It’s an ill wind that blows no good. Or in the case of Infigen Energy, it was a case of not very much wind at all. The wind farm specialist, with operations in Australia and the US, yesterday notched up a $75.3 million loss after the breezes took a little time out during the past financial year.
Considering the company once formed part of the self-immolating Babcock & Brown juggernaut, many might look on yesterday’s numbers as almost respectable. Unlike many of its former stablemates, Infigen was blessed with a reasonably sound long-term debt structure and decent management.
But its performance in the past year raises questions about the company’s viability as a stand-alone operation and whether or not the incentives being used to cut greenhouse gas emissions are being employed to maximum efficiency.
The only time Infigen has ever earned a reasonable profit was last financial year – and that was as a result of selling its wind farms in Portugal and Spain. It tried desperately to offload its American operations this year but to no avail.
After the failure to reach a consensus on emissions trading in Copenhagen, renewable energy operations – while still very much on the radar screens of existing power companies – no longer hold the thrall of investors.
Without a price on carbon, the sad fact is that wind power cannot compete with coal or gas, and it is debatable if it ever will. It costs about twice as much to produce a megawatt of power from a wind farm compared with even the dirtiest coal-fired generator.
The only way an operation like Infigen can stay in business is through green subsidies. Under the Mandatory Renewable Energy Targets, all power companies must generate at least 20 per cent of their energy from renewable sources by 2020. To encourage the commercial sector to achieve that target, the federal government issues certificates to companies that generate power from renewable sources like wind and solar. Those certificates are worth money and an operation such as Infigen, which generates all its power from renewable sources, can sell those certificates to companies not meeting the targets.
In Infigen’s case, a large portion of its revenue last year came from the sale of Renewable Energy Certificates. The company believes it is in a good position to capitalise on the enhanced targets laid down by the government in the lead-up to 2020.
Right now, the entire strategy of reducing greenhouse emissions is targeting the wrong end of the industry. Rather than trying to shut down or clean up the dirtiest end of the industry, by placing a price on carbon emissions, the policy vacuum now in place encourages dirty operators to remain just as they are while taxpayer subsidies are handed out to clean energy operators who may or may not be economic.
The technology used in wind farms is reasonably mature. Propellers and turbines have been around for quite some time. So there is little scope for a major technological breakthrough that will significantly lower the cost of capital.
The basic economics of wind power in Australia may look attractive, if only wind speeds are taken into account. There is a potential to generate 6000 megawatts in South Australia, 5000 in Victoria and and 4000 in NSW.
But those raw figures overlook the practicalities of building a wind farm. Huge amounts of land are required. Gaining consent from large numbers of disparate and sometimes feuding landholders can be a nightmare. And that is before the approval process from local and state government authorities can even begin.
Then there is another problem. The best locations for wind farms often are vast distances from major urban centres where the power is required. That results in significant leakage from the system.
And then, of course, there is the reliability factor. No wind means no power. That’s exactly what happened to Infigen in the first half of the financial year. That rules out wind as a base load or a peak load provider of electricity.
Take Infigen’s operation in Geraldton. Acquired from the disastrous takeover of Alinta – the transaction that finally brought Babcock & Brown undone – the operation is huge. It comprises 54 turbines but produces just 89 megawatts of power. That is a fraction of the output from a traditional coal-fired power station.
So what of Infigen’s future? Its chief executive, Miles George, was upbeat yesterday. The company had oodles of cash in the bank, the wind has been blowing in the US and Australia lately and electricity prices in both countries had improved in the second half.
That may be so. But its share price has been sinking in recent times for good reason. Until yesterday it was at two-year lows.
Power generation and energy supply is a complex business, largely because of the politics.
It is dominated by a pair of stockmarket-listed players in the form of AGL and Origin. Throw in Victoria’s massive foreign-owned coal-fired generators – the dirtiest in the country – and complicate the situation with NSW’s state-owned coal-fired generators.
Overlay that with a complex regulatory regime and a carbon price strategy once considered a certainty but now in disarray, and Infigen’s future as an independent operator must be called into question.
Longer-term, it is more likely to end up as a subsidiary operator to a major producer looking to meet its renewable energy targets.
Almost all will be eyeing off Infigen. And all would be hoping to pick up the entire operation for less than they would have to pay for Infigen’s Renewable Energy Certificates over the longer term, and at a vast discount to its asset values.
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