Largely unnoticed by much of the press, the federal government and its Energy Security Board have dreamed up a plan to bail out the owners of coal-fired generators, and it’s you who will be paying the bill.
Most of the private-sector owners of these coal-fired generators bought these power stations for a song, at prices well below the replacement cost of the power plants. One of them, Trevor St Baker (number 149 on the Financial Review Rich List 2021 with a net worth of $727m), picked up his power plant – Vales Point – for less than the price of the average Sydney home at $1m. AGL, which paid a fair bit more than $1m for Liddell and Bayswater, nonetheless still boasted to investors that it had paid so little for these power plants that it could shut Liddell immediately and the deal still made fantastic money.
Now in fairness to the owners of these power stations, the reason they picked them up for such a small amount of money was because they knew, and so did everyone else in the electricity industry, that these power stations were on borrowed time. If you took politicians, including Liberal party politicians seriously, all these coal power stations had to be phased out over the next 10 to 20 years. This was in order to meet Australia’s international commitment to help contain global warming below 2C.
However, what a number of the purchasers of these power stations realised was these power stations would be incredibly profitable in the next few years after they bought them. AGL and Origin Energy laid out very clearly in investor presentations the logic behind why they bought these highly polluting power stations, in spite of all their glossy sustainability reports claiming a commitment to address climate change. These presentations pointed out that gas prices were about to skyrocket due to the start-up of gas liquefaction plants that would allow huge quantities of gas to be exported to Asia. With this rise in the gas price, electricity prices would soon follow as gas power plants typically set the price in the wholesale electricity market.
Their predictions were spot on.
Nothing better illustrated the subsequent astronomical rise in profits of coal generators than the experience of St Baker’s Vales Point. The power station he and his business partner had bought in 2015 from New South Wales taxpayers for just $1m was by 2017 valued at $730m.
But as everyone expected, eventually someone would do something a least half serious about addressing global warming and the good times would come to an end. Analysis by myself and analyst Johanna Bowyer indicates that between 2018 and 2025 Australia’s east coast grid will connect an amount of wind and solar capacity that is capable of generating as much electricity as the entire state of NSW consumes. This extra supply with no fuel cost will drive power prices down to record low levels such that five of Australia’s coal-fired power stations, including Vales Point, will be losing money.
The financial industry here in Australia but also around the world has now come to realise that loans and investments involving high-polluting assets are a very risky proposition, because there are at least a few powerful politicians that take climate change seriously.
Now St Baker and the owner of Loy Yang B coal power station (Chai Tai Fook Enterprises – which is predominantly owned by a very wealthy Hong Kong family) are complaining that the banks won’t lend money to their power stations. According to St Baker this is just virtue signalling by the banks. But of course, if this was just a matter of satisfying woke, inner-city lefties, rather than sensible management of financial risk, you have to wonder why the highly wealthy owners of these power stations aren’t willing to make up the financing gap themselves?
Still, into this void the federal government and the Energy Security Board would like to volunteer you – the electricity consumer.
Of course, they don’t put it this way. Instead, they disguise this bailout with a convoluted name – the Physical Retailer Reliability Obligation. What this will mean in practice is that you will pay these coal generators not for the electricity they actually produce, but instead for their potential capacity to generate electricity, even if it is rarely, if ever, used.
The proponents of this bailout will try to suggest that this is not a unique idea, because a number of electricity markets around the world, including Western Australia, provide an extra payment to power plants for their capacity, irrespective of how much it is used. But there’s a critical difference between Australia’s east coast market (the NEM) and these other markets. Most electricity markets around the developed world impose caps on how high they allow prices to rise but Australia’s NEM has an extremely and unusually high price cap, which now stands at $15,000 per megawatt hour. To put that in perspective the average price of electricity in the NEM over the past 12 months was between around $45 to $65 per megawatt hour. Meanwhile in Western Australia’s market, the highest price allowed is less than $600 per megawatt hour.
The justification historically for the east coast NEM’s very high price cap is that its wholesale spot market only pays generators when they actually generate electricity, and some power plants will only be needed for brief periods when demand spikes on very hot days. To make it worth their while, we have to pay these generators a very high price for this short burst of electricity. But if we are moving to a system like Western Australia that pays generators an extra fee just in case they might be needed, on top of a payment for their actual generation, the reason for this ultra-high price cap disappears.
Bizarrely though neither the Energy Security Board nor the federal energy minister have indicated that consumers will see a compensating lowering of the extremely high price cap in return for being forced to pay coal and gas generators a universal minimum income.
This exposes the reality that this isn’t any kind of thoroughly considered reform to position the electricity system for a long-term future. Instead, it is a desperate quick fix to try to bail out owners of coal generators from an onslaught of renewable energy which they should have seen coming.
If we really want to improve the reliability of supply, propping up old, inflexible power plants that financiers see as the walking dead isn’t the best way to go about it.
Tristan Edis is the director of analysis and advisory at Green Energy Markets