, and fluctuating fuel costs.
“Forcing old plants to remain open would expose owners to safety issues if rising maintenance costs make the plants uneconomical compared against investment returns. And the prolonged operation of aging plants may require material refurbishments to improve their availability and reliability, adding to their cost base and unit costs.”
