AGL Energy faces $90m hit from Loy Yang A coal breakdown

The loss of a quarter of Loy Yang’s capacity could cut profit by $25m a month, analysts have warned.

The breakdown of a coal generator at AGL Energy’s Loy Yang A plant in Victoria could reduce the power giant’s net profit after tax by nearly $90m if the facility remains out of action until August 1, RBC said.

The loss of a quarter of Loy Yang‘s capacity could cut profit by $25m a month, with RBC now assuming AGL will be required to buy additional electricity from the spot market given shortfalls caused by the breakdown.

Buying more electricity on the spot market will be more expensive given future wholesale electricity contract prices have risen to over $150/MWh in NSW, and over $100/MWh in Victoria since the outage.

Based on exchange traded futures contract pricing, NSW and Victoria future wholesale electricity prices will likely be higher this year than they were in 2019,“ RBC analyst Gordon Ramsay said.

“These factors imply the cost to purchase additional spot electricity volumes will be slightly higher than in 2019, possibly offset by a shorter shutdown period for Unit 2.”

The power retailer told The Australian on Saturday that wholesale power prices will stay high for years as the power grid rolls through a bumpy transition.

AGL may turn to other generation units to top up supply and will likely run the rest of Loy Yang at higher rates to make up for the shortfall.

“AGL may also turn to its other generation units for additional electricity supply, although we note AGL closed a Liddell NSW generation unit on 31 March 2022 which would now limit the ability to obtain additional electricity generation from that plant,” Mr Ramsay said.

Moody’s Investors Service also warned that faster than expected exit of coal generation from Australia‘s power grid requires significant investment in replacement capacity to ensure market stability.

The closure dates for big coal plants in NSW and Victoria have been brought forward by AGL and Origin Energy given profitability challenges as solar and wind eat into margins.

“We believe coal-fired thermal generators will face accelerated retirement as baseload coal producers are facing challenges in operating profitably, depending on access to ample volumes of low-cost coal,” said Arnon Musiker, a Moody‘s senior vice president.

“We expect rated utilities to manage the obligations associated with closure, particularly environmental remediation, as well as seek to repurpose sites into renewable energy sites, which can defer rehabilitation costs.”

Some $47bn of investment is required in new supply to offset the closure of coal plants, Moody‘s said referencing data from the Australian Energy Market Operator.

“Based on AEMO projections and assuming timely execution of project pipelines, generation capacity is likely to be sufficient to meet demand in the National Electricity Market,” Moody‘s said. ”Such conditions should help to constrain volatility and facilitate price discovery in energy markets, an important credit driver for the power utilities that need to source power at a predictable cost to maintain their sales margins.”

Executing big projects within budget and deadlines remains important given the risks of coal closures and broader price volatility, Moody‘s added.

Separately, AGL will look to convert coal ash into construction bricks at its Bayswater power station in NSW after signing a memorandum of understanding with Nu-Rock Building Products.

The technology converts large volumes of solid and liquid industrial waste into building products with 30 jobs to be created if the plan progresses.

“This technology is a great example of using various value streams, as we produce energy at Bayswater to power the state, our coal ash waste can be recycled for the better by Nu-Rock into bricks that can be used in local construction projects,” AGL chief operating officer Markus Brokhof said.

The 180-year old power giant has already announced a plan to close the doors of the Bayswater coal plant in NSW’s Hunter Valley up to five years early by 2030 while Victoria‘s Loy Yang A facility faces the axe from 2040 from its expected retirement in 2048.

Both Bayswater and Loy Yang A will form part of Accel Energy should a planned demerger proceed with plans to eventually switch the sites into low carbon industrial energy hubs.

AGL closed down 0.8 per cent at $8.41.