Five things we learned this week ……

Origin vs AGL

This week was a tale of two utilities, and apart from being fierce competitors in the same industry, you could not accuse Australia’s two largest vertically integrated energy companies of trying to flatter the other with similar business models. AGL wants to maintain the renewable energy target as it, Origin wants it reviewed. AGL has invested in brown coal generators, which will underpin its earnings in the next couple of years, and expects to have a lot of money to spend on other stuff, and Origin Energy has invested heavily in LNG, which will take up most of its capital expenditure in the coming years, meaning it doesn’t have much to spend on other stuff.

Origin Energy has been the only one of the big three utilities to invest heavily in new technologies (Sliver solar and hot rock geothermal), but it has gotten burned by the experience, and is now cutting its losses. Any money it does spend (over and above gas) will go towards established renewable technologies such as hydro and conventional geothermal, and in markets where it says the economic metrics are overwhelming, such as Chile and Indonesia (not Australia). It also continues to work on a plan to build a 2,500MW hydro project in PNG and string a line to Australia. It’s now taking the safety-first route.

AGL will focus on Australian development, particularly its 420MW Macarthur wind farm, although it seems to have run into problems with Hallett 3. It also has the flagships 159MW solar PV project, which it says will be the largest PV project in the southern hemisphere (although this seems likely to be bettered by projects in South Africa and Chile before this is completed in 2015). Both companies are chest deep in renewable energy certificates, meaning they don’t need to build or contract much new plant for a few years. Origin says it’s good until 2017, and has the big Stockyard Hill project in reserve, AGL says it’s good till 2016, and has the solar PV and wind projects in Broken Hill in reserve. Wind farm and solar developers looking for power purchase agreements in the next couple of years may have to look elsewhere.

And what of solar PV?

What was absent from both presentations was the “this is the future” dialogue that has dominated the thinking of international utilities, who agree the industry is facing its biggest upheaval in a generation. Take this opening address to a press conference from RWE chief Peter Terium as an example. At Origin Energy and AGL Energy there was barely a mention of rooftop solar (or much about smart meters and the like), a surprise given the fact that Australia installed more rooftop solar than any other country in 2011, and the recognition by market operators about the cumulative, game-changing impact of this on demand, revenues and profits. AER chairman Andrew Reeves even noted this week that if solar installations in South Australia, which already has the highest penetration of any state, was trebled in coming years (as it is forecast to do), then midday demand could fall below that of midnight demand. German utilities can tell you what that does to generator margins, and so can academics.

Origin Energy recognized that solar PV was having an impact on demand, but CEO Grant King thought that the rate of installation had peaked, and may not regain that level for a few years. Its own solar PV division has seen business cut in half.  AGL Energy chief Michael Fraser didn’t mention solar until he was posed a question (by RenewEconomy) about the demand outlook (“I suppose since it’s you who asked the question, we better mention solar”, he quipped. Is he suggesting that RenewEconomy is pre-occupied with solar? Perhaps we are. But then, so is the rest of the world.

Churning numbers

On that note, another curiosity was the churn rate of customers, the number of people who switch accounts each year. At least one in five of us do it, apparently, partly because we have an historical antipathy to utilities, partly because someone is always ringing us up offering a better deal. (Origin Energy spent a lot of money buying an energy retailer in NSW and is now losing customers (losing a net 160,000 in last year – it won 545,000, but lost 705,000). AGL didn’t buy a retailer but is spending a lot of money ($193 each) buying new customers (gaining a net 152,000 last year).

But all three major utilities (TRUenergy included) claim churn rates well below the national average of 20.4 per cent. As Deutsche Bank analyst John Hirjee wrote in a note to clients: “We continue to scratch our heads as to how the three leading retail companies, accounting for (around) 80 per cent of customer accounts can all consistently report churn below the market average.”

Perhaps the rest have already left the grid.

Reform at last

Since Julia Gillard stuck out her chin and took on the energy industry and the state over the gold plating of networks, there has been a flurry of activity that suggests that reform is finally about to take place. The most important of those were draft recommendations unveiled by AEMC chief John Pierce about reinforcing the powers of the market regulator. Basically, it’s a strengthening of the rules which means that his good mate, the Australian Energy Regulator head Andrew Reeves, does not get taken around the back of the shed and beaten up by network operators every times he questions their outlandish spending programs. Gold plating will end, said Pierce, holding the document and trying not to sound like Neville Chamberlain.

The political parties have also agreed to have a Senate Inquiry into the power industry and energy prices. You can be skeptical of these inquiries, but the key point here will be the publicity that this brings. Just look at the progress in the last few weeks. A few facts on the table and in the public domain will have a considerable impact on policy, particularly as it will be such a focal point in the election. The government has also trotted out the latest update on its National Energy Saving Initiative, which gives some modelling on a national white certificate scheme, and how that might work for  energy efficiency measures in the household, businesses, transport and generation sectors.

Finally, some progress.

Meanwhile, back on the farm …..

The Australian government gave its approval for the 30 million tonne Alpha Coal mine in the rich farming district of Queensland’s Galilee Basin, where if coal miners have their way you will be able to walk across without ever setting foot on grass. Alpha Coal boasts that it will be one of the world’s largest single coal mines, which may mean something to a country that struggles to get gold medals in the swimming pool these days. GVK, the Indian company that bought most of the mine from Gina Rinehart, has never actually built a new coal mine before, and doesn’t actually have enough money to do it, and is trying to find partners to share the cost. They may even sell some of the stake back to Rinehart.

But let’s say they do get the money and know-how. At peak production, and at the standard Australian measurement of 2.38 tonnes per tonne of coal, the mine will produce 71.4 million tonnes of Co2 per year (about the annual emissions of Finland), when the coal is combusted. That is, after billions of tonnes of soil is removed, the coal dug up in Queensland, stuck on a rail wagon for 500kms to a port in the Great Barrier Reef shipped 10,000kms or so to an Indian port, put back on another rail wagon, where it will sit for a few days or weeks while the line is repaired, before finally making it to its destination, where it will be burned, waste 70 per cent of the coal’s energy in combustion, another 10 per cent (at least in India) being transmitted to a consumer, who will probably suffer a blackout anyway and have to switch to his diesel backup. If GVK get to dig up the neighbouring Kevin’s Corner mine, output will double. Call us pre-occupied, but sometimes a solar panel and a battery makes a lot more sense. It is certainly starting to for more people in India.

And if you haven’t already done so, Paul Gilding’s piece on The End of the Industrial Revolution is a must read.

Have a good weekend.