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The AFR View

The AFR View

Generator exits highlight energy promise and risks

The pulling forward of renewable investment by Queensland and AGL this week confronts energy investors and customers with the practical risks of transition that must be overcome.

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Australia’s new legislated target to reduce emissions to 43 per cent below 2005 levels by 2030 is now being matched by momentous decisions about switching to green power, as it was meant to do.

And both the promise of a cheaper, reliable green power grid, and the very real practical risks in achieving it are becoming clearer, too.

AGL’s Loy Yang A coal-fired power plant will close a decade earlier than previously planned. Bloomberg

This week the Queensland government announced that it will mothball the coal-fired power stations that provide 75 per cent of power to the state by 2035. And AGL will shut its biggest coal-fired power station, Loy Yang A in Victoria, by 2035. Both closures are happening a decade earlier than originally planned.

It’s a big win for AGL’s activist shareholders led by tech billionaire Mike Cannon-Brookes, who wants to turn Australia’s biggest energy company into a flagship for the transition. Under AGL’s plan, its coal-fired assets will be replaced by 12 gigawatts of renewable power by 2036, at a cost of $20 billion.

Queensland’s replacement projects will be even bigger. It will spend $62 billion, including on two gigantic pumped hydro dams, to make itself 70 per cent green-powered in just a decade.

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But this is also confronting investors with ever greater transition risks. Queensland’s state-owned generators will fall back on taxpayers and the federal government for more than half of the $62 billion bill. However, AGL shareholders not quite as evangelical as Mr Cannon-Brookes could baulk at being asked to cough up some of the required $20 billion.

Huge cost risks

Analysts question the appetite among AGL shareholders to stump up new equity as their reliable coal-fired earnings phase out.

And the rapid pulling forward of projects underscores huge cost risks. Total spending could hit $100 billion by 2030. Just as in mining booms of a comparable size, the surge of activity threatens supply-chain bottlenecks that hit investors with the same kind of cost blowouts that plagued Pilbara iron ore mines and LNG projects around the country.

Mistiming the transition means risks for consumers, too. Europe already faced an energy debacle in 2021 because of its premature replacement of coal with intermittent renewables. That was one of the reasons why Vladimir Putin decided he had a free pass to invade Ukraine.

The Energy Security Board warned this week there would be no let-up in high power prices as the costs of policy changes and massive physical investment are passed on. The transition would be bumpy, it said.

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The electricity sector is used to this disruption, but soon it will be overtaken as an emitter by the rest of Australian industry. This will be subject to the safeguard mechanism, the de facto carbon trading system. With a legislated carbon target, it will be harder for some industries to dump their carbon costs onto others through special pleading and carve outs. That’s another coming source of cost and conflict.

The government’s deal on Thursday with the major east coast gas exporters to guarantee domestic supplies of this critical transition fuel between coal and renewables won’t provide the buffer against high world gas prices that big domestic users also wanted.

If the federal government really wanted to help control the cost of this part of the energy transition, it would be leaning on NSW and Victoria to lift their remaining bans and encourage new domestic development, rather than unnerving export customers in Asia.

Australia, through LNG, hydrogen, copper or battery metals, is ultimately a global energy supplier with serious opportunities in a net zero carbon world. But this week the country started getting a taste of the practical costs and risks, too.

The Australian Financial Review's succinct take on the principles at stake in major domestic and global stories - and what policy makers should do about them.

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