The Coalition’s war on renewable energy
The AGL offer: relax, it’s just capitalism in progress
There were squeals of protest from the AGL board when Mike Cannon-Brookes, in cooperation with Canada’s Brookfield, made a bid for AGL.
The offer is conditional on the company phasing out coal-fired plants by 2030, and meeting net zero emissions by 2035. That’s much more ambitious than the company’s present plans. AGL owns three large coal-fired power stations – Liddell (2 000 MW, scheduled to close in 2023), Baywsater (2 600 MW, scheduled to close in 2033), and Loy Yang (2 200 MW, scheduled to close in 2045).
Morrison, always one to talk about the virtue of markets but the first to complain when markets don’t align with the interests of the Coalition’s mates in the fossil fuel industry, jumped in to defend the government’s commitment to keep on burning coal for as long as possible. In a press conference, responding to journalist’s question about the bid he said:
We need to ensure that our coal-fired generation of electricity runs to its life, because if it doesn't, electricity prices go up, they don't go down. And so our government is very committed to ensure we sweat those assets for their life to ensure that businesses can get access to the electricity and energy that they need at affordable prices to keep people in jobs.
He and Treasurer Frydenberg went on to make far-out claims about electricity price horrors that lie ahead should we elect a Labor government. Frydenberg also hinted at the regulatory processes that could be brought to bear to thwart the takeover. Peter Ryan, writing on the ABC website, lists some of the regulatory hurdlesthat could confront the bid, some genuinely to do with competition, others that could be used to unnecessarily prolong the life of coal-fired generators.
In a (paywalled) article in the Financial Review, former energy regulator Kerry Schott pointed out the obvious fact that renewable sources are cheaper than coal. The Australian Energy Market Operator’s transmission plan is aimed at ensuring that the lower cost of wind and solar-generated electricity can be carried through to consumers. She said, in direct response to Morrison’s and Frydenberg’s claims about Labor, “It is also notable that federal Labor Party policy includes significant expenditure on transmission to bring the benefits forward and reduce the price impact”: Why Scott Morrison is wrong on AGL.
The business case and its policy implications
The AGL board claimed that the offer, at $7.50 a share, materially undervalued the company, and was not in the best interest of shareholders. That’s an extraordinary claim from a board that has managed a company whose share price fell from $26.80 in 2017 to $5.50 late last year, and had recovered to only $7.15 before the offer.
Writing in The Conversation Bruce Mountain goes into detail about the takeover offer: The battle for AGL heralds a new dawn for Australian electricity. He explains how AGL “got big on coal, did well – then lost”. The company’s board will naturally haggle over the price – that’s how takeovers work – but it would be foolish to knock back the offer. The bidders propose to take AGL off the stock market and operate it as a private company while offering existing shareholders a share in the new structure. He says “AGL’s staff and unions will surely welcome new owners that promise a great deal of new investment to revitalise the company.” AGL, like so many public companies in Australia, has been hampered by shareholders’ demands for high dividends, thus restraining its cash flow for new investments.
Mountain raises an important point that applies to many publicly-listed companies. With a history of easy returns over more than a hundred years, Australian investors have been conditioned to expect easy returns in the future. In economists’ terms they set high “hurdle rates” for new investment. (This distortion was worsened by the Howard Government’s capital gains tax changes that penalize long-term investment.) It is therefore likely that our energy transition will probably have to rely more on private companies than on publicly-listed companies. (That shift to private companies for investment in long-term growth industries could have negative implications for Australia’s distribution of wealth.)
Mountain also points out that with the largest coal-fired generators closed, there will be a need and “an opportunity to breathe fresh air into Australia’s alphabet soup of energy regulators. Caught between the need to prepare for decarbonisation and governments hostile to it, they have succeeded only in delivering thick layers of red tape, muddled thinking and half-measures.” Our policymakers have been too concerned about extracting the last few heartbeats out of coal rather than planning for a future without coal. As Chris Briggs of Sydney’s University of Technology points out, commenting on Origin’s brought-forward closure of Eraring, we lack a transition plan for coal’s inevitable demise.
Also writing in The Conversation – How Australia’s geology gave us an abundance of coal – and a wealth of greentech minerals to switch to – Melanie Finch and Emily Finch explain that while our geology gave us huge reserve of coal, it has also given us copper, cobalt, lithium and rare earths needed in a worldwide energy transformation. The proposed transformation of AGL is just the stimulus needed to accelerate these business opportunities.
In writing about AGL I should disclose that I have a shareholding in the company, explained in a footnote.[1]
1. In 2017 I bought AGL shares for my superannuation fund, believing that CEO Andrew Vesey and the team he had assembled had a realistic understanding of the medium and long-term direction of Australian and world energy markets, and were preparing a long-term plan to take AGL out of coal and into renewable energy. That outlook was in line with the work of the IEA and the AEMO, and with scientific models of climate change.
When Vesey left the company in 2018 there was speculation in Renew Economy that he may have been pushed politically. An article by Mike Seccombe, Frydenberg pushed AGL to sack boss, published in The Saturday Paper, confirmed that there had been political interference. Seccombe described how then Environment Minister Frydenberg pressured the AGL board to require Vesey to drop the plan to close the Liddell power station, and how the board, in response, made his position untenable.
I wrote to the company secretary asking her to remind board members that their obligation is to the interests of their shareholders, not to the interests of the Liberal Party. My annoyance was not about blowing money on a dud investment – that’s what happens in a diversified portfolio – but about the politicization of corporate governance.↩
Pipe dreams and stranded assets
Historians and older Australians can recall Reginald Francis Xavier "Rex" Connor, Minister for Minerals and Energy in the Whitlam Government, who had grand plans to build a transcontinental gas pipeline connecting the northwest shelf to markets in eastern Australia. His attempts to raise funds for that project, bypassing Treasury and London-based brokers, was one of the Coalition’s claims to legitimise their manipulation of powers vested in a distant European monarch to bring down the Australian government in 1975.
Even larger and more expensive gas pipeline projects are included in the Morrison government’s 2021 National Gas Infrastructure Plan. It envisages a need for gas to feed power stations to ensure grid stability and to provide dispatchable power (with no regard for demand-side management), and so-called “clean” hydrogen using carbon capture and storage, rather than zero-carbon green hydrogen produced by electrolysis. This deceptively-named “clean” hydrogen project is attracting $1.2 billion in government funding, on top of $0.2 billion subsidies towards developing gas extraction in the Beetaloo sub-basin. (These subsidies for the Beetaloo project have been subject to a legal challenge, because they are being made without consideration of their consequences for climate change, but the Commonwealth went ahead after successfully appealing against a lower court’s decision to block them.)
The plan is neatly summarized in the Australian section of the Global Energy Monitor Report Pipe Dreams 2022: Stranded Assets and Magical Thinking in the Proposed Global Gas Pipeline Buildout. The report warns that the expansion of gas pipelines threatens world climate goals and creates a $US490 billion stranded asset risk. China accounts for the largest share of this proposed development. Australia, Brazil, India, Russia and the USA each have around 20 000 km of gas pipeline under construction or subject to strong proposals.