Via Credit Suisse:
AGL’s 90-day commitment no different to prior voluntary commitment, now more politicised: following a meeting with the Federal government, AGL has committed to revert in 90 days with an alternate plan to the Government’s preference of keeping Liddell operating beyond its 2022 end of life. We note that AGL had already committed to providing a plan at an investor day to be held later this year; the process is now slightly accelerated and much more politicised.
AGL’s preferred plan a mix of gas peaking, storage and demand response: the Liddell closure should be seen in the context of the market in 2022, not 2017. Between now and 2022, the Renewable Energy Target is on track to deliver two Liddell’s worth of additional energy to the market; by 2022, Liddell is not required for energy. As AGL acknowledges, the market may need some capacity, however the most efficient way to deliver this is unlikely to be coal fired given the additional wind and solar will dramatically alter the operating profile. AGL is working on a plan to replace the 1,680MW of effective capacity at Liddell with 500-1,500MW of peaking plant representing an investment of A$800mn–$1,500mn.
Sale to third-party to be avoided at all costs: by 2022, the likelihood is that the market will be oversupplied from an energy perspective (not capacity). Thus, keeping Liddell in normal operation would depress prices and reduce the value of AGL’s other ~35TWh of generation. We expect AGL will pursue all options in order to avoid this. We do see a third option whereby Liddell is retained in a ‘strategic reserve’ only to be called upon in extremes; however should industry be relying on 50+ year old plant to start reliably a handful of times each year.
Liddell specific risk that AGL is forced to gold plated replacement, part of a mosaic whereby industry is losing control of the conversation: the risk here is that the Government insists on a like-for-like replacement; i.e. 1MW of dispatchable capacity for 1MW. This would mean capex of closer to A$1.5bn than $800mn. Assuming for illustration that this additional capex earns no return, this is a 3%–4% reduction to our NPV.
