In a fake free market 2000MW = 1000MW and Liddell coal is worth more destroyed than sold

The Australian Fake Free market is so screwed. What asset is worth more in the trash-can than sold to a willing bidder?

Everyone is talking about Liddell. The old coal plant is on the chopping block in 2022 and we can see the electricity price rise coming from here.

People in Australia are going without their veggies to pay for electricity. Liddell coal plant makes cheap electricity (like old coal plants everywhere). This is a problem that would solve itself if not for Malcolm Turnbull, the RET, and the AEMO. It takes a lot of money and whole fleets of bureaucrats to stop the free market fixing this by default.

AGL is the largest coal-fired producer in Australia, but it’s also the largest generator in toto and the largest investor in renewable energy on the Australian Stock Exchange. Spot the conflict of interest? The company controls 30% of the generation in our two largest states, and 40% in South Australia. The man in charge of AGL – Andy Vesey – formerly of New York, earns $6.9 million a year, and can probably afford to pay his own electricity bill. But as Tony Cox points out, he has surrounded himself with Gore-trainees and Get-Up and ALP staffers. Not a great combination for a man controlling something like a fifth (more?) of our generating power. Not surprisingly, after the NSW government practically gave the old coal plant away for free to AGL in 2014, it appears the company has been running Liddell into the ground.

Rather than being incompetent, this is no doubt part of the plan, and an advantage for shareholders in the new tribal world of Good-Lectrons:Bad-Lectrons. After a few more years of AGL management, it won’t be worth taking over.

When 2000 is equal to 1000

Another example of “these people are not good with numbers”: AGL plans to replace 2250MW of reliable coal with 990 – 2050MW of random unreliables. Thanks to Judith Sloan at Catallaxy:

What could possibly go wrong?

Can someone ask Vesey to explain how this renewable solution will make electricity cheaper when supply shortages will be more likely, a cheap generator is taken out of the bidding, average bids will rise, and short-supply-spikes will surely be more likely?

The best coal plant is a dead one?

Three years after buying two large coal assets that generated 11% of the total Australian grid, AGL’s new boss said no one would buy coal. Publicly trashing the value of their own assets is not normally the way CEOs attract investors or start a negotiation.

“We do not believe that any private capital will invest in new coal plants,” CEO Andrew Vesey told the assembled analysts. “Someone may say they want to, but that does not mean they will.”

So much for that theory. No one wants coal except for the people building 1600 new plants in 62 countries. Three companies have already offered to buy Liddell. Alinta is suggesting $1 billion:

Alinta Energy has flagged a $1 billion offer to take control of the Liddell power station as AGL faces mounting political pressure to sell the ageing coal-fired plant in NSW to extend its life by up to seven years.

AGL ‘s excuses not to take that offer are “creative”:

But AGL resisted the building pressure yesterday, saying it was relying on Liddell to generate power for its customers until 2022. “We will require its infrastructure for our replacement plans into the future. We have received no offers for Liddell,” AGL said. “AGL received an approach from Alinta last night expressing an interest in entering negotiations to acquire the Liddell power station … Should a formal offer for Liddell be received, it would be given consideration in order to meet our obligations to customers and shareholders.”

Bankers explains AGL won’t sell Liddell because then electricity will get cheaper:

But research from analysts at JPMorgan yesterday said it was unlikely the deal would ever eventuate due to a number of market and logistical reasons.

Selling the power station to Alinta would hurt the wholesale prices that AGL can charge for energy from its other assets, the analysts said, while also helping a rival that is determined to eat into AGL’s market share. Operationally, Liddell and AGL’s nearby Bayswater power station are supplied with coal from a single coal loader and are subject to a number of contracts that would need to be unwound.

“Extending (Liddell) would likely have a negative impact on wholesale prices, and therefore the value of the rest of AGL’s generation assets; it would support the growth of a competitor in electricity retailing; and a separation from Bayswater would be complicated with the two assets intrinsically linked,” JPMorgan said. – Paul Garvey, The Australian.

Lower wholesale prices means “good news for customers” and “bad news for expensive retailers” — like owners of renewable generators. Many are blaming the privatisation of an electricity generator, “a national asset”, but the real crime was nationalizing our electricity market and Big-Government demands that we use our generators to cool the climate.

There’s immense political pressure, but AGL won’t sell:

“AGL is under immense political pressure but the Australian government at this stage does not appear to have the power to force a change, with the ACCC appearing to indicate that it is entitled to close the asset and AEMO indicating if (AGL’s post-Liddell) plan is adopted the shortfall will be covered,” Macquarie said.

Here’s a little history and background on what’s becoming an issue of major national interest.

Liddell – bought for nothing — zero dollar value

AGL made it clear to investors in 2014 that it had acquired the 2,000MW Liddell generator for free from the NSW government, bundled in with the Bayswater Plant like a toy with a McHappy Meal.

At the time, AGL valued Liddell as a very low coal electricity supplier generating at $20/MWh. (That hasn’t changed in 2017. See page 6). Two cents a kilowatt hour?

When cheap bidders are lost, the winning bid goes up

The AGL investor presentation in 2014 pointed out that both old black coal plants in NSW were among the cheapest electricity providers on the Australian national grid. SRMC means Short Run Marginal Cost. If we can get rid of a few more of those cheaper megawatt providers, the “winning” bid prices will keep rising up that curve. And in Australia, every successful bidder gets the price asked by the top winning bidder. On this graph below, with Liddell gone, each time National demand hits 25,000MW instead of 27,000MW, higher bids will win. This is what caused the step up when Hazelwood closed.

In the worst instances, three times the plant’s equipment had oil supply failures that led to turbines grinding to a halt in about 10 minutes compared with 40 minutes under normal conditions, “basically wrecking” the machinery.

The engineer also noted how Liddell routinely has at least one of its four units out of operation, and that half of the four units were suddenly unavailable on February 10 – the first day of a record NSW heatwave – due to leaks in boiler tubes. That poor performance was despite its turbines being replaced about a decade ago.

A new group in Australia has formed to talk some sense and call for Hazelwood 2.0 and an extension of Liddell. Good on The Monash Forum. I’ll be talking more about that soon and the incredible furor their sensible suggestions have raised.

Ownership of the generation on the Australian Grid:

AGL is the green one “on top”.

The rise of “gentailers” – vertically integrated major players

We haven’t even started talking about the problems of having a few big players controling one market. The AEMO has this to say about “Vertical Intergration” which rose from 15% of the national generation to 47% in the last nine years:

.5.1 Vertical integration

While governments structurally separated the energy supply industry in the 1990s, many retailers later reintegrated with generators to form ‘gentailers’ that own portfolios in both generation and retail. Three retailers—AGL Energy, Origin Energy and EnergyAustralia—supply 70 per cent of retail electricity customers in the NEM. The same entities expanded their market share in NEM generation capacity from 15 per cent in 2009 to 48 per cent in 2017. Vertical integration allows generators and retailers to insure internally against price risk in the wholesale market, reducing their need to participate in hedge (contract) markets. But reduced participation in contract markets reduces liquidity in those markets, posing a potential barrier to entry and expansion for generators and retailers that are not vertically integrated. – AEMO State of the Market report 2017

* [PS: The fine print in the graph in the middle "low cost NEM" notes that it excludes plants with SMRC costs above $350/MWh which are Anagaston , Snuggery, Port Lincoln, Mt Stuart and Mackay (all versions of diesel/oil/kero generation). Just in case you were wondering. Diesel backup comes at a savage price.]

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