Origin Energy CEO Grant King says falling demand and the push to renewables means there will be no requirement for new baseload power stations – either coal or gas – until the end of the decade.
And in an exclusive and wide-ranging interview with RenewEconomy, King says that if the country is serious about reducing emissions, then its next choice of baseload energy will likely be hydro – from Papua New Guinea.
“If we really do want to decarbonise our fuel, then when the time does come to build baseload power stations we probably don’t want to build coal or gas ones,” he said
In the interview, King discusses why the renewable energy target could be problematic: “I know there are others that are saying something is wrong with the system and nothing is being built, but nothing is being built because the market is long RECs.”
He reflects on the roll-out of smart meters and the potential implications for energy suppliers and energy users: “If you turned up in any other state and said I’ve got a good idea, let’s mandate smart meters on every house, that would be a real lead balloon experience.”
King talks about the challenges of geothermal: “Unconventional geothermal has got quite a long way to go, and got some challenges, and has probably missed the RET window.”
And he responds to criticism about the role of Origin Energy in the Solar Flagships saga. “In respect of PVs in paddocks … in my view, nothing is being learned through projects like this that hasn’t already been demonstrated somewhere else in the world.”
It’s a long interview, so to help time-poor readers jump to their subject of choice, we’ve provided some hyper-links below. And if you want to read what Origin plans for the Sliver technology, and how it may ensure it can beat Chinese manufacturers on price, go to this story here.
The interview in full:
The last time I spoke to you, about six months ago, you were warning about the political uncertainty and the impact on energy investment decisions. To what extent has that changed?
So, the term political uncertainty means many things, and different things at different times. Though I suspect over the last week it’s meant the leadership of the federal Labor Party. My comment at that time was about the passage of the carbon pricing scheme, it was more a comment about where would that scheme end up
Are you happy with the way it ended up and are you happy with the way it is now being handled.
Ultimately the facts become the facts, the parliament has passed a scheme, and we are busily making sure we have all the systems and processes in place to meet our liabilities under the scheme. The debate about the scheme itself has been had. People engaged quite vigorously ahead of the passage of the bill, but once it is passed from our point view the debate is over, and our concern moves to implementation and compliance. We have quite large liabiliies … this is sort of a GST like – the systems and the process, and the way it impacts across the economy. It is no trivial matter to be ready by July 1.
What sort of investments and decisions are you making then. Is is about offsets, changes to generation mix, or a mixture of a whole bunch of things?
It is a whole bunch of things. We contended most strongly that if we were to have a scheme it should be a traded scheme, and as you will know it is not a traded scheme for three years. And even then there is a $15 floor on the trading price. The point of saying that is that in the early years, there is only an opportunity to acquit 10 per cent of the liability through credits, so 90 per cent of it is in an economic sense just a tax. So, in some respects you don’t need to do that much in its early form because there is very little opportunity to do anything apart from setting systems up.
As for 2015, the first thing to say is it is three years away, secondly it is not clear where those things that will influence the price at the time to the extent it is above the floor, and there are arguments that there is no reason why it will be anything other than the floor at $15, so it will depend on one’s perception of the opportunities as to how you set about meeting that liability. And in response to your earlier question, you wouldn’t invest in anything today to meet your liability by 2015, because you couldn’t build it quickly enough anyway. So if you are going to invest in your investment activities, it is much more about what is going to happen in 2015 plus.
And there are some reviews scheduled before 2015 – so the question is how those reviews go, where the rest of the world is in 2015, if Australia is travelling in complete isolation from the rest of the world there will be one sort of conversation in Australia, if the world is moving there will be a different conversation. Thirdly, there will be price implications as more of the scheme becomes traded. I think we will be able to acquit up to 50 per cent of our permits, those sort of things will affect the choices we make and it will depend on price. I think that whole period around 2015 will be when it gets interesting because there are some quite big questions about the true nature of the scheme.
Let’s go to gas, that has been one of the transformative actions for you in the last few years, the massive investments in LNG in Queensland. To what extent, though, will this transform the electricity market in Australia, because gas will be more an export commodity and its price will be set as such. How will that change the way we consume and pay for electricity in Australia?
The starting point to that question is not gas, but the Renewable Energy Target. And the reason for that is that there has not been the demand growth in Australia that might have been expected three or four years ago. There are a number of potential factors – over stimulation of solar sector, efficiency gains, consumer responses to price increases, to economic effects. No one of them is profound or obviously the core one, but demand today is less than what was forecast. If you project that due to 2020, which is the time we are supposed to have 20 per cent renewables, what it does mean that investment in any other form but renewables is pushed out because the energy that is needed, not the capacity, will be mandated under the renewable energy target. Whether our policy makers knew that at the time is another question, that’s the way the numbers turned out, the RET requirement was roughly equal to the extra demand that was forecast. You still need renewables, but it pushes out investment in baseload anything.
Indeed, you mentioned in the annual result there will not be baseload gas investment, it will be just peakload.
That’s why I started there. You asked about gas, but in a sense it has nothing to do with the price of gas, there is just no requirement to build baseload and that’s a feature of the RET scheme. Having said that, the one sector that does need investment is open cycle gas to provide the capacity we need as distinct from the energy, which will come from renewables, but the firm capacity doesn’t. The reliability factor for wind is still held to be less than 10 per cent, even thought the energy will largely come from wind or solar, the capacity or reliability that we seek in the system will not come from renewables, so there will probably need to be some more open cycle gas to firm the system.
More to firm the system or to meet those increases in peak demand?
When we say firm, we mean meet the peak. I don’t think the market will require baseload gas or coal this side of 2020, so if we go to open cycle, then it will certainly be gas, because the nature of open cycle is that it doesn’t matter what the price of gas is, because you are running into the peak prices. We have the Mt Stuart station in Townsville, and it runs on jet fuel, because there is no natural gas up there. But it won’t matter what the price of gas is, because you are not generating into a 40MW/h market, you are generating into a $200/MWh, or $2000/MWh or $10,000/MWh market price. Gas will play a role. Mortlake power station which has a nameplate capacity as big as Darling Downs – 550-600MW – might use 5 petajoules of gas a year if it is lucky. Darling Downs can run at 40 petajoules but is probably running at 30 petajoules as an intermediate supplier.
The Productivity Commission is doing a review of the RET, what will your submission be?
We haven’t prepared that submission yet. The observation we have made publicly is that when you look at what happening in the RET market, it is long RECs, and it is so because it was effectively flooded by solar rooftops in 2009/10. I accept that people have different views on this, but many accept that it was far too generous subsidies for solar PV. There was also a multiplier applied. That was probably fair enough, but the consequence of that was a substantial oversupply in the REC market, the restructure of the MRET into the LRET and the SRET, and what it also meant was that companies like Origin Energy quite clearly saw RECs trading below their long-term value.
We’ve said publicly that we have sufficient RECs to meet our projected requirements through to 2015 and 2016. The point of that is that we do not need to cause physically to be built any more assets to satisfy that market for quite some time. And I know there are others that are saying something is wrong with the system and nothing is being built, but nothing is being built because the market is long RECs, they were already developed. It was just oversupplied, like too much office space in the city. That surplus needs to be cleared. The consequence of that is that the build required to meet the 20 per cent target does get squashed into a much shorter period, and you will know that the major sites for wind farms have been in South Australia, followed by NSW . SA has already got a high penetration for wind in relation to its demand, so there is less room to fit wind into SA, but in NSW they have decided to make permitting processes more challenging. It will affect the rate at which sites can be developed and the amount that can be generated at those sites.
Your pipeline is particularly affected by that?
Anything that is not consented is. But Stockyard Hill (up to 540MW) was consented, I think it was the largest wind farm that was consented before the changes came into place.
Can we move to solar, and the Sliver technology that is now in the Transform Solar joint venture in the US. You said that you are still considering the best way to roll out the technology. What are the issues there?
The broadest view of the solar PV market is where Chinese manufacturers are taking the PV price. There is no question that PV costs have come down. That is largely driven by Chinese tier one suppliers, who are very effective, very good manufacturers. They are not bringing new technology to PV, but they are bringing scale production and probably a lower cost of capital – a very competitive cost structure.
Everyone knows that PV needs to come down a lot to be competitive with grid connected electricity, but the cost of grid connected electricity is also going up a lot as well, and so that is closing the gap quite quickly. We think that solar PV may be economic without subsidy by 2015, in some markets today but potentially in Australian by 2015/16. So if you are a manufacturer rather than a buyer –and we have two hats there, we buy solar PV to put on rooftops and we are considering being a manufacture with new technology – but to make that decision you have got to sure you can be well below where Chinese tier one supplier can get to, three or four or five years out. That is the investment horizon and that is a big test.
So that’s what you are contemplating at the moment?
To meet that test you need to have two things – a technology that is competitive and can operate at a scale. Now, a scale plant in China is probably a gigawatt, so no point being a 50MW or 100MW plant, you will be knocked out of the game straightaway on scale. So you have really got to be able to see the way forward to invest in quite a large plant. So it is what I would call a non trivial decision. If you look at size of Australian PV market and you are contemplating a one gigawatt or even a half gigawatt plant, there’s just no way you can invest in that sort of facility in Australia, and therein lies the dilemma about why our markets are too small to be globally competitive on manufacturing. Our work with Micron by the way encourages us that we can be competitive with Chinese tier one suppliers, but it is a big decision so we are being very careful about that decision and that is what the joint venture is focusing on in the next six months.
If you are right about the costs of solar PV coming down and being economic without subsidy by 2015/16, how does that change the nature of the energy market, and the nature of your business given what we have seen in Europe with the problems faced by conventional generators from the incursion of solar.
My personal view is that governments globally are strapped for money and we’ve been through an era of substantial government support … such as mandated feed in tariffs. Communities are struggling, economies are in poor condition, cost of living is becoming a bigger and bigger issue, so my view is that a lot of the subsidies that have been driving renewables will come under a lot of pressure globally. Having said that, we would generally only want to invest in sectors that don’t need subsidies, because businesses like that are hardly ever sustained.
We do believe that solar PV, and hydro and geothermal and wind can all find places to operate in the world without subsidies, and that’s where their focus ought to be in some sort of ordered global energy mix, but if you then come back to PV and your question directly, what Origin is interested in is how much households spend on energy, and whether that comes from grid, or whether that comes from PV or other technologies is of interest to us and how we combine those technologies is of interest to us. One of the missing pieces in the jigsaw which will become evident shortly is that having now invested a very substantial amount of money in new customer systems, we can begin to do with those systems things which will offer customers an amenity that they have never previously seen. In an era of information technology, for example, very few people can actually have a fully internet enabled relationship with their energy supplier, which you would be almost appalled to think that was the case, but it just reflects the billing systems in the energy industry.
That goes to the issue of Tendril, and you mentioned in that results briefing that you hoped people would like the offering. But it’s more than that isn’t it, it’s quite essential for your ability to manage customers going forward isn’t it?
It means that we can help customers manage energy no matter where that energy comes from, and we think that is the next big step in where the industry goes. There is an interesting question on the role of smart meters in the process. To digress, and to make a point that not everyone will agree with, but the rollout of smart meters was in my view characterized more by hope than reaility. Nonetheless, it was probably the right thing to do. The reason I make that critical comment and hopeful statement is that no one had connected the dots on how to use those smart meters to provide benefits to people. I may be wrong, but in Victoria I’m not sure there are tariffs or other amenities that Victorians can attribute to smart meters to the extent it is helping them in any particular way. At the moment they are seeing a cost, but not the benefit.
I think we are on the cusp of seeing technologies that will ultimately allow smart meters to be made more useful from a customer’s point of view and to provide them with benefits that will let them say yes that was worth doing. If that was the case, then you get into a conversation about a broader national rollout of smart meters, right now my judgement would be that if you turned up in any other state and said I’ve got a good idea lets mandate smart meters on every house, that would be a real lead balloon experience. I think that conversation has to be picked up again, and industry can demonstrate they can offer products that provide a benefit to customers.
On geothermal, you’ve talked in the results briefing about the opportunities in Chile and in Indonesia, what’s the latest update in Australia. The drilling in the Innamincka Shallows did not appear to be conclusive. What’s the prognosis.
What we call the deeps joint venture is about to spud another well at Habanero, and that’s largely testing what was hoped to be tested in the well that failed. That will be an important test. Frankly, it’s a step by step process until we get the results …. If we are successful we know what we will do next, but we need to be successful first. In respect to the Shallows, we drilled a well and got a lot of data from that well, and what that data allowed us to do is then go back and do more analytical work without drilling wells on permeability and heat, so it kind of gave us a calibration to allow us to think what other technical attributes can we observe to improve our ability to locate wells in areas that might have the sort of temperature gradients that we are looking for. So, look, the unconventional geothermal play has got quite a long way to go, and got some challenges, and has probably missed the RET window.
That’s an interesting prediction.
If you think about 2012 and how long it takes to build anything, we still quite early in that technology journey.
On PNG hydro, that seems to have grown in size and you are now talking about it being more than 2000MW.
If you go back to the broad diagnosis that we don’t need any baseload until somewhere near the end of the decade, not going to see a lot of gas in the system because we don’t need to build baseload coal or gas, and we just need to firm the renewables which we call interruptible baseload, so there will be a bit of open cycle gas, the question is what happens after that. If we really do want to decarbonise our fuel, then when the time does come to build baseload power stations we probably don’t want to build coal or gas ones.
So if we look at what is the next baseload fuel that could provide a material addition to the baseload market and the answer is hydro. The extraordinary thing about Purari is that unlike hydro in Australia, Purari is baseload. Hydro in Australia is not baseload because we have long weather cycles, although right now it is wet. My view is that the whole world will be fundamentally interested in the question of how do you move baseload sources of energy long distances to where the markets are, because you can’t move the fuel. You can’t move the sun, can’t move the wind, can’t move the water, so you’ve got ot move the electricity. That means that transmission technology, and particularly HVDC technology plays a critical role. What you see happen in various places around the world, in Russia, Brazil, north America, people are talking about very long distance transmission, HVDC lines to move renewable baseload resources to market. Our view of the world is that what solves the puzzle is actually baseload hydro towards the end of the decade.
One last question, Origin has been critical of the grants based schemes. In a submission to the CEFC you described it as being inefficient, a lot of money going to consultants and lawyers etc. In turn, Origin and the other retailers have been criticized for their role in the grants-based scheme. And can you explain your view on Solar Flagships, where Origin was mentioned as playing a pivotal role?
Or not playing a pivotal role. I accept that people will criticize this view, but if you stood back and looked at when solar flagships was conceived, at what three years ago, and then you look at what happened in the solar rooftop market, where we got very large stimulus, I have a very strong view … are you aware of the sort of subsidy that was required for those projects?
Yes, about $300 and something million for the solar PV project and $460 million for the solar thermal project.
Absolutely massive subsidies. My view is that people are entitled to think that something new is being learned in the application of public funds. In respect of PVs in paddocks, the reason the subsidy is so big is that the REC revenue and what we call black energy, the wholesale value of energy, if you took that same number of panels and put them on the roofs of homes, the subsidy would probably be a third or less. In my view, nothing is being learned through projects like that that hasn’t already been demonstrated somewhere else in the world. So those projects, particularly the solar ones, got caught between a market that was long RECs, and interestingly cheap solar RECs, and increased the subsidy considerably beyond what people thought, and I think that in the current economic and social environment, those two projects were taking over a billion dollars of public funds, and I think the community should be wondering what new is being learned.
So did you reject it out of principle?
No, we made a commercial view that the value of the RECs was not very great. And my understanding is that what that went back to was an increased requirement for subsidies. And the government said if that is where it is we can’t justify the project. I would say as it went on, we said there were plenty of other opportunities for RECs anyway, we ceased to have an interest in the project at all, but that was a commercial decision. It is a matter for government to decide how much subsidy to put into these things, but I do believe the levels of dollars we are talking about, that buys you a lot of other things, either in energy sector or other sector of the economy. And if you remember all the RECs were created by putting solar panels on the roof, and the same manufacturers were then going to put the same panels in the paddock, so sorry to be a bit cold-hearted in the light of day, but every now and then someone has got to say that.