The Case for Seizing Liddell

There is supposed to be a gas shortage on Australia’s east coast caused by the LNG plants in Gladstone sucking all the methane molecules out of the country. But AGL has a plan to shut a coal-fired power station and replace it with mostly natural-gas powered diesel engines. It just doesn’t make any sense. And, at the same time foreign companies continue to build wind farms subsidised by the Australian taxpayer.

Part of the background to this situation is that the game in the energy sector has moved from traditional utilities doing the investing and selling the power themselves, or selling it to a utility retailer, to one in which small developer teams run around doing all the approvals, including getting land, applying for network access, conditionally contracting an EPC firm (Engineering, Procurement and Construction), legally organising contracts, ie., the full development of a project short of financial close, and then selling the nearly done project to an investor.

Usually, to obtain project finance you’d have to put in 30%-40% equity and the bank(s) put in 60%-70% debt. But the traditional bank approach is that the developer must have a power purchase agreement (PPA) with a high grade retailer (state-owned monopolies preferred).  So, unless they were traditional big utilities, aspiring developers wouldn’t get too far.

Now, once you have developed a project to the stage of obtaining all approvals but short of obtaining a PPA with a big retailer, you can turn around and sell the project to an investor with deep pockets, which can bring in its own 30%-40% percent equity and re-contract the hands-on work to others. But instead of going to private banks, the investor goes to the “federal subsidisation bank” called Clean Energy Finance Corporation (CEFC) to obtain cheaper debt.  As stated, CEFC doesn’t require a PPA with a big guy as it is willing to take risk in the wholesale (spot) electricity market.  The investor who has bought the project will also take risk in the wholesale market. But because the money that CEFC uses is Australian taxpayers’ money, commercial risk is passed from the investor, bank and retailer under the traditional model to the public purse.  The market is being distorted by a federal agency, CEFC, elbowing private banks out of the game. The CEFC lends cheaper money than private banks and punts in the more volatile wholesale power market (compared to a long term PPA).

There is no problem with punting in the wholesale market as long as it’s done by private parties who should be able to hedge to minimise spot-market risks.  They then should get the return commensurate with their risk-taking.  I think the traditional model of forcing 20-year PPAs onto a developer or investor was too inflexible, itself forcing development of major projects into the hands of state-owned utilities because banks prefer them to private developers. To repeat, state-owned entities are implicitly guaranteed by taxpayers.

Australia developed wholesale power markets that are flexible and large in order to break up the monopoly of state-owned utilities.  These wholesale markets enable small players by providing them with a ready market, instead of them being beholden to state-owned monopolies.  But rather than forcing banks to learn how to deal with the new world of flexible and competitive wholesale market, and lend to smaller private suppliers to help them enter the market without seeking recourse to taxpayers’ money, government is destroying the rationale of the competitive private market by offering massive amounts of tax money through CEFC and ARENA (Australian Renewable Energy Agency), the latter dishing out equity money to complement CEFC’s debt offers.

To be fair, agencies like CEFC and ARENA are the messengers, as they only do the federal government’s bidding, which is to facilitate renewable projects as much as possible. At the end of the day, voters put the government in and, in so doing, they agree to a stronger renewable uptake.  You can argue that voters don’t mind the government dishing out their money to help renewable projects get up.  The only thing is that such a crowding-out effect on private lending has a detrimental impact on the free market as a whole.  Meanwhile, renewables remain too expensive to enter the market without those significant subsidies. Our power-supply sector is a high-cost shambles because government swings with the Greens, who held balance of power for so long.

It really gets serious when the cheapest and most reliable bits of our power supply system are being destroyed for ideological reasons. So far that has been the case with the Port Augusta power station and Hazelwood in Victoria. Apparently the latter was scheduled to close in 2021, but that wasn’t soon enough for Premier Andrews who sent in Worksafe to find fault with the power station. Some half a billion dollars worth of things in need of fixing figured, so the plant’s owner brought forward closure instead.

Now the action shifts to NSW, where AGL plans to close its Liddell power station in 2022 and replace it, in part, with 750 MW of natural gas-fired, piston-engined generation. Based on what AGL is building at its Barker Inlet power station near Adelaide, the generators will be 18 MW each with the ability to also run on diesel. These figures from an AGL presentation on 13^th December shows AGL’s rationale for such a setup:

AGL plans to profit from a power-supply system that has been made unreliable and “spiky”, revelling in that inherent unreliability by capturing the high prices it creates. Batteries are too expensive for that, but diesel engines provide the fastest reaction times and can be brought on in smaller increments than gas turbines.

Liddell doesn’t have to close in 2022. AGL has put out numbers showing that keeping Liddell going will cost more than the scheme it has concocted, but anyone who has worked for a large company knows that job security often depends on providing provide management with nothing more tnor less than the numbers they are looking for. As Liddell is of limited value to AGL, by its own admission, then compensating for nationalising it won’t cost much. It should then be run by some power station engineers who like being power station engineers and are proud of their work. This is the optimum outcome from here.

All it would take to happen is for the re-emergence of members of parliament who have an interest in the welfare of the country.

David Archibald is the author of American Gripen: The Solution to the F-35 Nightmare