Snubbed on coal buyout, TRUenergy turns on LRET

Leading utility TRUenergy has responded to the failure of the contracts-for-closure scheme by changing its position on the renewable energy target (LRET) and joining Origin Energy in calling for it to be diluted, and made a percentage of “real” demand rather than a fixed target.

To support its case, TRUenergy has released a study by consultants ACIL Tasman that recommends a policy that would effectively bring the development of new wind farms and solar farms in the country to a halt at the end of 2016, and pave the way for only gas-fired generation to be built in the future.

The call comes in a speech that TRUenergy chief executive Richard McIndoe is due to give in Sydney on Friday. McIndoe argues that reducing the LRET will save each consumer $50 a year out to 2030, when the scheme is due to expire. Multiplied by 17 years, and Australia’s population, that comes to $25 billion in savings. It is based on a study from ACIL Tasman, which puts the cost of the LRET at around $100 per year per household by 2020 – nearly double other industry estimates.

However, the new position seems to be concerned mostly about the impact of renewables on the coal-fired and gas-fired generators. In his speech, McIndoes says the LRET is putting “incredible pressure” on the wholesale electricity market because it is lowering prices, so much so that with the accompanying fall in consumer demand, it “calls into question the sustainability of the market itself.”

The ACIL Tasman report recommends a “Real” 20 per cent scenario that reflects that lower demand. It results in new wind generation being more than halved. In fact, its scenario only allows around 2,600MW of new wind capacity to be built up to 2016, at which point the wind and solar industries will come to an effective halt. ACIL Tasman says this will cause wholesale prices to rise, but this will allow new fossil fuel generation to be built.

Its scenario envisages 1,000MW of gas generation to be built by 2020, replacing around 3,300MW of wind farms envisaged under the LRET,  with only about 4,000MW of baseload and peaking gas-fired generators being built in 2020-2030.

Here is how they see the market …… (CCGT is baseload gas, OCGT is peaking gas).

The position on the LRET is a backflip from TRUenergy’s recent support for the LRET to be maintained as is. However, following the failure of the buyout of coal fired generators, it is not surprising.

The contracts for closure scheme failed because the coal fired generators and the government could not agree on price – mostly because the carbon pricing package is so weak, and the compensation so great, that they stand to benefit from staying open.

However, the biggest threats to the business model of the coal-fired generators are lowering demand – caused by changing consumption patterns – and from increased capacity from renewables such as large scale wind and solar, as McIndoe and ACIL Tasman acknowledge. These two technologies displace brown coal from its primary position in the electricity markets merit order (or bidding stack) and reduces their revenues and profits. This is the dreaded merit order effect.

TRUenergy also owns the Mount Piper and Wallerawang black coal-fired generators in NSW; gas-fired generation at Tallawarra in NSW, at Hallett in South Australia, and Newport and Jeeralang in Victoria. It also owns the Waterloo and Cathedral Rocks in South Australia.

Earlier this week, TRUenergy announced it had signed power purchase agreements for two wind farm developments in NSW, each of around 107MW. However, it needs to either build or contract another 2000MW of wind farm or solar farm developments to meet its obligations under the LRET.

TRUenergy’s switch means that two of Australia’s big three utilities now want a change to the legislation which is seen as critical for the rollout of wind farms and solar farms in the country.

Origin Energy opened the public campaign against the LRET earlier this year, and wants to focus on gas exports and gas generation, which is also squeezed by extra renewables capacity.

AGL Energy vigorously supports the LRET. It has the largest portfolio of renewable developments in Australia, and a large pipeline of projects, even though it also owns Loy Yang A, the largest emitter in the country. However, it feels that is the strongest of all brown coal generators because of its lower emissions intensity and the recent refinancing of debt.

AGL also chairs the Clean Energy Council, the peak body for the renewable energy industry. TRUenergy is also a member, and McIndoe was previously its chairman. Origin Energy left the CEC several years ago.

Here are the graphs on the two scenarios made by ACIL Tasman – one under the LRET as it is, the other in its “real” 20 per cent scenario.