Tsunami of cash to slash carbon: gilded cage opens for $2.6 trillion investment
Heightened activity in the energy sector shows there’s heavy capital available for the transition to net zero by 2050.
The gilded cage containing $2.6 trillion to decarbonise the Australian economy has been prised open, with a turning point reached as a flurry of announcements about early exits from coal-fired power generation culminated in the Brookfield-Mike Cannon-Brookes consortium’s ground-shifting $8bn offer for AGL Energy.
The action so far has been concentrated in NSW, where Treasurer Matt Kean was immediately – but privately – aghast when the Morrison government invoked Brookfield’s domicile in Canada as a potential issue for examination by the Foreign Investment Review Board.
The bid, which included a $20bn capital pledge for the “world’s biggest decarbonisation project” to slash emissions from AGL’s fleet of generators, died a natural death on Monday when directors rejected a sweetened, $9bn offer from the consortium.
AGL said the bid was pitched too low, and the board much preferred its own proposal to demerge the group into a “green” retailer and a coal-dominated generator.
Regardless, Kean now feels free to unload on the “hypocrisy” of his federal colleagues, namely Scott Morrison and Energy Minister Angus Taylor.
“The bidder’s plan for AGL was entirely workable for us,” Kean tells The Weekend Australian.
“And it’s a bit hypocritical for the Morrison government to complain about this move when it’s always saying it wants the private sector to step up and build reliable and dispatchable energy.”
Kean rubs salt into the wound by implicitly supporting Brookfield’s assertion that the AGL demerger could create more risk as opposed to the claimed added-value.
Unlike the consortium’s demonstrable access to torrents of cash, the demerger could entrench perceptions of a monumental carbon challenge faced by the group, which lacks the widespread support of deep-pocketed institutional shareholders.
Says Kean: “Whatever happens, I want to make sure AGL is able to meet its obligations to its counter-parties, including the remediation costs it will be required to incur.”
Commonwealth Bank institutional boss Andrew Hinchliff, a keen observer of the sharp rise in activity levels in the energy market because of decarbonisation opportunities in the nation’s highest-emitting sector, says technology has been the big game changer.
“Whether it’s renewables, batteries or the uplift in transmission grids – technological improvement at twice the expected rate,” Hinchliff tells The Weekend Australian.
“These decisions have been made after a careful examination of risk and reward, but we’re just at the start of it – it’s only 2022 and (net zero emissions by) 2050 is still a stretch for the world.
“About 70-80 per cent of our energy grid is still driven by fossil fuels and we shouldn’t take that lightly, but equally there’s willing capital to step in there and make an investment because you can see the technology that’s going to do it.”
On CBA numbers, achievement of carbon neutrality by 2050 to keep global warming below 1.5C will require $2.6 trillion of investment, driving a two-decade extension of the peak investment levels triggered by the resources boom from 2005 to 2015.
There will be many turning points in the decades-long transition to net zero, but few will be as significant in Australia as Origin Energy bringing forward its exit from coal-fired generation almost at the same time as the consortium bid to floor AGL’s decarbonisation accelerator.
Origin announced on February 17 that the coal-fired Eraring power station – about 40kms south of Newcastle – could close in 2025, seven years earlier than anticipated.
The 2880 megawatt generator, the nation’s biggest coal-fired plant supplying a quarter of NSW’s power needs, had originally planned to start closing its first unit in 2030, ahead of a full shutdown in 2032.
It will now run for just over three more years.
The Eraring announcement continued the flight of global capital from emissions-heavy, coal-fired generation, with 90 per cent of the global economy now signed up for carbon neutrality.
But now, there’s also a gathering tsunami of inbound capital, lured by the compelling economics of battery storage and cheap, clean and abundant renewables – wind, solar and hydro.
The transition to net zero by 2050 will absorb an estimated $US120 trillion in global capital.
The Brookfield Global Transition Fund enlisted for the AGL bid is the world’s largest fund of its type, but “only” has $US15bn under management.
The co-manager is former Bank of England governor Mark Carney, the United Nations special envoy on climate change and co-chair with Michael Bloomberg of the Glasgow Financial Alliance for Net Zero – an umbrella group with $US130 trillion in pledged assets to invest in decarbonisation.
Carney’s credibility was enhanced by his early prognostications on the changing climate, some of which were considered by sceptics to be almost apocalyptic.
As BoE governor in 2015, he warned about the “potentially huge risk to investors from stranded assets, saying vast reserves of coal, oil and gas could become “literally unburnable”.
Speaking from London, Carney told a conference in Sydney this week that his fund was examining more than 50 opportunities for investment around the world in several industries.
“The scale of the net zero transition is such that this is a target-rich environment,” he said.
However, companies which were slow to deploy the capital needed to slash emissions would lose out to others which acted more rapidly.
The latter group would create value but the former group would simply destroy value.
On Wednesday, Origin Energy chief executive Frank Calabria told analysts in an update that decarbonisation underpinned the group’s entire strategy.
“It starts with a belief in decarbonisation,” Calabria said.
“We believe in decarbonisation because it’s good for shareholders, it’s good for customers and it’s good for the environment.
“The transition that many people talk about in energy is something that’s going to take place for many years, and it represents tailwinds that really are very exciting in terms of the growth it presents to Origin.”
Origin is well-placed to manage its own transition but will consider co-investment with third parties.
There are plans for a giant, 700MW battery at the Eraring site.
Along with committed and expected supply from across the sector, the company said the shuttered Eraring capacity would be covered and in place by the summer of 2026.
A week before the shock Eraring announcement, AGL effectively started the ball rolling by saying it would bring forward the closure of its giant Bayswater and Loy Yang A power stations by 5-8 years.
The 180 year-old power giant said it would exit Bayswater in NSW’s Hunter Valley up to five years earlier by 2030, with Loy Yang A facing the chop from 2040 – ahead of its previously foreshadowed retirement in 2048.
Hinchliff says CBA breaks the issue down into five separate buckets.
The first is the expensive greening of the energy grid, and then electrifying everything that relies on the grid.
After that comes making buildings and industrial processes more efficient, followed by improved carbon efficiency in the agricultural sector, and finally the use of carbon markets to offset the remaining emissions which were difficult to remove.
“Those 5 buckets are all attracting capital right now,” the CBA boss says.
They’re all going to be important to a smooth transition, and they’re all going to need a hell of a lot more capital, and it’s all going to flow at an exponential rate.
“We’re certainly committed to all five of them.”