Re­al­ity short-cir­cuits PM’s po­lit­i­cal games

The pol­icy vac­uum is pro­duc­ing some truly bizarre re­sults

The Weekend Australian - - BUSI­NESS RE­VIEW - MATT CHAM­BERS

When a com­pany or­gan­ises a me­dia tour to one of its as­sets the as­sump­tion is that its aim is to show how well it is go­ing and to gen­er­ate some pos­i­tive cov­er­age. But this is def­i­nitely not the thinking be­hind a trip AGL En­ergy has or­gan­ised this com­ing Tues­day, when it plans take a bus­load of jour­nal­ists to the old and sud­denly well­known Lid­dell coal-fired power plant in the Hunter Val­ley.

In­stead, the fo­cus will be on giv­ing the press a first-hand look at how much work would be needed to ex­tend the life of what is now a 45-year-old plant.

And the mes­sage is likely to be­come clearer that AGL’s heavy-hit­ting board will al­most cer­tainly re­ject Mal­colm Turn­bull’s call to ex­tend the life of Lid­dell beyond its planned 2022 clo­sure.

This month, the con­cept of ex­tend­ing the age­ing plant’s life reached en­ergy-cri­sis-panacea sta­tus in the Turn­bull govern­ment’s eyes.

This hap­pened af­ter the Aus­tralian En­ergy Mar­ket Op­er­a­tor said Lid­dell’s planned clo­sure would leave a re­li­able power sup­ply gap of up to 1000MWh.

Iron­i­cally, the fore­cast short­fall that has spurred the govern­ment into ac­tion is based on com­mit­ments from power com­pa­nies in the ab­sence of en­ergy pol­icy cer­tainty that would give in­vestors con­fi­dence to start build­ing more new sup­ply.

In a 90-minute meet­ing with the Prime Min­is­ter dur­ing the week, AGL chief ex­ec­u­tive Andy Ve­sey gave a be­grudg­ing com­mit­ment to take to his board a propo­si­tion to ex­tend the life of Lid­dell by five years or sell it to some­one who will.

But the chief ex­ec­u­tive, who im­me­di­ately af­ter the meet­ing re­peated the line Lid­dell would re­tire by 2022, has also com­mit­ted to com­ing back to the Turn­bull govern­ment with a plan to fill the sup­ply gap with a coal-free mix of gas peak­ing plant, de­mand man­age­ment, pumped hy­dro and bat­ter­ies.

And this is what the AGL board will fo­cus on as it faces the dilemma of hav­ing be­come the fo­cal point of the govern­ment’s re­sponse to an east coast power cri­sis driven in no small way by a lack of pol­icy cer­tainty.

As you would ex­pect of a top 50 com­pany, AGL’s board has plenty of ex­pe­ri­ence and will not be pur­su­ing a non-coal so­lu­tion if an ex­ten­sion to Lid­dell is in the best in­ter­ests of share­hold­ers.

Like­wise, it will not be eas­ily pushed into a Lid­dell ex­ten­sion by govern­ment pres­sure.

The heavy­weight AGL board in­cludes re­tir­ing chair­man Jerry May­cock, a former CSR chief, his re­place­ment af­ter this month’s board meet­ing, Graeme Hunt, a former Broad­spec­trum and Li­hir Gold CEO, long-time Oil Search man­ag­ing di­rec­tor Peter Bot­ten, who has spent the past two decades driv­ing Pa­pua New Guinea’s oil and gas de­vel­op­ment, former Broad­spec­trum chair­woman Diane Smith-Gan­der and former QBE chair­woman and Mac­quarie banker Belinda Hutchin­son.

AGL has been de­vel­op­ing a plan to fill the Lid­dell gap and the board is now work­ing on de­liv­er­ing some­thing to the govern­ment within 90 days, as com­mit­ted to by Mr Ve­sey.

The com­pany wants to in­vest in what it sees as sus­tain­able power gen­er­a­tion that will be around for decades and help the com­pany grow, rather than in­cre­men­tally ex­tend the life of a 50-year-old plant.

The main hur­dle is fi­ness­ing a plan AGL has been work­ing on for some time amid a lack of pol­icy cer­tainty, which makes it hard to test the eco­nomic viability of new re­new­able or gas plants. The board will be hop­ing — pos­si­bly in vain — that some pol­icy direction will emerge in the next three months.

In what is no doubt a source of frus­tra­tion for AGL and its board, the loom­ing Lid­dell short­fall gap ex­ists mainly be­cause dys­func­tional na­tional en­ergy pol­icy means gen­er­a­tors can­not comfortably com­mit to the plans they are hatch­ing that might take the place of Lid­dell.

And there­fore AEMO’s fore­casts, based on com­mit­ted pro­jects, show a short­fall.

In fact, if there was a Clean En­ergy Tar­get, gen­er­a­tors would be keen to fill the sup­ply gap to se­cure mar­ket share.

AGL has its yet-to-be re­vealed plans, and En­er­gyAus­tralia in July said it had 1100 MW of gas-fired plants that it could quickly press the but­ton on if a Clean En­ergy Tar­get was put in place.

Mr Ve­sey has told The Aus­tralian that the costs of ex­tend­ing the life of Lid­dell would be sig­nif­i­cant.

An­a­lysts es­ti­mate any­where from $300m to $600m would be re­quired for a life ex­ten­sion, while AGL has pre­vi­ously said the cost of se­cur­ing new coal to keep Lid­dell run­ning will be close to $60/MWh.

Given fu­tures curves show NSW whole­sale power prices fall­ing from around $100/MWh now to about $70 by the end of 2020-21, back-of-the-en­ve­lope numbers for a Lid­dell ex­ten­sion do not look good. The com­pany has run the numbers and while it will not give fig­ures, its view is they do not stack up.


AGL chief Andy Ve­sey is un­der po­lit­i­cal pres­sure

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