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AGL considering Loy Yang A shutdown in response to industrial action

Update 16/12/2016: According to the Australian Financial Review (AFR) The Construction, Forestry, Mining and Energy Union (CFMEU) has backed down on its threats of industrial action at AGL Energy’s Loy Yang power station, putting an end to a whirlwind eight hours that saw AGL responding with an indefinite shut down and the Victorian government intervening to avert significant damage to the state’s energy supplies.

An ongoing dispute regarding pay and conditions at the Loy Yang A power station in Victoria could result in industrial action and subsequent employer action at the facility.

AGL’s negotiation with the CFMEU over an 18 month period has failed to yield an agreement to suit all parties. This led to the Fair Work Commission granting approval to CFMEU’s application for a ballot of its members on taking industrial action. The resulting ballot showed support for this course of action.

Due to this outcome, AGL has now advised the market operator (AEMO) that it intends to take employer response action to the proposed industrial action at Loy Yang A power station. The response will be a full site lock-out at both the Loy Yang A power station as well as the adjacent mine. The lock-out at the mine would curtail fuel supply to Engie-owned Loy Yang B power station. AGL has advised that the lock-out would commence on 28 December 2016 and last for an indefinite duration.

The news comes as the market operator is already predicting a tight supply / demand balance for the quarter. The most recent forecast doesn’t take this news into account but shows that Victoria was already relying on its interconnectors to keep up with demand in the state. A reserve shortfall was originally expected to occur on 22 and 23 December and will therefore not be affected by this announcement.

Figure 1: Reserve capacity for Victoria Source: AEMO

The loss of Loy Yang A (2,305 MW brown coal) and a reduction at Loy Yang B (1,120 MW brown coal) is likely to increase the number of reserve shortfalls and could lead to involuntary load shedding. The Victorian brown coal generators are also responsible for keeping prices down and stabilising the system.  During Q116, Loy Yang A provided 35% of the state’s average load and Loy Yang B provided 19%. Without the base loaders, the more expensive peaking generators will have to provide more generation which will be at a much higher price.

It is not just Victoria affected by the planned industrial action. South Australia is heavily dependent on Victoria for both prices and energy support. With potential shortages in Victoria, South Australia will struggle during times of low wind. Other regions will be affected as well. We saw earlier that the planned March 2017 shut-down of Hazelwood (1,820 MW brown coal) increased the forward prices across the entire NEM.

The announcement today is likely to affect Q117 contracts and maybe even beyond. Victoria will not be able to sustain the loss of both Hazelwood and Loy Yang A and it is likely that either the lock-out will be called off or Hazelwood will have to keep operating for longer if the unions and AGL cannot find agreement before March 2017 when Hazelwood is scheduled to come off.

The market operator will update its outlook for the period once the market has had a chance to respond to the news.

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