Environment and Energy Minister, Josh Frydenberg has assailed the Queensland government for presiding over (if not conspiring to produce) an outcome in the electricity market which has enriched the state government coffers by $1.5 billion (actually over four years).
Following a reorganisation, the previous three generator portfolios, directly owned by the Queensland government were collapsed into two. It is doubtful that the two businesses were actually formally coordinating their bidding (actions that are illegal) but the understanding of contracts, capacities and likely outages makes it easier for suppliers to take advantage of demand conditions and create contrived shortages when there are only two main players.
Although the Queensland government’s beneficial ownership is less than 50 per cent of the state’s generation capacity, it owns or controls a much larger share of the actual output (wind and gas where there is no government ownership only operates at about one third of its nominal capacity). The Queensland Government owns 63 per cent of the all-important coal generation capacity and has a controlling interest in another 10 per cent.
Competitive factors that Frydenberg highlights doubtless played a role in the profit bonanza Queensland state generators have reaped. But much of the “windfall” to the Queensland Government would have occurred as a result of higher prices in the National Electricity Market stemming from the withdrawal of coal generation capacity, especially Hazelwood and South Australia’s Northern Power Station.
Those events have caused the spot price for electricity to have doubled, alongside the gross returns from the National wholesale market which were $8.2 billion in 2014/15. Although most electricity is sold by contract and not on the spot market, the contracts (which normally exceed the spot price) follow the spot prices after a lag.
This revenue windfall goes straight to the bottom line as costs, except those of gas generators which account for around 7 per cent of supply, have not changed. So the electricity generators are presently earning almost $8 billion a year in unanticipated profits. Coal generators account for three quarters of this.
Everybody has seen those annoying AGL ads for how things are changing and the business is to replace its coal fired power stations between 2022 and 2050 by clean, modern wind and solar facilities. At present over 80 per cent of AGL electricity generation is coal and most of the rest is gas. Electricity price developments have made that asset base extremely profitable.
In its latest investor presentation, AGL reports “underlying profit” as being $720-800 million. However, its gross electricity margin was $772 million in the first half of 2017, up from $714 million in the same period last year. AGL has around 24 per cent of the National generation market, meaning it is earning ‘super profits’ of some $1.5 billion a year from the energy crisis that government policy has created. One industry insider pointed out that the company has engaged highly priced advocacy specialists paid for in coal dollars to burnish its anti-coal credentials.
AGL with the largest coal generation portfolio has benefitted most but other generators will also have profited.
This has possible implications beyond the political capital that Frydenberg is seeking to make by drawing attention to the Queensland situation.
As Michael Sexton points out in today’s Australian, in contrast to Menzies’ day nobody now asks, ‘where is the money coming from?’ – they want the spending and they want someone other than themselves to pay. Governments are therefore voracious hunters of soft revenue raising targets. The electricity market has been totally undermined by political intervention. How long before the Commonwealth recognises that super profits are being earned as a side effect of harmful government actions and, like its Queensland counterpart, moves to grab those profits for itself?