The AGL CEO tells Climate Spectator editor Giles Parkinson that:

– An ETS is the best way to cut carbon and stimulate investment in a low-carbon economy;

– That AGL will need to develop more wind farms to meet its future renewable energy obligations, but has covered its obligations until 2014;

– That the Australian public is currently having a "love affair" with solar and the development of smart appliances makes sense in a Australia's "rising price environment", but will largely depend on customer appetite.

 

Giles Parkinson: Michael, thanks for joining us.  Look, a month ago you made a very loud call for the introduction of a carbon price in Australia. 

Michael Fraser: Yes.

GP: How do you read the political situation? Any suggestions that we might be getting closer?

MF: Well, I think first of all it’s at least pleasing to see that, in the list of items that the independents have put forward that they want to discuss with the government and with the Coalition before deciding where their allegiances lie, climate change is one of those issues.  So, you know, that’s encouraging.

GP: Last month you also talked about Australia risking a Kodak moment. What did you mean by that?

MF: Well, I guess there are a number of things that I meant by it, but particularly our reliance upon coal and …it’s such a big part of the economy and the world is moving to a low carbon future and we need to think about that, because otherwise we’re going to wake up one day and the technology will have changed.

GP: What are the implications for your business and the energy sector as a whole if we do not get a carbon price anytime soon?

MF: I’ll be very clear about this; what we’re going to get is more of the same, and that is coal-fired generation continuing to run for many more years to come. If we don’t get a change in policy and if we don’t get a price on carbon, that’s what will happen. Right now you’re seeing a hiatus in people being able to make investment decisions around substituting baseload coal with baseload gas. I’ll give you an example, you know it anyway, of the legislative certainty that is there around the renewables as a consequence of the amendments back in June. Get the policy settings right, the investment will follow – I refer to the $1 billion Macarthur wind farm announced two weeks ago.

Right now, how do you make an investment decision around baseload generation? If you look at coal, you’d go to your board and say well that doesn’t make any sense because we all believe that there will be policies put in place at some stage to put a price on carbon, so we had better not make that long-term investment. But how do you invest in baseload gas when, today, without a price on carbon, coal is more economic. You go and you say, well, we think that there will be a price put on carbon at some point in the future, but we don’t know when. We don’t know what form of that sort of mechanism is going to be used to put a price on carbon, and so therefore you can’t make the investment decisions.

GP: And if we do get a price on carbon, what are we going to see? A lot of baseload gas being built?

MF: Well, ultimately – and I’d emphasise that this is absolutely a long-term issue and I’ve said that before – it requires long-term solutions. And the investment decisions you make after the long term, and what you will see if you put a price on carbon, is that coal-fired power stations will start to be shut down and plans for their shutting down will be announced. Then you’ll see that’s substituted by base load gas generation.

GP: What do you think of the proposal, then, by the Victorian government – and I guess it comes under the Liberals’ direct action plan too – to retire installations such as Hazelwood and Yallourn by simply out compensation? You guys own Loy Yang A. Do you have a view on this?

MF: That’s another way, you know, to get to it. Our position is we believe that a market-based mechanism and emissions trading scheme is the way that, over the long term, the market will work out the least-cost way to transition to a low carbon future. That might get the ball rolling, that particular initiative, but I really do believe that you need a broader-based policy around reducing emissions generally in the economy and I think an ETS is, we’re on the record as saying we think that is the best long-term solution.

GP: And one last political question: Should and can business speak with a unified voice on this?

MF: Well, I think those of us who are the likely investors, and I look at particularly the large energy retailers here in Australia, I think are speaking with one voice on it. I think, you know, the Australian-based companies – ourselves and Origin – we are speaking with one voice on the need for a price being put on carbon.

GP: Let’s turn to the renewable energy target. You’ve said today that you’ve met your obligations at least for the mass market out to 2014.

MF: Yes.

GP: How have you done that? And can you explain your approach here?

MF: Well, it’s a combination of… we’ve obviously got the wind farms that we’ve developed ourselves in combination with going into the market and buying up renewable certificates.  There is a surplus of renewable certificates, that’s well known, and while the government changed the legislation, we’ve entered into contractual arrangements to buy up that surplus of RECs for our future obligations.

GP: Ok. Now what about in the future? Will you need to build any more wind farms to meet your obligations? When is that likely to happen?

MF: Ok. Well, by definition there will be additional wind farms, additional renewable projects that will need to be built to meet our obligations. My expectation is that we will build a reasonably substantial portion of that ourselves, but I’m also saying very clearly that if other people have more economic projects that can deliver us a cheaper, better way to meet our obligations, then we’ll enter into contracts with those people to buy renewable certificates from them.

GP:  PPAs have been very hard to come by for the independent power developers. Will there be some delay before you start doing those sorts of negotiations?

MF: No. We are negotiating with people on a constant basis. I think the key issue is that we have been an early mover in this space and we’ve put our foot on some of the very best wind farm development sites in the country; great wind speeds, close to the transmission system. And what we’ve seen of what others have had to offer to date, it’s a better outcome for our business to develop our own projects. But if people can bring forward other projects that give us a better financial return, then that’s the way that we’ll go.

GP: Ok. You said today that you might not need to build out any more, to give the go ahead to any more wind farms for 12 to 18 months, because you’ve met your RET obligations. That might change, though, if you buy some of the Energy Australia assets, mightn’t it? You might have to accelerate that development pipeline

MF: Well, I think that’s really where people were heading. Obviously if you buy any of the retail businesses in NSW, you’re going to inherit an obligation to surrender additional RECs.  Whether you need to build more wind farms to satisfy that, or not, will depend on the particular position of that retailer and how much they’ve forward contracted. 

GP: Ok. How have your wind assets actually performed this year? Did you get enough wind and did the wind blow at the right time?

MF: The long and the short of that is absolutely yes. We generated 780,000 megawatt hours and it was up pretty substantially on the prior year. And the capacity factors, the Hallett wind farms were sitting up around the 40 per cent mark, which really is world class. It’s just interesting to note that's equivalent to taking around 160,000 cars off the road, what we generated out of our wind farms this year.

GP: And your hydro assets? How are they performing? And do you have enough water for them?

MF: Yeah. Well, that’s part of the good news that we’re letting people know about today; that the last time the Dartmouth hydro plant ran was back in late 2007. It’s a dam of last resort for irrigation purposes and with the drought it was run down and hasn’t been able to operate. But we’ve got it back up to the water levels that are necessary and it ran the other week. We’ve run it up to around a 100MW.  Also, at Eildon we’ve had, you know, the good rainfall and the snow that’s there at the moment, that’s led to an increase in capacity at Eildon for us as well for the summer that’s ahead. The hydro scheme is basically drought proof because it collects all the snow melt from Falls Creek, so it fills three times a year and that’s more of the same for it.

GP: What about solar? You have a shortlisted application in the Solar Flagships Program.  What role do you see solar playing in the Australian energy industry?

MF: Well, first of all, of the technologies that we see out there in distributed generation, obviously it’s got a lot of potential to come down the cost curve and certainly from the people that we’re talking to, over the next couple of years we expect to see continued reductions in the cost to manufacture, and see improvements in the efficiency of solar. So, I think there’s a lot of potential that’s sitting there. I think the other really interesting thing about solar is the... almost the love affair, I guess you’d describe it, that the general public has with solar. And we’ve seen that with the uptake of solar as a result of the policies that the government put in place. So, people are wanting to do the right thing and I think that community attitude, as much as anything else, is going to drive the future development of the solar market.

GP: You’re particularly interested in solar PV, I understand – large-scale solar PV. What is the potential there, and what about the cost outlook?

MF: Well, when we look out two to three years from where we are today, we see some fairly significant reductions in the cost of large-scale solar PV and improvements in the efficiency of the technology. That having been said, there’s still a way to go for large-scale solar and certainly small-scale solar, to compete with wind. As a large-scale technology, wind is well down the cost curve. I think one of the other interesting issues about large-scale solar is the quantum of land, quite frankly, that is required to be taken up. I think that’s an issue that people will need to focus on, as opposed to wind farms, that you really don’t sterilise the farms. Once you’ve got your wind farms up and running, people run their sheep and run their cattle.  It’s not an issue.

GP: Lend Lease announced their solar plans just a few weeks ago and said that they’ll be joining with a large electricity retailer. That wouldn’t happen to be you, would it?

MF: I think that would happen to be us, yes.

GP: And what are your expectations of that joint venture?

MF: Well, we’ve combined with them. We’ve obviously got the relationship with our customers.  We’re a natural channel to market and we’ve teamed up with Lend Lease and First Solar, who we think have the best quality product out there to supply, to back to our… into our customer base. Lend Lease will do the installation. First Solar are supplying the product. And we’ll manage the customer interface. 

GP: The electric vehicles; you’ve got an interesting joint venture with Better Place. How’s that progressing?

MF: Well, I think the primary focus, and if it goes ahead, is likely to be in the ACT market. So that gets interesting for us from a number of points of view, because obviously we have our interest in the ACTEW AGL joint venture there, as well as the overarching relationship between ourselves and Better Place. That’s progressing well, but at the end of the day it’s a matter for Better Place as to when they press the 'go' button on that and if and when they do, we’re ready to supply the renewable energy.

GP: And what about the potential for what’s called, sort of, 'game changing technologies' in this industry? People talk about distributed energy and things like trigeneration. People talk about electric vehicles. People talk about smart grids. What do you see that potentially is out there for such game-changing technologies?

MF: There’s all sorts of technologies that can be taken up, but it’s really cracking the nut as to what the consumers want to grab hold of and what do consumers actually want. In a rising price environment – and that’s exactly where we see that we are – we think that there is potential for control within homes, controlling energy efficient appliances, being able to remotely control heating, cooling, etc. Those kinds of things we think do have the potential for uptake. It’s a matter of cracking the nut to find what will actually engage customers in the product in the way that iPhones and iPads and those kinds of applications, perhaps, have the potential to do.