Q&A: AGL's Michael Fraser

The CEO of energy retailer AGL discusses the need for certainty on the Renewable Energy Target, the current stalling of large renewables projects and the installation of smart meters.

AGL Chief Executive Michael Fraser chats with Climate Spectator about:

-- The crippling uncertainty surrounding the Renewable Energy Target, which could put the prospect of reaching the target at risk;

-- AGL's decision to step back from the Silverton wind farm and its Solar Flagships progress;

-- Whether AGL will only look in-house to meet its RET obligations;

-- The RET Review timeline and the impact of decision delay; and

-- The challenges of getting customers to embrace smart meters and flexible pricing.

Tristan Edis: So, Michael, today you mentioned that really, in 2014, we’ve got to settle the uncertainty around the Renewable Energy Target.

Michael Fraser: Yes, absolutely.

TE: The Coalition spokesperson today, Simon Birmingham, did say they were committed to 41,000 gigawatt hours and used that precise figure. Is that enough to resolve the degree of uncertainty around the RET?

MF: Well, certainly I think it’s a step in the right direction. Of course, there are a couple of other things. There was no discussion about the timeline to get to that target, which is obviously another variable and I think I made two comments: we need to settle the target once and for all and we need to settle the pathway to meet that target.

The other comment I’d make is that there is still this legislated review of the target next year and that is post an election and we know that there are differing views out there about what the target ought to be and perhaps what the shape of the trajectory ought to be to meet that target. So, quite frankly we need to get that review done, dusted, get rid of the overhang of constant reviews of the target and step back and let the industry work out how best to get there.

TE: In terms of AGL’s portfolio of projects, I think it came out recently that Silverton, you’ve made a decision to hold off on commitment for Silverton.

MF: Yes.

TE: At which point or what would you need to see before AGL is comfortable to start committing to Silverton and perhaps some of the other projects that you’ve got in your portfolio?

MF: Okay. So, let me come back first of all just to back up a little bit. We’ve also got the Solar Flagships project, so at Nyngan and Broken Hill, and that’s around 150 odd megawatts. We anticipate financial close on that project in the coming weeks, so that project will go ahead and obviously there are funds available from ARENA and also from the New South Wales government for that project, so that project will be going ahead. 

For us, the issue is you’ve really got to know what the supply-demand balance actually looks like and until you know what the target is and what the shape of the pathway is of the trajectory, we’re not actually going to know what that looks like. And so, if the review takes all of 2014 to conclude and the government to conclude what its response is, then it will be not until we know that that we’re actually going to be able to then step back and look at Silverton and say okay well where does this… what’s the optimal timing for this?  It’s no good building projects ahead of time and effectively having lazy capital invested there that you’re not getting an appropriate return on.

TE: And I suppose that’s a rational decision for all of the retailers really is to sit and wait until we’ve seen the conclusion of well one the election I suppose.  And if it’s Labor, I suppose there is perhaps some clarity if they do move that legislation to remove the requirement for a review, but if it’s the Coalition, I suppose the rational thing for all retailers is to wait until the end of 2015… or the end of the conclusion of that… the government’s response to the review.

MF: Yeah, l mean at the end of the day, every retailer’s position is going to be different because you know they’ll have either built different projects or they’ll have different contracts sitting in their portfolio, so everybody’s position is different. But you’re right, the logical thing for people to do is to wait.  Unless they’re really short in their portfolio, the logical thing is for people to wait and see well what is it that you’re actually shooting for?

TE: And in terms of your requirements for certificates, if we assume no change in the current settings, will you be looking to do most of your projects in house or are you…?

MF: No. Look, to be honest we’ve got a very open mind about that. So we’ve done a lot of work to rank all the renewable projects that we know of in Australia, so not just AGL’s projects but everybody else’s projects.

TE: I saw that in the presentation.  I think it was Paul Simshauser’s presentation had a sort of a cost curve for the supply.

MF: Yes, exactly. Projects don’t necessarily get built in the right merit order, … so we overlay that with what projects we know are committed and so what does that mean in terms of the supply-demand balance? 

Now, at the end of the day, there are a few things going on.

You’ve got the fundamentals of particular projects, but you’ve also got different return expectations. So, if you look at what we’ve done with our wind portfolio to date, we have largely developed the projects and then on-sold them. We’ve put in place a 25-year PPA. Now, essentially there are other investors that have got a much lower cost of capital than AGL has that can gear these projects up a lot higher than AGL can, given our triple BBB credit rating. 

So, if there are other people out there who, you know, on that merit order might have a project that may not necessarily be the best project but they’ve got a lower cost of capital than we have and that offers a lower cost opportunity for us to acquit our obligation, then absolutely we will sign PPAs with those people. And we talk to the market constantly about that, so we are absolutely not wedded that we have to build AGL only projects. Not at all.

TE: Yes. In terms of the timeline, I mean a wind project takes some time to move from… even with planning approval in place, there are still a number of steps and time involved in getting that project to the point where it starts generating power to the grid.

MF: Yes.

TE: If we’re not going to have clarity perhaps… let’s say the Coalition win and they choose to do a review and that review takes say the same amount of time as…

MF: Well, remember it’s a legislated review.

TE: Yes.

MF: So, at the moment there’s no… unless they change the legislation, there’s no option.

TE: Yes. Well, even if it was Labor and it chose to do the review… And we were talking about a timeline similar to what we experienced with the Climate Change Authority. I think… Roughly what was that? 

MF: Yeah. Twelve months.

TE: That was about twelve months.  So, that leaves us with 2014, 2015. Early 2015 we have an answer. Does that really give us enough time to build projects in such a way that the target is going to be met?

MF: Well, I think that’s the point that I’m making. When you overlay that certainty, exactly that, that’s the point that I’m making that I think is going to be a real challenge to meet that target because it’s a very logical thing for people to sit back and say, you know, look Silverton we talked about it; it’s a half billion dollar investment. Well, until you know, no one’s going to commit that money and I guess that’s the point I’m making. You then… have got a very short timeline between now and 2020 to actually meet that target, so quite frankly if there’s going… and there is going to be a review in 2014, the sooner that review can get to a conclusion and we’ve all got certainty, the sooner people can get on with investing in a way they’d need if the scenario you’ve suggested (eventuates). (That is), if there’s no change, well then quite frankly the sooner we know that, the better, so we can get on with making the investments that are necessary.

TE: Yes. I suppose the counter argument is we shouldn’t be rushed, we need to do this review thoroughly and doing that thoroughly takes time. And then perhaps we end up with a situation where a review team is sitting there that is given a timeline which then creates an answer for them which is there isn’t enough time to meet the target, so therefore we need to change the target.

MF: Which, to be blunt, to back it right up is why we argued strongly with the review last year that we should get rid of the two-yearly reviews. Now, as it is, that requires an amendment to the legislation. That hasn’t happened. We’re going to have a federal election before that’s possible, so the reality is we are where we are and we’ve got this delay, so we’ll need to see how that plays out.

TE: Can you imagine there being any information that’s come to light in the last few months since the last review delivered its findings that would… that’s new, that people are going to look at it differently … and say well actually this review has new information to work with than the other one because only twelve months…

MF: No. If I think about what’s new information, you’ve probably seen us delay the investment in Silverton as an example of new information. And I think, if anything… if we get to next year’s review, what information people will have is to say well okay, you know, what are the projects that are actually committed, that are on, you know, developers’ books around the country? 

And so, given where we’re at next year and given the timelines we’ve just talked about, what’s the shape of the bill that needs to happen to get to the forty-one…?

TE: So, the only thing that’s really changed is just the… Because we’ve waited another 12 months, 24 months, we’ve just made it harder for ourselves. 

MF: Correct. Yes, that’s exactly right.

TE: Yeah, okay. One other thing, there’s been a lot of discussion around… with the AEMC and their power of choice review and restructuring the way that we price electricity for householders.  The AEMC has made a recommendation that the rollout of smart meters should be something that’s… One, they’ve sort of said ‘well that shouldn’t be done the way it was done in Victoria’. They don’t support a mandated rollout and they believe that the rollout should be in… within the control of retailers to make that decision in conjunction with customers. What was your view about that as a recommendation? Do you think that’s the right way to go about it?

MF: Absolutely. I think it makes enormous sense. I mean you go back to the whole power of choice, the name of the review that they gave the review and we saw some of that presented today. I think it makes enormous sense that you give consumers choice. 

I think flexible pricing is an inevitable next development of the energy market and, at the end of the day, if you step right back from it, it doesn’t matter whether it’s generation or it’s distribution networks or transmission networks, if you’re going to end up with efficient investment, you’ve got to send the right price signals and you can only send the right price signals when you’ve got flexible pricing that reflects the cost of meeting the shape of the load.

TE: How do you see it rolling out though? I suppose that’s the challenge everyone’s grappling with is you’ve got your cost of sales involved in trying to convince a customer not just to switch over to you.  I mean I’ve been door-knocked and now you’ve pulled out of door-knocking, right, so you’ve got a disengaged customer and you’re trying to sell them a more complicated product without door-to-door sales.

MF: I think… Yeah, look at the end of the day…

TE: And they have to pay some money for the meter.

MF: Yeah, potentially that’s right, but you also have a natural turnover in meters in the market as well. 

Look, I think for consumers flexible pricing is one part of it, but there are a whole lot of other conveniences that come with it. I mean one of the things that we’ll be introducing very shortly is flexible billing, so we will allow consumers to tell us when they want to be billed. So, if you want to be billed on a particular day of the month that lines up with when you get paid and you want to be billed monthly rather than quarterly, then we’ll enable that to happen. Now, if you’ve got a smart meter – we’ll call them that still – installed, then you can get an absolutely 100 per cent accurate bill. 

You know, we can do it by an estimated bill, but obviously there’s a benefit there. In terms of just remote connection and disconnection, that’s another advantage that is there for customers.

TE: But is that one that a customer will value?

MF: Well, I think they are things. I think one of the things we often get, one of the complaints we often get and it’s quite interesting. We’ve had this bifurcation of the industry. We’ve separated out networks and networks have largely retained ownership of meters and then you’ve got the retailers and then you’ve got the customers and customers really don’t care about how the industry has bifurcated itself; all they want to know is they want to have the power of when they move in or they want to get it disconnected when they move out and they want to get an accurate bill. And certainly the way the industry is set up at the moment, the way the metering arrangements are set up, that doesn’t necessarily happen. And I think those kinds of changes to metering technology can make a huge difference just to the ... let’s call it ... the hygiene factors of the industry.

TE: Let me just challenge you on it. I could see a situation where under this structure, in the end we see a very piecemeal rollout of smart meters, we see inconsistencies in the specifications of those meters and we end up with say a customer that goes for a smart meter of a particular specification and another retailer comes along who may be able to offer a whole heap of other products and services, but not with that meter. And the cost of pulling it out actually means you imbed a particular set, whereas if you’d just said right okay here are the specs that everyone is going to work with, let’s roll it out in one go, maybe we don’t do it by a regulated monopoly who has no incentive to control costs, but we have a model and then everyone knows what they’ve got and you don’t have the same education challenges as well.

MF: Yeah look, I mean there are a few things in what you’ve said there. I guess the first thing I would say is you’ve absolutely got to have minimum standards as to the meters that can be installed, so that’s a given, but if you then start mandating not just minimum standards but these are the standards and you sort of draw a box around it, you’re kind of limiting the ability to innovate and take technology to the next level and who knows where that will actually go. And so if you then come back and actually say okay this is about consumers having choice, if somebody, in the scenario you painted, if they’ve got minimum standards and then there’s some other retail member that comes along that offers something that the consumer values, then it’s up to the retailer to make that case as to why that represents better value.  If the consumer wants to pay for it, that’s their choice.  If they don’t want to pay for it and they’re happy to sit with the functionality that they’ve got with their existing meter, then so be it.

TE: Yes, alright. Thanks very much.

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