A revenue and renewable neutral budget
It has seemed for a long time that one of the major planks of Labor’s re-election strategy has been to delay the next election for as long as possible so it can demonstrate that a carbon price was introduced and, hey presto, nothing much happened. Sadly, much the same can be said of their commitment to renewables: nothing much has happened. If Kevin Rudd, Julia Gillard, and Martin Ferguson wish to document their achievements in the clean energy space after five years of power, they only need to look at their clean energy photo album – apart from a couple of R&D centres, it’s pretty much empty.
Despite announcing, between them, more than $5 billion in grants for new projects, and re-invigorating the renewable energy target, they have and will probably be unable to find a large scale renewable project that they could call their own, and which wasn’t mandated by some state based desalination plant offset or a state grant. Still, that $5 billion of promised but unspent funding has proved very useful for a government focused on juggling numbers to ensure that it could deliver a budget surplus. The independent Australian Renewable Energy Agency, and the Clean Energy Finance Corporation, can’t come soon enough.
Ferguson talks down the value of coal
It seems kind of ironic that Energy Minister Martin Ferguson should be cast as the doomsday merchant for coal-fired power generation in Australia. Ferguson, labeled by frustrated renewables types as the Minister for Coal and Gas, has been forced to talk down the value of coal fired generators as part of the contract-for-closure negotiations, where the government is proposing to buy out and close up to 2000MW of brown coal generation as part of carbon pricing package.
Ferguson has been quoted as saying that the brown coal generators have an inflated view of their own worth. Now, that might be true if the government had introduced a reasonable emissions target, or not announced billions in compensation for the carbon price. Or, as in the US, introduced some tough emissions standards. Then he would be right, the plants would be worth little, and the government wouldn’t have to bother buying them out (around 100 have closed or announced their closure for no compensation in the US).
But the carbon price is small, and looks like getting smaller into the future without more biting targets, the compensation package is large, and with Abbott’s threat to rescind the whole package, the generators believe that the value of their assets will increase, so much so that they are now wondering whether they should bother closing down at all.
AGL celebrates its brown coal bounty
This is definitely the position of AGL Energy, which has proposed to buy the Loy Yang A brown coal power station, the largest generator in the country, and the most polluting. AGL invited a bunch of analysts to a briefing at their target asset this week and showed that carbon is not much of an issue at all for the generator, and it fully expects to continue producing for another three decades, or even more. It stands to pick up $1.3 billion in compensation (a $240 million upfront payment in June and free permits for four years), and the company which once (and still) describes itself as the biggest investor in wind energy in the country, is now getting excited about the possibility of exporting brown coal to the developing world.
Its presentation revealed that Loy Yang A will likely burn 1.2 billion tonnes of brown coal over the life of the plant (and the neighbouring Loy Yang B coal fired generator which it also supplies), but that would only account for half of its coal reserves. So it is suggesting digging that up too for using as fertilizer, chemicals, synthetic fuels or as a “carbon value-add” export. But wait, there’s more! About 7 billion tonnes more, according to resource estimates (which are one scale down from proven reserves). Looks like they will be getting on fine with Victorian Premier Ted Baillieu, who is insanely jealous of WA’s ability to earn riches from iron ore and wants to export Victorian brown coal to the world.
In debt, and scared of the sun
While a modest carbon pricing regime is not the enemy of brown coal generators, the spread of renewables is. As we highlighted in our story, “Why generators are terrified of solar”, large deployment of renewables, and particularly solar PV, have the potential to devastate the earnings of fossil fuel generators, who are used to cashing in on soaring wholesale prices as peak demand brings in expensive peak plant. Indeed, their profit margins depend on it and, it would seem, their lenders have banked on it too.
This table below highlights the issue at Loy Yang A. It reveals that lower revenue from a combination of reduced demand (electricity retailers have relied on increased annual consumption for most of the last few decades) and lower prices (caused by milder weather and the impact of wind farms, particularly in Victoria), pushed Loy Yang A from a neat profit in 2010 to a $30 million loss in 2011. That’s because Loy Yang A, like the other brown coal generators, is hocked to the eyeballs and has massive interest payments. The revenue line from generation was – and will likely continue to be – the big swing factor in many of these generators’ accounts.
In the case of Loy Yang A, the situation will be resolved because AGL plans to bring the debt onto its own balance sheet, reduce its size, and pay less in interest because it has a better debt rating. That is the attraction of the transaction to AGL. But many other brown coal generators don’t have that option, and will be facing a similar situation illustrated by this table. No wonder they pressured the Victorian government to arrest its renewable energy ambitions, and want the Clean Energy Finance Corp to support renewables in the test tube, and not its deployment. And if wind, producing mostly at night, has this impact on coal-fired plants, imagine what 2-3GW of new solar a year (the latest forecasts for the solar industry in Australia) would do to their margins when it dumps that much energy during the daytime peaks.
But transformation is happening elsewhere
But while the Australian industry sometimes represents a depressing focus on business as usual, large utilities in the US and Germany are taking up the challenge of transforming their portfolios with some enthusiasm. Tom Doyle, the head of NRG Solar, said the electric power industry is headed for some amazing changes. “We are changing the energy industry — and we’re changing the world,” he told a conference last week. His business is the fastest growing division of NRG, a major US utility with interests in nuclear, coal, gas and other renewables.
NRG has been one of the biggest developers of utility scale solar plants in the country, as well as with rooftop solar, and its progress and how it manages the transition will be watched closely. Interestingly, after NRG released its first quarter results this week, Deutsche Bank analysts valued its solar business ($US2.7 billion) at around one quarter of its overall value, ascribing a 10 times multiple on the anticipated $US270 million of earnings by 2014, compared to an 8.25 times multiple for the earnings of the remaining business. NRG’s Doyle said he expects solar will be as commonplace in homes in the US as a sink in a kitchen. “It won’t be driven by a desire to be green — it will just make sense,” he said.
In Europe, the largest utilities are also dealing with change, mostly caused by Germany’s decision to shut half of its nuclear capacity and its vow to close the rest within a decade. E.ON, the country’s largest utility, said the energy industry is undergoing a “fundamental transformation,” but having incurred losses from the closure of its nuclear plant, it now feels the worst is over. This was echoed by the company’s 2nd biggest utility, RWE, which described the nuclear losses as a “one-off” and expects its profits to quickly rebound as it invests more in renewables.