In what has turned out to be an unsuccessful bid, Mike Cannon-Brookes and Canada’s Brookfield made an $8B bid for AGL. The consortium ensured they would invest a further $10B to replace its coal fired generators by 2030. Mike Cannon-Brookes is a well known investor in renewable energy through his involvement in the $20B Sun Cable project.
This latest move comes days after Origin Energy’s announcement to shut down Earring Power Station in 2025 and AGLs earlier announcement about the early retirement of Bayswater and Loy Yang Power Stations in the 2030s.
Over the weekend the AGL board met but rejected the $7.50 per share offer. As expected, this first approach was a lowball offer with room for the offer to increase.
The idea of the takeover will likely cause a headache for the federal government as we approach an election. Cannon-Brookes has indicated as well as a business plan he has a $20 billion war chest to spend on renewable energy to replace retiring coal-fired plants. The other headache is for the consortium partner, Brookfield which is currently procuring AusNet Services, the owner of electricity and gas transmission and distribution assets in Victoria.
AGL Energy’s board rejected the offer, telling shareholders to stick to a proposed demerger, which will separate the company’s coal fired generators from its retail business and investments in renewable energy projects.
The federal energy minister has been tight lipped on the offer but is likely to remind Australians of the increased risk to energy security if the Cannon-Brookes plan to accelerate the retirement of AGL’s coal fleet occurs.
If the proposal is eventually accepted it would allow a truly integrated business with Brookfields stake in AusNet, the group would control gas transmission, generation, electricity transmission, retailing and electricity distribution. This is likely to flag competition issues with the ACCC and the foreign investment board.
Following the rejection of the offer Cannon-Brookes said “AGL shareholders would be worse off if they stick with the power company’s demerger rather than if they accept his $5 billion joint bid with Brookfield to take the company private and get out of coal by 2030”.
Despite the offer being below the valuation of the whole AGL business, it is in line with the value of the retail arm of AGL.
Is AGL waiting for a counteroffer from another group such as Iberdrola or Ampol or do they believe coal fired generation will form an important part of the NEM for many years to come?
Last week the Clean Energy Regulator (CER) released its targets for liable entities to meet their Large scale Generation Certificate (LGC) and the Small scale Technology Certificate (STC) obligations for 2022.
The 2022 Renewable Power Percentage (RPP) was set at 18.64%, up marginally from 18.54% in 2021.
The 2022 Small scale Technology Percentage (STP) was set at 27.26%, down marginally from 28.80% in 2021.
What are these targets?
These targets are set under the Renewable (Electricity) Energy Act to stimulate and support the development of renewable electricity production in Australia.
Liable entities are individuals or companies who make relevant acquisitions (mostly the purchase of wholesale electricity) from a grid with an installed capacity greater than 100MW. Liable entities are most commonly electricity retailers. Under the Renewable Energy Target (RET) legislation, liable entities are required to surrender a specified volume of certificates equivalent to a set percentage of their relevant acquisitions across the year.
There are two types of certificates under the RET, LGCs and STCs. The percentage of LGCs required to offset relevant acquisitions is set by the RPP, and for STCs it is set by the STP. Retailers produce or procure certificates and surrender them to the CER to meet their liabilities. They then pass on the costs associated with meeting these liabilities to retail customers based on their proportional contribution to the relevant acquisitions.
What do these targets mean for large users?
The key point to understand is that in most situations the liable entities are the retailers. But a retailer’s liability is directly derived from what is consumed by the retail customers. Each user’s contribution to a retailer’s liability can be calculated utilising the relevant liability percentages, and the consumer’s loss adjusted gross consumption.
The higher the RPP and STP the greater the percentage of a customer’s usage needs to be covered by the relevant certificates. Assuming a customer’s annual consumption remains on par from one year to the next, higher liability percentages result in more certificates being required to offset that user’s contribution to a retailer’s liability.
Can large users control the costs associated with these targets?
Short of reducing consumption, users cannot control the number of certificates that their retailer will need to cover their contribution to the retailer’s liability. These percentages are regulated.
Emissions Intensive and Trade Exposed (EITE) users can apply for exemptions through the CER. These are issued in the form of Partial Exemption Certificates (PECs) that when provided to the liable entity can be used to directly offset the liability.
Large commercial and industrial users can negotiate electricity sale agreements with their retailers that allow them to proactively work with retailers to determine how and when certificates are obtained by the retailer to meet the liabilities associated with that user. This can involve the user having the ability to instruct the retailer when to purchase or price a set quantity of certificates, or to self-surrender certificates acquired or produced elsewhere by the user to the retailer, or to ask the retailer to sleeve third-party agreements (such as renewable power purchase agreements – PPAs) negotiated by the user to facilitate the provision of certificates at prices and terms negotiated by the user.
Where do these certificates come from?
LGCs are created by accredited power stations that produce electricity from renewable energy sources. For every megawatt hour (MWh) of electricity produced from renewable sources equals one LGC.
STCs are created by eligible energy systems. Like the LGC an STC is equivalent to 1 MWh of renewable electricity produced, however, the number of STCs a system can produce is calculated over a period of 1 to 10 years based on the technology. STCs can be produced by rooftop PV systems, small scale wind and hydro and even the electricity displaced by a solar water heater or heat pump over its lifetime.
How are these certificates traded?
LGCs can be acquired by purchasing them directly from renewable energy power producers or through the secondary market. The price of LGCs can vary depending on if the certificates are acquired via the market or directly from the project, and if they are settled and transferred upon entering a transaction (spot) or at some time in the future (forward contracts). Currently, the spot LGC price is around $46 per certificate, and the forward curve for LGCs falls away year on year.
Once an STC is created it can be traded through the STC market or through the STC clearinghouse. The STC clearinghouse is operated by the CER with a set price of $40 per certificate. It’s operated on a first in first served basis, which means sellers need to join the end of the queue and wait for their turn to sell. The market is more liquid and affords sellers the ability to sell certificates once a deal is negotiated. The price of a certificate is based on the supply/demand balance, with STCs currently trading around $39.40 per certificate.
What can I do to reduce my costs associated with LGCs and STCs?
Like many large users that aren’t already managing these components, your costs are no doubt going up. This doesn’t have to be the case. If you’re a large energy user, reach out to our team. We can assess your portfolio and certificate requirements, how you currently get charged for these components, and advise how you can be better manage this with your retailer.
Edge2020 traded over 1.75 million LGCs and 1.17 million STCs in 2021 for our portfolio of large users. These were either managed through retail sale agreements or directly with renewable producers through power purchase agreements (or similar).
Our team are specialists in ensuring large users minimise their costs utilising products and strategies that deliver value. These products may be a pass-through cost for retailers, but that doesn’t mean they shouldn’t be managed and minimized. We work closely with retailers, in a collaborative and positive manner to achieve outcomes that reduce their costs whilst not impacting their operational processes or retail returns.
You may have heard it has been hot in Queensland over the last couple of days. Yesterday this all came to a head with the market showing some cracks.
At a high level, the spot price averaged $1,607/MWh for the day. Prices were less than $300/MW for most of the day when solar generation was high but as we moved to the evening the spot price spiked to between $10,000/MWh to $15,100/MWh for a few hours as coal, gas fired generation and pumped hydro set price.
Yesterday and again today the market is under pressure on both the supply and demand sides. For the last couple of days, the hot weather has been influencing consumption. The second part of the equation is the supply side. At the start of yesterday Queensland’s largest generator, Kogan Creek was offline as well as Callide B2. All other “baseload” units were online.
High temperatures and particularly high humidity impact the output from coal and gas fired generation. Coal units generally vacuum unload over the evening peak if they have not been proactively managed by the operators, which AEMO is fully aware of and is built into the contingency. Another issue with Kogan Creek being offline is that it reduces the flow across the QLD to NSW Interconnector (QNI), the result flows from NSW and is generally capped at ~600MW.
The final issue is the bidding behaviour of participants. The previous days’ bid stack indicated prices would stay below $300/MWh during the daylight hours then jumped to $900/MWh where CleanCos cap price with its Wivenhoe Hydro generator, but once through that price band the spot price jumped to $10,000/MWh then again to $15,100/MWh.
Adding to the already tight supply balance, the Tarong Power Station Unit 2 tripped at 15:15, returning to service at 18:50. Tarong 2 was ramping up at the time of the trip and from the trip profile, it does not look like a tube leak. From 18:50 the unit ramped up over the next couple of hours and is now running normally. Shell also had plant issues at the 78MW Condamine Power Station, taking the unit offline. Tarong, Millmerian, Stanwell and Gladstone Power Stations also had one or more issues over the evening peak.
An Intervention Event was triggered as a result of Reliability and Emergency Reserve Trader (RERT) being implemented in Qld. This took effect from 17:00 01/02/22 until 21:30. Intervention pricing took effect from 17:00.
A Lack of Reserve (LOR3) is still active for today as RERT has not been extended to manage today’s evening peak. If RERT is extended or reinstated today the LOR3 will be cancelled.
As part of RERT, Powerlink was asking for industry to reduce consumption if safe. Large mines in Queensland have historic agreements with Ergon to reduce consumption and on this occasion, they reduced load as requested.
In the build-up to the evening peak, the Minister for Energy, Renewables and Hydrogen and Minister for Public Works and Procurement, the Honourable Mick de Brenni made the statement “It is possible that Queensland’s previous record demand of 10,044MW will be exceeded on either today or tomorrow.”
Queensland’s demand peaked at 16:40 as a result of the demand side management.
At 21:30 AEMO published a market notice letting the market know that the intervention event had ended and as a result, RERT and Intervention pricing was not continuing.
So what is ahead for us today?
Demand forecast is looking to peak close to 10,000MW today, this is forecast to occur at 17:00.
Pre dispatch spot pricing is again forecast to be at $15,100/MWh between 14:00 and 23:00.
RERT may be needed again today and AEMO will currently be exploring their options.
Written by Alex Driscoll Senior Manager Markets, Trading & Advisory
