• AGL Energy has the chance to focus its efforts on driving and leading the decarbonisation of the NEM
  • PSA! Shareholder tolerance for corporate activities, which don’t lead to decarbonisation, is waning 
  • Long term ramifications include the adoption of energy storage

AGL Energy (ASX:AGL), Australia’s largest electricity provider, has kicked a plan to split its coal fired assets from its retail electricity business to the curb following pressure from tech billionaire Mike Cannon Brookes, investors, and climate experts.

In what has been described as a ‘huge day for Australia’ by the tech billionaire himself, the failed demerger has prompted question about what the major upheaval of one of Australia’s biggest climate polluters actually means for the company’s future.

 

 

Paris-aligned transition strategy

What we do know is that the move signifies the opportunity for AGL to reset, ditch some bad board decisions and focus on their role in driving and leading the decarbonisation of the National Electricity Market (NEM).

Harriet Kater, climate lead for the Australasian Centre for Corporate Responsibility, says AGL now has the chance to develop a clear, Paris-aligned transition strategy and communicate some clarity around power station closure dates.

“This would enable the build out of renewable generation to replace AGL’s current capacity, ensuring a smoother transition and decreasing the risk of price shocks for consumers,” she said.

“No one truly believes that the Loy Yang A power station will remain open until 2045 – AGL has done a disservice to the communities in which it operates and the broader market in suggesting so.”

 

AGL in the box-seat to lead decarbonisation push

With a $260m price tag, the failed demerger means the company has the dough to spend on a ‘genuine decarbonisation push’ by providing the infrastructure, management, and investment needed to facilitate it.

From that point of view, Climate Energy Finance director Tim Buckley says the move is an important one.

“There is no doubt we are going to see hundreds of billions of dollars invested in the Australian energy market over the next two decades and AGL is in a perfect box seat with 4.5 million customers and a strong balance sheet,” he said.

“Grok Ventures made it clear that they didn’t think the board’s strategy was working but even more importantly was that almost all active investors fled the register because the current board was failing to implement a strategy aligned with what they demanded the board do,” he said.

“The shareholders gave a clear signal back in September last year and AGL decided that the federal government’s climate science denialism was more important than listening to shareholders.”

 

Shareholder tolerance is waning

Polly Hemming, climate and energy advisor at the Australia Institute said this sends a signal to other companies that tolerance by shareholders, stakeholders and customers is waning for corporate activities that don’t lead to decarbonisation – whether that be by demerging, offsetting or opaque climate targets based on emissions intensity.

“The demerger would have spread external scrutiny thinner,” she said.

“By that I mean attention would have rested predominantly on Accel as the ‘dirty’ company with diminished scrutiny on AGL.

“But AGL Australia had some questionable prospective approaches in regard to climate too that might have gone overlooked.

“While AGL Australia had a vague commitment to net zero by 2040 in the short term they were going to be ‘carbon neutral’ but for scope 1 and 2 only — this way the scrutiny and responsibility to decarbonise lies with one company.”

 

Long-term ramifications

There will be long-term ramifications, too, particularly for the adoption of energy storage.

Dr John Roles, research fellow for the University of Queensland and consultant project manager for Providence Asset Managers, says with the acceleration of the coal-fired power fleets comes a substantially higher volatility in the market price.

“From that, there will be greater value in any kind of energy storage system to balance that kind of volatility,” he said.

“Gas will become a more viable proposition as a result to address that volatility – gas is a solution to that, income streams for gas plants (whether open cycle or combined cycle) across the country will be much more utilised.

 

Battery and hydrogen peaking will make their entry

Jack Colreavy, corporate finance associate at Barclay Pearce Capital, says he expects to see big investments from AGL on the energy storage front over the next few years.

“Given the increasing duck curve being present in energy prices, there is a need for peaking power options and I don’t think AGL will build any more natural gas peaking plants so it appears big batteries and hydrogen peaking may make way for their substitution,” he said,

“With the demerger issue dead, my immediate concerns turn to the reliability of the NEM.

“It’s clear that the acceleration of the coal assets is now going to occur and as the country’s largest generator of power, AGL, help make this happen but there will be a lag between the cessation of the old and the start of the new.

“There will need to be a significant substitution of fossil fuel energy with green energy but both the public and private sectors need to collaborate and work closely together to ensure that Australian residents don’t suffer from blackouts as a result of an improper transition to renewables.”

 

A victory for activist investing

One thing is clear – this news is a significant victory for activist investing, Colreavy said.

“The whole saga has really highlighted the debate around the fiduciary responsibility that directors hold to shareholders; does this duty extend purely to profits or does it need to incorporate more than that?

“This has put another nail in the coffin of purely profit focussed requirements and is a huge win for ESG requirements being part of the principal-agent relationship for directors with shareholders.”

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