KGB: Origin's Grant King

Origin Energy chief executive Grant King tells Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

• Australia will not need a new base load power station until about 2020

• He thinks base load hydroelectric power in North Queensland and New Guinea are the way of the future

• A carbon price of $23 a tonne does not fundamentally change the competitiveness of coal versus gas as a fuel

• The carbon tax will cost generators billions of dollars a year, but that works out to only about $150 a year for the consumer

• Manufacturing and industry, that pay closer to wholesale prices for power, will be hardest hit by the carbon tax as it will increase their costs by a greater percentage

Alan Kohler: Well, this week our guest on the KGB interrogation is the CEO of Origin Energy, Grant King. Thanks very much for subjecting yourself to an interrogation by the KGB.

Grant King: Alan. I look forward to it.

AK: Now, perhaps you could start with the government's decision to cancel the hot water service subsidies at five o'clock on Tuesday. What do you think of that?

GK: The broadest answer to the question is that I think there's been a very large amount of subsidies put towards various forms of renewable; solar, wind, throughout the world. Understandably, people want to see our economy decarbonised. I think with current economic times governments are looking to balance their budgets and to save money and I think a lot of those programmes throughout the world have been withdrawn. So, I don't think there's actually anything hugely unusual about that. As I understand the programme was always to terminate in 2012 anyway.

AK: You're such a diplomat, Grant. Rheem is getting stuck into them.

GK: Well, that's understandable.

AK: And what do you think of the fact that they just came out and did it without warning anybody?

GK: That's a bit like companies issuing profit warnings on the day and everyone says why didn't they tell us yesterday? I mean there is always a day when a piece of information breaks and it always seems like a surprise. New South Wales went through the same process following the change of government in New South Wales with the withdrawal of subsidies for solar rooftop PVs, but I just think it's part of a broader trend that sees people far more questioning about the level of their subsidies than the, if you like the public good that's been achieved by them.

AK: Do you think in general the renewable energy targets and certificates and all that stuff are an inefficient, expensive way to achieve renewable energy?

GK: Well, in a similar vein there's been discussion about the solar flagships programme and the fact that two major projects that were going through the review process and those flagship programmes have also not proceeded to finalisation and that was a million dollar programme targeting support for two projects, each project receiving around four or five hundred million dollars of public subsidies. Now, at the end of the day there'll be a whole series of judgements. People have different views about, as I say, the public good of these things – but that is a lot of money in the current circumstances.

AK: We're asking for your view. What do you think?

GK: Look, if I take the two solar flagship ones and if I take solar hot water installations. One of the two programmes was really trying to demonstrate something new, something different. It was a thermal solar project. One was a solar PV project. In my view, enough money has been put to solar PVs on rooftops, not to need to demonstrate that we can also do it in paddocks, and effectively the size of the subsidies simply reflected the different value of electricity in a paddock versus on a rooftop. You know, wholesale cost of energy versus the delivered cost of energy and the difference was just a bigger subsidy. So, I don't believe one of the projects was demonstrating anything new and therefore doesn't in my mind pass that test of public good in relation to the amount of money that's been invested. Solar hot water systems have been installed throughout Australia for a long time. They're very effective. We've provided a lot of solar hot water systems in our business, I think we're probably the largest installer of solar PVs as well. But we should be moving towards these things being economic in their own right. And solar hot water in particular would be in that category.

Stephen Bartholomeusz: If the subsidies are removed or not taken advantage of, what happens to the 2020 target; 20 per cent by 2020?

GK: So, if I answer that question a little bit in reverse, what happened through '09, '10 when there was a very significant state-based move towards feed in tariffs that essentially over-stimulated the solar PV industry, they actually flooded the markets with RECs and those RECs were very cheap because they were long…

AK: Which stands for Renewable Energy Certificates.

GK: Renewable Energy Certificates, and that's what you have to acquit in order to meet your liability under the renewable energy target. So, a somewhat ironic situation is the market's awash with REC certificates and, acquitting the target, we would say we're covered through 2015-2016 because we have certificates that we bought as part of that process and I think our competitors would say, certainly AGL I think would say, they're also largely covered. So, in respect of the REC scheme, broadly the liability's probably covered through to 2015 already. That leads to noise around why aren't we building more things? And the answer is they've already got built through all the solar PVs that went on the roof because that part of the industry got over-stimulated. So, this is an area – and I think we would say and I think business at broad would say – there's been too many of these programmes sort of thrown into the short term with the view that they would create, in aggregate number, that they would all work together. So, the RET target is there for 2020, a lot of that's now going to have to be satisfied through a bill probably squashed into 2015, '16, '17.

Robert Gottliebsen: If I could change the subject, Grant, is it true that the electricity generating companies have had to pay almost four billion dollars in carbon tax after the rebates? And if that's true, what effect is that going to have on profits and prices?

GK: So, to answer that let me give you some sort of factual basis for that discussion. At $23 a tonne and the average carbon intensity in them is about a tonne per megawatt of electricity produced, the number will be big. You know, if those sorts of numbers are true.

AK: What? Four billion? Is that right?

GK: Well, for example, from a larger power station which could produce 20 million tonnes of carbon a year, so 20 million times $20, [that's] $400 million straight away for just one power station. So it's not hard to get to a number like three or four or five billion dollars, so I would imagine that's in the ballpark of a correct number. Now, that's remembering that for the first three years the scheme is a tax. Bob, in dealing with your question, obviously, everybody will pay $23 a tonne in the first three years through to 2015 and the generation sector is the biggest emitter of carbon. It will pay a very significant bill and that in the normal course would be what ends up on a consumer bill and that's why I imagine the government has said we'll also adjust tax to try and keep the average consumer roughly whole. And we would formally agree with their analysis that they will be kept roughly whole. And just to put that into perspective, the four or five billion dollars is a big number, but the average household uses about seven megawatt hours of electricity, so seven times $23 is about $150, so that's where that sort of household compensation number comes from. So just be a bit careful, because at an industry level lots of megawatts get generated and it's a very big number, but we only use, as I say, on average seven megawatts to live in our homes.

SB: For generators though it's a big issue, isn't it? MacGen said that it turns them being a profitable generator into being an unprofitable one instantly, and that there were cash flow issues associated with that.

GK: So, let's then go through the phases. What happens is in the initial phase, so when it's implemented on July 1, the scheme I think is reasonable in that you incur your liability, but you only pay 75 per cent of it at year end and then the balance post that, so you're getting the revenues through the year and you're actually settling that liability. Basically, you generally pay your tax through the year and the year end as well. So, it's actually okay when you implement it in that fixed price period. 2015-plus we enter this trading period, so it's not a fixed price anymore. It's not a tax in the literal sense of the word. It's going to be whatever the price will be. And the government is trying to deal with the working capital issues there by quarterly option of permits, so not making everybody pay upfront in one big hit and having a regular release of permits to smooth the cash flow effects. The issue that the industry is very focused on is however that between probably a year or so out in that period 2015 when it becomes traded, the industry will start to think about how do we bring certainty to our long term contracting activity because we'll now also have to acquit that carbon liability to our contracting activity and in that period we may have to buy permits two or three years forward and that is the issue. It's this transitional period. So for the first year, for example, it's not such a big deal because the government is allowing effectively a settlement at the end of the period. Normal trading beyond 2015 we have a situation where it's quarterly, so you're trying to reduce the working capital impact, but if the industry wants to write long term contracts that span that transitional period, it could have to outlay very, very large amounts of money to back its contracts. Now, the industry hasn't a choice and that is not to write long term contracts and trade almost entirely spot, but that would bring a lot of instability to the industry as well and that is not the way the industry has historically operated because of course it increases everybody's risk exposure to short term prices and that's not the way the national electricity market's worked.

SB: And presumably they could be gamed, so you could see price spikes?

GK: Well, if you entirely have a spot market, you will see the underlying volatility in the market and the reason we write long term contracts and hedges is so our companies don't blow up if we see underlying volatility. Now, gaming is just a function. You know, game is just another word for commercial behaviour in the market. I mean at the end of the day electricity has been bought and sold now for ten years and there have been days where it's been $12,500 a megawatt hour. If you have a naked exposure to that, that breaks companies, that breaks retailers or it breaks generators, counter parties, and that's why we write long-term contracts. So, if we continue to write those contracts, we need also to hedge the carbon price and that's the big issue for the industry. How do we manage through that transition?

RG: But Grant, you've been warned by Tony Abbott, you and all generators, that the rules will change after the election if he wins, so that if you have written long term contracts and you lose by them, then he will declare that your own fault and you have to pay for the loss.

To read the second part of this transcript, in which Grant King continues to discuss the impact of the carbon tax, the ways in which the cost will be passed to consumers, and the future of baseload power generation and renewable energy in Australia, click here.

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