AGL under the weather

The weather has not been AGL Energy’s best friend this past financial year. Mostly it was too mild for its coal-fired plants to make any profits, and when it did get extreme, it sent the cost of its surplus energy purchases soaring.

AGL’s annual accounts reveal that the Loy Yang A brown coal-fired power station, in which it holds a 32.5 per cent stake, returned the unprincely sum of zero in 2010/11, thanks to a slump in wholesale energy prices over the year.

Last year, Loy Yang returned a pre-tax earnings of $108 million, but the apparent loss of $91 million in revenue from the more than 10 per cent fall in wholesale prices effectively wiped out its profits in 2010/11. AGL says it expects no improvement this year.

When the weather was extreme in January and February – with the Queensland cyclone, floods in that state and in NSW, and heat waves elsewhere – wholesale energy prices surged, often peaking at the NEM limit of $12,000/MWh with several days of record electricity demand in NSW and the highest recorded electricity demand in South Australia. AGL also suffered from shut downs from the Yabulu power station and constraints at its Oakey power station, both of which might normally profit from the volatile price movements. The sum total of these events was a $43 million cut to its profits.

The results of AGL, like the other big electricity groups Origin Energy and TruEnergy, are closely followed because of their appetite to invest in new power generation projects, particularly in renewable developments that are needed to meet the 20 per cent renewable energy target.

AGL confirmed that it had continued buying renewable energy certificates throughout the year, spending some $130.8 million over the period and boosting its net position by $94 million.

AGL is currently building three wind projects: the massive Macarthur wind project in Victoria, as well as Oaklands and Hallett 5, but that will be it for the moment. “We’re not committing to any more projects,” managing director Michael Fraser said. “There is still a surplus of RECs washing around the market.”

However, Fraser said AGL would be keeping a close watch on the market. He noted that 3,500MW of new capacity would need to be “on stream” from 2015, and that level would need to escalate rapidly from there. AGL has 700MW of approved wind projects “ready to develop” and a further 1200MW of wind and solar in feasibility mode.

AGL also revealed that it had paid $15 million for its purchase of Rezeko, a national solar PV installer. Fraser said that, despite the winding back of subsidies, the costs of rooftop solar continued to decline and the company envisaged solid growth in the industry. “We are well place to leverage Rezeko’s national footprint,” he said.

AGL will, however, go ahead with a couple of peaking gas developments, mostly in response to surging peak demand. This  includes the 500MW Dalton peaking plant near Goulburn, and a gas storage facility in Newcastle, which would also respond to peak demand. The capital costs of the two projects would be $700-$750 million. Fraser said that the high $A meant the company could get attractive prices on plant and equipment. “It’s a good time to be negotiating,” he said.

As for the federal government’s carbon pricing legislation, Fraser noted that there was a high level of political uncertainty. “Nobody knows whether that legislation will be passed or not,” he said, although electricity markets seem to be factoring in a 70 per cent probability. Assuming that it does get passed, AGL would be a net beneficiary, because its average emissions – courtesy mostly of a $3 billion investment in renewable energy in recent years – was 58 per cent below that of the NEM average.

He said a market-based mechanism was clearly the cheapest way of achieving the bipartisan target of a 5 per cent reduction in emissions. He said AGL’s liability amounted to around 10 million tonnes of CO2e, but it expected Loy Yang A to receive transitional assistance over the first five years, and for the carbon costs to pass through to customers.

Other interesting points from the results included that its profits from eco-market transactions rose 24 per cent to $44 million, a result, the company said, of increased renewable energy generation and “favourable transfer price movements” in green certificates, including RECs and various state-based schemes. This was partly offset by the costs associated with discontinued green schemes and unfavourable tariff outcomes in NSW and Queensland.

AGL said it wrote off $900,000 of exploration costs in relation to the Barossa geothermal project in South Australia.

AGL’s mass market margins also rose around 10 per cent per customer, delivering a $62 million boost to its profits. While much of the focus on rising electricity costs has been the impact of network upgrades, which accounts for more than two thirds of retail price rises, and the cost of green energy, margins have also been creeping up. AGL’s margin per customer is now at $183, up from $166 last year and just above $150 a year earlier.