AGL rings the alarm bells
The National Electricity Market is becoming an unviable investment proposition for all forms of new generation and the NEM is consequently at risk of “systemic failure”, prominent electricity retailer AGL Energy has warned ahead of its annual general meeting today.
The call comes just days after it halted construction on the gas-fired Dalton power station in New South Wales due to unfavourable market conditions, specifically soft demand.
Criticising the decisions of regulators in South Australia and Queensland, AGL chair Jeremy Maycock said new investment was likely to dry up, even in renewables.
“When these decisions (to regulate down retail prices) are added to the current policy uncertainty around the future of carbon pricing and the 2020 renewable energy target, no-one should be surprised to see new investment in the NEM evaporate, with all the consequences that would follow,” he said.
“The continued regulation of retail prices and overlapping state and federal regulatory structures creates a real risk of systemic failure of the National Electricity Market.”
The company is set to defer all investment in South Australia, which means its renewables projects in the state – the 99 MW Mt Bryan (Hallett 3) wind farm and 186 MW Barn Hill wind farm – will remain in cotton wool.
In reality, new wind developments in South Australia are already facing difficulties as there is so much wind capacity installed that when the wind blows, electricity pool prices take a dive.
Overstated fears
While there are some alarming quotes from AGL's leading executives, despite policy mistakes, the drying up of investment is likely not as dire as made out.
If you look closely at recent stats you will find that not only has electricity demand been falling, as discussed on countless occasions in Climate Spectator, but critically, peak demand as well.
As you can see in the below graph from the Australian Energy Regulator, seasonal peak demand in the NEM has been on the decline since 2008/09 in both winter and summer. In fact, winter peak demand is off almost 10 per cent from its peak in 2008 and summer peak demand is off just shy of 15 per cent since 2008/09.
This three-year period of reducing peak demand coincides with the years of overall demand weakening. In the latter case, the first year of deterioration was put down to the impact of the global financial crisis. The next was blamed on milder weather conditions and it was only the third year that most analysts began to say ‘hang on, there seems to be a trend here'.
In the same way, perhaps peak demand is going through the same stages, just a little more under the radar. It is too early to tell just yet though given peak demand is more subject to seasonal weather variations, specifically climate extremes.
Given weakness in peak demand and demand in general, AGL's claims the NEM is becoming an unviable investment proposition for new generation largely ring true. Warnings the NEM is at risk of systemic failure however, appear over-the-top.