Victoria faces winter power curb as AGL Energy’s coal unit knocked out

The biggest power station in Victoria, which provides 30 per cent of the state’s power needs, may be without one of its four generation units until August 1.

Victoria’s largest power station could be without one of its four generation units at the Latrobe Valley plant until August 1. Picture: AAP

Victoria faces the loss of coal power generation over the critical winter demand period after AGL Energy revealed an electrical fault at its Loy Yang A plant had knocked a unit out of service, sparking an earnings hit at a time of high electricity prices.

The state’s largest power station, which provides 30 per cent of Victoria’s power needs, could be without a quarter of its 2210 megawatt capacity until August 1 during the critical winter period of power demand.

AGL said on Wednesday an investigation had started after unit 2 was taken out of service due to an electrical fault on April 15, the second time in three years the same unit has experienced a major fault.

The length of any outage and any measures to ease its impact are still being assessed and AGL said the August 1 date for it to return to service was highly preliminary and subject to change.

The loss of a major coal unit represents a worst-case scenario with the power giant now self insured, Morgan Stanley said.

AGL suffered a similar problem at Loy Yang A in 2019 with a seven month breakdown. While it recovered $100m in lost earnings from business interruption insurance, it has now shed those insurance benefits.

“As a reminder, this generator was rebuilt in 2019 over 7 months and costing $100m in earnings when Victoria prices averaged $90/MWh,” Morgan Stanley analyst Rob Koh wrote in a note to the investment bank’s clients.

“ AGL recovered those losses from business interruption insurance, however AGL is now self-insured. We view a repeat of this scenario as a worst case.”

The coal plant breakdown represents a missed opportunity for an earnings bounce given spiralling wholesale electricity prices, Morgans said.

Wholesale spot prices have more than doubled in Victoria to $122 per megawatt hour from an average of $57MWh for the fourth quarter of 2021.

“My impression is that the impact is likely to be a missed opportunity rather than a large drop in earnings. The other units at the plant are running close to 100 per cent capacity whereas typically the output of this unit would be more like 70-80 per cent,” Morgans analyst Max Vickerson told The Australian.

“My base case assumption is that AGL‘s short position is probably limited but we won’t know for sure until the company provides more information. The flip side is also that AGL can’t participate in the very high wholesale prices that otherwise might have boosted the second half of 2022 earnings.”

 

AGL’s interim profit in February dived amid low power prices and an upgrade to its annual earnings guidance may now be under pressure given the generator malfunction at Loy Yang A.

Underlying earnings for 2022 were expected to be between $1.275bn and $1.4bn compared with previous guidance of $1.2bn to $1.4bn while underlying net profit was seen between $260m and $340m from a prior forecast between $220m and $340m.

Volatile market conditions in the last few years have routed profits for some of the industry’s biggest names and piled pressure on AGL’s coal-heavy generation portfolio, forcing it to split the company in two amid pressure from investors to act.

AGL fell 3.2 per cent or 28c to $8.52 after dropping as much as 7 per cent earlier in the day.

The Australian Energy Market Operator, which runs the power grid, currently forecasts sufficient supply to meet demand.

The energy operator plans to update the market on the financial hit from the breakdown after ongoing assessments have been completed no later than the first week of May.

Australia’s fleet of coal plants can still provide more than 60 per cent of power for the national electricity market but many facilities are being closed earlier than anticipated amid a wall of cheap renewable power supplies during the day.

Loy Yang A started operations between 1984 and 1988. AGL bought the station in 2012 and recently completed a $60m upgrade to change old systems to digital control technology.

AGL has already started closing its Liddell coal plant in NSW’s Hunter Valley while the 180-year old power giant has also announced a plan to close the doors of the Bayswater coal plant in NSW’s Hunter Valley up to five years early by 2030.

The Loy Yang A facility also faces the axe from 2040 from its expected retirement in 2048.

AGL is also proposed to split itself into two, becoming an energy retailer while Accel Energy will be the country’s largest electricity generator, housing the big coal plant sites.

AGL and Snowy Hydro this week questioned a blueprint for Australia’s electricity grid, arguing the assumptions used to model fast coal plant retirements and critical transmission projects may result in higher costs, project delays and an increased risk of blackouts.

A plan released in December by the Australian Energy Market Operator found coal was set to be extinguished from Australia’s electricity system up to a decade earlier than planned, ­exiting three times faster than ­expected, with a nine-fold increase in wind and solar capacity needed by 2050 to meet net zero emissions targets.

AGL said the favoured “step-change” scenario based its coal retirement assumptions on meeting long-term carbon constraints, which do not currently exist, rather than actual market conditions such as generator revenues.

Originally published as Victoria faces winter power curb as AGL Energy’s coal unit knocked out