AGL Energy calls for renewables target to be scrapped completely

Giles Parkinson, RenewEconomy

AGL Energy – once the ‘greenest’ retailer in the country and now the largest producer of coal-fired energy – has called for the renewable energy target to be scrapped altogether.

As speculation increased in Canberra and media circles that the Abbott government and Labor would agree on a compromise that would result in a significant hair-cut to the current 41,000GWh target, AGL intervened in the debate by saying that was not good enough – the RET should be dumped completely.

Chief executive Michael Fraser, who has overseen the change in AGL Energy’s business model from green to black, says the RET policy is broken. He endorses the controversial Warburton Review’s more extreme finding that the target should be dumped altogether.

Fraser argued in an interview on Radio National on Friday that Australia should go ‘back to the drawing board’ and consider alternative mechanisms such as feed-in tariffs, or tax incentives – and then consider how much renewable energy it wants to have in the system.

There are a couple of issues with what Fraser has said. For a start, as all the inquiries to date have found, the RET has actually worked very well. It spurred billions of dollars of investment, thousands of jobs, and in states such as South Australia has caused dramatic falls in emissions.

What has caused the hiatus in the last two years is the uncertainty caused by the Abbott government’s review, and the inability of developers to get power purchase agreements from the likes of AGL Energy and others, and therefore to get finance. Still, the government likes to use the ‘target is impossible’ argument – despite its own modelling rejecting the idea. Environment Minister Greg Hunt this week has used it to raise the spectre of a $90/tonne carbon price from renewables.

AGL Energy has an interest in not having a carbon price, or a renewable energy target, particularly since its purchase of the 2.2GW Loy Yang A brown coal generator, and the 4.6GW Bayswater and Liddell coal-fired generators in NSW. That changed the colour of its revenues to $12 black for every $1 of green energy.

As it made clear in July, its long-term business interests now lie firmly in removing environmental policies such as the carbon price and renewables:

‘While the removal of the carbon tax and associated transitional assistance has a negative impact on the short-term earnings of the Loy Yang A power station, it has a materially positive impact on its long-term value. Any reduction in the Renewable Energy Target would also have a positive impact on the value of Loy Yang A.’ Ditto for Macquarie Generation.

AGL Energy, therefore, has an interest in ensuring that carbon and renewables do not trouble its business plan. Earlier this year, it said – and Fraser repeated again on Friday – that the renewable target cannot be reached. Even ACIL Allen, the Warburton Review’s modelers, disagree with that, as do most others in the industry – although any further long-term delays will make it difficult.

Fraser says the EU and the US rely on alternative mechanisms, and maybe Australia should consider things like feed in tariffs. That’s kind of ironic, seeing it was AGL Energy that fought so heavily against the feed in tariffs for solar. It repeated the call for an end to household incentives this year. It also ignores the fact that the EU has a renewable energy target of its own – it has just lifted it to 27 per cent by 2030 (including transport), and so do 29 states in the US. This has underpinned development in renewables in the US, and now tough emission standards are doing the same.

(There is no doubt that mechanisms such as reverse auctions – used to set a feed in tariff – have been effective, in the ACT, in South Africa and in Brazil and elsewhere – the popular in the US too. But again, the size and scope of these auction are subject to constant reviews by the government of the day).

And it is clear that Fraser is talking his own book when he calls for payments to be made for closure for coal-fired generators. It is no doubt attractive for AGL Energy, which says it bought 2,000MW Liddell generator in NSW effectively for zero. It would like nothing better than to get a payment from the government – say from $100 to $300 million – to help with the ‘remediation costs’ of full closure. Many owners of unused coal-fired generators are choosing to mothball them rather than close them, because doing the latter will require them to clean up their mess.

The issue of payments is a hot point of debate within the industry and the environmental groups. Origin Energy CEO Grant King doesn’t like it, Ross Garnaut has dismissed it, arguing that the market should sort itself out. But some say there is no other way than to clear it out of the system.

Fraser even used the ‘lights may go out’ line popularised by former Energy Australia chief executive Richard McIndoe. (To give you some idea of how bizarre Australian energy politics are, McIndoe was Fraser’s predecessor as chairman of the Clean Energy Council, the primary lobby group for renewables. Fraser gave up that role late last year).

Fraser argues that if wholesale prices continue to fall – because of the impact of renewables – then that will drive generation out of the market. We need coal generators, he says, to allow people to ‘keep the lights on’ and ‘cook dinner’. The ‘lights will go out’ argument is trucked around, despite the fact that the industry itself reckons that more than one-third of Australia’s coal-fired capacity is surplus to requirements.

The big generators in Germany spent a decade arguing the same line. The German government refused to buckle, and – somewhat belatedly – those big utilities are now investing in future technologies as they should have done all along, having burned billions of shareholder funds in the meantime.

When AGL Energy first bought Loy Yang A, Fraser argued that the company was not changing its stripes and that the huge profits being spun off Loy Yang A were better in its hands, because it was more likely to invest back into green energy. Easy coal profits can be addictive, however, and that is why AGL Energy were so keen to pick up the NSW coal assets for a song. Increased renewables simply translate into lower returns from those assets, as the Warburton Review made clear.

This article was first published in RenewEconomy.