Source: Financial Review 22/01/17
The likelihood of further closures of Victoria's brown coal power stations has sharply reduced after the decision to extend the life of Alcoa's Portland aluminium smelter, which raises expectations of tighter supply and higher electricity prices.
Last week's four-year lifeline provided to the Portland plant through $230 million of government subsidies and a revised electricity supply deal with AGL Energy will have the effect of lifting wholesale power prices across the market, particularly with the closure of Engie's Hazelwood plant set for March, analysts say.
The price increase will benefit generators such as EnergyAustralia and AGL itself, while the risk that more brown coal generators will be shut down has reduced, industry sources said.
While the details of AGL's new contract with Portland remain confidential, it is believed to be priced more cheaply than a 2010 deal scrapped by Alcoa last year.
RBC Capital Markets analyst Paul Johnston said he believed the contract would have to be priced "substantially below" the forward price for power in Victoria of about $80 a megawatt-hour. He calculates the $200 million subsidiary to be paid by the state government to Portland at about $3.30 a megawatt-hour.
But AGL, which has 2210 megawatts of baseload power generation capacity in Victoria, is better off offering a discount on the smelter contract and supporting wholesale prices than letting the smelter close and selling all its output at a lower price, according to Morgan Stanley analysts.
Citigroup analyst Michael Dargue similarly calculated AGL benefited more from keeping Portland open and accepting a lower price on 15 per cent of its electricity output
Citigroup is forecasting a "materially" tighter power market in Victoria once the 1600 MW Hazelwood plant has shut and the Portland plant resumes full production, particularly when a lack of wind cuts wind power generation.
Hazelwood has been producing 12-15 per cent of Victoria's generation, while the new 510 MW contract for the Portland plant is equivalent to about a tenth of the state's demand.
The smelter had been widely expected to be shut down, especially after Engie's decision to shut Hazelwood. That would have resulted in a rough balance between supply and demand compared to the current oversupply, one industry source said. But with Portland remaining open and ramping back up to full capacity, the market ends up shorter, ramping up the pressure especially during heatwaves when demand can remain elevated for several days at a time.
The decision to close Hazelwood, the country's most carbon-intensive power plant, has increased environmental pressure on the next most intensive, EnergyAustralia's Yallourn plant, which is also fuelled by polluting brown coal.
But while the calls from environmental groups for Yallourn to close are expected to continue, the continued operation of Portland adds more weight to EnergyAustralia managing director Cath Tanna's argument that the plant is important for supply reliability.
Meanwhile, the Victorian government's $200 million subsidy to keep an otherwise uneconomic plant in operation has been questioned on economic grounds. The smelter employs about 540 people directly.
Mr Wood said the subsidies had just "kicked the can down the road" for Portland, given the problem of its economics would just resurface when the deals expired in July 2021.
"It's hard to see anything changing between now and then considering these plants continue to get older and continue to operate in a difficult aluminium industry," he said.