AGL Wants 9 GW Baseload Removed From Australian Market

August 3rd, 2013 by Giles Parkinson

This article originally published on RenewEconomy

AGL Energy, one of the big three power utilities in Australia, says that 9,000MW of fossil-fuel baseload capacity needs to be taken out of the national electricity market (NEM) to bring it back into balance.

The claim was made by managing director Michael Fraser, on Wednesday, at the announcement that AGL Energy had secured extra financing for its 155MW solar PV project in western NSW – the first solar project of its scale to be built in Australia.

To agree to proceed, however, Fraser said AGL Energy sought extra funding from the Australian Renewable Energy Agency to make up for equivalent estimated falls in wholesale electricity prices.

“We have got an oversupplied wholesale market,” Fraser told RenewEconomy on the sidelines of the announcement.

“There is too much baseload relative to where demand has got to, and rooftop solar has impacted on demand … and that has impacted on the economics of coal-fired generators.

“We guess there is around 9,000MW of oversupply in the market. That’s not helpful, either for existing assets or for trying to get new projects off the ground.”

That assessment of 9,000MW equates to nearly one-third of the country’s baseload generation – a sure sign that renewables, and in particularly rooftop solar, are changing the dynamics of the market. And it also suggests that some state governments built more generators than was necessary, as they have done more recently with poles and wires.

This table, below, illustrates the problem. It was presented by AGL economists Paul Simshauser and Tim Nelson last week, in conversations about the state of the market and the need to move away from simple energy-only markets, to markets that incorporate capacity or “capability” factors, a subject we have looked at in detail here, here and here .

Before markets can be redesigned, however, the big question is how, and under what conditions, that excess capacity should be retired. Fraser noted that some generators, such as Alinta’s Northern power station (in winter), and some of the Queensland generators, had taken themselves out of the market.

But there is also renewed discussion about the idea of “contracts for closure” – i.e. payments made to coal-fired generators to close down “early”.

The federal government did have a “contracts for closure” program for retiring up to 2,000MW, but pulled it because the generators were reportedly asking for too much money.

The idea that some generators could be escorted out of the market in a sedan chair with balloon payments in their pockets for compensation will not be welcomed by many.

But Fraser suggested that framing compensation in terms of the costs associated with the physical closure – dealing with asbestos and other environmental issues – could be one that is welcomed by the general population.

“Maybe society would be prepared to pay,” Fraser said. “You could get an improvement in the local environment as well as lowering the carbon footprint.”

The revival of the contracts for closure concept, and its apparent support among some renewable energy developers (particularly in the wind energy space), suggests that there might be some unspoken pact about maintaining the renewable energy target in exchange for a payout to some coal generators.

However, it is also a likely reflection that generators realise that the growing attraction of solar PV will continue to impact on demand and, as Fraser suggested, the economics of coal-fired generators.

Fraser’s deal with ARENA delivered added protection for AGL Energy and its solar project if wholesale electricity prices continue to fall, but means that if prices rebound (if excess capacity is removed from the market), then ARENA will get their money back.

As for the closure mechanics, Fraser says it is an “interesting” question – not just for the legacy fossil fuel assets out there, but also for new renewable projects.

“Ideally, we will get those old plants taken out,” he said.

AGL Energy is unlikely to be a participant in that process, because the Loy Yang A brown coal generator in Victoria – despite being the biggest single emitter in the country – is also one of the most efficient and cost effective. But it would still benefit from any closure of other plants, sponsored or otherwise, because wholesale prices would be higher than otherwise.

Australia is not the only market facing such dilemmas. Germany, much further advanced than Australia on its renewables path, is witnessing the forced closure of fossil fuel assets as the market dynamics change – and despite the withdrawal of nuclear capacity. The issue of carbon budgets is also overshadowing global energy markets, with recent reports suggesting that two-thirds of the coal capacity in the US would need to be shut down. AGL has also been a supporter of a carbon budget for Australia, which would also suggest limitations on fossil fuel generation, over and above a carbon price.

AGL Energy has been a strong supporter of the renewable energy target, and once again took issue with those rival companies who have actively campaigned against the RET, accusing them of “trying to protect the value of the assets that they bought or built.” He said opponents had greatly inflated the cost of renewables.

He didn’t mention names, but AGL Energy’s two biggest rivals – Origin Energy and EnergyAustralia – are campaigning heavily for the RET to be severely diluted, or even abandoned. Both companies have recently invested heavily in NSW coal-fired assets.

Now, another one of those assets is up for sale: Macquarie Generation, which includes the Liddell and Bayswater power stations. The price that is paid is likely to be heavily dependent on estimates of the deployment of large-scale renewables and the fate of the RET, the rate of deployment of rooftop solar, the future of the carbon price, and the likelihood of excess capacity being removed.

All else being equal, they are probably not worth anywhere near what the NSW government would be hoping to obtain. Even the Queensland government-owned Stanwell Corp last year noted that its 4,700MW of mostly coal-fired generation was surplus to requirements.

Keep up to date with all the hottest cleantech news by subscribing to our (free) cleantech newsletter, or keep an eye on sector-specific news by getting our (also free) solar energy newsletter, electric vehicle newsletter, or wind energy newsletter.

Tags: AGL, AGL Energy, Australia, baseload, fossil-fuel baseload, National Electricity Market, NEM

About the Author

Giles Parkinson is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.

Edward

‘But Fraser suggested that framing compensation in terms of the costs
associated with the physical closure – dealing with asbestos and other
environmental issues – could be one that is welcomed by the general
population.’

And the public should pay for this why? You’re a private company, clean up your own s***.
Doug

This is interesting stuff. What’s happening in Italy? Not much news on #2 in solar.
Wayne Williamson

Just one thought on this…I know it won’t be popular, but what happens if the wind doesn’t blow for two weeks, or the sun doesn’t shine(cloudy) for a couple of weeks…
I guess what I’m trying to say is we need backups on top of backups…etc…..
- Doug
  
  Remember Wayne that electricity consumption is lower on cloudy days.
- Bob_Wallace
  
  Please tell us how often we encounter periods of two weeks without the wind blowing. I’ve asked people to do this before and I have yet to see any data.
  
  Now, I’m not talking about the wind not blowing just any old place, but in the sort of high wind areas where we install wind turbines, and 80 meters up in the sky.
  - Wayne Williamson
    
    Yeah, I.m talking about those 1 in a hundred year events. Don’t know if they occur…just thinking ahead….
    Many times we read about having just local sources whether they are solar and/or wind. If we have good transmission capabilities, then chances are, somewhere the wind is blowing and/or its sunny.
    Also, I would like to see them put some wind around me, but there are many days when the wind really doesn’t blow. Probably 20 miles out in the gulf, it is always windy.
    - Bob_Wallace
      
      OK, where’s the data that wind stops for two weeks once ever 100 years?
      
      During times when the Sun also doesn’t shine, the tides not ebb and flow, water not flow downhill, biomass and bio-oil refuse to ignite, and deep Earth also go cold?
      
      The future grid will almost certainly have lots of inputs and transmission ability will be much greater than what we had with the outdated grid. It’s simply an engineering study to figure out how to get by during times of unusually low supply.
      
      You might have noticed how we brought some mothballed NG generation out of storage when the two reactors at San Onofre failed? Or how Japan drastically cut demand and increased other generation following Fukushima?
    - Matt
      
      This is like when it gets so hot, that all the coal/NG/nuclear plants have to stop because the lake/river water is to hot to use for cooling and put back in the source. Already happens to some just need a spell of 110 across the whole world. Or just a region. Name you power mix and we can come up with a 1 in a gazillion event that will require browns outs. Wait this happen all around the world today.
Matt

And people think you need to build nuclear in Auz?