Sunday, 27 March 2011

Energy giants punt on the future

16 March 2011, Page: 30

Origin Energy's $2.3 billion equity raising shows that big companies are still laying energy bets amid uncertain carbon policies, but their benefits are easily found. Grant King's empire is built on the foundation of a fully integrated business model that means he can manage wholesale energy market risk and indeed government policy risk with stable retail customers. The same applies to AGL Energy and TRUEnergy, with the latter showcasing the diversification benefits by diluting the Yallourn coal fired generator's share of its portfolio from 77% to 45%.

At the same time, the Victorian share of its retail network fell from 79% to 37% through the NSW purchase. Maybe that explains why incumbents were the only parties to bid in last year's privatisation. Others would argue that uncertainty over government policy was a more obvious reason, scaring off offshore investment, with the resources tax debacle and carbon price uncertainty the major factors.

Still, Hong Kong based CLP Group was prepared to back local boss Richard McIndoe on last year's $2bn NSW investment to establish TRUEnergy as a stand alone player. Origin Energy's King is pleased the government is open to discussion on the carbon tax, but like other producers he would prefer a well designed trading scheme that would provide incentives for new abatement investment while also creating a more stable investment environment to ensure supply continuation.

The idea being the trading system would work towards the right price and, in the process, obviate the need for artificial support for renewable energy. The problem with the present model is that the emphasis on the 20% mandated renewable target skews investment towards more expensive alternatives, away from cheaper base load supply. King has his bases well covered.

But he has long warned that the better Australia is at exporting coal seam gas and other gas, the higher the local gas prices will be. The pressure to increase renewable targets also raises domestic prices and negates some cost advantages enjoyed by base load power sources such as gas over high carbon sources like coal. In short, the more the government distorts the market, the more it will defeat its aim of reducing carbon emissions.

The concept of carbon taxes as setting a price to provide stability is laughed at by the energy industry, given the long lead times for investment. But at least it's a start. The government can now till in the details to fast track the move towards a market based system. That will necessarily involve politically difficult decisions but is preferable to leaving the market half pregnant.