Hot on the heels of the decision by Origin Energy to bring forward the closure of its nearly 3000-megawatt Eraring coal-fired power plant in NSW by seven years comes the bid by Canada’s Brookfield (with Mike Cannon-Brookes a minor party) for AGL Energy.
At this stage the AGL board has rejected the bid; there’s no doubt there is a long way to go before there is a final resolution.
The Brookfield bid is being headed by Mark Carney, former governor of the Bank of England, and a committed greenie. He runs a large climate-related fund within Brookfield. He has spent much of his time since his retirement from the BoE in 2020 travelling the world attempting to convince financial institutions to put net-zero emissions by 2050 front and centre in their decision-making.
Using his knowledge of the Canadian electricity grid, including its regulation, Carney reckons AGL Energy is ripe for the picking given its ownership of several coal-fired power stations and the scope for investments in renewable energy plus storage. The intention is to close the suite of coal-fired plants earlier and to be completely out of coal by 2030.
This not only will lead to lower emissions – which he and Cannon-Brookes regard as important for the planet, notwithstanding Australia’s small overall contribution to global emissions – but also will be profitable for Brookfield shareholders.
Carney has concluded his ambitions can be achieved without raising electricity prices and without using additional gas (as a source for peaking plants backing up intermittent renewable energy). Further analysis may prove him wrong on both counts, and government reaction to higher prices needs to be factored into the investment case. (Think here the price caps imposed by the British government.)
AGL Energy holds the dubious honour of being the largest single emitter in the country. Its plants include the soon-to-be closed Liddell power plant in NSW’s Hunter Valley, the nearby Bayswater plant (the closure of which has been brought forward) and the large (brown coal) Loy Yang A plant in Victoria (which provides 30 per cent of that state’s electricity). The company’s plans include the sequential closure of its coal-fired plants, with the last one going in the 2040s. Its intention to demerge, with its fossil-fuel assets in one company and its other assets (retail and clean energy) in the other, was announced last year.
It is worth outlining here the relatively short life of the national electricity market, which came into effect in the late 1990s as a result of the National Competition Policy. It created a large interconnected system using a common set of rules and regulations. Based on a mixture of private and public players, the system initially was characterised by excess capacity and 24/7 coal and gas plants (mainly coal) and falling prices. There was no intermittent energy to speak of in the system.
The NEM still has a mixture of private and public players (the Queensland assets remain government-owned) but there is now a great deal of intermittent energy in the system requiring backup. While much attention is paid to wind, the bigger recent factor has been solar, with its rapid penetration, particularly rooftop solar, and its falling cost.
As a result of this development the system has become increasingly unstable and the Australian Energy Market Operator regularly is forced to intervene in the market, including by calling up reserve supplies. Its latest planning document, the contentious Integrated System Plan, envisages even greater take-up of renewable energy but has nothing to say about the impact on prices.
Several questions emerge from these recent developments:
• Can Brookfield really accelerate closure of AGL’s coal-fired plants without risking stability and reliability of the grid and without raising prices significantly?
• What is the required capital spend, given many renewable assets last only 15 to 20 years and their efficacy declines across time? (This is in contrast with large centralised, well-maintained coal-fired and nuclear plants, for instance.)
• Apart from Snowy 2.0, what real options are there for significant storage? (There are limited options for pumped hydro plants, and technical leaps for batteries have not been forthcoming. Note here batteries don’t generate any power themselves and provide power for several hours only.)
• Will there be more push-backs from rural communities concerned about the rapid spread of (to some, unsightly) renewable energy installations and new transmission lines and the loss of arable land as a result?
• Given that Brookfield owns the transmission assets in Victoria, will there be legal competition objections to the deal? This may be where Cannon-Brookes comes in to navigate a solution.
• Is the NEM really suited to the whims of private sector decision-making based on evangelical thinking by executives as well as making money for the shareholders? Zealous bureaucrats could be added to this list.
There is a tremendous amount at stake, not just for households in the eastern states but for businesses, current and prospective. Can you imagine a large smelter setting up shop in NSW given the news on Eraring and now the AGL Energy takeover? At this point it will be touch and go for current energy-intensive plants to survive, particularly if a Labor federal government puts a tightened safeguard mechanism (emissions cap) into force.
It is also extraordinary that these risky developments are occurring as an energy crisis has emerged in Europe, in part because of growing dependence on intermittent energy (and a predictable wind drought through most of last year) and the associated need to turn to expensive gas, often sourced from Russia.
To be sure, Australia has solar, but the sun has an annoying habit of going down in the evening and waiting until dawn to rise. Running a grid with high penetrations of solar (and wind) makes running the NEM in the early part of the century look like child’s play.
Let’s hope this potential tsunami hitting the NEM doesn’t involve galloping electricity prices – the current European experience – and sporadic brownouts and blackouts.
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