“It’s enormous:” AGL sees 7-fold leap in AI data centre demand, says new big batteries will boost coal returns

Australia’s biggest coal generator, AGL Energy, has predicted a massive rise in data centre demand in the coming decade, with a potential 7-fold increase that it describes as “encouraging” news that will underpin its energy assets.

AGL CEO Damien Nicks, in a presentation to investors on Wednesday, says the Australian Energy Market Operator’s (AMEO) predictions of “exponential” growth in AI-driven data centre demand, particularly in NSW, Victoria and the ACT, may be exceeded.

“Today, operational data centres account for approximately five terawatt hours of energy demand in the NEM,” Nicks said.

“This is expected to double once projects under construction are operational and ramp up to full capacity, with a further 25 TWh of forecast demand should all projects currently in development in the NEM come to fruition – a combined forecast of 34 TWh, which is enormous.”

Nicks described this development as “encouraging” – and although he noted that not all these projects would be built, “the outlook and opportunity is significant – and our transitioning energy portfolio is well positioned to leverage the upside of overall demand growth in the NEM (National Electricity Market).”

His comments, which follow news from Origin Energy last week that demand from data centres is already showing up in higher electricity sales, are significant, because one of the big challenges for policy makers in Australia and overseas will be how to manage these sudden and rapid demand boosts.

If it translates into an accelerated uptake of renewables, that could be a good outcome. If, as seems inevitable in the US, it results in more fossil fuel generation – gas and coal, then it will be a bad outcome.

The likes of Fortescue found Andrew Forrest are investing nearly $1 billion in creating a new green grid for demand centres, but Origin and AGL have built next to nothing and contracted little new renewable generation to meet rising demand.

AGL’s biggest coal generator is Bayswater in NSW, a 2.6 gigawatt facility across the road from the already shuttered Liddell coal plant that is likely to be its last to close.

Right now, it is learning to “dance” around the impact of rooftop solar, and dialling down its output in the middle of the day by 70 per cent, according to Nicks, to dodge negative wholesale prices.

To illustrate how effective this strategy is, Nicks pointed to a “typical” day where Bayswater achieved a volume weighted average price (VWAP) of $84 a megawatt hour over a 24 hour period, higher than the $71/MWh market average.

But it says these earnings could be further enhanced when it fully commissions the two big batteries it is building – one at Liddell, at the site of the shuttered coal plant that will be rated at 500 MW and 1,000 MWh, and another at Tomago that will be rated at 500 MW, 2,000 MWh, with double the storage thanks to improved battery tech.

By charging in the middle of the day, and supporting demand and so lifting daytime prices, Nicks suggested this could boost Bayswater’s VWAP by around 10 per cent on that “typical” day to $93/MWh.

“This demonstrates how incremental firming capacity materially enhances realised returns, even in periods of subdued average pool prices,” Nicks said.

Nicks also pointed to evening peaks, and what he described as how “finely balanced” the system is in the evening.

Curiously, he pointed to the Victoria market on January 27, which hit a new demand record of 10,784 MW at 7pm local time, with relatively moderate price outcomes.

Nicks attributed this to the increased output of large thermal baseload – mostly coal, and wind generation. But AEMO, in its recent quarterly energy dynamics report, highlighted the same event to illustrate the moderating impact of utility scale and especially home batteries on the market.

“What is clear is that without the wind generation on that day, or if it had occurred a day earlier and coincided with South Australian extreme prices, Victorian prices would have very likely hit its 20 thousand price cap for a sustained period,” Nicks said.

“Overall, the current picture is one of a system that is functioning, but with limited margin for error during peak periods.”

But AEMO, in its recent Quarterly Energy Dynamics report, highlighted the very same event on the same day to illustrate the moderating impact of utility scale and especially home batteries on the market.

Still, Nicks said that AGL – even though more than 80 per cent of its generation still comes from coal – is making a “progressive shift” away from thermal power to a lower carbon energy supply portfolio.

“Operationally intensive thermal assets – with higher fuel costs, labour intensity and sustaining capital requirements, will be replaced with our growing fleet of firming assets, as well as renewables,” he said.

“In effect we are shifting away from a high COGS (cost of goods sold), capital intensive thermal portfolio, to a less capital-intensive energy portfolio with lower operating costs and lower risk.

“This supports strong risk-adjusted returns, high cash conversion and improved earnings quality as we reshape the portfolio over the next decade.”

AGL, however – like the other big three gentailers – has committed little to new wind and solar assets in recent years, although it has signed an off-take agreement with Tilt Renewables’ 260 MW Palmer wind project in South Australia that will begin construction this year.

Its interest has turned to the isolated Western Australia grid, where it has signed an off take deal with another Tilt project, the 108 MW Waddi wind farm, and where it is pursuing an even bigger wind and battery project at Twin Hills, north of Perth.

That project, potentially nearly a gigawatt in capacity and with a big battery, is currently owned by WestWind, but AGL appears interested in at least an off-take deal as it looks to boost its green energy suppliers to support its Perth Energy business targeted mostly at commercial and industrial users.

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