AGL's shutdown of the Liddell coal-fired power station is a win for renewable energy and lower emissions, but don't expect a steep fall in prices.
The Australian energy giant over the weekend confirmed its plan to shut its Liddell coal-fired power station in 2022 and replace it with a mix of renewable energy sources and gas peaking power.
Of the eight terawatt-hours of annual output now supplied by Liddell, six will be replaced by renewables, one by gas, and one from other sources including an upgrade of its Bayswater coal-fired power station.
"This plan sees them align with the National Energy Guarantee, so it gives confidence to the market and those concerned as the Energy Security Board carries out its review," Grattan Institute Energy Director Tony Wood said.
"This is the perfect example of a technologically neutral response to help the transition to a low emissions future," Mr Wood said.
AGL plans to provide up to 750 megawatts of its new power mix from gas peaking operations.
While the company is yet to determine the source of the gas it will need, its application to the federal and Victorian governments for a floating import plant at Crib Point, in Victoria, continue.
It is understood AGL will look to source its gas from multiple sites for its first stage NSW gas peaking unit.
Locations close to available gas pipelines and transmission networks would be key for its second stage Newcastle gas peaking unit, with a number of sites understood to be under consideration.
AGL would be unlikely to build an LNG import facility in NSW similar to its planned Victorian facility, with the company able to manage gas through its existing assets.
The company would not reconsider coal seam gas exploration or a re-examination of its former Gloucester CSG assets.
Mr Wood said the gas component may play a greater role in Australia's future energy landscape, as the reliability aspect of the NEG may impel more generators to look to gas to support wind and solar during this transition.
"Gas-fired power stations in NSW are more likely to be commercially viable than the Snowy 2.0 hydro storage facility," he said.
The announcement of AGL's new combination of renewable and gas generation had a small impact on near-term NSW baseload electricity future contract prices, driving them down as confidence in energy security rose.
The 2018 March quarter fell by more than a dollar, from $107.65 per megawatt hour down to a bidding price of $106 a megawatt hour.
The largest drop in future contract prices was seen for the September 2018 quarter, which saw a difference between the bidding and the asking price of more than six dollars.
However, in the long term, prices are more uncertain.
While AGL's replacement generation mix is expected to produce electricity at a much lower levelised cost of electricity (LCOE) of $83 a megawatt hour, in 2017 real terms, compared to the potential LCOE of $106 a megawatt hour if AGL were to instead extend the operation life of Liddell, these prices are significantly higher than forward trading prices.
Forward prices for NSW between the 2020 March quarter and 2021 December quarter run to an average of $75.73 a megawatt hour, close to AGL's first stage project costs of $76 a megawatt hour, but 8 per cent lower than Liddell's forecast cumulative LCOE of $83 a megawatt hour.
However, this forward price difference is significantly smaller than the 28.5 per cent difference in LCOEs from the $106 a megawatt hour price point forecast if AGL continued to operate Liddell as a coal-fired power plant.
Energy Action analyst Ivan Slavich said looking beyond 2020 it would be difficult to accurately assess prices.
"Compared to where the futures market is for 2021, it gets a bit illiquid for 2022, as it is unusual for energy buyers to purchase so far ahead," Mr Slavich said.
In the near-term, Liddell continues to have operational issues.
While slated as having 1680 MW capacity, one of the four units - which has been out of action for months - is not likely to be back online until the end of January, underscoring its unreliability.
Combined with the fact one unit is often wholly utilised to power the nearby Tomago smelter, this means only half of Liddell's full capacity will be utilised by consumers and other industrial customers.
AGL will consider pumped hydro potential in the Hunter Valley, which would provide more "firming" options to overcome renewables intermittency issues.
The 300 MW of large-scale solar announced as part of the package included "very competitive prices", that have been falling at a surprisingly rapid rate even when assessed months ago.
Construction of a Hunter Valley facility along with renovation work at Bayswater and other energy supply investments means AGL's workforce in the region will have no net-job losses.
The Australian Energy Market Operator will provide the federal government with advice as to how the new combination will impact energy security and reliability in mid-February, ahead of the final Council of Australian Governments' National Energy Guarantee policy determination in April.
- With Peter Hannam
