Boardroom Energy

Shh… it’s a state of emergency

The problem with coal fired power stations these days is that state governments, particularly very left of centre ones, don’t want to talk about them. They want to talk about renewables and batteries and hydrogen. Coal is something to be demonised, not relied upon.

Which makes the quietly escalating emergency at the Yallourn brown coal power station in Victoria’s La Trobe Valley all the more intriguing. The wall which is holding back the brimming Morwell River adjacent to the huge, flat open cut mine that supplies the power station is at serious risk of breaching. If it did, it would force the closure of the power station for months, and possibly, forever.

Yallourn represents 22 per cent of the state’s electricity supply. It was supposed to close in 2028 in a deal struck between its owner EnergyAustralia and the Andrews Government which, while veiled in the secrecy with public money now typical of this government, appears to be going to the construction of a new 350MW battery on (higher ground) on the Yallourn site.

Increased renewable generation in the state means that the hole left behind by no Yallourn would be smaller in aggregate: there would be enough wind and sunshine, coupled with gas and hydro, to cover for the loss.

But probably not all of the time. Not when other coal generators have problems, or there are technical problems with transmission lines, or during spikes in demand caused by very hot or very cold weather. And not on chilly, dark and still winter evenings.

Yesterday the Victorian Government quietly announced a state of emergency at Yallourn, having spent the past few days playing down the risks involved.

The risks are that this has happened twice before this century. Brown coal is wet and relatively low in energy per tonne. It is mined close to the surface and close to the mine, to reduce cost. Brown coal is heavy and wet, so is not stockpiled for mor than a few days.

The brown coal mines of the La Trobe Valley are long, wide and cut only a dozen or two metres into the ground. Over the decades they have been worked they have taken up a lot of area, requiring rivers around Yallourn to be diverted to allow mining, and generation, to continue.

The river runs above the mine at Yallourn. The only thing holding it back is an artificial levee. This failed in 2012 when heavy rainfall resulted in high water pressures getting into the structure of the levee via small cracks, which became bigger and bigger. The water then seeped into the coal underneath the levee, expanding it and undermining the structure of the levee.

The exact same thing is happening right now. Same cracks, same risk. The levee might hold, it might give way. But it’s on a knife edge.

A state of emergency grants the Victorian Government powers to ensure the supply of electricity, including enforcement. It is unclear how far this power extends, like whether it could require EnergyAustralia to restore a coal mine scheduled to close in 2028 anyway.

China Light and Power (CLP) has been regretting its investment into the Australian electricity market. It has been trying to sell out or list its Australian business since 2012. If the levee does break, its likely to cost around $120 million to repair. Hard heads around the CLP board table will want to know how much more money goes into an unwanted, twilight asset.

Coal – a hard habit to quit

With great fanfare, the G7 announced this week that it was “getting out of coal”. Federal government representatives were quick to retort that Australia was not a signatory to the G7’s agreement and that Australia would pursue its own national interest.

As always the devil is in the detail. The G7’s fine print can be found as part of its lengthy communique, in which the specific commitments are:” domestically we have committed to rapidly scale-up technologies and policies that further accelerate the transition away from unabated coal capacity, consistent with our 2030 NDCs and net zero commitments” and “we commit now to an end to new direct government support for unabated international thermal coal power generation by the end of 2021”.  There are a fair few qualifying terms in each of these.

Accelerating the transition away from unabated coal capacity is not a commitment to stop burning coal altogether, just to bring forward the end date for doing so (to the extent there is one). This will mean different things to different G7 members. At one end of the scale there’s the UK, which pretty much ran out of coal by the end of the 20th century, moving from a 40 per cent share of generation to 2 per cent. It has already set a coal end date of 2025. Germany wants to follow suit, but has complicated its decarbonisation task by phasing out nuclear too, while: France and Italy have not been reliant on coal for decades, due to low domestic reserves and the development of major hydro resources and nuclear power (France) in the post-war era. Canada is similarly blessed with extensive hydro as well as several nuclear plants. The US has been switching from coal to cheap shale gas for a decade. Renewed zeal for climate action under President Biden will continue  reduced coal generation, especially when the Rocky Mountain institute estimates 79 per cent of the existing coal fleet is already losing money.

That leaves Japan. Japan is the one member of the G7 that has seen coal’s share of generation rise in recent years, from 26 per cent in 2012 to 31 per cent in 2019.  This is largely down to the impact of the Fukushima accident. This led to a dramatic reduction in nuclear generation which has never fully recovered, with enduring Japanese public opinion against the re-firing of nuclear generators.

So how is Japan going to live up to the communique? The first point is that it is not binding. But there would be some embarrassment in diplomatic circles if they just completely ignored it. A key clue may be in the word “unabated”. They may seek to implement carbon capture and storage (CCS) at existing coal plants. Japan has identified CCS as a part of its strategy to meet its Paris targets. But it has yet to get a CCS project up and running.

As a major coal importer, there are obvious benefits for Japan if it can wean itself off coal. Energy security has long been a key strategic objective by Japan. The US oil embargo imposed in the early days of World War 2 are considered to be a key driver in Japan’s aggression in bombing Pearl Harbour. However, post-war, Japan has done well for itself by securing multiple sources of fossil fuel imports.  Hydrogen is clearly being mooted as a potential replacement, but this is a long-term strategy. There’s no sense that Japan is willing to compromise its energy security just to meet climate goals. Its plan for meeting its Pairs target still has coal on a 26 per cent share in 2030, and its current phase-out plan is only focussed on older less efficient plants even as it plans several brand new high efficiency plants. However, this means that it may not take much to demonstrate an “acceleration” without giving a hard date for the end of coal plants in Japan.

Ironically, despite Acting PM McCormack’s retorts, Australia is in practice somewhat aligned with the G7 announcement. While starting from a much higher base, coal’s share of the electricity mix is declining and that rate is likely to accelerate as state government flex their muscles to drive the energy transition. While the federal government talks a good game on supporting coal generation, it isn’t doing anything meaningful to support new coal plants – the $4m to Shine energy for a feasibility study was just political theatre.

Twiggy’s African adventure begins

Self-promoting mining magnate Andrew “Twiggy” Forrest continues to maintain an impressive media profile built upon his vague but ambitious plans to build 1000 gigawatts of renewable energy around the world.

While most of the global population was bunkered down in 2020 trying to prevent the spread of the coronavirus, Forrest was jetting around the world with a clean energy entourage, apparently doing clean energy deals which he later boasted amounted to access to around 300GW of hydro and geothermal resources.

That’s a huge amount of generation. It would dwarf the entire generation of Australia and eclipse the biggest utility in the world, Enel, which has around 84GW.

Last September Forrest announced one of these projects was in the Democratic Republic of the Congo (DRC). The plan, he has now revealed, isn’t new at all. Forrest has signed an exclusivity agreement with DRC President Felix Tshisekedi to develop a suite of hydro projects, including the $100 billion Grand Inga hydro project.

The Grand Inga is an epic and controversy ridden mega-project located in one of the most corrupt and unstable counties in the world. It proposes a series of dams in the west of the DRC on the Congo River to produce around 40GW of hydroelectricity. For sense of scale this is around double the output of China’s Three-Gorges am and the equivalent of around one-third of the entire electricity generation of Africa.

Since the 1990s, there have been multiple attempts to develop this project which have foundered, like most major investment in Africa, around problems of corruption, absence of rule of law and the inability of capital providers to secure their share of the $100 billion needed to make this project work. This is on top of the usual environmental, equity and engineering challenges associated with mega projects on this scale.

The World Bank pulled out of the project in 2016 following a strategic disagreement with the Congolese Government. Multiple expressions of interest have been developed by different consortia of companies including BHP in 2006. Miners are keen to be part of the project as the energy supply would help then open opportunities for zero emissions smelting operations and access to the DRC’s copper reserves, while activists want the electricity to be prioritised for the people of the DRC.

The challenges in getting the project up are not simply building the dams and hydro plants, but also building or securing access to the transmission infrastructure needed to move the electricity, and developing the basic market and legal structures needed to support contracts for such massive electricity supplies.

The notion of an “exclusivity agreement” with the DRC government likely has little value. The Government would be keen for anyone to help build the project, with Fortescue being just the latest in a long line of corporate tyre kickers that has included the Three Gorges Corporation from China and a Korean-Canadian consortium including Daewoo.

Forrest is more likely to succeed building a gas import terminal and power station in Port Kembla, while simultaneously criticising gas developers for developing new gas fields, apparently without a hint of irony.

News wrap

Risk has returned with a vengeance to Australia’s electricity market. A black swan event – an explosion at the Callide C generator in Queensland on May 25 – forced it to close and triggered sharp increases in spot wholesale prices. As we show in our chart of the week, this in turn triggered skyrocketing prices for caps – the insurance product sold by peaking generators to mitigate risk of high prices. The caps market has been in the doldrums for more than a year with chronic over-supply and a mild summer. It took off in May, signalling a market that is suddenly exposed to the risk of the unexpected. A dull, dying market being slowly strangled by political interventions to suppress prices has sparked back to life. EnergyAustralia chair Graham Bradley has used the moment to warn of the dangers of a rushed and ill considered transition to renewables. In reality, it will probably just accelerate government interventions even further.

The looming brown swan event – the possibility of the Yallourn power station in Victoria being knocked out by flooding – is still to be fully reflected in the caps market. This swan is potentially more serious than Callide, especially now Callide B has returned to service. Yallourn is the oldest and weakest brown coal generator and is now scheduled to close in 2028. It’s owned by EnergyAustralia, which in turn is owned by China Light and Power. As we discuss in this bulletin, their board has been trying to exit the Australian market since 2012. It’s not certain that hard heads in Hong Kong would see merit in spending more than $100 million to pump a flooded mine dry and repair the levee to revive an old power station and only to flood it all in seven years’ time. After dismissing the risk earlier in the week the Victorian Government has now declared an energy emergency. Perhaps they hope to be able to force EnergyAustralia’s hand “when the levee breaks”. At least it will have its own soundtrack.

The Victorian storm has also served as a sobering reminder of how dependent we are as a society on electricity supply. By Wednesday, 25,000 customers had endured five days without power, and some of them will have to wait a month for service to be restored as the local distributor rebuilds parts of its network destroyed by the “the worst damage to our network in a single incident in memory“. This type of event can only accelerate the take up of DER, especially backup equipment like batteries and gensets.

It was President Biden’s first G7 meeting since his inauguration in January. A chance for the group to re-set strategic direction on climate policy and ambition after four lost years under the Trump administration. They agreed to halve emissions by 2030 and to stop investing in new coal projects next year unless linked to carbon capture and storage. The politically symbolic official end date for burning coal was not agreed. Japan still doesn’t know how it will power its economy without it, and Biden is still trying to manage challenging domestic politics in key swing states.

It used to be the dictum that the best way to deal with activists was to ignore them. Not any more. Climate activists are really getting into the grille of the gas industry, which used its APPEA conference to discuss how they counter the threat and make the case for gas as a transition fuel. The Climate Action Group is pushing for fewer people on the boards of energy companies with experience in energy. Which is a bit weird when you think about it.

Andrew “Twiggy” Forrest really wants to be noticed. He’s run a constant stream of media announcements this year relating to his sudden and all-consuming interest in energy. He dished out on gas businesses developing more gas, seemingly oblivious of his own NSW plans for a gas import terminal and peaking generator. Anyway, Twiggy will soon have his hands full trying to build a multi-billion dollar dam in the Congo. To date many have tried. All have failed.

Chart of the week: Cap market reflects risk

Caps are a derivative product in the National electricity Market. Buying caps as a retailer or large customer hedges the risk of very high spot electricity prices. As the name suggests, a cap contract caps this risk at $300 per MWh. If there is increased risk of wholesale market price spikes, demand for caps goes up, and the prices of caps go up. If there is low risk, demand and the prices of caps fall.

Caps are critical to providing a revenue stream for peaking generators that are needed only a few times a year. They remain commercially viable by selling insurance. And thus the setting of a high enough maximum spot price (VoLL) is key.

Until May 2021 the cap market has been soft in all NEM states, reflecting increased government intervention, over supply and soft wholesale prices. Q2 2021 cap prices began to increase in early May, and spiked in Queensland and NSW following the explosion at Callide C power station. They remain much higher than the historical average, although caps for Q3 2021 are back down to traditional levels, suggesting the market assumes the undamaged units at Callide will be back on line soon.

Cap prices in Victoria are trading around $11, which suggests the market is factoring some risk from tight supply in SW and Queensland, but is not pricing in short term risk from the possibility of Yallourn being pulled off line because of flooding.

ASX Caps market Q2 2021 March-June 21


ASX Swaps market Q2 2021 March-June 21