Origin Energy CEO Grant King has warned that crucial investments in energy generation may still be delayed by political uncertainty around carbon pricing, even if the Clean Energy Future legislation is passed by parliament this year.

In a broad-ranging interview with Climate Spectator, King says that given the Coalition’s policy to repeal the carbon pricing legislation, “political uncertainty may still remain” even if it gets through parliament.

Origin is the largest generator and retailer in the country, has more than 3,800MW of gas-fired generation plants in the pipeline, as well as another 3,400MW of wind.

However, King also suggests that it may not be possible to meet the 2020 Mandatory Renewable Energy Target, which after several years of delay will require a build-out of new generation capacity at a multiple of the current rate. He suggests that a 25/25 target – 25 per cent by 2025 – may be more practical.

King says that Origin is now beginning to negotiate power purchase agreements with third parties, although it still could be months away from making decisions on these, or even on its own developments, such as the potentially 450MW Stockland Hill wind project in Victoria. It has enough renewable energy certificates to acquit its obligations until 2014/15.

He also defends the company’s track record on coal seam gas, suggesting a “strong ideological view that we should be moving straight to renewable energy... has sought to demonise coal seam gas.”

Here is an edited transcript of the interview:

Giles Parkinson: Grant, you’ve got 3,800MW of gas projects in the pipeline. Does the Clean Energy Future legislation as you understand it provide you with the incentive to begin making those investment decisions?

Grant King: I’ll make it a three-part answer. If the legislation goes through and that’s it, then certainly those decisions can be made, unencumbered by uncertainty around carbon policy. I have a view that in the current political environment I’m not quite sure it’s going to be that simple and ...that clear, so I suspect we’re in for more uncertainty. But, in principle, the legislation and ultimately the regulations will contain sufficient detail and a sufficiently well-designed scheme to take away that sort of uncertainty that prevents decisions being made. Now, whether or not we are then committed to a project would be much more to do with the supply-demand balance and our perceptions of that, than with the scheme. And so a feature, not of the scheme but of stuff around it, is will there be early withdrawal of capacity from, say, brown coal in Victoria? So, it’s those things that are more likely to influence any decision we’d make with respect to, particularly, gas-fired investment.

GP: So, that proposed buyout of those investments of that capacity in Victoria is actually quite crucial, because the price otherwise might not be enough incentive at the moment?

GK: Well, what broadly happens in the market is that the MRET scheme causes enough renewable energy to be built which, if it’s wind supported by gas, sort of broadly has enough capacity in the market through to 2020, so you’d actually need to early-retire some capacity to create a new need over and above that which is already envisaged to occur.

GP: If the legislation does get passed, will you still be satisfied that the political risk has been removed?

GK: That’s a hard question actually, Giles. But, I can only state the facts, that if the legislation is passed, I presume the Coalition will maintain its policy that it will repeal the legislation. So, frankly, one is still subject to an electoral outcome and that’s why I made my comment earlier that whilst the scheme of itself, if passed, creates within it sufficient detail, I suspect that political uncertainty may still remain.

GP: So, you may not be making those decisions which are deemed necessary now for another couple of years?

GK: Well … yeah, one would certainly be mindful of those risks, yeah.

GP: I asked you at the earlier press conference a question about gas as a transitional energy source. I asked you that because gas investments have a profile of about 30 to 40 years, I presume; I’m wondering if that transitional role would play in your mind when you’re making those investment decisions, and if you think some of those gas plants might need to be carbon capture and storage or CCS-compatible sometime in the future?

GK: I think that lies in the detail. Let’s just hypothesise, for example, that under the MRET a lot of wind is built, and in order to firm that wind – that wind will be intermittent – you’ll need open cycle gas. As long as there’s wind, there’ll be open cycle gas to firm it, but that open cycle gas might only run, you know, 5 per cent of the time, 10 per cent of the time. And that’s not really going to be a major source of carbon emissions. So, you know, sure, when they run they’ll produce some carbon emissions, but they’re not running that often because the role they’re playing in the generation system is to firm the intermittency of wind.

GP: Sure. What about for base load gas?

GK: So, you then come down to basically baseload CCT technology. I would have that if you were contemplating putting some form of either pre- or post-carbon combustion carbon capture on that, you wouldn’t be doing that until all of the coal-fired power stations in the fleet had already done it, because of the way the carbon costs would fall on it. And I would think that it would take a long, long time to take out either all of the current coal or retro fit the current coal with pre or post carbon capture. And so gas is going to be playing the role it’s playing for a long, long time.

GP: Can we just touch on the CSG debate? Have you been surprised by the tenor of that debate in the public and the fact that it’s taken such a hold? Does it have any potential impact on your investment plans in the industry?

GK: So, I think the better answer is that it is now easier, in the context of the last couple of weeks, to say I’m not surprised, but more importantly, the reasons why; I think the issues in CSG fall into three buckets very quickly. There’s what’s happening below the ground; there’s what’s happening on the ground; and there’s what’s happening above the ground, you know, in the atmosphere. And, you know, the way that we foresee CSG, or anything from oil and gas or gold or iron ore or anything else, is no different, the way we access mineral resources. The laws of the land that govern the ownership of those resources are either states on behalf of their community, and the laws that govern access have been the same in Australia for so long that the CSG industry is doing nothing different. We drilled out first CSG well 20 years ago.

We’ve been using all of those arrangements to collaboratively access land, work cooperatively with land owners and achieve, you know, good outcomes for everybody. Now we believe, therefore, that there is a very legitimate discussion about land ownership which the industry has been managing sensibly for generations and which I think should able to continue to be sensibly managed. But having said that, there will be some land owners who’ll have a view about their property that may or may not make it easy to access, in that particular circumstance. But in general, the arrangements have worked very, very well. We’ve always known that working with land owners and communities is critical and we’re always trying to focus on having as effective as possible local land owner and community arrangements. And so the concern is not new. We're not surprised about the concern, and we will continue to work very hard with local communities in that regard.

So, the overlay, which is now becoming more evident, is that there’s a group of people who have a very strong ideological view that we should be moving straight to renewable energy and [these people] have sought to, in my view, demonise coal seam gas. You may have a particular view on this as well, but if I just stood back and looked at the objective facts, seeing protests outside brown coal power stations and coal mines and coal gasification projects is very common and is part of the broader agenda to, you know, largely demonise fossil fuels at the expense of renewable energy. I will tell you, as a developer of wind farms as well as coal seam gas projects, I’ve not seen any NGOs, green NGOs protesting wind farms, but I can tell you that the issues are exactly the same for the local community about how we access properties, the compensations paid for doing it and the impacts on the local community of these developments.

GP: Can we just briefly go on to some of the issues you mentioned with coal seam gas? Aquifers: is there enough uncertainty to justify concern and caution there?

GK: There are two sets of underground issues, Giles – very important. One is the concern that chemicals used by the industry contaminate aquifers – and I can say to you that Origin uses no chemical in any of its activities that you don’t either drink, eat or wash up with, okay? So, we believe, in respect to anything to do with any suggestion of toxic chemicals or anything else is very easily dispelled. It’s just factually not the case. The other issue is the impact on regional aquifers. And I’d like to make a conceptual point that might sound a bit esoteric, but I think it’s very important. We have done very extensive basin modelling in Queensland, not just on the impact of our project, but on all of the coal seam gas projects. And we use that modelling to predict the impact of our projects on the aquifers – and we have every soundly-based, scientific and engineering reason for thinking that those models are appropriate for us to use as a basis for proceeding with our project.

But of course, to make sure, the regulatory environment we operate in requires very, very detailed monitoring of all of the water tables, so we monitor something like 600 water boards to make sure that what we are thinking will happen is what’s actually happening. We can arrest our activities, or we can make good, in whatever way based on very real time feedback. I think that is a responsible and effective basis for going forward in respect of issues at that level.

GP: Can we maybe talk about your position on renewable energy certificates? It’s not spelled out in your interim reports. I think last time you said were still acquitted out to about 2014 and 2015. Is that still the case after the recent acquisitions of the electricity retailers in NSW?

GK: Karen Moses [chief operating officer at Origin] certainly knows the latter point.

Karen Moses: Yeah. 2014/15 is sort of about right.

GP: And when do you think you’ll be making decisions on renewables to either go ahead with your own developments or signing PPAs with other parties?

GK: Look, that’s a real-time discussion. In Origin we have a number of proposals in front of us. I think the absolutely truthful comment is we are currently working through just what’s the right balance between contracting for projects to source certificates, versus developing our own – but that’s just an economic choice on our part. You know, what’s the best thing to do? We’ve begun to contract again, not on a big scale yet, but we’ve begun to contract again.

GP: When do you think you might be getting back into larger-scale projects in wind, or other projects on a 100MW, 150MW, 200MW size scale?

GK: At the moment, we probably don’t see a decision being made, you know, anywhere inside months. But I think sometime in the next six to 12 months we will make some fairly significant decisions in that regard.

GP: Ok. Now, you said that Stockland Hills looks like a very good wind resource and you’re currently appraising your options there, but I get the impression that, generally, you'd prefer not to go with wind, or you don’t see wind as the appropriate source to fill out the renewable energy target.

GK: Look, we will unquestionably contract or buy more wind in some way, shape or form, but we are… I mean it’s a simplistic thing to say, but because wind, with its intermittency… Let me go back and give you an example. About three weeks ago in South Australia, for a substantial number of hours on the weekend, the wholesale electricity price was minus $600. Now, you start to get to a certain amount of wind in the system and you start to get some quite unusual effects. Now, there is a limit as to how much wind you can reasonably economically get in to the system. And the point there is just to say, we believe that there need to be other sources of renewable energy as well, and clearly some of those conceptually-best other sources would be baseload renewable energy. So, we believe that whilst we will increase the amount of wind that we cause to be built in some way, shape or form, we will also examine other alternatives like geothermal and baseload hydro.

GP: Yeah. Let’s look geothermal. You wrote off a large part of that investment, almost all your investment, with Geodynamics, that joint venture there. What’s the feeling now? You’ve done some tests in the shallows. The first, I think, wasn’t particularly conclusive. Are you still hopeful that geothermal can deliver in the timeframe?

GK: So, several comments, Giles, and I think probably firstly and importantly, given some of the other comments I’ve made, I think writing off a $196 million investment ought to buy us a fair bit of credibility in the renewable energy sector because I don’t think any other organisation has spent anywhere near what we’ve spent to try to make things like this work. Secondly, we still believe that the prospects are there, and one of the features of the government’s clean energy future was the Clean Energy Finance Corporation, which may allow funding, you know, for not just those renewable, but some low emissions technologies that might see hybrid geothermal technologies work as well. So we will continue to try and understand and have, in fact, recently drilled a well in what we call the shallows. And so we will still do some more work in that area.

GP: And you’d still like to get that PNG hydro project and have that able to acquit the MRET in Australia?

GK: We would. That’s going through its early phases of feasibility. It’s got, sort of, four or five iterations to go in that development cycle. I think come 2013 we’ll have a better idea as to whether that’s a real project, but it certainly has the attributes, it ticks all the boxes: base load renewable, access to the Australian market, good for development and great for Papua New Guinea.

GP: And you said before that it could be transformational for Australia. In what way?

GK: Let me just give you this proposition: Australia has some, if not the world’s best bauxite resources – the Gulf of Carpentaria has some of the world’s best bauxite resources – but much of that bauxite is turned into alumina and aluminium in coal-fired smelters in NSW and Victoria. Now, if one stood back and asked will that still be happening in 30 or 40 years’ time, you’d probably say no, given the direction of things. But why should Australia lose those opportunities? So we see that if we can develop what is arguably one of the world’s best undeveloped hydro resources, then why can’t we move that alumina and aluminium smelting to the resources and to the energy and create renewable production of aluminium, for example. Ultimately, that change is of an industrial scale over 20 or 30 years, but that’s the sort of vision we need to have in ...trying to move towards a lower-carbon intensity future. And we don’t have to lose things. The debate shouldn’t be about winning and losing. A debate should be about evolving and migrating, making different choices, and that’s what this project has the prospect to do. It also makes a very robust transmission connection for North Queensland that, at the moment, it’s been sort of at the end of a very skinny wire.

GP: Can we talk about the solar industry: Origin is now the largest installer of solar PV, I think, in the country. What’s your view on the tariffs that are needed and the support that is needed to take solar from where it is now – costs coming down – to where people expect it to be within the year or two, which is at grid parity, I suppose, whatever that means?

GK: I agree we probably are the largest installer of rooftop solar, but the point of the matter is that we were some of the first to say the subsidies were too generous, ridiculously generous, and that has now been understood and wound back. We are finding that, whilst those subsidies have been wound back, there is still a very healthy level of demand for rooftop PV and clearly the cost of PV is coming down; so that objective of grid parity is getting closer. Now, let’s get to the production-side joint venture with Micron. We are seen as a potential producer of photovoltaic cells, but there is also a relentless reduction in the manufacturing cost of PVs. And that belief is that, you know, in many parts of the world and in some parts of Australia, by 2015 PV could be, well, will be grid competitive. And therefore, the answer to your question is we should be aiming for an industry that needs no subsidies.

GP: Do we need anything in the interim?

GK: Look, when we look at it from Australia’s perspective, we think the answer is yes. But when you look at it as a global manufacturer, you say the answer is no. I mean these industries should aim to work without subsidy.

GP: You’ve mentioned that wholesale prices are down. They’re actually down quite steeply from four years ago, the wholesale price. What is happening there and why doesn’t the consumer see that?

GK: Well, in very broad terms wholesale prices maybe 30 per cent of your delivered price and network is 50 per cent, maybe a bit more, and I know these numbers might not add up now, but retail is maybe 10 per cent. So, maybe it’s 40, 50, 10, that sort of thing. So basically, the significant escalation in network costs, which are a bigger proportion of our customers’ costs, are greater than the reductions in the wholesale price.

GP: You’re rolling out the home displays with Tendril and that partnership has been expanded quite significantly, particularly in Victoria. You’re also having to manage falling demand from customers generally, probably not in peak times. To what extent are your business models for those retail businesses going to have to evolve?

GK: Look, it’s a good question. I mean we’re very much involved in rooftop PV because we think that it’s another form of generation, and we’re in the generation business. But you have to think about the business differently to see rooftop PV as being another power station. So, I think we’re alive to the need to continue to think differently about how people use energy and the role of retailers and the supply of that energy, for example. And I think the Tendril project; we’re trying to come up with really simple consumer-friendly, household-affordable products that help them make better choices in the home as to how to use energy and link that into your billing systems and just get all that smart stuff simple is a challenge, but we’re working on that as well.

GP: One last question, and something I forgot to ask before, we were talking about the renewable energy target: Do you think we should maintain that 20 per cent renewable energy target?

GK: Look, my personal view is that the target could be retained. But frankly, if you’re asking me, it should be pushed out to maybe 2025 and the only reason I say that is a purely practical reason that when you do the numbers a lot of stuff has to be built between 2015 and 2020 and we should just be questioning whether that’s going to cause the optimum outcome, but that’s just a pragmatist view of it. It’s not a philosophical or an ideological view, Giles. It’s just a pragmatist view. On our numbers the industry in Australia has to build renewable energy at three times the rate between 2015 and 2020 that it has in all of the time up till then. So it’s just a practical view, Giles. Maybe 25 by 2025 is a better number than 20 by 2020.