Origin Energy managing director Grant King tells Climate Spectator editor Giles Parkinson that the company has bought up enough renewable energy certificates at bargain prices to last them up to three years.

And while Canberra remains in political deadlock, King warns companies like his will take the course of 'the lowest risk decisions' while the policy outcomes remain uncertain.

Meanwhile, King is convinced of the immediate potential of gas to provide baseload power in conjunction with renewables, pointing out that geothermal baseload power is still up to four years away.

He also argues that, while warnings about electricity consumption in the advent of electric cars have merit, concerns about capacity are probably overblown.

Giles Parkinson: Grant, thanks for joining us. What’s your reading on the current political situation and the implications for your business?

Grant King: Look, without being too sort of evasive, clearly the electoral task is not yet done, and that’s extraordinarily unusual in an Australian context. So, we don’t know who the next government is and, frankly, I’m not going to speculate. I have no idea how it plays out. I only know what I read in the papers. So, clearly the electoral task is not yet done. It is possible that there are different outcomes which could have different implications for important public policy issues like climate change and carbon emissions, at large, and specifically in relation to the company. But to speculate today how they play out is just not possible because, as I say, the electoral task is not yet done.

GP: Sure. But you’ve argued strongly for a carbon price in the past and been fairly consistent about that. 

GK: Yes.

GP: Neither mainstream party came to the election with a carbon price proposal. Were you disappointed in that?

GK: By definition we are because it’s impossible to advocate that that’s the most efficient solution and then be sanguine when it’s not implemented. But equally, you know, we do respect that the community elects its politicians and they make our policies. So, from my point of view, you look through the carbon price into the commitment that is bipartisan and that is that both parties took to the election a reaffirmation that they desire to reduce carbon emissions by 5 per cent on 2000 levels by 2020. My inclination is always to look to the area where there is bipartisan support and recognise that the difference between the parties is as to means rather than to end.

GP: Yes, but you’ve said in the past that important investment decisions need to be made now for the investment in Australia’s energy industry, and whether we have or don’t have a carbon price is going to influence what sort of decisions are made and what sort of costs are imposed.

GK: And that’s correct, so hopefully make some sense of that comment… I don’t believe it makes sense to argue nobody will invest in the face of uncertainty. Now, what people do when faced with uncertainty is make those decisions which risk the least amount of capital. In other words, you make the lowest risk decisions you can. And so to the extent that our governments have chosen a particular policy position, we will still see investment, but it will be different investment than that which would otherwise occur under some different policy setting, and the risk that we’ve always pointed to is that under the current policy settings, for example, we will build a system that has a lot more renewables, arguably a lot more wind. We’ll build into that system a lot more intermittency. We’ll put a lot of open cycle gas in to balance that system out.  We’ll have much more volatile pricing as a result of that. And with renewables like wind, you know, the wind can blow all night when we don’t need the power for example, so we’ll have long periods of maybe even negative prices which will make subsequent investments in different forms of base load generation much more difficult.

So, there will be a set of consequences that arise from the current policy settings, but at the end of the day people will still invest and we’ll still have our power. You know people will still get electricity for example, but whether it would be the least cost, most effective system that you could have otherwise had is highly debatable.

GP: And with a carbon price, I think you argued that then you can actually go ahead with some of these baseload gas facilities, for instance.

GK: Well, we will, inevitably, because a carbon price clearly will cause fuel substitution and that’s from more carbon intensive to less carbon intensive fuels – and that is the one shift that our economies have to make. At the moment, to the extent that politicians are not doing that through a carbon price, they’ll try and do it through other means like efficiency or mandatory schemes like the renewable scheme. In my view there’s little evidence that people or policymakers can connect the costs that that will cause to incur in the system, compared with the costs that a carbon price might have caused in the system.

GP: Let’s turn to the renewable energy target. Origin has not announced many renewable energy projects. I understand that’s because you’d been filling your obligation by buying RECs (renewable energy certificates) on market. Can you explain what you’ve been doing and why?

GK: The simplest way to think about that is to say that the penalty rate in the RET scheme is effectively $60 before tax and about $90 after tax, and that is effectively an indicator of where people think the long-run marginal cost of renewable energy will be. In other words, It’ll take that sort of subsidy to cause investment in renewable energy. Against that $90, RECs were selling at $30 to $40 and, from my memory, are still selling somewhere in the $40 range.  That’s probably less than half their true cost.

So, from our perspective, what we’ve done is built lots of opportunities. We have well over 2000MW of wind development sites in our portfolio. We’re spending a lot of money and doing a lot of work trying to make geothermal energy work and we’re investing a lot in solar energy. But right now, well certainly in the last year and early this year prior to changes in the RET scheme, we were able to buy RECs at far less than their replacement cost and it clearly makes economic sense to do so.

GP: And you’ve built up about two or three years’…

GK: We think, in respect to our current demand, we’ve sort of probably bought two to three, maybe more, years’ worth of RECs depending a lot on what of course our retail load does.

GP: And what might the trigger price in the RECs be for you to start pushing the green button on some of those wind... on some of those renewable projects?

GK: The reason prices are low is because the market is long and that is probably in part to do with the multiplier outlet that occurred with the solar RECs. But inevitably, physical capacity has to exist to provide the RECs in the market and so, eventually, the RET price would have to rise to that price necessary to cause that investment to occur. So if RET prices start approaching the sort of $60-$80 level, you’d think that you’d be seeing investment. The prices don’t have to physically be there, we just have to believe that that’s where they’re heading, then you’d start to look at investment again.

GP: I think Origin’s modeling suggests that wind will account for an awful lot of the RET obligation. Is that a good thing, or would it mean that there would be the building of some sub-standard or even sub-economic assets?

GK: It’s sort of slightly a different thing. We’ve said that the technology that is currently mature enough to invest in this is wind, and if it turns out that wind meets most of those requirements, certain things will occur and clearly one of them is the consequence of the intermittency attached with wind and the need to firm that up with a substantial amount of, most likely, open cycle gas generation. Now, it transpires that if there were competitive economic sources of baseload renewables, you know, i.e. if geothermal can be competitive, then that diagnosis would change. But it is not yet clear that those sort of baseload geothermal energies will work economically and it’s our view that it’s still some years, two, three, four years away before that question will be answered.

GP: Yes. I was going to ask about geothermal. Do you see more potential in the so called deeps – the hot dry rocks – or in shallower and more conventional resources? How do you see that playing out, or is it just too early to tell?

GK:  Too early to tell is the short answer. Look, we see a lot of potential. I mean if you just talked about a resource, the resource potential is massive, like CSG’s resource potential is massive. You know, are there sweet spots; and how much of that resource can be economically accessed, is the key point. And it’s still, as I say, some years away before we know the answer to that question.

GP: Can we turn to solar? Your solar business has jumped to more than $100 million in revenue. What are your forecasts for this sector and what sort of margins are you getting?

GK: Look, we haven’t disclosed any particular margin information. What we have said is the business has grown to the point where its EBITDA contribution is actually becoming material.  It’s actually contributing to the bottom line and in growing businesses often that’s not the case for the first few years when you’re putting all your money back into building the business.  Clearly the growth in rooftop PV has been driven by strong state and federal, particularly state-based, feed-in type tariffs and net and gross feed in regimes that are pulling through a lot of PV, you know, rooftop PV.

We have a substantial share of that market, in part because we’re also wanting to establish a channel in the market for the technology development that’s occurring in what we now call Transform Solar, our joint venture with Micron, and clearly what we’re trying to do there is develop, and we believe we have developed and are now in the process of piloting, new technologies for making, you know, much more competitive, cost competitive, solar cells.

GP: Would that be applicable to smaller-scale solar modules or also large-scale installations?

GK: Both. Both. Absolutely both.

GP: What is the potential for large-scale solar? There seem to be a lot of different views on this, about whether it is a competitive priced technology…

GK: Well, I think the important point to note is, to effectively state the obvious, if solar is on the rooftop, it’s competing with delivered price of energy and, to be very simplistic, if you take 50 per cent of delivered energy costs and network charges, then solar is actually worth twice as much on the rooftop, as it’s avoiding those network charges, than it is out in the paddock somewhere acting like a power station.

GP: Yes.

GK: So, if you then go back to the technology and look at how technology might drive down the costs of solar cells, clearly they are going to be more competitive on the rooftop before they are competitive as a source of generation out there in the paddock, sitting beside a gas turbine or a coal-fired power station or a wind farm. There is a migration, but the growth market in solar PV is just a rooftop market because they are they are going to be much more competitive at a delivered price than at a wholesale price.

GP: OK, the cogeneration market; you’ve made an $8 million investment in Cogent last year – what are the opportunities there and will you be a bidder for the City of Sydney tender?

GK: I think we are is the short answer. There’s nothing new about cogeneration, we built Australia’s largest cogeneration plant in 1997 in Osborne in South Australia. It’s a very sophisticated,  expensive plant. What’s changing is that we are likely to see, and it goes back to our earlier discussion around the public policy position, you know, in the absence of a carbon price I think we’ll continue to see more and more intervention in the market around energy efficiency and building standards and that will force developers to look at much more efficient energy or energy efficient technology. And so our interest in things like trigeneration is because it’s likely, and you referred to the City of Sydney project, it’s likely that it will require much more efficient technologies to be used.

GP: Yes. I actually meant to say trigeneration rather than cogeneration before… But what do you see as the potential for what is known as distributed generation?

GK: Again, and this is going to sound a bit contradictory to my prior answer, the argument for the economics and benefit of distributed generation is the avoidance of network costs, but as equally that generation needs the network costs, depending on the technology, to back it up.  And so there is always going to be a symbiotic relationship between networks and generation and it is likely that more forms of distributed generation might become economic. But not yet. In the absence of carbon pricing or other drivers it is still more competitive to generate our energy in large-scale plants and transmit the energy than it is to develop it in millions of small-scale plants, you know, in households. Now, that equation is probably beginning to change a little bit.

GP: Now, you’ve mentioned electric vehicles and electric vehicle networks. You are in a partnership there, you’ve suggested that they could be a game changer in the market and that you were looking into it. What did you mean by that?

GK: Again, it’s a public policy question. But at the end of the day, if there is a desire to reduce… Well, two reasons: One, carbon intensity; and two, urban air quality, the use of, you know, oil petrol as a transport fuel and if electric vehicles prove to be part of that answer, then they will, of course, substantially impact on the demand for electricity, off our power stations in our grids.  Now, the general perception would be that the interesting part of that equation is that you’d put your car away at night and charge it up at night. So it has significant implications for adding more demand for energy in terms of fuel and power generation, but not necessarily a big impact on capacity, because if you fuel up again, or you top up again overnight, that has some quite significant implications for the way our grids work.

GP: Ernst and Young and Boston Consulting in the last couple of months have both published reports on the outlook for the energy industry, predicting the potential disruptions from, I guess you could call it, new technologies such as smart grids, smart appliances, energy efficiency and electric vehicles and the introduction of different business models. Do you see those sort of same disruptions heading your way in the energy industry?

GK: I think it is nearly always the case that technology often gets taken up more slowly than people think. How long has a smart meter been around? 30 years? I don’t know, a long time.  We’ve seen the compulsory rollout of smart meters in Victoria, but we still haven’t seen tariffs approved to use them. So, I don’t think they’re going to be disruptive, frankly. I think there is no question that technologies exist that can be applied in very different ways, but I don’t believe they’re going to be disruptive in the way that a consultant might use the word disruptive.

Let me give you a practical example: The petrol engine is still alive and well. I don’t know how long ago the petrol engine was, you know, declared an industrial dinosaur, but if you watch, what’s the show, Top Gear, they drove a BMW, an M3, versus a Prius, and the M3’s fuel economy was better. And I’m only making the point that we’ve had lots of technological alternatives for the petrol engine, but it still sits in most of our cars. So, look, although these technologies are exciting, they’re interesting, we’re not going to throw out this massive investment we have in all of our existing networks and suddenly replace them with a whole bunch of new technology.

GP: That’s an interesting point. So, what are you hoping, most of all, then, from public policy from Origin’s point of view. You’ve obviously got a lot of gas that you’re building out in Queensland and elsewhere. What are you looking for from any new government?

GK: My view is that I would look for the same from any government and I know it’s going to sound awfully high level, but I believe the community has a right to good public policy, thoughtfully designed and effectively implemented and I would expect that challenge sits in front of any government. At the end of the day, the sort of reactive 'do anything, do something' type policy environment is not good. I, again, would expect that the policy that’s put in front of the community is, as I say, thoughtfully designed and then effectively implemented.

Now, you know, I accept that there are different ways of getting to the same end and, if we go back to where the conversation started, there is a bipartisan commitment to a 5 per cent reduction in carbon by 2020. There may be different legitimate paths of achieving that objective, but there is bipartisan commitment around that objective and whoever wins government would, in my view, set about achieving that target, but in a thoughtfully designed and effectively implemented manner.