The NSW Liberal government’s announcement for its renewable energy growth plans seals the death warrant for about 6 gigawatts of coal capacity, and is very bad news for the owners of the same.
By 2030, we expect around 6GW of currently operating coal generation will be surplus to requirements. Exactly which generators will close and how soon will depend on competition. In ITK’s main model we have, in previous runs, constrained NSW coal generation to a minimum of 2GW up to 2030. That seemed academic a couple of years ago, but is a live issue now.
In short, if we continue to constrain NSW to have minimum coal generation then all the brown coal generators in Victoria will be in deep trouble. On our numbers all three would be faced with unachievable ramp issues by 2030, which perhaps a battery could help with in theory, but capex likely not justifiable. In that scenario we think it very likely Yallourn will close around 2025.
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If, alternatively, we dispatch entirely on merit order, that is lowest variable cost to highest, then it’s the higher cost black coal generators in NSW that bear the pain. In practice, the reality is that neither AGL or Origin will allow Bayswater or Eraring to run down towards zero every day. They will most likely see that by taking short-term losses they can force Yallourn out of the market.
Caveat: Its also important to note that we have not considered inertia, frequency, voltage and system stability in this analysis. To the extent that AEMO, and the AEMC still don’t have processes in place to ensure those system services can be provided by 21st century technology (read batteries and virtual synchronous machines) then it may be that AEMO will constrain wind and solar off if leaving it on makes coal generation likely to close. We know the answers to this problem but the NSW announcement ups the ante again for rulemakers. State Governments wouldn’t be doing all this stuff if the Federal Government had made policy and if the AEMC had been more forward looking. Nature abhors a vacuum.
Flat load prices $15/MWH lower by 2030 compared to prior estimates
We expect prices to fall around $15/MWh compared to our prior forecast as a result of the NSW announcement although mostly towards the end of the decade. We do expect volatility around the coal generation closures and offer a ray of hope in that the low prices may be enough to keep things like aluminium smelters running.
Thumbs down to AGL, CLP and ORG as investments
Nevertheless what we are left with is the losers. They are CLP (The owners of Energy Australia and Yallourn), AGL, ORG and Alinta and probably some assets owned by Stanwell and CS Energy in QLD that we haven’t got round to yet. Profits for these companies unless they dramatically change strategies are likely to be worse than expected on average.
I have to focus on AGL and ORG because they are listed in Australia but one could include CLP. The management of these businesses have behaved like incumbents in any industry. They don’t believe what’s happening, underestimate the change and try to influence Government to slow things down. AGL, as we have written before, is by far the most culpable because it deliberately bet against climate change and renewable energy when it bought Macgen (the NSW coal assets) and increased its interest in LYA (Loy Yang A in Victoria). That was company-destroying misjudgment.
Even today, management of all three big gentailers seems to see wind, solar, and behind-the-meter as nothing but a threat. None of them has anything of interest to tell investors and investors have largely washed their hands of them. AGL has signed a couple of battery PPAs and maybe one solar PPA in the past few years.
ORG and CLP have essentially done nothing more than the minimum to meet their mass market LRET requirements and nothing new in recent years. Further, the management of all three appears to have given up. Finding a way forward isn’t easy but Orsted and Nextera have shown what’s possible, Orsted being a more recent example. This note focuses on generation, but the majors are also losing share in retail, about 1/7th of the mass market volume is behind the meter, and corporate PPAs have taken say 2.5% of the larger than mass market volume.
Source: NSW Liberal government
Date: Nov 16, 2020
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