Rise in wholesale prices provides scope for green shift
The recent hike in wholesale electricity prices allowed AGL Energy to raise its earnings forecasts on Thursday and pull forward the closure of two of its coal-fired power stations.
The higher prices are well timed, coming just ahead of a decision on AGL’s ambitious plan to split the business in two.
The clean, green AGL Australia will take renewables and retail, while Accel Energy will house the coal-fired power stations that today make the gentailer both the largest energy business and the largest emitter.
The man tasked with Accel’s transition to a new energy and storage business is current chief operating officer Markus Brokhof. AGL has faced market pressure over whether Accel could really stand on its own going forward, even with a 15 per cent holding in AGL Australia.
Brokhof, acknowledged as one of the best operators in the business, is now in a much better space. “The rise in wholesale market prices has given us a bit more headroom but we need the headroom if we want to accelerate the retransition with our new closure dates,” he said.
He insists prices are not a gift to allow everyone to relax. Cuts in both operating and capital spending were announced at Thursday’s half-year results as AGL strives to maintain a cost advantage in the market.
Unsurprisingly, morale at AGL – and particularly among those headed for Accel – has lifted. Some of the team running the fundamental models tell Brokhof they had always said the price was too low and a change would come. But he says others see the Accel Energy story as just getting more and more exciting.
This is a big change from Accel being labelled “bad co” or “dirty co” when the business split was first announced.
“People like that we are speaking about repurposing of our sites. That’s so important.
“We are not speaking only about closure.
“The transition has closure in it but it also means building up something new,” said Brokhof.
When it shuts a power station, AGL’s cuts in emissions will dwarf the cuts most businesses in Australia could make, something CEO Graeme Hunt – who will become chief executive of Accel Energy – enjoys reminding the odd critic.
The 50-year-old Liddell Power Station, one of the least efficient generators, will shut by April 2023. Accel’s annual emissions are expected to fall 18-27 per cent between 2025 and 2034, compared to a 2019 baseline.
“The closure of Liddell is most probably the biggest contributor than anybody can do in Australia,” says Brokhof.
AGL’s decision to bring forward the closures of the 2640 megawatt Bayswater coal plant in NSW’s Hunter Valley from 2035 to 2033, and the 2210MW Loy Yang A facility in Victoria’s Latrobe Valley from 2048 to 2045, brought a terse warning from federal Energy Minister Angus Taylor, concerned about the credibility of investment plans to replace lost supply.
There is also growing industry pushback against the energy market operator’s timetable for the exit of coal-fired power from the grid.
On Thursday, Snowy Hydro CEO Paul Broad told The Australian that without the proper investment in transmission, the system could face higher power prices, blackouts and instability.
Markus Brokhof says AGL is willing to follow the AEMO forecast, but calls for realism.
“There will be an earlier closure of coal-fired power stations,” he said. “But when you look at the extreme scenario of step change in the AEMO modelling, we need a huge amount of investment. I think they have disclosed a number of up to $90bn that we need to enhance the grids.”
He points out that the interconnector project between NSW and South Australia started in 1999. “In 2022, the interconnector is only now starting to be built. That’s a long time to get the interconnector off the ground.”
Brokhof also sees a lesson in Europe’s transition, a market he knows well. “In Europe, the closure of nuclear power stations and coal-fired power stations were done too quickly. At the moment there is a huge risk premium incorporated in prices in Europe. It’s most probably now all dependent how the US, Russia and the EU can find agreement around Ukraine.”
The new CEO of the second business in the AGL Energy split, to be called AGL Australia, is also on the executive team: chief customer officer Christine Corbett.
Assuming shareholder approval for the plan, Corbett will be running what she calls a flexible and green portfolio by mid-year.
The business includes the large gas and electricity retail operation.
Higher wholesale prices will not favour AGL Australia in the same way they do Accel Energy.
But Corbett is confident the offtake agreement with Accel Energy over the first five years will provide continuity and security of supply.
AGL Australia will be blessed with a mix of renewable and firming capacity that Corbett says mitigates risk well in the market.
Performance is then all about trading skills, something well-honed in house. “As AGL Australia will be a retailer that is short in energy, we have a trading team that has the experience in dealing with that short position. It’s only in AGL Energy’s relatively recent history that we have been a long generator,” she said.
Christine Corbett’s X-factor for customers and investors is clean, green cred. She says the sheer scale of the retail business helps bring the renewable investment to market.
On Thursday, the company committed to underwrite 3GW of renewable and flexible generation as part of AGL Australia’s climate commitments, a deliberate move to decarbonise ahead of where the NEM will be by 2030.
Looking ahead, Christine Corbett sees strong growth from AEMO’s predictions. “By 2030 they are predicting a 23 per cent increase in demand. If you compare that to the last two decades, it’s less than 5 per cent. We are moving into a growing market. That has not been the market that we have been in over the last couple of decades,” she said.
Accel Energy’s 15 per cent holding in AGL Australia is certainly good to have for a business weighed down by legacy fossil fuel assets. Brokhof’s task is to do what he does best on the trade front to fund Accel’s way forward.
