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)|
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.