The great big battle for Australia’s energy future

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Growing evidence of slumping energy demand means the stakes are extremely high in the upcoming review of the Renewable Energy Target, as well as the proposed cash-for-clunkers buyout of brown coal generators. The future of conventional and renewable generation in Australia could well depend on it.

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If Energy Minister Martin Ferguson is really keen to pay a low-ball price in his cash-for-energy-clunkers scheme to buy out old brown coal-fired generators, he might be well advised to wait for the updated electricity demand forecasts from the country’s energy market operator.

We’ve remarked before that Ferguson has been put in the unusual position of talking down the value of the fossil-fuel generation sector as he and his team negotiating the terms for the “contracts for closure” bicker over pricing.

Ferguson’s problem until now has been that the generous compensation afforded the brown coal generators, and the growing prospect that Opposition leader Tony Abbott can and will repeal the carbon price once elected, has combined to make the economic prospects for brown coal generators look better than they have – a situation underlined by AGL Energy’s purchase of the largest and most polluting of them all, Loy Yang A.

If Ferguson waits a few weeks, however, he might have an ace up his sleeve. AEMO is expected to deliver a significant reduction in the demand outlook for the Australian energy sector, as the combined impacts of state-based efficiency schemes, moderating demand from manufacturing closures, the impact of rising retail prices, and the growing incursion of solar PV have their impact.

As we reported on Tuesday, energy demand is now at least 10 per cent below where it was expected to be less than four years ago – a stunning miscalculation given the history of demand growth, and the scale (in terms of money and time-frame) of investments made in energy infrastructure. The demand fall identified by Origin Energy’ Grant King earlier this year – Why Australia needs no new baseload – appears to have intensified in the last few months.

These graphs below show  how it might translate into lost revenue and shows what it means for generators. They are estimates of annual revenue for generators in three key states, based on the volume weighted price of electricity in those years and the amount of electricity produced. The figures are adjusted for 2012 dollars.

First is Victoria …

then NSW …

and then Queensland …

They all tell a similar story. Wholesale electricity prices in the National Electricity Market have never been so cheap, and the revenue pool so low – even omitting the huge peaks of 2008.

As Loy Yang A revealed in its accounts, small changes in revenue lead to more dramatic swings from profits to losses, because most brown coal generators are heavily geared.

The generators have relied on revenue generated from dramatic price spikes caused by surges in demand. It has been estimated that one quarter of revenues in the past has been delivered by just a few days of heavy demand. But that pool is disappearing, putting balance sheets and business models under pressure.

AGL will mitigate that by reducing debt levels and re-issuing the rest with its own higher rating, but other generators will not have that flexibility. This gives Ferguson and his team a powerful negotiating position.

The demand forecasts are also going to be crucial in the upcoming review of the Renewable Energy Target, which in 2012 has been transformed from a largely procedural biannual review to a critical ruling that has grave implications for incumbent, conventional generation, and the rapidly emerging renewables industry.

Origin Energy and allies in the Business Council of Australia and large energy users are expected to push aggressively to dilute the RET. Origin Energy has argued that the 20 per cent target should reflect a percentage of actual demand rather than the fixed target (now of 41,000GWh) – an effective reversal of the position it argued when the RET was being formulated and demand was expected to increase.

Origin Energy is suggesting that keeping the fixed target could translate in renewables accounting for 27 per cent of generation target, at extra cost to consumers. That estimate is hotly debated, not least because King used an original 45,000GWh in his calculation, and critics suspect double counting of the solar PV component. Nevertheless, the renewable energy sector regards the retention of the RET as absolutely crucial, warning that adopting Origin’s position would result in a 40 per cent reduction in the deployment of large scale renewables over the next 8 years, effectively bringing the industry to a halt.

The modification of various ancilliary schemes has caused delays, and boom and bust scenarios, particularly in the PV sector, and they warn that the RET is diluted as is proposed then most developers of large scale generation in Australia will simply pack up and move elsewhere.

However, the incumbent generators have a lot at stake because if demand for energy falls as some suggest, solar PV is deployed as quickly as the Australian Energy Market Operator suggested earlier this week, and the 20 per cent target is met, then possibly the only thing that could lift revenues would be a return of the dramatic El Nino conditions that helped create the demand and price surges of 2008.

Either way, the RET Review, the first significant task to be undertaken by the newly formed Climate Change Authority under the chairmanship of Bernie Fraser and CEO Anthea Harris, promises to be a critical decision for the black, brown and green energy industries.

 

 

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3 Comments
  1. barrie harrop 7 years ago

    Interesting stuff,however my home energy price is just going up and up,cannot image any supplier is going to reduce their cost of energy to retail customers.

    • Richard Hayes 7 years ago

      You simply have to change the equation.

      Install PV at zero cost except you buy the power at grid less 1 cent /kW-h for 7 years. Then it is yours for free.

      But is it much cheaper to just by it outright.

  2. David Rossiter 7 years ago

    Nice set of graphs but which one if any contains the Snowy scheme which has no doubt done well with wetter conditions and helped keep prices lower by increasing energy supplies.

    The concept of setting the renewable energy target as a percentage was publicly examined during the original design of the then mandated renewable energy target. One of its problems is that a target based on a percentage of an unknown future demand figure just adds an additional risk to market participants. An increased risk of that nature will tend to reduce market efficiency and increase costs. It is better to set a quantitative target so that a renewable power percentage (RPP) can be set for all liable parties that is meaningful. Each year the RPP is adjusted based on historic performance to compensate for under or over yield of renewable energy against the quantitative target.

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