Yesterday AGL confirmed its plans to close the Liddell coal powered electricity generator in 2022. It did so in the face of calls from the government – even by notorious green aficionado Malcolm Turnbull – for its life to be extended.
AGL epitomises the sort of firm that Warren Buffett invests in – that is a “business any fool can run, because someday a fool will”. It has previously been managed by a fellow fresh from running a Danish wind turbine manufacturer, Paul Anthony, who wiped out much of its value leaving it to now retired CEO Michael Fraser to rebuild value. Fraser did so largely by some astute purchases of coal generators including the planned-to-be-closed Liddell. AGL is now Australia’s largest energy supplier and on top of the 2,000 MW in Liddell it has over 6,000 MW in major fossil plant capacity (Loy Yang A, Bayswater and Torrens Island) plus other smaller fossil fuel plant and, of course, some wind generation.
Under its present management, led by American Andrew Vesey, the firm has taken the opposite tack to that adopted by his predecessor, firmly embracing the notion of wind and solar energy and lobbying for increased and longer-lived subsidies, without which that form of electricity could not be viable. Renewable policies have been responsible for Australia losing its pole position in electricity competitiveness transforming the industry into, on some measures, one of the most expensive in the world.
At the heart of this is the boosting of the wholesale price for electricity from around $40 per MWh to north of $80 today (in addition to which wind/solar receive a subsidy from the consumer of $85 per MWh) That price rise results from the subsidised renewables displacing cheaper coal and, in an outcome the green rent-seekers and their modelling auxiliaries assured us would not happen, bringing about the premature closure of the coal power station – most notably the Victorian Hazelwood facility. It also has brought additional costs to compensate for the intrinsically less reliable wind/solar facilities, costs that the government recognises with its requirement for renewables to have “firming” insurance.
AGL, in its statement to the stock exchange justifying its decision to close Liddell plant showed the costs of different options. With Liddell remaining open it maintained its “levelised cost of energy” would be $106 per MWh; with the plant closing and its output replaced by additional generation from its remaining fossil fuels stations the cost would be $83 per MWh. Not shown is the cost of the subsidies AGL receives for its renewables – these are $85 per MWh at present and $50 in 2022 according to the forward price curve. In other words, the renewable power which is partly to replace the lost generation from Liddell receives between $150 and $165 per MWh. According to work commissioned by the Minerals Council a new power station in Australia would be profitable at an energy price of under $50 per MWh.
AGL claims that it is only closing Liddell because the plant is too costly to maintain. This is untrue – if AGL were to offer to give the plant away, there would be numerous takers but the firm’ s profit depends on the plant’s closure boosting prices throughout the market. With 30 per cent of the nation’s generation and a strong retail position, AGL is well placed to ensure that its activities maintain the current excessive price of electricity. Closing a key and expensive power station is essential to this and the loss of revenue from Liddell is easily recouped by the higher prices received by other power plant the firm owns or has contracted.
In using its strong market position to manipulate supply and boost its profits, AGL is exploiting and magnifying the damaging effects of renewable subsidies. It supports its actions in a most sanctimonious manner starting with the ads where an actor impersonating a bearded lefty introduces the future of renewables with, “let’s face it! Things are changing.”
However, calling AGL a rogue firm for this role may be unfair. Its management is, after all, only seeking to maximise shareholders’ wealth.
The upshot of AGL increased income at the expense of the nation as a whole is the clear derivative of years of subsidies to accelerate the onset of the ever receding future of low cost renewable energy. It stems from government policies, and the Turnbull government is only maintaining a policy set by John Howard, 17 years ago (a policy Howard now says he deeply regrets). The policy was not curtailed by Abbott, who with Australia’s accession to the 2015 Paris Agreement set the stage for its continuations but now appears to be saying he’d terminate all subsidies forthwith. That approach is also favoured by the Lib Dems, One Nation, and the Australian Conservatives, (but not Bob Katter who’ll take any subsidy he can get).
It is five years before the scheduled Liddell closure which offers windows for policy change but if the nation is not to face almost irreparable harm to industry competitiveness early policy corrections are essential.