Power industry players plot their next moves
The government has set new rules on energy but the power industry is hedging its bets in case it all falls apart.
Such a facility seems strange, but be prepared for many unusual events as Australia seeks to claw its way out of the incredible energy mess created in part by state politicians.
Today I am going to give you a sneak preview into a small part of our new world of power generation and gas distribution.
Energy Minister Josh Frydenberg has set the basic rules to end at least some of the chaos and the application of those rules will create our new world.
But the industry players are also starting to hedge their bets in case it falls apart.
Crib Point is the site of an abandoned oil refinery and not far from BlueScope’s Western Port steel works. Once, BHP planned enormous steel works in the area and one day it may become the largest port in Australia. AGL believes that a gas tanker moored at Crib Point, plus enhanced gas storages there, will give it the ability to bring gas to Australia from around the world or from other parts of Australia.
That gas, via the existing distribution system, will then be available at least to NSW and Victoria at world prices.
Of course, as we know, subject to development drilling, Exxon had planned to exploit the vast onshore gas resources in Gippsland not far from Crib Point that don’t require fracking. And discussion had taken place with BlueScope as a major potential customer.
But to get green votes Victoria Premier Daniel Andrews blocked the development, leaving Victoria and Australia desperately short of gas when Queensland’s export contracts sucked gas from down south. Incredibly, Victorian Opposition Leader Matthew Guy backed Andrews but has since come to his senses and will allow the developments.
But AGL is wary and says if it has the ability to bring in gas from the world markets it will keep a lid on the price Exxon might charge for the abundant Victorian gas. Access to abundant gas at or lower than world prices has now become a vital cog if we are to have an Australian renewable power industry that doesn’t thrust the country into the continual threat of blackouts.
Under the Frydenberg plan power retailers must source a proportion of their power from what is called dispatchable power sources — power that can be switched on such as coal, gas, hydro or batteries. AGL’s largest coal station, Liddell in New South Wales, requires big sums — substantially more than $500 million — to restore its reliability and AGL believes that a series of gas-driven plants that can be switched on when required are a better investment than repairing Liddell.
And given that the Frydenberg plan gives flexibility less costly investment other coal power stations may take its place. That might even include AGL’s other coal-powered generator in Yallourn. (In the New South Wales crisis in February, which almost led to a statewide blackout, Liddell started the day with only one of its four generators operating. It had two operating in the crisis but it was a touch and go affair.)
And so in the next year we are going to see a close examination of which coal-fired power stations should be rejuvenated, expanded and made more efficient and reliable and which should be shut.
It is also possible that others will come to a different conclusion to AGL on the economics of Liddell. At the moment Liddell has a looming negative value to AGL because if and when AGL closes the power station in say five years’ time it will require substantial expenditure to restore the site. Exactly how much it will cost is hard to tell. When Alcoa shut Anglesea it cost at least $50 million and Liddell would cost much more.
So a power company wanting to restore Liddell should be able to acquire it from AGL for a negative number provided it has the capacity and the ability to restore the power station, including expanding the coal mines.
AGL’s view is that the money would be better spent elsewhere but there are no certainties and we are going to see a fascinating set of sums as it is decided which power stations should participate in the base load or discretionary power under the Frydenberg plan.
Meanwhile if we have back-up gas-driven power plants that can be switched on it then makes sense to expand renewables, although having a gas plant that is idle for most of the time is very costly. However, there are advantages in scale because a fully diversified renewable portfolio will not require 100 per cent backup. It is unlikely that all of the renewables will go out at the same time — ie somewhere the wind would blow and reduction in solar power has a predictable timing.
In time, when the battery technology improves substantially gas will not be required, but we are not in that situation yet.
Footnote: Note the US market last night became even more confident that Trump’s tax plan would succeed, at least in part, with strong rises in the 10-year bond rate, the US currency and the share market. For background go to “Donald Trump has big win on tax plan”.
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If all goes to plan, a large gas storage ship will soon berth off Crib Point in Western Port in Victoria, and that ship will be the pivot for a significant portion of Australia’s future gas distribution system.