Ten things we learned from AGL Energy’s Michael Fraser

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The AGL Energy boss takes aim at RET review, and network gold plating. Plus his take on solar; why it costs a lot of money to keep a customer; writing off geothermal; Macarthur wind farm on track; flagships project to begin in 2014; and why Loy Yang A was such a dud.

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RET should stay as is, floating target nonsense

AGL Energy managing director Michael Fraser has dismissed suggestions that the renewable energy target should be modified to a floating rather than a fixed target, suggesting it would put billions of dollars of investments in green energy at risk. “The reality is that a floating target – every time we get a change in forecast demand – is a complete nonsense… when you think about the billions of dollars that have been invested and are required to be invested,” he said during a conference call for his earnings results.

Fraser said the debate about a fixed versus a floating target had already been held on numerous occasions over the past decade, and said the review of the RET being undertaken by the Climate Change Authority, was causing uncertainty in the market and causing delays to investment decisions. He cited the company’s own Silverton wind project near Broken Hill as one of those decision being held up by the review.

The cost to keep a customer

It seems that network expenses, carbon price and renewable energy schemes are not the only things pushing up retail energy prices. AGL Energy says its gross margin from each of its 1.9 million retail electricity customers increased over the previous year by 6.6 per cent to $219.48, up from $205.81, driven mostly by regulated price increases. However, its business customers managed to do better, wrangling discounts that saw AGL Energy’s business margins falling 2.3 per cent to $3.29/MWh. That was possibly because business volume fell sharply, down 8.1 per cent, and they had greater negotiating power.

There is a massive battle for customers in the retail electricity industry, a complex and fiercely competitive business. AGL says it added a whopping 152,000 retail electricity customers in NSW alone during the year, although it experienced slight falls in Victoria and South Australia. But the cost of obtaining those new customers, finding them, advertising and offering discounts, jumped sharply to $192.43 in NSW, from $162.93. Those costs are passed on to all consumers – and given that the “churn” rate in the industry is 20 per cent – that is one-in-five customers changing retailers every year – it seems that electricity customers are paying more for the cost of signing up their neighbours than they are for green energy schemes. Interestingly, AGL Energy said that after an initial flurry of calls to its call centres about the carbon price, these had died off. “People are just looking around for the best deals,” he said.

Gold plating in Queensland

However, Fraser was also angry with the recent decisions by the Queensland Competition Authority on retail electricity pricing, and said AGL Energy would be “pulling back” on its activities there. “The reality in Queensland is that the network businesses have been gold plated up there and have been major drivers of retail price increases,” Fraser said, adding that the decision to regulate retail prices and “effectively regulate” generation prices well below the long-term marginal costs was “simply wrong.” The decision would cost the company $50 million a year, and it was now reducing its discounts available to customers in Queensland because some parts of the market were simply unprofitable. He also said the decision sent a clear signal not to invest in thermal generation in the state.

The growth of Solar PV

AGL’s accounts did not break out its operating performance on rooftop solar, but clearly solar PV is growing quickly. Fraser said customers were “clearly embracing rooftop solar” and, even after the winding back of feed-in tariffs and multipliers, “there is still a good appetite out there.” Fraser would not be drawn on the potential impact of the rapid deployment of solar on the business models of electricity retailers, generators and network operators, despite growing evidence that it will have an impact, and the recent comments by major international utilities. AGL said its solar PV business installed 8MW in the last 12 months and was now among the top 5 in the country, excluding aggregators. “We’ve acquired a solar business, and we are seeing strong demand for that business. We are delivering what customers want,” Fraser said.

Solar Flagships project to begin in 2014

AGL Energy says its Solar Flagships project is on track for completion by December, 2015, but construction will not start until the middle of 2014, with environmental approvals expected early 2013. AGL Energy won the re-tender of the PV component of the Solar Flagships scheme, winning approval for its 159MW project, which will cost around $450 million, with $195 million coming from federal and state governments.

Fraser said AGL Energy had maintained a “disciplined approach” to bidding in the first round, which it lost, and was well placed when the previous winning bid, the Moree Solar Farm project, “finally fell over.” The AGL project will be split between Nyngan and Broken Hill. AGL Energy says First Solar is taking construction risk and will build the project under a fixed price arrangement. AGL Energy notes that the output from the solar project should be “complementary to the proposed Silverton wind farm, which is a 1,000MW project that is likely to be built in stages, pending transmission upgrades, from around 2015.

Building wind farms makes money

AGL made profits of $43 million from the development of wind farms in the last year, which included $30 million from the sale of the Hallett 5 wind farm and top-up payment from the previous sales from two other extensions to the Hallett complex and the Oaklands wind farm. This was actually down from the $61 million booked the previous year and the company expects no wind farm development profits this year.

However, it says it is on track to complete what will be the Southern Hemisphere’s largest wind farm, the 420MW Macarthur Wind Farm in Victoria. Some 97 of the 140 turbines – (each with a capacity of 3MW) – have been installed as at July 31, and the complex is expected to be completed in the third quarter of 2013, although the first energy will be produced within the next few weeks. AGL says the expected cost of the venture with New Zealand’s Meridian Energy in on track, with its expected share to be $492 million.

Geothermal exploration written off

AGL has taken a dim view of its immediate geothermal prospects and written off $14 million from value of its geothermal exploration interests. AGL has a 9.9 per cent stake in the listed Torrens Energy but said a review of its geothermal exploration programs had concluded “that none of the results to date were supportive of commercial development.” This resulted in an impairment charge of $14 million before tax and $11.4 million after tax. AGL Energy said it didn’t anticipate any great expenditure on these activities is next few years.

Money to be made in green energy markets

AGL’s Eco-Markets has been a useful profit centre, with profits from managing the liabilities for both voluntary and mandatory green schemes jumping 49.5 per cent to $66.4 million from $44.4 million. The largest of these schemes is the Mandatory Renewable Energy Target, which was split into the Small-scale Renewable Energy Scheme (SRES) and the Large-scale Renewable Energy Target (LRET) from 1 January 2011. AGL said it had profited from the volatility of the SRES certificates. AGL Energy confirmed it had enough large-scale certificates to last until 2015, but expected a shortfall in the market in 2016, which would be a signal for more investment.

Loy Yang was a dud – under previous ownership

Loy Yang A – Australia’s single biggest power emitter – was a dud asset, at least under its previous ownership and debt structure. It lost $46 million in 2011/12, as it suffered from a slump in wholesale prices (down 6.1 per cent to $35.33/MW thanks to lower demand and the impact of renewables), and its huge debts meant that it was struggling to make any profits anyway. AGL Energy has now refinanced the Loy Yang A debt under its own better corporate ratings, and expects to generate significant profits from the operation in the years ahead.

Generation mix

Here’s an interesting graph on AGL’s generation mix and the performance of its wind farms, versus that of gas – some of the peaking plants were barely used. Note the figure at the bottom of the graph, of AGL’s carbon intensity in 2011/12, which stood at just 0.3 tonnes of CO2e/MWh, compared to a national average of three times that much. AGL Energy’s average intensity jumps to 1.0t of Co2e now that the purchase of Loy Yang A is complete, but Fraser says the company is well positioned for the carbon price because of its renewables portfolio and the carbon compensation for brown coal generators such as Loy Yang A.

The coming gas crunch

And here is another graph to illustrate one of Fraser’s key hobby horses: the need to allow coal seam gas production in NSW. Fraser says that the state is facing a major supply crunch within a few years as gas supplies are diverted to meeting the large LNG export facilities in Queensland. Fraser said the government needed to come up with a policy fast. “The clock is ticking,” he said.

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5 Comments
  1. Robert Johnston 7 years ago

    AGL says it makes money building windfarms – I’m not convinced.

    Sure they make a profit when they sell them, but at what cost?

    Based on the Hallett 5 deal, even accounting for the “development profit”, by my estimation they would have been better off contracting with a third party by about $6/MWh – about $1M per year! AND they would see less risk compared to having to develop and operate the project!

    It looks to me like AGL creates a development profit by increasing the ongoing revenue to the company they sell the windfarm to receive a payment today AND in doing it they are actually costing their shareholders money in the future! (Never mind Michael Fraser will have his bonus already by then)

    These are the guys who decide which renewable projects happen – something is wrong in the system.

    Don’t believe me? Do the numbers yourself >>> Hallett 5 Offtake $110/MWh (from July 14 – until then its $93) when the market is more like $90/MWh! – and they achieved a $30M development fee)

    • Jake 7 years ago

      Are you taking into account the LRET certificates?

      • Robert Johnston 7 years ago

        yes

  2. John D 7 years ago

    The first problem with the RET is that, even when there is a fixed target, the actual quantity of extra renewable power required to meet the target will vary with overall demand. The second related problem is that the price of RET credits is sensitive to renewable shortages and oversupplies.
    Greater certainty would be achieved if the RET was replaced by a system based on long term contracts to supply clean energy. Competitive tendering for these contracts would help keep the price of power down. For more details see: http://pragmatusj.blogspot.com.au/2009/12/driving-investment-in-clean-electricty.html

  3. Roy Ramage 7 years ago

    If there is a technology that can deliver energy “free of charge” then the public will embrace it. This is especially so when the price of doing so will soon be cheaper than paying your power bill. Its fun to hear the energy moguls saying they have good solar offerings but they place them selves between the “free” by still sending a bill. Batteries will be the killer app. Just watch the status quo energy moguls pay packets drop then.

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