Q&A: Michael Fraser

After delivering a flat profit result that was partly the product of weather extremes, AGL Energy's managing director and CEO talked to Climate Spectator editor Giles Parkinson about the uncertainty of Australia's political environment, the effect of the surplus of RECs, and the outlook for baseload gas, solar, wind and energy efficiency.

Giles Parkinson: Is the Clean Energy Future legislation, as you understand it, going to provide the right incentive to begin making those investment decisions necessary to transition to a lower carbon economy?

Michael Fraser: Well, if we can have confidence that the legislation stays in place, then the answer to that is yes. And I think, Giles, the other bit is, when you look at the package in its entirety, they have that tender to close capacity in there as well. And presumably, if the legislation gets passed and they've entered into those contracts for closure, then that, in and of itself, will bring about change, because it's difficult to understand how they would be unwound. But, you know, we're not going to be a party to those, but that's just my observation.

GP: The fact that there is a commitment by one party to repeal the legislation, does that mean that you're going to be hesitant in investment decision making?

MF: There's no doubt that that introduces a level of uncertainty which, you know, increases the risks of making investments. It will be very clear this is a far from ideal environment in which to have to invest and I think the whole industry would like to see a bipartisan approach.

GP: You've talked about making some investments today; the Dalton gas plant and the Newcastle gas storage. They're both peaking capacity. Do you have anything on the horizon which goes to baseload gas capacity at all?

MF: Probably the back end of the decade and, as much as anything, it does go to your first question: so, if we've got legislation in place putting a price on carbon, and we see the tender to close as a part of that package, then I think that is clearly going to drive a requirement for new baseload gas. When we look at the fundamentals of the market, Queensland is probably the market which is going to need additional generation first up, but we'll wait and see what happens there.

GP: Just one more question on legislation if I may: The Clean Energy Finance Corporation, which is proposed as part of the package, are you in support of that? Because there seem to be mixed signals coming out of the energy industry?

MF: Yeah. Well, I guess we need to wait and see exactly what the role of that Finance Corporation is and, I guess, just the one comment I would make is we just want to be sure that the market is going to be allowed to work. So we would say, put in place the rules, put in place the frameworks around an emissions trading scheme, around a renewable energy target, and then step back and let the market sort it out. So, provided it's not going to distort the market, that's ok, but we really need to see a bit more detail, really, to comment.

GP: Let's go to renewables now, and you talked about your position on renewable energy certificates, and you've still got a surplus. How far out is that surplus and when will you start making decisions yourselves, or talking with other people about off-take agreements?

MF: So, we've got ourselves covered out to around 2014 or thereabouts and we did substantially increase our REC coverage in the year just concluded. When we look at the fundamentals of the market, our current estimate is that, based on the known projects today, there are about 3,500MW of new generation that need to come into the market by 2015. So if you work back from that, those projects will have to start construction 2013, 2014, depending on the scale of them; perhaps the back end of 2013. So we're ...not committing to any new projects. We want to see the price signal. We want to make sure that that surplus is taken out. And quite frankly we just want to make sure both sides of politics remain committed. We want to see that they are remaining committed.

GP: Do you think that the 2020 target is still feasible or, like Grant King from Origin the other day, he suggested that 25/25 might be more comfortable?

MF: Look, Giles, I won't comment on others, but certainly let's just say that AGL has been a big supporter of the renewable target all the way along, and that hasn't been the case for all parties. But I do think that the 20 per cent target is achievable. Does that mean a hell of a lot has to be built in a hurry? Yes, absolutely it does.

GP: How much do you think you're going to build yourself to acquit your obligations and how much do you think you will actually import in third party agreements, etc?

MF: Look, that's a very good question. I think our long-range planning at this stage would probably see us somewhere around the 70 per cent mark, that we would self supply 70-75 per cent; contract the balance from other people. But at the end of the day the decision around that will be driven by the fundamentals. If people have got better projects than we've got, great, we'll buy off them. If our projects represent better value, then we'll build them.

GP: In your pipeline you say that there's, under feasibility study there are 1200 MW of wind and solar. I was a bit intrigued by that. Is that 50/50? And what sort of solar projects are you thinking about?

MF: It's not 50/50, it's just dominated by wind, but the reality is the economics of solar continue to improve, it seems, month by month at the moment. The strength of the Australian dollar obviously helps that, but also with the benefits of mass production out of China and Korea. So, we're continuing to watch that and, really, what we're doing is the early work as we did around wind farms. You've got some of the same fundamentals. Where's the resource? How close is it to transmission? And, you know, what are areas that from a local community point of view you are going to be able to develop?

So, we're doing the groundwork now for identifying sites that are suitable for large-scale solar. We'll see where the technology goes and we'll see where the cost structure goes, but our planning is towards the back end of the decade. We think the low hanging fruit, a lot of it has already been taken in the wind space, but you'll be getting more marginal wind sites and, at the moment, you've got solar improving from a cost point of view.

GP: And you've also invested $15 million in (PV installer) Rezeko. Is that just a small business or do you think that can actually grow into something quite significant in the context?

MF: Oh look, I think it can grow into something quite significant. I think, when you look at the domestic solar market, there are a lot of small players in that market who, I know you're well aware of it, Giles, they can't deal with all of the cash-flow issues surrounded by changing government legislation, etc. We think the fundamentals of that market remain strong. We think customers, ultimately, will want to have the confidence of dealing with people like AGL, who they know are going to be around to service those installations in the future, so we see that as a real opportunity to add to the product offering for our customers, so that's the game plan.

GP: And the controversy or the big debating point in the solar PV market at the moment is the value of electricity exported back into the grid. Do you think it's fair that that should be paid just the same amount as what you would pay for energy exported out of a coal plant or a gas plant, or do you think there's a happy compromise to be made somewhere?

MF:Look, at the end of the day, the reality is that, part of that is quite mythical, quite frankly, because people like us are paying like 6, 8 cents a kilowatt for that solar energy, so from our perspective we are paying what we think is a more than a fair price.

AGL media advisor: We're going to have to wrap this up Giles, just one more question...

GP: Can I just ask two? The wholesale gas energy prices have come down quite significantly. What is the reason for that and to what extent does that change the way that you operate an energy business? Because if demand is falling for whatever reason...

MF: Well, the first thing, what's driving it is simply supply and demand. Whilst we see that continuing for, you know, the next little while, I think our view is there is no question that both gas and electricity prices are going to rise and continue to rise over the next decade, so we think this is a temporary situation. The reality is, Giles, we actively work with our customers to see how they can save energy. So yes, shrinking demand. I mean we're actively out there promoting it because we think, for our customers, that the cost of electricity which has largely been driven, as you know, by distribution charges over the last few years, it's becoming a real issue. And we think if we don't do that, then certainly somebody else will be doing it, and we want to help our customers manage those rising costs. So that means that you start to, you know, sell those services to customers. It's one of the responses that you have. You expand by buying things like the Rezeko solar business; another example of it.

GP: Loy Yang; Transfield wrote down the value of its investment in Loy Yang A. Did you consider doing the same thing? And if not, why not?

MF: Obviously we decided that we had no reason to write down the value. The Transfield situation was driven by the fact that they had done a whole-of-company corporate transaction to sell their 80 per cent of that Transfield entity to a Thai-based company. Having agreed the overall terms, they had to allocate value across the different assets, so it's a point in time. We value Loy Yang on an asset-in-use basis, and when you do that, you get to a different answer. So we certainly, obviously, looked very closely at the value of Loy Yang; just saw no reason at this point in time to write it down.

GP: Terrific. Thank you very much, Michael, for your time.

MF: Thanks, Giles.