It seems certain that the NSW and Queensland governments will have to take significant write-downs on the value of the fleet of coal-fired power generators, and the assets may not be able to be sold because of the radical reshaping of the Australian electricity market.
The NSW government is seeking buyers for its coal-fired generators, and a price of $3 billion, and the Queensland government is mulling over recommendations that they should do the same. Any sale of those assets would likely be held in 2015/16.
But are they worth anything? Industry insiders say there are unlikely to be any buyers at the price the governments are expecting- because black coal-fired generation is becoming increasingly sidelined by the unanticipated fall in demand, the impact of renewables such as rooftop solar and wind farms, and the effects of the carbon price. Many of the black coal-fired generators are operating at barely more than half their capacity, as the concept of baseload generation gradually recedes.
Michael Fraser, the head of AGL Energy- which, it should be noted, is not a buyer of the NSW generation assets – earlier this month questioned the value of the NSW fleet of coal-fired generators.
In a presentation to the Macquarie Australia conference, Fraser said the value of NSW generation assets for sale was in doubt given the NSW demand outlook, the surplus capacity in the state, and forward curve for wholesale electricity prices, which are at their lowest level ever if the carbon price is removed. (NSW black coal generators received no carbon compensation under the Federal Government’s Clean Energy Future package).
To illustrate his point, Fraser used this graph below, showing that even on the day of record temperatures in NSW on January 18 – Sydney reached 46C – the state still had a massive amount of excess capacity, and the wholesale price barely broke above $150/MWh. Baseload generators are often described as low cost, but they rely on midday peaks which can push the prices as high as $10,000/MWh to boost their profits. Around one quarter of generator revenues are sourced from 40 hours of such peaks a year.
NSW Premier Barry O’Farrell has said that the state will only sell its remaining generators for the asking price of $3 billion dollars – “and nothing less”. But insiders have suggested to RenewEconomy that no bids at anywhere near that price has been forthcoming. \
The Greens have raised concerns that if any sale are concluded, they will come with hidden subsidies. To add to the problems of demand and electricity prices, many of the generators have benefited from cheap coal supplies, and these contracts need to be renegotiated. This is where subsidies could be hidden.
In Queensland, the situation is even worse. As we noted last year, the government owned generator Stanwell Corp had revealed in its annual report last year that – on average during 2011/12, the state had 4,500MW of capacity more than it needed.
This was another way of saying that its entire 4,000MW portfolio of mostly coal and gas fired generation was surplus to requirements for much of the year. The Queensland generators had previously relied on exports to NSW, but even that is not needed given the graph presented by Fraser.
The fact that coal-fired power generation has suffered badly in recent years has been well documented by market analysts. Pitt & Sherry, which provides a monthly update, published this graph earlier this month to highlight how production of black coal-fired generators
One of the main reasons for this was the lack of carbon compensation, which means that black-coal fired generators are more exposed to changes in demand and price. Brown coal generators are cheaper, and they have received compensation.
And the growth of renewables has not just reduced demand in the case of rooftop solar, it is changing the nature of the markets, requiring more flexible generation capacity to respond to changes in output and demand. Black coal fired generators are poorly equipped to meet this requirement, and to falling prices, so some 3000MW of capacity in Australia has been closed in the last 18 months, some of it permanently.
Australia is not unique in this case, because it is a well documented impact in Germany, where power producers have decided not to invest in any new baseload generation beyond the ones that have already commenced production. In the US there is a similar story, with base load generators, including nuclear ones, pushing back on renewable energy targets for fear it will undermine their own business case.
This explains why the governments of NSW and Queensland have been so dogged in arguing that not only should the carbon price be removed, but the renewable energy target be diluted, the rollout of solar PV should be curtailed by higher fixed charges, and the energy efficiency measures should also be wound back.