Should Alinta get back into coal-fired power?

Ross Greenwood speaks to Tony Wood, Energy program Director at the Grattan institute, about why Alinta has got back in coal-fired power, having bought Loy Yang B which supplies about 17 per cent of Victoria’s power needs

Introduction: Should Alinta get back into coal-fired power?

Ross Greenwood: A really important story here and that is the owner of the massive Loy Yang B power station in Victoria, that’s Engie, has confirmed it’s going to sell the plant to Alinta. Now Alinta is owned by the Hong Kong-based Chow Tai Fook Enterprises company. Basically, it’s actually going in and buying a brown coal-fired power station. Now the Greens, Adam Bandt has basically said that Alinta’s decision to spend more than a billion dollars to 1.2 billion dollars, is wrong. In fact, he basically said, “Coal is struggling at the moment” and it really is but he says this is not the way to go in the future.

Let’s just try and figure out what this is about, why they’ve done it. In fact, Ken Woolley who’s the director of Merchant Energy at Alinta said, “There’s every future for coal. Coal is critical to the energy security in the market here. Coal will play an important role for a period of time.” Well, Tony Wood from the Grattan Institute is the energy program director. He knows more about this than just about anybody in the country and he’s on the line. Good day, Tony. How are you doing?

Interview with: Tony Wood, Energy Program Director, Grattan Institute

Tony Wood:  Good day, Ross.

Ross Greenwood: Were they wrong to go and buy a coal-fired power station at this stage?

Tony Wood:  Well, they’re putting this year all this money into it as you said they’re a Hong Kong-based owner and time will tell whether they’re wrong or not. The good news here is that the public is not having to put out any single cent of public government funding. There’s no guarantees on this and we’ll see the continuation of the running of what is actually one of the younger coal-fired power stations and therefore one of the more reliable ones that will probably will live for a while as we make what is an inevitable transition towards our emissions future.

Ross Greenwood: Then you go to the next aspect of this and that is that Australia needs baseload power because baseload power at this stage– and I do note that that controversial Tesla battery is now being apparently completed in South Australia, which will try and overcome some of the shortages there. It’s the biggest in the world. I do note that but it still requires baseload power. If you’re going to have big users such as aluminium plants, steelworks foundries, brickworks, all that type of things, this is where the base load power comes from.

Tony Wood:  That’s why this transition is both challenging, important, but inevitable. The new owners of this plant, Alinta, know better than anybody how this works because they operated a coal-fired power station in South Australia, which was the last coal-fired power station in South Australia to close last year when the impact of the rising proportion of renewable energy mostly wind having an impact on forcing them out.

They’ve gotten into this with eyes wide open. They know better than anybody both how important coal is, but they also know the challenges to maintain a coal-fired power station as we make this transition. From that perspective–

Ross Greenwood: Explain the challenges to me because ultimately, like a wind farm, or like a solar farm, or like anything, a power station ultimately you’ve got the raw material, which in this case is the coal. Then you’re actually going to create electrons that will go into the electricity grid. You’ll sell it at a high price or a low price. You’ll win or lose off the back of that. Is that the problem or is it the emissions and the cost of the emissions that Australia has got that are the issue that will determine whether this is a success or a failure?

Tony Wood:  Well, this plant’s only about 20 years old and that’s actually middle-aged in the sense that it’s coal-fired power station. Hazelwood was shut down early this year, was 50 years old. This is a relatively young plant in that sense. What makes the big difference to this sort of plant is the future of the emissions because it will be relatively efficient right now because of the closure of Hazelwood and because of the high prices that most of us are paying, this plant will actually be quite profitable for a while.

Until we start to see the further transition towards renewable. What will make the big difference is that transition because this will be a very low-cost coal-fired power station. It’s using Victorian brown coal, which is about as cheap as you can get in terms of resource, but it’s high emissions. It’s that balance, which is important. They know they can run very efficiently but they also know that inevitably, there’s going to be a transition to lower emissions. Victorian government has a renewable energy target, which is very similar to the level of renewables we saw in South Australia over the next 10 years.

That’s the sort of thing that will impact as you get more and more wind and solar coming into the system in a system where the total consumption of electricity actually is falling. You understand why that will put pressure on the profitability of these plants. Alinta will have done this with their eyes wide-open, make profits right now to maintain their secure system but also to understand that ultimately it will close.

Ross Greenwood: If I’m sitting there and thinking 1.2 billion dollars, pretty easy math here. If you own a 15% internal rate of return, you got to generate 180 million dollars. If you own a 20% rate of return because of the additional risk, you’ve got the best part of 240 million dollars that you’ve got to generate. It’s those types of numbers and as you save, you got to shell out 1.2 billion dollars for the plant, you’ve got to be pretty confident in your mind that you can get those returns over a prolonged period of time to justify the expenditure.

Tony Wood:  You’re absolutely right. No one’s building a new coal-fired or gas-fired power stations at the moment because of the very reasons you pointed out. They will have had to do their maths, their numbers, their financing and worked out that they think that as this plant runs right now very profitably, it will get less profitable over time but of course, they had to make their assessment on that basis. There’s no reason why they shouldn’t be allowed to do it.

It’s important, as you described Ross, that these plants continue to be part of the transition, but inevitably will be phased out. It’s just a judgment. It’s a very important judgment. It’s a 1.2 billion dollar judgment that they’ve made but it’s hard to see why that would be wrong or bad for the shareholders if the judgment’s right. It also is not bad for our transition as Australia to lower emissions because it will still have to comply with whatever comes out of this god-forsaken mess we’ve got in relation to clean energy emission reduction policies and so forth, which will be discussed in about tomorrow.

Ross Greenwood: I’ll tell you what, great to have you on the program. Tony Wood is the Grattan Institute’s energy program director. That’s a big buy, 1.2 billion, a coal-fired power station in this environment. That as you can hear, it’s about the maths but it’s also about the need for electricity that right now is keeping those prices high. Tony, as always appreciate your time.

Tony Wood:  Thanks, Ross.

 

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