AGL’s profits from coal likely to attract special taxes

Just to prove that they are doing something to combat high electricity prices, the PM (and his energy Minister) called the major retailers to Canberra.  Mr Turnbull offered the retailers the sharp end of his tongue, admonishing them for the high electricity prices.  Mr Frydenberg nudged them along saying he was reluctant to regulate but unless they looked to reduce prices etc, etc.

The firms promised to do more to advise customers of better offers and many of them said what was needed was a move to the Finkel recommendations of a form of carbon tax which would offer greater subsidies to renewables.   Some of them may even believe this but all of them see more renewable energy subsidies as a more certain means of profitability than fighting it out in the market, especially since government has demonised coal as a future supply option.

Not everybody is hurting on electricity prices.  Today AGL issued its annual report.  This saw a profit rise of 14 per cent for 2017.  It is expecting a further 25 per cent increase next year.  AGL’s profits are dominated by electricity generation which has seen gross margins increase from $1038 million in 2014 to $1549 million last year.

Judging from its tiresome adds (the bearded one and synthetic family appear prominently even in the financial reports) you’d think this must be because of all the renewables AGL is providing.  Well you’d be wrong.  Just 6 per cent of its generation is from wind and solar and a whopping 85 per cent is from coal.

But, rest assured, the future belongs to renewables since the firm shows how they are now cheaper than coal, and on a par even with the insurance (‘firming costs’) they must pay to combat their inherent unreliability.

The disconnect between this picture and the firm’s on-going campaign for (apparently unnecessary) wind and solar subsidies is not addressed.  Nor is there any mention of alternative estimates.  Minister Frydenberg puts the cost of wind with (totally inadequate) insurance at $108 per MWh and the spate of coal plant building across the world testifies to its cheapness – the Minerals Council used one of the most prestigious engineering firms to put Australia’s cost of new coal at under $50 per MWh.

AGL explains how its wholesale prices have shown a healthy increase.  This is purely because of the forced closure of coal capacity in Victoria and South Australia bringing much lower supply (and a previously unprecedented NSW-Victoria export norm).

Since the gross profit is dominated by electricity generation and the costs of the dominant form of generation, coal, have not changed AGL’s escalating profits might be considered to be “economic rent” and this is something that governments – especially those which cannot cut spending to make ends meet, are likely to regard as seizeable without such an act having a disincentive to future output.

They might see such a course as particularly attractive once they realise the fallacy of homilies about exotic renewables being cheaper.  Even for a bladed-on wind fan like Turnbull, the reality must eventually give pause for thought.  Zealots must see some correlation between Australia leading the way in renewable installations and taxes on fossil production while simultaneously being catapulted from the world’s cheapest to the dearest electricity supply.

A government not intent on its own suicide is likely to look at many measures “in order to buy time for the inevitable triumph of exotic renewables”.  Price controls and the absurd requirement that fossil fuel power stations give there years notice of closure are among these.

But increasingly attractive in preventing the price rising before the renewables have achieved their forecast cost parity and resolved their reliability deficit is a government owned or underwritten coal base load power station.  This would staunch the price increases and reduce the chance of outages as reliable power stations continue to close, battered by subsidised renewable competition.   Having it financed by a levy on excess profits earned by the remaining coal generators may prove irresistible.

Such a measures would appear to be the inevitable steps in governments’ destruction of the competitive electricity supply industry that heralded the present century.   It returns us to a version of the nationalised industry that once prevailed and which operated with plant productivity (‘availability to run’) at 20 per cent less than today and with a labour force fivefold that of today.  Some people would see these inefficiencies as progress.

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25 Responses to AGL’s profits from coal likely to attract special taxes

  1. old bloke

    You can read this and weep. Every member of the LNP government should be turfed out of Parliament for the destructive policies which they either allowed to remain, or which they actively encouraged. These people are presiding over the destruction of Australia, sack the lot of them without mercy.

  2. RobK

    The economy cops it in the neck from high electricity prices and the write down due to sterilization of the natural resource,( brown coal in particular as it’s not suitable for export). Funding the accent of renewballs by the atrophication of coal is a costly mistake. Contrary to Finkel’s expectation that eventually prices will fall, removal of the known and proven technologies by subsidizing unproven and yet to be developed ones is almost certainly going to come unstuck as both the source of revenue and the overall market for electricity diminish. Costs will only increase under this regulatory forcing. It would be best to scrap the entire RET scheme for a smooth transition to the future.

  3. Rayvic

    Turnbull and Frydenberg waffle on. They continue clutching at straws, when what is needed is jettisoning subsidies for high-cost uncontrollable renewables and investing in new-technology low-cost coal-fired power stations instead.

    How many business bankruptcies and job losses are needed before the duo get real?

  4. cynical1

    They are now going to have to shit or get off the pot.

    Today’s Courier Mail: The economy is on the road to ruin because of power costs.

    Thank you Mr Gore.

  5. RobK

    The Finkel report did highlight some systemic problems with the bidding system of the National grid and the rorting that follows, but this doesn’t seem to get much attention.

  6. Cactus

    If I was the Premier of NSW or QLD. I would open a tender to produce a coal fired power station. I would open up one of the numerous coal blocks to the bidder and make a long lease part of the package. A firm long term commitment/contract with taxes on that project. No export licence ever for the coal. Then I would get it built and make it bloody huge. Lastly I would announce that I am withdrawing from the NEM & saying that our state is going to be built on the back of competitive low cost power. Let SA & Victoria stew in their boots. Then I would open up/get rid of planning restrictions on a special economic zone. Say West Sydney near the airport, or similar block in QLD. Zone it all up, & say to local & global business – here it is, your cheap land – your cheap power -> go nuts. Imagine!

  7. Cactus

    Btw Alan – your tax on the generators to fund a coal station has a certain elegance to it. But the problem with it would be AGL et al pushing their prices up to pay for the tax. That would be a disaster at the Ballot box.

  8. Rohan

    #2464315, posted on August 10, 2017 at 12:29 pm
    The Finkel report did highlight some systemic problems with the bidding system of the National grid and the rorting that follows, but this doesn’t seem to get much attention.

    Be that as it may, the fact is that NSW, Victoria and South Australia no longer have enough nameplate capacity to supply their energy needs. So QLD is propping up the entire eastern seaboard. If they have a serious prolonged technical issue with a generator, it’s lights out huge parts of the country. I would estimate upwards of 4 million people effected in rolling blackouts at any point in time. It’s insanity.

    Just reopen Hazlewood, build a new Hazlewood size plant at Hazelwood with the latest HELE technology and problem solved so you can decommission the old plant. But no, that would require political resolve, so we’re fvcked.

  9. Kneel

    No need to subsidise coal plants, just remove the subsidies on solar and wind including the “must take” bits – hey, they are “competitive” price wise already with coal/gas, why do they need subsidies? Once that is gone, they (ruinables) can pay for their own stabilisation (which thermal provides “included”).
    Cactus, I like the idea, but the latte-sippers would howl long and loud and get it blocked unless someone has the spine to ignore them. Only need to do it for a few months so that people see more jobs and lower bills, then it’ll keep itself in check, methinks.

  10. Kneel

    Or maybe AGL and other retailers could add a “synchronous bonus” to coal/gas pricing and say “hey, it’s cheaper ALL UP, why are you yelling at us for doing the right thing by the consumer, and why are your policies forcing us to charge more?”.
    Sigh. Never happen, alas. But it SHOULD. And if just one of them tried it, I think several more would be “yeah – that’s right!” even though not prepared to say it first.

  11. Dr Faustus

    … and this is something that governments – especially those which cannot cut spending to make ends meet …

    Which other ones are there?

  12. BoyfromTottenham

    Cactus, I see at least two problems with your suggestion – firstly, the LRET, which forces electricity retailers to buy ‘clean energy’ certificates (currently worth $85/MWh) for some 30% of the electricity that they sell to the public, AS WELL AS having to give ‘clean energy’ preference over baseload (i.e. coal, gas) power. So any state owned coal-based generator as you suggest would be competing against heavily subsidised renewables, the same as the private coal-based generators. IMO the massive subsidy provided by the LRET is the root cause of the chaos in our energy industry, and this madness will not stop until the LRET is abolished. By the way, the amount of ‘clean energy’ that retailers must buy goes up every year until about 2022. And secondly I’m not sure whether a state could ‘withdraw from the NEM.
    One more thing – if you look at the ‘worked example’ on the Clean Energy Regulator’s web page it clearly shows that a hypothetical renewables generator gets about 1.8 certificates for every 1 MWH delivered to the grid, versus the stated ‘1 certificate per MWh’ stated on the same page. If this difference (1.8 instead of 1 certificate per MWh sent to the grid) is typical, and the roughly 20 million certificates created in 2015-16 equals about $1.7 billion. If the formula was corrected from 1.8 back to 1 certificate per MWh, the renewables’ hidden subsidy would be reduced by about $700 million per annum. I have asked the CER about this, but am still waiting for a response.

  13. The Deplorable Barking Toad

    God that is depressing reading that.

    The stupidity of governments of all persuasions, state and federal , will make a case study for future generations.

    In the meantime the country is fucked.

  14. yackman

    Alan, thanks for this analysis.
    my rough read of the AEMO Data dashboard indicates that the daily peaks in the current winter period are around 26,000 MegaWatts for the East Coast system. I have not looked back to see the summer peaks which are higher.
    When total capacity numbers for the system are quoted and average availability is taken into account are you able to comment on the available reserve to cover equipment failure or extreme summer demand?
    Price hit the $14,000 Mwh a few times last summer.

    it is noteworthy that SA has had a wind generator limit placed about a week ago in order to maintain security. (ref Wattclarity)

  15. Major Elvis Newton

    If you were a half-smart Federal politician you would build a coal-fired power station along the rail line form the Adani coal mine with the legislated insistence that Adani provide the coal for its operation.
    Such a forward-thinking initiative would also solve the impending power crisis triggered by the increasing population in FNQ.

  16. Cactus

    Cynical me. Regarding AGL’s bearded fool asking are you with us on our renewable ex-coal journey? Do you think this could be partly the present management/team looking at 1) making out like bandits in the short term by selling coal power at exorbitant rates but 2) shifting the glare of the public to – but but but theyre getting out of it? This also gels with AGL makes lotsa money for the next 5 years, which means lots of mgmt. bonuses but then shafts the long term shareholder who gets it in the neck from devaluing the long term asset base? I.e. skipping across a bridge to a pile of money then throwing a match on it just as you retire?

  17. v_maet

    Cactus @ 12:39

    If I was premier of NSW or QLD I would cut the interconnector to the southern states and watch as they try to claim the environmental high ground while their economy crashes without access to cheap reliable coal power.

  18. David Brewer

    The graph on “estimated cost of new generation” is garbage again.

    The “firming costs” of wind and solar massively underestimate their impact on overall electricity prices.

    This is because wind and solar, because of their intermittency and unreliability, push up the price of all other electricity generation, even without mandates to take them first, which we also have.

    Wind and solar are a different, lower-quality electricity product, so it makes no sense to compare their per-megawatt generating cost to that of other generating methods in the first place. They lead to market dysfunction where wholesale electricity prices no longer send the correct signals to generators about the need for capacity. Gail Tverberg:

    With the strange demand pattern that occurs when intermittent renewables are added, standard pricing approaches (based on marginal costs) tend to produce wholesale electricity prices that are too low for electricity produced by natural gas, coal, and nuclear providers….The marginal pricing scheme gives little guidance as to how much backup generation is really needed. It is therefore left up to governments and local electricity oversight groups to figure out how to compensate for the known pricing problem. Some provide subsidies to non-intermittent producers; others do not….Some countries may let these producers collapse; others may subsidize them, as a jobs-creation program, whether this backup generation is needed or not.

    The only way of getting a handle on the costs of wind and solar is to compare the overall system costs of electricity before and after they are introduced. This we are in the process of doing. The experiment is being carried out on the electricity consumer. He is hurting badly.

  19. MACK

    Interestingly the AEMO dashboard is still forecasting deficits for summer electricity in Vic and SA this summer. Pass the popcorn.

  20. Crossie

    Turnbull and Frydenberg waffle on. They continue clutching at straws, when what is needed is jettisoning subsidies for high-cost uncontrollable renewables and investing in new-technology low-cost coal-fired power stations instead.

    How many business bankruptcies and job losses are needed before the duo get real?

    What do those two care? Malcolm is on the way out anyway and Josh is in a safe seat.

  21. Crossie

    The only way of getting a handle on the costs of wind and solar is to compare the overall system costs of electricity before and after they are introduced. This we are in the process of doing. The experiment is being carried out on the electricity consumer. He is hurting badly.

    It’s been obvious for at least three years that it’s costing everybody much more than it was claimed. Many years before then it was obvious to industry that Australia was becoming unaffordable and exodus to Asia has slowed down only because there is no industry left.

  22. truth

    It’s hard to tell if the big meeting between government and electricity gentailers was frank and fearless as Turnbull claims..or whether each party was just interested in going through the motions while being careful to hide its true agenda…Turnbull’s.. to get something for the next NEWSPOLL and the gentailers… to get everything in place for their ‘transformation’ by force, of the Australian economy… in the heist of the millennium.
    IMO the vertically-integrated gentailers …egged-on by all the carpetbaggers and rentseekers of the financial world …are trying to game Australia’s energy market [ just my opinion] making the retail price of electricity so high that fed-up consumers will fork out the thousands needed for solarPV+ batteries to turn their suburban homes into small-scale power plants.
    The plan of the gentailers is then to round them up and herd them into energy collectives…..the gentailers’ virtual power plants…which gentailers will then control mainly by use of their preferred tool …demand management.
    IMO demand management will very likely end up …once they’ve killed coal stone dead…being RATIONING and COERCION.
    How can it not be …in a situation of supply drought that’s certain to come at some point…with zero base load to fall back on.
    We’ll all B exhorted to do it ‘for the planet’.
    We’re told what Turnbull kept secret…that the gentailers urged [or demanded?] that the government adopt Finkel’s CET asap.
    They’re desperate for the CET because their vertical integration includes their own wind farm and solar farm holdings which of course allow them to get in on the heist of the millennium….the subsidies …aka biggest money shift from th poor to the uber-rich in history…and the merit order effect that helps them to kill off the demonized COAL…to get OUT of our energy mix that vermin that’s powered the economic, scientific, medical and social miracle of the 20th and 21st centuries.
    We didn’t hear from Turnbull…although we knew…that the vertically-integrated gentailers want COAL eradicated as if it were a cockroach plague…while the government is still at least paying lip service to building a HELE coal plant as the rest of the world is doing.
    How deranged is it that Australia is offering itself up for the new gold rush…the RE carpetbaggers rushing to Australia in droves we’re told…a feeding frenzy to get in on the big experiment foreshadowed by AEMO’s Zebilman and AGL’s Vesey…Australia the gormless guinea pig for the high to total penetration of RE…so the world can sit back and find out from our misfortune…if high penetration RE will COLLAPSE an industrialized 1st world economy…or just CRIPPLE it for the foreseeable future.
    How insane is it that we jump like lemmings into this vortex when non-hydro RE generates less than 5% of the world’s electricity…when the world is overwhelmingly powered by COAL and GAS?
    When it’s all over for Australia Zebilman and Vesey will just toddle off back to a thriving, rehabilitated America that’s been snatched back from the edge of the Socialist abyss by the reviled Donald Trump, even as Australia was sinking…and Turnbull will most likely spend his retirement in his luxury New York apartment….while Australia struggles to survive …taking its place in history as the example of how the world’s most bright and shining country can become roadkill for a hoax almost overnight…when a Narcissist mental pygmy is allowed to topple a prescient , commonsense democratically-elected true leader of proven judgment in a MSM-promoted coup.

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