AGL: using market power to mint profits

Alinta’s bid to buy AGL’s “unwanted” power station for $250 million has been rejected.

Energy Minister Josh Frydenberg pointed out that AGL valued the power station at zero in 2014 but back then electricity prices were under $40 per MWh, about half of their present levels.  The plant was sold by the state government for only one million dollars on the advice of Kerry Schott, who also advised the sale of Vales Point, now valued at $750 million, for $1 million.  Ms Schott’s clairvoyance was rewarded by Prime Minister Turnbull appointing her as the head of the leading energy industry quango!

Tony Abbott is calling for a compulsory purchase and re-sell, arguing that the firm is closing the power station only so that the decline in capacity will boost prices for its other generation.

The Coalition comprises a wing that is tearing into AGL recognising the firm as the corporate gouger that policies have allowed it to become.  Frydenberg is seeking to balance this and the Turnbullites, who might even endorse the vacuous ALP spokesman Andrew Leigh’s labelling of the Abbott proposals as representing, “the coal dinosaur factions who want to see taxpayers’ money go to subsidise coal-fired power plants”.

Based on its February 2018 interim results, Liddell is producing some 7,000 GWh of electricity a year – about 17 per cent of AGL’s output.  Based on the average price at spot this year of $85 per MWh, its revenue would be about $600 million a year.  Coal and other operating costs might, on the basis of the opportunity costs of contracted coal, be as much as $30 per MWh.  That would still leave a gross profit before interest, tax and maintenance of close to $400 million a year.

Some market players claim, as they have done for the past three years that, with all this wind and other capacity, the price will soon “collapse” to $60 per MWh.  In that case, gross profit before interest, tax and maintenance would be around $200 million.

AGL claims it is rejecting the Alinta offer because it, “significantly undervalues future cash flows to AGL of operating the Liddell power station until 2022 and the repurposing of the site thereafter.”  The repurposing includes the odds and sods of a 100 MW upgrade of the Bayswater coal plant, a new $400 million gas power plant in Newcastle and new solar and wind plants and plans further gas, hydro and storage investments.  Some of these are said to be located on the existing site.

For AGL a number of “what if” modelling runs would have been undertaken.  One might see the price of electricity dropping to $70 without Liddell, bringing some savings through the reallocation of coal and the increased subsidised wind share, offset by increased costs of gas.  One scenario might see AGL’s electricity portfolio looking like this:

volume (GWh) price ($per MWh) costs ($per MWh) profit ($M)
With Liddell 44600 70 25 2,007
Without Liddell 43000 80 25 2,365

It goes without saying that the profit gain to AGL shareholders is at the cost to electricity customers across the nation.  If the price is $80 rather than $70 there is a cost to customers approaching $2 billion a year.

AGL could, if it was simply seeking to get a price lift, mothball the plant immediately.  This however would run into at least two problems.  First, mothballing involves continued on-going costs with no offsetting revenue and the firm needs time to commission some new capacity better to take advantage of the price rise.  More importantly, a mothball would need to be justified on the grounds that market prices made the plant unprofitable.  Such a claim would, given the recent doubling of prices, raise the eyebrows even of an ACCC reluctant to intervene, notwithstanding AGL’s commanding 44 per cent of the NSW market.

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37 Responses to AGL: using market power to mint profits

  1. OneWorldGovernment says:

    Alan

    From 22 May 2017 to 18 May 2018 the AGL share market price has dropped nearly 15%.

    Obviously a well managed company, not!

    In this case I agree with Frydenberg that Australian taxpayers should not bail out the useless AGL, except as a pass through arrangement as Tony Abbott has suggested.

    But something has to be done to get rid of all the subsidies on ancient windmill and solar technology which has hardly progressed for millenia.

  2. OneWorldGovernment says:

    And giving tax dollars to ancient windmill and solar technology providers is robbing the poor.

  3. OneWorldGovernment says:

    AGL has a market cap of approx AUD$14.15billion.

    If you took out the subsidies payed by Australian Taxpayers what would their Market Cap be?

  4. OneWorldGovernment says:

    Free markets in Australia.

    Don’t make me laugh.

  5. OneWorldGovernment says:

    From the Open Topic (OT).

    egg_
    #2716308, posted on May 21, 2018 at 2:42 pm

    A (former) State Govt asset that’s being exploited by an (overseas) rent seeker, ENRON style.

    I used to work Collins Street back in the 1970’s and AGL was one of the finest Asset classes you could ever want.

    Now they employ a former Enron ‘spiv’.

    {Sinclair D. I will take this one]

  6. Evan says:

    It’s wonderful that someone like Alan is able to publish his work at a sheltered workshop such as this.

  7. OneWorldGovernment says:

    From the OT

    Dr Faustus
    #2716315, posted on May 21, 2018 at 2:45 pm

    When asked if there was any further action the government would take to try and keep Liddell open, Mr Frydenberg said: “One thing I can give you a guarantee on is we will not allow any shortfall in the domestic energy market”.

    A free tip.
    When you have no control over the energy market, no Plan B, and the major players are pulling your pants down in public – try not to give guarantees you don’t understand and can’t possibly deliver.

    No, don’t thank me…

  8. Tom says:

    The Australian political class fully endorses the high-cost, anti-consumer, anti-competitive, low-growth toilet the Australian economy has become as a result of policy settings supported by both major parties — in spite of the inevitable investment drought that’s on the way as capital heads for the booming US economy.

    We’ve never had this before: both major parties are fully signed up to communism’s long march through capitalism. Voters have no choice.

    Australia has become a textbook example of how to destroy not only an economy, but a democracy.

  9. OneWorldGovernment says:

    Evan
    #2716352, posted on May 21, 2018 at 3:27 pm

    It’s wonderful that someone like Alan is able to publish his work at a sheltered workshop such as this.

    Glad you know best about sheltered workshops Evan.

    I would not have known about Alan unless you had told me.

    Thanks Bro

  10. OneWorldGovernment says:

    Tom
    #2716374, posted on May 21, 2018 at 3:43 pm

    The Australian political class fully endorses the high-cost, anti-consumer, anti-competitive, low-growth toilet the Australian economy has become as a result of policy settings supported by both major parties — in spite of the inevitable investment drought that’s on the way as capital heads for the booming US economy.

    We’ve never had this before: both major parties are fully signed up to communism’s long march through capitalism. Voters have no choice.

    Australia has become a textbook example of how to destroy not only an economy, but a democracy.

    They haven’t quite destroyed democracy yet Tom.

  11. Alan Moran says:

    Evan aka evcricket, notorious troll and recipient of copious funding from renewable programs and his clients who are lobbying for more such funds, indifferent to the economy undermining this causes; such a disgrace!

  12. Tom says:

    Yes, Alan, I do remember evcricket hanging around the Cat as a swampfilth parasite, hanging shit on people who work for a living.

    Has this clown ever had a real job in the private economy or (as I suspect) has he spent his entire existence living off other people’s money?

  13. OneWorldGovernment says:

    Alan Moran
    #2716378, posted on May 21, 2018 at 3:47 pm

    Evan aka evcricket, notorious troll and recipient of copious funding from renewable programs and his clients who are lobbying for more such funds, indifferent to the economy undermining this causes; such a disgrace!

    Tom
    #2716392, posted on May 21, 2018 at 4:01 pm

    Yes, Alan, I do remember evcricket hanging around the Cat as a swampfilth parasite, hanging shit on people who work for a living.

    Has this clown ever had a real job in the private economy or (as I suspect) has he spent his entire existence living off other people’s money?

    no no no no

    You blokes have got it all wrong.

    Evan is an intellectual.

    Did I say that right Evan.

    Evan, Evan, Evan.

    Where are you Evan?

  14. jock says:

    As i see it agl is acting rationally given current energy and environmental policies of both sides of politics. Freydenburg can weep all he likes but they support the policies that agl is intent on keeping to.

  15. OneWorldGovernment says:

    jock
    #2716405, posted on May 21, 2018 at 4:08 pm

    As i see it agl is acting rationally given current energy and environmental policies of both sides of politics. Freydenburg can weep all he likes but they support the policies that agl is intent on keeping to.

    jock

    Anyone but anyone that supports taxation subsidies for ancient solar and windmill technology are nothing but thieves.

  16. Dr Faustus says:

    The Coalition comprises a wing that is tearing into AGL recognising the firm as the corporate gouger that policies have allowed it to become.

    Nicely encapsulates the Government’s problem.

    Having laid out a lavish banquet of policy settings that restrict competition, yummy subsidies, and special market rules, the Government is now horrified when AGL turns up, invited and welcomed – and throws itself onto the table, gorging and scrabbling and belching, showing no sign of leaving, stuffing its pockets with the scraps, farting loudly, and without once thanking its host.

    Its the unintended consequence you have when you have no idea what you were doing.

  17. Exit Stage Right says:

    Had great pleasure in changing my energy provider from AGL to Alinta Energy about two months ago. 28% guaranteed reduction in energy bills for two years and likely extension after that. Same supply cost, kwh usage charges, so no down side that I could see. The switch was prompted mainly by that abysmal AGL TV ad blowing up power stations and that bearded American hippy saying “are you with us?” Each time it came on my wife and I said spontaneously in chorus ,”no f**cking way”.
    Woman from AGL rang me last week trying to convince me to stay with AGL and that AGL is a 180 year old Australian company and does more than just provide energy. Gave her an earful on renewable energy and that the TV ad turned our family off-she ended up hanging up on me .
    Today got a very sneaky letter from AGL which at first read looked like authority to transfer all information to Alinta. After a closer read, it was asking me to sign the document and send it back to AGL reply paid authorising them to cancel my dealings with Alinta. I’m sure older people trying to switch may have thought like I did, it was to sign over to Alinta. Letter went into the shredder.
    The main reason AGL gave for staying with them was, wait for it, Fly Buy points you accumulate when paying your AGL bill! For chri**sake you accumulate Fly Buys at the rate of $1 for every $200 spent. No incentive whatsoever.
    Just thought I would share this experience with fellow Cats.

  18. Thanks Alan.

    AGL is acting in the best short term interests of its shareholders (exploiting the scam).

    The govt. operates the scam (RETs et al) and takes a cut called company tax and GST.

  19. stackja says:

    AGL laughing at the ‘experts’.

  20. Dr Fred Lenin says:

    The total removal of taxpayer (not government. Taxpayers) subsidies ,and penalties imposed on coal fired would be the death knock for the carpet baggers industry ,be nice to watch the comrades of the union mafia explain to the wukkas where their super went ,bit of violence at meetings do you think ? It would also reduce donations to politicians for helping the carpetbaggers ,and no cushy “jobs” when they retired “to spend more time with their families “ , be delicious wouldn’t it ?

  21. H B Bear says:

    Meanwhile in WA the beggar-thy-neighbour rooftop solar scam threatens to bring down the entire house of cards.

    Not forgetting that every kW of rooftop solar consumed does not contribute to the poles and wires that these households require in mid February when the 4 split systems are running at full bore and electricity is being generated by inefficient banks of open-cycle gas turbines.

  22. Singleton Engineer says:

    “AGL could, if it was simply seeking to get a price lift, mothball the plant immediately. This however would run into at least two problems… ”

    Plus a third problem. Under the current market rules, large generators cannot be mothballed or closed permanently without first giving 3 years’ notice to the “Regulator”, a.k.a. the wind and solar generator owners’ best friend.

    I’m not sure whether outright sabotage is excluded. Australian Greenwash Limited probably still has short term exit options for its Liddell asset.

  23. Evan says:

    Worth noting Cats, that your author and claimed free-market economist supports the state seizing corporate assets. Read this thread for evidence
    https://twitter.com/evcricket/status/998427884770312193?s=19
    I wonder what else he wants to nationalise? Free market when it suits, communist when it doesn’t.

  24. nemkat says:

    So, from now on, anything Tony Abbott deems an unproductive asset can be confiscated by the State, and gifted to someone more deserving.
    Spare bedroom Tax on steroids.
    Then, come 2022, Alinta closes Liddell down anyway.
    But, keep listening to Tony Abbott, he makes Comical Ali sound credible.

  25. Tel says:

    Read this thread for evidence

    The thread where you call yourself a troll, and Alan calls you a liar? It’s evidence of something… you obviously are not telling lies about trolling.

  26. egg_ says:

    Free market when it suits,

    What current free market?

  27. Bruce of Newcastle says:

    AGL has a near monopoly on retail gas infrastructure in the Eastern States.
    They have realised that solar and wind energy require gas in large quantities.
    Wind availability is typically less than 30% because the wind only blows some days.
    When the wind doesn’t blow, and when it erratically changes, gas is required to make up the difference.
    Because AGL controls the gas, and because the state governments have restricted or banned gas extraction, as soon as Liddell closes the gas price will skyrocket.
    At that point AGL will put out a press release about how they have proactively built a LNG import facility.
    Then they will sell that imported gas into the Eastern States market at a huge profit.
    No one else will be able to because they won’t have infrastructure.
    And everyone will look mystified about why the AGL shareprice has gone crazy.
    The bonuses for senior AGL executives that year will be most yummy.

  28. Bruce of Newcastle says:

    OT: hey Ev, you are a bird nerd? Are you in a bird group?
    I get 9 or 10 species eating out of my hand every day, sometimes more.

  29. stackja says:

    Al Gore showed the way to make money.

  30. Barry Bones says:

    Alan,

    You sound like a communist.

    It’s AGL’s plant and they can do whatever they like.

    If you don’t like it, then build your own plant. That is, put up or shut up ! But please – for the love of gawd – stop whinging !!

    The reality is that renewable with firming up capacity is the future. It’s cheaper and cleaner. Time to get off the coal ideology my friend. It’s getting rather embarrassing!!

  31. manalive says:

    The reality is that renewable with firming up capacity is the future. It’s cheaper and cleaner …

    Bullsh1t.
    Rooftop solar subsidies will cost consumers $1 billion this year alone, up to $100 ripped off aged pensioners single mums disabled, simply to satisfy the selfishness and vanity of a new parasitic class.
    And Frydenberg is a hypocrite: “… a compulsory acquisition of Liddell would be against Liberal values …”.

  32. Evan says:

    Is there any argument for nationalising Liddell that isn’t also an argument for nationalising the banks?

  33. Tom says:

    Evcricket, was there ever a single minute of your pathetic existence when you weren’t a tax-hoovering parasite living off other people’s money?

  34. AlanR says:

    Here is a company doing what it is legally obliged to do – act in the best interests of its shareholders by maxamising profit and company value – and here is the author complaining about that. Strange mixed messages there Alan.

  35. egg_ says:

    Here is a company doing what it is legally obliged to do

    If the rules dictate exploitation – change the rules.

  36. Evan says:

    Hi Tom thanks for your question. Yes, there was a moment of my existence when I wasn’t hoovering whatever you said.

  37. Fang says:

    Hang on! Dont have to nationalize anything! Stupid politicians (all persuasions) can stand up at an impromptu press conference, and say ” we polys have stuffed up big time, and have voted unanimously to cease and desist ALL subsidys for renewables and carbon fossil fuels!
    We firmly believe, that the the free market will more closely control the market better than any goverment controls can ever do. So with no futher to do, All Ret, renewable subsidys and fossils fuel subsidys will ceist and desist from this date and time righ now!
    Notice to general public, that the next 24 hours will be a bit problematic, but the free market is realy good at sorting this stuff out very quickly. 🙂
    And it will almost guarantee it will be significantly cheaper than currently is now! Eventuality.

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