Australia’s energy transition
A corporate takeover bid raises issues in renewable energy, the role of industry super funds, and the ground rules of shareholder capitalism
News about corporate takeovers are generally confined to the inside pages of the Financial Review, but when the target is Australia’s largest electricity company, and owner of Australia’s largest coal-fired power station, everyone takes an interest.
The north American private equity companies Brookfield and EIG Global Energy Partners have made a $20 billion bid for Origin Energy. The bid has been approved by the ACCC on competition grounds. Some financial analysts, and the Origin board itself, recommend that shareholders accept the offer of $9.43 a share. Origin shares were trading at around $7.00 in March this year before the contenders made an initial bid of $7.95, subsequently raised to the current offer. (You can follow the bumpy share price history of Origin Energy on Yahoo Finance.)
Origin’s largest shareholder, the industry superannuation fund AustralianSuper, however, opposes the deal. With 15-16 percent of Origin’s shareholding, it should have the numbers to block the deal.[1]
Here’s where it gets interesting, as Geraldine Doogue and the ABC’s Business Editor Ian Verrender discuss on last weekend’s Saturday Extra: The fight for Origin Energy. (13 minutes)
In part, as in many takeovers, AustralianSuper’s objection is based on a claim that the offer price is too low. That’s a common bargaining tactic in such situations, but it may be a reasonable financial assessment: Doogue and Verrender note Macquarie Bank’s suggestion that Origin’s share price could be worth more than $9.53 because it has the capacity to pay an assured flow of dividends.
The bigger issue is that AustralianSuper’s investors – millions of workers seeking a decent retirement income – may not prefer a cash payout or a few years of high dividends, to equity in a firm that should be around a long time as it goes through an energy transition. These are long-term investors, and the fiduciary duty of a superannuation fund, or of any corporation, is to attend to the interests of its owners, who, in this case prefer to own something that will serve them in retirement to a quick return now. Economists would identify the issue as a conflict between investors with high discount rates and those with low discount rates: it’s hard for one company’s board to serve both interests.
In the casino-capitalism of earlier times, when superannuation was dominated by for-profit funds taking out high management fees, superannuation account-holders’ interests were not served well when fund managers did well for themselves by churning investors’ funds through frequent trading.[2] Fortunately for Australian workers, industry funds now dominate the market and fund managers are more tightly regulated, but the culture of financial markets has not fully caught up with this change.
There remains a big dose of self-interest in financial markets. The stock market provides a great playing field for speculators who believe they can beat the market, and high-velocity traders who clip tiny percentage commissions out of financial transactions. This is the “financial dynamism” (encouraged by the Howard government’s 1999 changes to capital gains tax). By comparison managing funds for patient long-term investors isn’t very glamorous.
A complicating issue in this case is that the bidders are promising to invest $30 billion to help Origin transform itself to a renewable energy company. Environmental advocates seem to be split in their views on the takeover, but AustralianSuper has assured shareholders that it could provide a similar capital contribution towards the company’s transformation. David Leitch, writing in Renew Economy, discusses the possibilities of such a transformation: Origin: Can the gentailer commit to 100% green when the Brookfield bid fails? It’s not about the availability of funds: it’s more about the culture and mindset of an established firm that has operated in a set way for so long, probably more focussed on the retail end of the supply chain than on the generating end.
This gets to a major issue in our renewable energy transition. There is plenty of money sloshing around in superannuation funds and in personal investments, but there is a lack of opportunity for Australians to invest in that transition. For example, in a similar situation, in 2020 the highly-successful ASX-listed firm Infigen Energy was taken over by a foreign firm, leaving its Australian shareholders with a heap of cash rather than a stake in our nation’s energy transition. We let smart foreigners, with a long-term attitude to wealth creation, take over our companies, while we were left in the speculators’ casinos where shares and real estate are traded.
Australia still has the business culture of a “settler society”. We have been conditioned to easy investment returns as we stole land from its original owners, depleted natural resources and speculated in real-estate in growing cities. By some measures, over the last 122 years we have enjoyed the highest returns on equity of all “developed” countries. It’s hard to adjust to a future of lower returns in patient investments.
The even broader issue, only touched upon in the Doogue-Verrender interview, is our understanding of “investors’ interests”. As described above, because different people have different time horizons, it’s not possible to be firm even about investors’ financial interests. When it comes to long-term investments, such as superannuation, surely trustees should be taking into account investors’ interests other than their financial returns. It would be a strange person indeed who is comfortable with the idea of retiring with a large superannuation account balance in a wrecked planet.
1. ASX rules require that a takeover be permitted only if shareholders holding 75 percent of a company’s shares approve the takeover. Because many small shareholders don’t cast a vote, and some other shareholders oppose the deal, AustralianSuper probably has the numbers to block the takeover. ↩
2. See the 2018 Productivity Commission Inquiry into Superannuation and the subsequent “Royal” Commission report of Misconduct in the banking, superannuation and financial services industry. ↩
Carbon credits – the easy but ultimately ineffective copout
How much will you pay me not to chop them down?
Andrew Macintosh and Don Butler, both of ANU, have a Conversation contribution: The unsafe safeguard mechanism: how carbon credits could blow up Australia’s main climate policy.
They explain that one of our most important policy instruments to reduce emissions is the Safeguard Mechanism, which places caps on the emissions of around 220 of our largest sources of CO2 emissions. Every year to 2030 these caps reduce by a set percentage.
If these firms cannot reduce emissions in their own facilities – a process that the authors describe as “difficult and expensive, at least in the short term” – they can buy carbon credits. That is, they can pay someone else who can cut emissions more cheaply. It all makes good sense, at least in the mathematically pure world of an economics lecture theater. Its catch is that the credits so exchanged should relate to real, rather than confected reductions.
The authors point out that most carbon credits come from three project types – avoided deforestation, regeneration of native forests, and combustion of methane from landfills. Most of these projects have very low integrity: that is, people can often get carbon credits for doing things they were going to do anyway (or for not doing things they weren’t going to do, in the case of not clearing land). Following a 2022 review, commissioned by the Albanese government, some of the least effective of these options have been closed off to new applicants, but many have been grandfathered, meaning they will go on accruing credits even if they are close to useless in reducing emissions. Also, as the authors explain, the government and big polluters have a shared incentive to keep the price of carbon credits low.
The authors explain a simple market-based solution:
The government could solve the problem by introducing a standard cap price into the Safeguard Mechanism. Instead of surrendering credits, facilities could pay, for instance, A$50 per tonne on excess emissions. But that would open the government to claims that the scheme is just another carbon tax.
Is the Albanese government still letting a handful of climate-change deniers in the Coalition parties determine its energy transformation policy?
The global picture – a hint of progress
The Norwegian energy research firm Rystad has produced an upbeat report Global Energy Scenarios 2023, which predicts that we are approaching the peak in global emissions, which should start falling from 2027. Even earlier, by 2025 investment in low-carbon energy solutions will surpass investment in coal and gas, and will continue to rise quickly. It is particularly optimistic about progress in sectors in which it has so far been hard to reduce emissions, notably steel. (The ABC’s Daniel Mercer has a summary of the Rystad report.)
Rystad’s main cause for optimism is a massive increase in solar manufacturing capacity.
Therein lies a huge opportunity for solar energy firms to do very well in markets where the price is still set by high-cost fossil power, particularly as storage becomes more affordable. But in the longer term there is a possible market failure: solar power is becoming so cheap to generate that in competitive conditions the difficulty for firms to make a profit could deter investment.
Giles Parkinson writes in Renew Economy about how these market realities are requiring the government’s to take a more hands-on approach to meeting its targets: Bowen dumps RET for 32 GW of auctions in massive policy shift to supercharge renewables. The government will be using minimum revenue guarantees to encourage renewable investment and price caps to protect consumers. It will also boost the Capacity Investment Stream by adding more storage.
One should be sceptical about upbeat forecasts and attempts to jawbone a response to our need to boost renewable capacity. But renewable energy may be following a logistic pattern typical of technological transformations – a painfully slow start which gives way to a very rapid uptake, until eventually there is saturation.
As for Australia’s fortunes, we had better get a move-on. We’re not the only country with sunshine. The Germans, for example, are involved in large renewable-energy fed hydrogen projects in Africa.
Who’s emitting what
Visual Capitalist has a neat pie chart showing different countries’ carbon emissions as a percentage of global emissions in 2021. It’s actually not a conventional pie chart: think of a pie cutter who finds slices of circle sectors to be too unimaginative.
Australia, at 1.1 percent, shows up – but note that in relation to our population we’re big.
On a similar theme Oxfam has produced a report Climate equality: a planet for the 99%. The title is a reference to its revelation that “in 2019 the super-rich 1 percent were responsible for 16 percent of global carbon emissions, which is the same as the emissions of the poorest 66 percent of humanity (5 billion people).
It’s just possible that the increasing incidence of bushfires may have something to do with climate change
According to the Essential poll of November 13, 53 percent of Australians agree with the proposition that “Australian bushfires are made worse by climate change”, while 31 percent agree with the proposition “Australian bushfires have nothing to do with climate change”. That is, climate change is not a causal factor, and that the CO2 produced by fires does not contribute to climate change. The other 16 percent are unsure.
It’s informative to dig into these figures. There is a big divide between the Coalition supporters and supporters of Greens and Labor. The strongest deniers, however, are supporters of “minor parties/independents”. We can be fairly sure that these are not supporters of the “Teal” independents: they are more likely to be supporters of the far-right.[3]
The other significant divide is between people aged 55 or more and those who are younger. Does this mean that older Australians don’t care about climate change because they will be dead when its consequences are most strongly manifest, or did they miss something in their schooling?
Harder to explain is a gender divide: women are much more likely than men to link bushfires with climate change.
3. This failure to provide a more granulated classification is an intrinsic weakness in Essential and most other polls in Australia, rendering estimates of TPP outcomes to be little better than wild guesses. ↩