Alan Kohler: How does all the political confusion and heat about energy policy affect the listed company’s do you think?
Tristan Edis: I think it makes it difficult for them. It has its pros and cons. So on the pro side, it makes it difficult for new entrants to come in and invest in substantial new power generation capacity because they don’t know what the long term rules of the game are. To some extent that favours the incumbents who have existing generation in place and we have seen in the last 12 months a huge increase in the underlying wholesale price of electricity, that’s the price that the electricity generators get paid and that has been fantastic news for AGL. They purchased at very low cost, coal generators from the New South Wales government out of privatisation and that’s been a superb acquisition, and at the time that happened, the market was highly over supplied with generating capacity and some question of the wisdom of that deal in spite of the fact it was a very low price for those power stations relatively to what it would cost to replace them, but it has turned out to be superb for AGL because eventually some people bit the bullet and closed some power stations that were very old and AGL has been in superb position to take advantage of the fact that consequently wholesale prices have gone through the roof.
AK: You mentioned closures, the big one of course is Hazelwood which seems to have been a rock in the pond of energy markets in Australia and is having a lot of impacts, can you talk about those effects of the Hazelwood closure are?
TE: Yes, so, I suppose the first thing is that it’s scheduled to close in March, but what we saw was a substantial and quick increase in the price for electricity on what is known as the forward contract market. So you can buy electricity in advance of your needs through a year-long forward contract and the moment that it hit the news that Hazelwood was likely to shut, it took a little while before it was absolutely confirmed by the company we saw the prices on the contact market instantly spike up for 2018, and even 2017 vintage contracts, so that’s what we can see and will start flowing through once Hazelwood shuts, we will see a lift in the wholesale price, but really that has already flowed through to energy prices through the contract market.
AK: And so that’s benefiting AGL, which other companies are benefiting from that?
TE: Well to some extent, the other established retailers with power generation are advantaged. So Origin Energy, relative to AGL, they tend not to have a large amount of generation relative to their electricity load. But they have enough and they also have, I suppose in large size, you get better risk management because you level out peaks and troughs in your customer load and it also advantages Energy Australia who are owned by China Light and Power. Those three are seeing substantial advantages flowing through, not just on the generation side of their business but also retail side of their market of their businesses because the smaller retailers, the ones that don’t have any generation need to go out and get long term contracts for their power and with the exit of ENGIE from the market who own Hazelwood, they haven’t completely exited yet, but they are looking to sell their other assets, so they have sort of withdrawn from the contract market. That has given considerable advantages to AGL, Energy Australia and Origin in their retail arm as well, so they can provide longer term contracts to customers, they have a lower cost of acquisition for getting long term power deals and at the end of the day, these smaller guys are going to have to come to the likes of Origin and AGL to get their power, and Origin and AGL aren’t going to give them a particularly good deal relative to their own business. So there is an expectation, there’s probably going to be a shake out and some of the smaller retailers that are out there, power retailers are probably going to shut down, and that’s going to mean there is less competition in the retail market which should also help margins of the likes of Origin and AGL and Energy Australia.
AK: And I wonder if you help us make sense of the argument of South Australia and the black outs there which obviously has been going on for a while and the federal government’s blaming what is calls, South Australia’s experiment in renewables. Firstly, can you help us pick through this, and secondly, what does it mean for renewable’s companies, like Infigen for example?
TE: So first of all, like most things in the world, it is usually more complicated then politicians make it out. So South Australia has seen the closure of its two major coal front power stations, but one of those coal fired power stations was basically irrelevant already, it was more than 50 years old, and even before the wind farms came along, so between 2001 and 2003, which is basically that wind farms started getting built in South Australia in 2003, so if we just took those 3 years, 2001 to 2003, that’s 1095 days, guess how many days’ places that was not operating or generating any electricity, Alan?
AK: I couldn’t imagine.
TE: 898 days. So 82% of the time, that generator wasn’t even operating. And so its shut down was utterly irrelevant to the market basically.
AK: And not caused by the South Australian government?
TE: No… Well the thing is another complication in all of this, which is the large amount of renewable energy in South Australia, had nothing to do with the South Australian government. They have for a long time pretended that they were overseeing this substantial expansion in the renewable energy sector in South Australia, but South Australian government had precisely zero to do with that. That was due to essentially two things. They already had very high electricity prices in South Australia because they have a greater reliance on gas, and not very much high quality coal in South Australia and so their electricity prices are always on balance going to be higher than any other state in the eastern seaboard. So the wind farm developers were attracted to South Australia by the fact there were high electricity prices there, so that’s one key component, their revenue. The other component of their revenue is known as a renewable energy certificate and that is driven by a federal government mandate not a state government mandate on electricity retailers to acquire a certain proportion of their power from renewable energy. It’s kind of funny that you’ve got a bunch of federal government parliamentarians blaming South Australia for not being able to manage its electricity supply very well, when in fact the reason is lots of renewables in there is partly to do with federal government policy, and it’s partly to do with natural features of South Australia, they don’t have large reserves of coal and gas is expensive.
TE: Well it is kind of weird, isn’t it, that happened. But I suppose the South Australia government tried to take credit for all the renewable energy even though they shouldn’t have been, so they kind of got to cop the slack at the same time. So that was a bit of a public relations move that worked well for them for a period of time. But the issue with the outages, is that you need to look at each one individually to try and understand what is going on…
AK: We don’t have time to go into too much detail with that. I suppose the basic point is that the accusation that it is all to do with too much renewables is over simplistic as well.
TE: Yeah, no it is. So the first one was basically a disastrous leader that led to a wide spread, a state wide blackout. You had a series of tornados rip through the transmission backbone in South Australia and consequently they lost a lot of generation in the state from wind farms at that time very, very quickly, too fast for them to be able to bring on anything on to replace it. But if you took all away those wind farms and you still had the northern coal-fired power site station running, guess what? It relies on that exact same transmission line that got ripped to shreds by those tornados. So you still would have had exactly the same problem occur in South Australia whether you had wind or whether you had coal because of the reliance on this major transmission line got ripped apart by a series of tornados. The other thing is that we are now seeing the supply demand balance, not just in South Australia, but in others states. For example, NSW become much tighter as a result of the closure of the series of power stations, but people need to keep in mind that those power stations are very old, Hazelwood is over 50 years old. The place at be that I mentioned which was the other coal-fired power station was barely running, that was more than 50 years old. The northern power station in South Australia wasn’t as old, but it was dependent on a coal mine that first started operating in 1954 and was reliant on a very long train line to deliver essentially coal that had less calorific values then a packet of cornflakes. So that was a huge cost burden to Alinta who was running it, and in the end they went, this isn’t worth it, you just got to accept that we have to shut this thing down, it’s not going to make money. I think with Hazelwood, they were facing a very large clean up and health and safety remediation bill out of the fact that they had a horrible fire in their mine that burnt for several weeks and coated a nearby town in acrid smoke. So the EPA has demanded that they make a series of investments to make that plant and coal mine safe, and they went, ‘well we don’t know whether this thing is going to be running for that much longer so it’s just not worth us spending that money and we are better off shutting it down’. That’s just the reality we are facing in Australia is, coal-fired power stations, mines, they get old, they become a part of Iran, they need new investment to continue to operate and generally people looking at it going, well I don’t want to sink any more money into this.
AK: So what does all this mean, what’s been going on, but also the political arguments, what does it all mean for all the renewable energy companies such as Infigen?
TE: Well in the short term its very good news for them because power prices are going up and consequently their returns are going up. So they benefit from a higher electricity price because they are generating electricity. Also the degree of uncertainty that’s there, this policy uncertainty and this horrible political conflict that is going on around this issue, means that it’s harder to bring in new supply of renewable energy to fill the renewable energy target and that’s good for companies that have existing renewable energy plans because they are also seeing a lift in price of renewable energy certificates to very high levels. So that has been very good for Infigen that’s been reflecting on their share price which are sky rocketed over the space over the last 18 months. It’s also good for AGL as they are one of the largest owners or contractive parties with renewable energy generation, so it is working out well for AGL as well. Some of the other parties that are out there, they not generally listed so Pacific Hydro, which used to be listed a long time ago, that’s now owned by a Chinese investment company, but obviously it is working well for them as well. Hopefully we are getting through this and we are seeing some new investments flowing into new renewable energy projects, people have enough confidence to contract with projects to know that policy settings won’t be changed, for at least for a reasonable period of time. So we are starting to see investors get back into the sector and build some large solar farms that are now under construction, quite significant amount of capacity so that will work itself out. Hopefully that may mean lower electricity prices and lower renewable energy certificate prices and lower bills for consumers over time.