Origin CEO Frank Calabria warns on ‘messy’ coal exit
The departure of coal from the national energy market could get ‘messy’, with power reliability at risk, an industry chief says.
Origin Energy has warned of a potentially “messy” energy transition with plunging prices forcing out coal generation earlier than planned while rival AGL Energy says its proposed coal-heavy PrimeCo will have a debt structure allowing lenders to reduce exposure to the fossil fuel.
Both of the power giants are grappling with a fast transition to renewables that has contributed to rock-bottom wholesale prices and raised pressure on the nation’s fleet of coal-fired power stations that still supply about 70 per cent of electricity in the market.
“If you follow the energy sector, you will know the transition is not without its challenges. Wholesale electricity prices have fallen to unsustainable levels, which is placing pressure on the profitability of baseload power stations,” Origin chief executive Frank Calabria told the Australian Shareholders’ Association conference on Tuesday.
“This is where the transition has the potential to get messy, as we are likely to see coal-fired generation leaving the market in a planned and potentially unplanned way, leading to shocks to either reliability or affordability. These are clearly outcomes we all want to avoid.”
Coal plants can struggle to receive any value for their generation when they get undercut by solar and wind that can produce at close to zero cost.
Energy tsar Kerry Schott, chairman of the government’s Energy Security Board, suggested that by adding a new price mechanism reflecting the important reliability role provided by power stations through a “capacity market” could help spur investment before coal plants retire.
Origin said it was an area that needed to be considered.
“The model for investment in energy infrastructure potentially needs to change – currently, energy companies that operate power stations are only paid for the energy that they generate, or what’s called an energy-only market,” Mr Calabria said.
“The low cost of renewable energy drives down wholesale energy prices to low or negative levels much of the time, yet it is the higher wholesale prices that have historically incentivised investment in new generation.”
Origin’s 2880MW Eraring plant, which supplies 20 per cent of NSW’s daily power needs, will switch off the first of its four units in 2030.
The move follows EnergyAustralia’s decision to shutter Victoria’s Yallourn coal power plant in 2028, four years early, while AGL Energy’s Liddell coal plant will close in the summer of 2022-23, sparking a demand for generators to build new supply to avoid a spike in power prices.
AGL is looking to hive off its coal plants into a separate company called PrimeCo as part of a planned demerger but said it was conscious of having the right debt structure to reflect the needs of lenders.
“Given our significant coal exposure, our existing AGL business is subject to growing capital market constraints, both in debt and equity. A separation would allow both businesses to pursue capital structures that reflect their funding needs and market appetite,” AGL chief financial officer Damien Nicks told the ASA conference.
“While not yet confirmed, we envisage PrimeCo would pursue a debt structure providing lenders a clear line of sight to reduce their exposure to coal.”
Both PrimeCo and the carbon neutral New AGL retail business expect to have investment grade ratings as AGL seeks to reposition the company after conceding the power giant’s huge coal unit has led to capital constraints for its existing business.
AGL will provide further details of the proposed split by June 30, including asset allocations, capital structures and key commercial agreements.
“These are two truly strong businesses with compelling growth and investment opportunities ahead of them as independent companies,” Mr Nicks said.
“There is still significant work to do before execution, but we are very confident in our strategy.”
Traditionally the country’s big coal generators run around the clock, reflecting both market demand for the fuel but also the difficulty in tweaking output from huge pieces of machinery that can take hours to properly synchronise with the grid.
But the relentless surge of cheap and plentiful renewables – solar, wind and hydro and battery storage – is sparking a shift among the big baseload coal producers that supply much of the grid’s needs and threatening the viability of the fossil fuel.
